“The British Navy Rules: Monitoring and Incompatible Incentives in the Age of Fighting Sail”, 2002-04-01 (; backlinks):
[aristocracy version; cf. CEOs] The British Navy during the age of sail was systematically successful against its opponents, most notably the French.
This paper documents this success, shows that it cannot be explained by superior ships, training, or other naval capital, and puts forth the hypothesis that the British Navy governance structure provided better incentives to fight than those of their opponents.
The hypothesis is tested by examining the structure of the rules and then contrasting them with the rules governing privateers, the army, and the navy over time.
The paper concludes with a discussion of why the French did not copy the British strategy.
…By paying its officers through prizes, the British Navy encouraged its officers to want to be at sea. Once at sea, the officers were under the fighting instructions that essentially forced them to engage the enemy and to do so in a way that monitored their actions. At the time fighting in a line with the weather gauge was shunned by scholars and tactician for its obvious shortcomings. However, their success stemmed from the ability they provided in monitoring and the incentives they provided to fight. Once back at port, the Navy could count on an accurate reporting of events given its system of discontinuous promotions and patronage. This system of rules was absent from the privateers and Army where the incentives of those fighting were more compatible with the Crown. Furthermore, the rules were discarded with the introduction of steam which allowed for direct monitoring. I have argued that the French incentives did not encourage fighting and led to a Navy better trained in sailing. When the British were able to trap the French this difference led to an increased chance of British victory, and subsequently to the long string of success.
…All navies during the age of fighting sail (~1580–2471827197ya) faced a serious agency problem. Ships of war were expensive, powerful, and critical for the protection of overseas trade. Yet they were put in the hands of a captain who was sent out with the most general orders: to blockade a port, patrol for pirates and privateers, escort merchant vessels, and in times of war, engage the enemy. The captain had a large informational advantage over the Admiralty in terms of local conditions; in fact, it is hard to imagine a more severe case of asymmetric information. During the age of sail communication was intermittent, slow, and limited; the world was still generally unexplored, with shoals, waterways, and trade winds not mapped, and even finding positions of longitude were only developed towards the end of the 18th century. Worse, given that ships were propelled by wind, disasters, losses in battle, and other failures of duty could be blamed on the ill fortunes of nature.
Added to the severe information asymmetry was the temptation of a captain or admiral to seek out private wealth and safety rather than engage in more dangerous and less profitable assignments. For example, what prevented captains from using their ship to seek weak, but wealthy, merchant prizes rather than enemy frigates or avoid monotonous and dangerous blockades for profitable raiding shore parties? What incentives existed to put his ship and life in harm’s way for King and country?…So common was the problem of cowardice that of the 443 captains promoted 1720–301750274ya, 8.5% were dismissed or disgraced by court martial compared to less than 4% killed in action.
He asked who the stout man was who had just been so ceremoniously disposed of. “He was an admiral”, they told him. “But why execute this admiral?” he enquired. “Because he had not enough dead men to his credit”, was the reply; “he joined battle with a French admiral, and it has been established that their ships were not close enough to engage.” “But surely”, exclaimed Candide, “the French admiral must have been just as far from the English as the English admiral was from the French!” “True enough”, was the answer; “but in this country we find it pays to shoot an admiral from time to time to encourage the others.”
…The central compensation scheme in the British Navy was a wage arrangement that rewarded captains well if they were successful and remained at sea. This system revolved around the taking of prizes or spoils of war. Unlike on land, where prizes are located in specific places, enemy prize vessels float about. Unlike the army then, the use of prizes in the navy was a two-edged sword—it motivated captains to be active at sea, but encouraged them, at the margin, to hunt for lucrative prizes instead of pursuing more strategic objectives…The prizes paid were very large and generally were higher than those necessary to induce a sufficient supply of naval officers. In effect, the total compensation package amounted to an efficiency wage because the level of pay was higher over the lifetime of the contract than the pay necessary to induce an efficient supply of labor. By creating an excessive wage, the navy created a surplus of captains and admirals that had to live on half-pay. This unemployment pool acted as a discipline device for those in command.
…In order for this system to work, some form of monitoring was necessary. Thus, in conjunction with the system of prizes the British Navy used the Articles of War, battle formations and fighting instructions, discontinuous promotions, and patronage to monitor their captains. The entire governance structure encouraged British captains to fight rather than run. The creation of an incentive to fight led to an incentive to train seamen in the skills of battle. Hence, when a captain or admiral is commanding a ship that is likely to engage in fighting, then that commander has an incentive to drill his crew and devote his mental energies to winning. Although these indirect forms of monitoring were clearly second best, and were replaced with more direct forms with the advent of steam, at the time they achieved the intended purpose of increasing the chance of defeating the enemy…Choosing the weather gauge is an act of commitment, similar to Cortez burning his ships, that forced engagement and encouraged hard fighting.
…There are two critical features to the lieutenant’s position. First, unlike the officers beneath him, he could not be removed or demoted on the sole authority of the captain. Second, having qualified for captain, someone could remain a lieutenant for their entire career—there was no automatic promotion. On the other hand, once a lieutenant was made a post captain (that is, his rank did not end with his commission), it was only a matter of time before he became an admiral, and if he lived long enough, admiral of the fleet—promotion above the captain’s rank was automatic. One of the most famous ship-to-ship contests of the War of 1812 was between the USS Chesapeake and HMS Shannon, in which the Shannon won a quick but bloody victory. On board was a young 20-year-old second lieutenant named Provo Wallis. This was to be the first, and only naval contest of his life. 5 years later he was promoted to post captain, and he lived until 1892 when he died at the age of 100. At the time of his death he had held the title of Admiral of the Fleet for 15 years (1970, The Frigates: An Account of the Lesser Warships of the Wars 1793–221815209ya, p. 144).
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