We're operating on the brink of my historical knowlegde, but IIRC outright piracy and letters of marque in peacetime were in sharp decline in the year 1700, when empire starts. All Sir Beane has written holds true for the 17th century, but in the 18th there is a marked rise in state building and violence controlling agencies. This meant that piracy moved to the east coast of africa (I can make such a statement here without offering evidence, unlike in the monastery) and was removed from the carribian.
In wartime, some of the merchant fleet was used outside regular naval operations, and had different legal measures assigned to them. This meant that they operated as a private navy supplementing the national navy, but I wouldn't really call them pirates, as they had no legal basis what so ever after the signing of a peace treaty. They were "paid" by being allowed to capture enemy ships and sell it and its goods as fair game, and as far as I know it was quite a popular sport.
SO - in game mechanics should allow raising of small-ship navy, much like mercenaries in previous titles, but using pirates as a state would be a little off.
(Maybe this part of the discussion belongs more in the monastery...)
/KotR
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