for most of the period in question, the obvious explanations are refuted: their ships were not better, their tactics were

ﬂ

awed according to the experts of the time, and the raw material of their sailors and of

ﬁ

cers had no distinct advantage over the navies of Spain, France, or Holland. My conjecture is that the British Navy was an effective

ﬁ

ghting force, not because of its physical and human capital, but rather because of the set of rules under which the British fought. Although there were rules for all men at sea, here I focus on the critical rules for the captains and admirals.

5

The British Admiralty created a set of clever monitoring devices that were only slowly copied by their opponents

6

and which worked even for single ships thousands of miles from home. Most interesting is the fact that on the surface, many of these rules technically hindered the ability of the Navy to do battle. That is, from a purely

“ﬁ

rst-best military

”

point of view, one that ignored issues of incentives, the British should have fought differently. 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, wh er e pr iz es ar e lo ca te d in sp ec i

ﬁ

c pla ces , en em y pri ze ve sse ls

ﬂ

oat abo ut. 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.

7

In order for this system to work, some form of monitoring was necessary. Thus, in conjuction with the system of prizes the British Navy used the Articles of War, battle formations and

ﬁ

ghting instructions, discontinuous promotions, and patronage to monitor their captains. The entire governance structure encour- aged British captains to

ﬁ

ght rather than run. The creation of an incentive to

ﬁ

ght 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

ﬁ

ghting, 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.

5

Again, see Benjamin and Thornberg (2001) for an analysis of the wage structure for the warrant of

ﬁ

cers.

6

This in itself is an interesting question since successful strategies in any enterprise, and especially in military activities, tend to be copied quickly. I return to this point later.

7

I will

not

argue that use of prizes created a perverse incentive structure. On the contrary, it was an essential part of the incentive structure of all navies and armies of the time. Nor will I argue that actual combat was not lucrative in its own right. What I argue is that payment by prizes in the navy had a drawback, namely that captains preferred the most valuable prizes net of the costs of capture. These prizes were not always the ones of most military value.

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