Tax Analysts Blog

How Profit Sharing Sent Captain Ahab in Search of Moby Dick

Posted on Dec 14, 2015

When Captain Ahab set sail, he was looking for revenge. But the crew of the Pequod were after something less personal and more profitable: sperm whales. And thanks to an 18th-century form of profit sharing, they were motivated to find them.

“The method of wage payment in the whaling industry was a singular one,” explained historian Elmo P. Hohman in a 1926 article. “The whaleman was not paid by the day, week, or month, nor was he allowed a certain sum for every barrel of oil or for every pound of bone captured. Instead, his earnings consisted of a specified fractional share, known as a lay, of the total net proceeds of a voyage.”

Indeed, the system of profit sharing was so fundamental that crew members were known as “sharesmen.” The fraction of total profit going to individual sailors depended on rank and experience, ranging from as little as 1/250 for a cabin boy to as much as 1/8 for a skilled captain.

For Ahab’s ill-fated crew, shares were less generous. As Ishmael recounted of the Pequod’s “lays”:

      I was already aware that in the whaling business they paid no wages; but all hands, including the captain, received certain shares of the profits called lays, and that these lays were proportioned to the degree of importance pertaining to the respective duties of the ship's company. I was also aware that being a green hand at whaling, my own lay would not be very large; but considering that I was used to the sea, could steer a ship, splice a rope, and all that, I made no doubt that from all I had heard I should be offered at least the 275th lay -- that is, the 275th part of the clear net proceeds of the voyage, whatever that might eventually amount to.

A 275th part was not a good one – “what they call a rather long lay,” Ishmael acknowledged – but it was still something for a beached sailor stranded in port. “It was better than nothing,” he wrote. “And if we had a lucky voyage, might pretty nearly pay for the clothing I would wear out on it, not to speak of my three years' beef and board, for which I would not have to pay one stiver.”

The cash value of a share was unknown until the voyage ended. But in one example, the unskilled hands of the Benjamin Tucker, docking in New Bedford in 1851, received $226 each for their two years of service – about $7,200 in today’s dollars.

The share system was already well established by the time Ahab embarked on his fictional voyage around 1820 or so. In fact, it had been operating for decades (and even centuries, if you include the similar British practice).

But that didn’t stop lawmakers from meddling with it.

As the American Revolution drew to a close, the whaling industry – like the fishing industry more generally – was in a sad state. As my colleague Marty Sullivan has explained, the mighty British navy kept American ships bottled up in port throughout the war, and skilled fishing crews had scattered in search of new work.

In 1792 political leaders tried to revitalize the industry by easing its tax burden. Lawmakers passed a law providing allowances to ship owners that roughly offset their payments under the tariff (which applied to cordage, fishhooks, and other maritime supplies). Tariffs operated much like a tax credit does today.

But the credit came with conditions. (Don’t they always?) Political leaders – including Thomas Jefferson, Alexander Hamilton, and George Washington – were intent on using the credit to bolster the profit-sharing system. As passed by Congress and signed by Washington, the law required that five-eighths of the credit be paid to a ship’s crew and the remainder to its owners.

The payment, moreover, was contingent on the continuation of the profit-sharing system. Just why lawmakers felt compelled to bolster profit sharing is unclear; Joseph Blasi of Rutgers University, who has written extensively on profit sharing, suggests that they were driven by a concern about the supply of skilled labor, as well as a conviction that motivated workers would aid the industry’s recovery.

“Both Congress and the Administration and the Treasury Department recognized that the performance of the crews depended on shared incentives,” Blasi writes. “They saw clearly the right of the government to use one of its principal domestic powers – taxation – in reverse, namely, to reduce taxes in order to encourage independent economic activity and remove the barriers for individual citizens to participate in a business.”

The tax credit for fishing remained in place (with one brief interruption) for decades. Whether it did much to help the industry, however, is unclear. An 1846 article in The United States Democratic Review suggested that it did not. “The cod and mackerel fishery has declined, notwithstanding the bounties paid by the government,” the magazine concluded.

The failure of the credit is most evident when we compare the fishing industry generally with whaling in particular, since whalers – despite being subject to the same pressures as other fishermen – were not included in the 1792 bounty legislation.

Their omission was surprising because Thomas Jefferson had advised lawmakers that whalers needed a tax preference just as much as other fishermen. But Congress, in its wisdom, had opted to exclude whalers from the public largesse. “The whaling interest not only received no drawbacks or bounties, but has been taxed most onerously,” the Democratic Review complained.

And yet the whalers did exceedingly well. While cod and mackerel catches continued to decline into midcentury, whale tonnage rose.

The differing fortunes of whalers and their fellow fishermen demonstrate the limits of government by tax preference. Whatever the cause of the decline in the fishing industry, tax credits were not enough to save it. The tax allowances may have slowed the decline, and they probably reduced the social cost that attends any declining industry — not least by encouraging profit sharing.

But at the end of the day, the credit couldn’t stem the tide.

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