Posted 11/25/2004
The Speculator
Thank the Pilgrims
for eBay
Plymouth Rock would be a mere footnote had its
desperate founders not seized on the formula that makes the tech icon such a
success today.
By Victor Niederhoffer and Laurel Kenner
The story of the
Pilgrims’ first years in America shows how a change from common ownership to
private property led to the feasting celebrated today at Thanksgiving. Similar
tales of expanding harvests and benevolence are told wherever people can keep
the fruits of their labor and trade them as they please.
The story
illuminates why eBay
After landing at
Plymouth in November 1620, the Pilgrims endured a cold, hungry winter during
which half of them died. Promised supplies failed to arrive from London. The
1621 harvest wasn’t as big as hoped, nor was the 1622 harvest. More famine
seemed inevitable.
And then the colony
began to talk through the problem. The London merchants who financed the
Pilgrims’ settlement specified "that all such persons as are of this colony are
to have their meat, drink, apparel, and all provisions out of the common stock
and goods of the said colony." In 1621, the Pilgrims planted 26 acres, according
to Judd W. Patton, an economics professor at Bellevue University in Nebraska. In
1622, they planted 60 acres, but that wasn’t enough to keep hunger away.
People began to
steal by night and day, "although many were well whipped,” Gov. William Bradford
reported.
The system made no
sense to anyone. The hard-working subsidized the slackers. The young and
ambitious didn’t want to do work for anyone else and get nothing for their
trouble. The wives of some of the men objected to be commanded to wash clothes,
dress meat or do other tasks for other men.
As Bradford would
later write in "Of
Plymouth Plantation 1620-1647,” "At length, after much debate of things, the
Governor (with the advice of the chiefest amongst them) gave way that they
should set corn every man for his own particular, and in that regard trust to
themselves, in all other things to go on in the general way as before.”
In what’s known
today as the Land Division of 1623, each family was allotted land at the rate of
one acre per family member and told to go out and produce. More than 184 acres
were planted that year. And, Bradford reported, "This had very good success, for
it made all hands very industrious, so as much more corn was planted than
otherwise would have been by any means the Governor or any other could use, and
saved him a great deal of trouble, and gave far better content. The women now
went willingly into the field, and took their little ones with them to set
corn.”
What is apparent
from this history is what we all know from our experience: When you can benefit
from working hard, you work harder. Under the system of common ownership, there
was stealing, shirking and malevolence. Under the incentive system, there was
good feeling, hard work and benevolence.
News of the success
at Plymouth and other settlements like it attracted more and more immigrants to
the New World. And everyone who lives in America today has a personal story that
is part of that great continuing tale.
An ancient impulse
The impulse to
improve one’s conditions through greater effort and trade is as natural as
breathing, and this has been so since the beginning. New York University
economist Haim Ofek, in "Second Nature: Economics Origins of Human Evolution,”
argues that trade helped spur the growth of the brain.
"Exchange requires
certain levels of dexterity in communication, quantification, abstraction, and
orientation in time and space, all of which depend on the lingual, mathematical
and even artistic faculties of the human mind," Ofek writes in the introduction
to his 2001 book. "Exchange, therefore, is a pervasive human predisposition with
obvious evolutionary implications."
Relatively flexible
and acute people had an edge in trading. They survived and prospered, they had
bigger, healthier families, and their descendants became dominant.
The Internet trading colony
The success of eBay
since its founding in 1995 shares many similarities with the Pilgrim story. Now
a public company with a market value of around $75 billion, eBay has created an
electronic network of niche markets that takes account of the infinity of human
tastes and aptitudes and specializations. The stock is up 72-fold since its
September 1998 IPO, from a price-adjusted initial price of $1.50 to $109.42 as
of Nov. 15. That is after a 77% drop in the tech crash of 2000.
Like the Pilgrims,
eBay gives each of its sellers a piece of land (though in virtual space) to
carry out his or her business. A spirit of benevolence is apparent in the
company’s feedback system; in almost half the transactions, both buyer and
seller rate each other, with almost all them highly favorable. But to us, there
is one overriding reason for eBay's success: It unleashes the desire and
provides a forum for buyers and sellers to improve themselves by trade in a
million ways every day.
From pork bellies to public benefit
The CME, odd as it
sounds, also bears some similarities to Plymouth Colony. Founded in 1897 as a
member-owned organization, the Merc started out as a market for the trading of
foodstuffs. Its activities and goals were torn between the interests of the
members and the interests of the public. A low point was reached in 1989, when a
widely publicized sting operation uncovered conflicts of interest and failures
to give the public a fair shake.
For years, the Merc
had been content to play a sleepy second fiddle to the Chicago Board of Trade
both in volume and number of products traded. In 1972, an inspirational governor
-- in this case,
Leo Melamed -- decided it was in everyone’s interest to match members’
interests with the growing public interest in financial products such as
currencies, Treasury bills, Eurodollars and stock market futures. Growth
exploded in 2000 as the CME prepared for the shift to public ownership by
converting members’ interests to shares. Since the Merc went public in December
2002 with its shares listed on the New York Stock Exchange, the stock has risen
nearly six-fold, and it has stayed in the top 10 of NYSE performers.
In effect, the CME
transformed itself from a tradition-bound club with the image of a raucous den
where men shouted at each other to get an edge on the public in trading pork
bellies. Instead, it became a pioneering company that lets hardly a week go by
without introducing a new electronic product designed to give the public more
ability to improve and hedge their ownership of stocks and debt.
The table below
shows how acreage planted and revenues grew at Plymouth, the CME and eBay.
|
The Plymouth, Chicago Merc and eBay experiences |
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*
In millions **Analysts’ estimates
The Soviet disaster
The Pilgrims
originally agreed with the London merchants who financed their settlement to
hold their land and its products in common, a sort of forced socialism, much as
the communists imposed on Russia after the 1917 revolution.
And the Pilgrims
learned, as the Russians would, that the system led to misery and poverty.
Whenever trade and its rewards are permitted, well-being and output improve
across the board. The principle is so mundane that it's hard to believe that it
could ever be forgotten. But it was. The Soviet economy broke down because
people had no incentive to reduce costs, to produce a quality product, to
provide the kind of gracious service that an American expects from even a
humdrum retailer.
If it weren’t for
those who risked death -- literally -- to start private enterprises on the black
market, the Soviet system would have collapsed long before it finally did.
Everyone knows a
million examples of how people respond to incentives. It's no accident that when
President Bush won a reduction in taxes on capital gains and stock dividends in
May 2003, the S&P 500 ($INX)
responded with a 27% rise. Incentives to buy stock increased, so prices rose.
The after-tax returns from stocks increased, so the public decided to place more
dollars into stocks versus the alternatives.
In Plymouth, thanks
to the gift of the Land Division of 1623, trade was created, and it did what it
has always done: