drhoads: Ok, so I managed to get good enough to kill a few ships. Had to switch from mouse to joystick and that helped a lot. I had read somewhere that P2 was better with mouse? Not for me! Anyway, I am afraid to level up my ship because combat levels with you. Is it better to play the story missions first? Do you make any money with them? Maybe just do min upgrades (medium ship, repair bot, mass ions) as to not make your money higher than the story level?
In the Privateer 2 bonus files section here on GOG you can find the strategy guide for Privateer 2, and on page 30 you will find a chart that shows how difficulty works. If you progress through story missions, increase your net worth, or reach a certain number of kills, the game will permanently increase in difficulty. It would be best to find a trade run only 1 or 2 jumps away so that you can avoid combat, because net worth-based difficulty is the only one that's 'reversible'. I played through the game killing quite a few enemies, and before the end enemies spawns became so frequent and overwhelming that I ended up cheating my way to the end.