Peter Leeson on Pirates and Self Regulation

I have been dying to read economist Peter Leeson's newest book The Invisible Hook: The Hidden Economics of Pirates.

The book is in my que and will have to wait until my reading habits kick back up, but in the meantime, I did get to read an article in Forbes by Leesson about Pirates, self-regulation, and financial instituations.

I would recommend you read the entire article, but here a few of my favorite parts:

Self-regulation sounds nice, you might say, but what incentive do greedy businesses have to create rules controlling their own behavior?

Plenty, actually. Even the most unethical and avaricious actors often benefit from regulating themselves. History's most notorious criminals--early 18th-century Caribbean pirates--relied entirely on self-regulation for their business--and they were violent thieves. The reason for this is simple: Privately created regulations often enhance productivity rather than stifling it, and tend to be good for the bottom line.

To maximize profits, pirates, for example, required rules and regulations to constrain their criminal inclinations among one another. They needed to prevent violence among one another, prohibit inter-pirate theft, and regulate activities--such as gambling, drinking and fraternizing with the fairer sex--that were likely to instigate conflicts. Pirates couldn't rely on government to create such rules and regulations for them; they were outlaws and therefore had to regulate themselves.

.......Legitimate modern firms also have more local knowledge about what kinds of regulations they require, and what kinds of regulations are unnecessary and might stifle productivity, than outsiders do. But government often ignores this fact and acts as if bureaucrats have better information about what firms need than the firms themselves do.

When this happens, regulations may not only fail to have the desired effect, they may also backfire and have exactly the opposite effect. That's what the Americans with Disabilities Act did when government introduced it in 1990: In an effort to boost employment for Americans with disabilities, the federal regulation forbade employers from firing an employee because he or she had a disability.

As a 2001 study by MIT economists Daron Acemoglu and Joshua Angrist showed, by making it harder to fire a disabled worker for reasons totally unrelated to his or her disability, the ADA caused employers to hire fewer workers with disabilities, reducing, rather than increasing, disabled Americans' employment.

.....Public-sector decision makers, on the other hand, don't have such strong incentives to avoid mistakes. Unlike their private-sector counterparts, public-sector decision makers don't pay for regulatory oversights or backfires through reduced profits. Thus, in addition to having a weaker ability to get regulations right because of a lack of local knowledge, public-sector decision makers have a weaker interest to do so as well.