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11/28/2002 |
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The Speculator
Give thanks for the freedom to
profit
The
first Thanksgiving celebrated a bounteous harvest brought about by
individual effort and ingenuity. Sadly, the lessons of that triumph
are not always heeded.
By Victor
Niederhoffer and Laurel Kenner
The natural effort of every individual to
better his own condition, when suffered to exert itself with freedom
and security, is so powerful a principle, that it is alone, and
without any assistance, not only capable of carrying on the society
to wealth and prosperity, but of surmounting a hundred impertinent
obstructions with which the folly of human laws too often encumbers
its operations.
--
Adam Smith, "The Wealth of Nations"
The rules of the
game exert a strong influence on our business, play, stocks, wealth
and Thanksgiving celebrations. Contrary to the myth taught our
children these days, the Pilgrims were not saved from starvation by
farming and fishing methods learned from Squanto, the Wampanoag
tribesman who befriended the settlers. In fact, it was a change in
the rules that ended famine in Plymouth colony.
Like today’s
technology ventures, New World colonies were risky propositions with
a history of terrible failures. The Plymouth colony’s angel, a joint
stockholding venture called the Virginia Company, tried to protect
itself by insisting that all produce be held in common, to make
collecting what the settlers owed easier. But when the 41 families
of the Mayflower arrived at Plymouth in December 1620, few things
went right. Food was distributed according to need, but the first
winter killed half the people. That year’s harvest and the next
didn’t last the winter. Some settlers stole from others at night.
Things seemed hopeless. Here, with modern spelling, is the account
by William Bradford, governor of Plymouth almost continuously from
1621 through his death in 1657, of what happened next:
"It well appeared that famine must still ensue the next
year also, if not in some way prevented. At length, after much
debate, the governor gave way that they should set corn every man
for his own particular, and in that regard trust to themselves.
And so he assigned every family a parcel of land, according to the
proportion of their number. This had very good success, for it
made all hands very industrious, so as much more corn was planted
than otherwise would have been." In 1624, the Pilgrims were
able to export a boatload of corn and pay off their loans to the
companies that financed them. (These joint stock ventures for
colonies were the forerunners of modern corporations. The
stockholders benefited if the colony was successful, and, like all
such investors, they were willing to move heaven and earth to make
it work. By contrast, Spanish and French settlements were ventures
of the kings, and in the main quickly disappeared because of their
inability to adapt and prepare for the unforeseen.)
How Plymouth came to prosper
There has
been much propaganda concerning when and how the first Thanksgiving
occurred. The first feast wasn’t really a Thanksgiving but rather
more of a traditional English harvest festival. Gov. Bradford first
officially proclaimed a day of Thanksgiving on Nov. 29, 1623, at the
end of a drought. An earlier celebration in the late summer of 1621
to mark the end of hostilities with Indians is often cited as the
first Thanksgiving, although the Pilgrims themselves didn’t think of
it that way.
The feast evolved into the Thanksgiving we know
now during the 19th century. In the early 20th century,
Americanization programs designed to help immigrants assimilate into
the culture seized on the Pilgrims as exemplary immigrants and made
them the centerpiece of traditional Yankee harvest reunions. (For
more, see “The ‘First Thanksgiving:’ Facts and Fancies" by clicking
on the link at left under "Related Sites." Meanwhile, you can buy a
copy of Gov. Bradford’s account in "Of Plymouth Plantation." Click
on the link at left.)
The important thing, however, is how
Plymouth came to prosper -- by converting communal property into
private property.
Lesson not yet
learned
The need for private property is a simple lesson.
Has it been accepted far and wide? Regrettably, no. In Ethiopia,
where famine is beginning anew, the state owns all the land and
tenure rights are uncertain. From 1974 to 1991, a Marxist regime
implemented the same collective farming theories that caused the
starvation of millions of Soviet citizens under Stalin. Ethiopia’s
private farmers paid higher taxes, were forced to sell to the state
at prices far lower than those paid to state farms and, on top of
everything else, had to surrender their “surplus.” Yet despite
receiving the lion’s share of fertilizer, improved seed and
agricultural loans, the state farms produced less than 5% of the
output and steadily lost money.
Nobody wants to tackle the
question of how to restore property rights in Ethiopia. That is too
bad, for under the present state feudalism, incentives are lacking.
Kinfe Abraham, in his 2001 book "Ethiopia: The Dynamics of Economic
Reform," irrigation is used on only 3% of irrigable land. When
Laurel visited Ethiopia this month, she saw peasants still plowing
with oxen and harvesting with scythes.
Progress without progress
China never
reached its potential for the same reason that American colonists
and modern Ethiopians starved to death under socialism. In the 11th
century, Chinese blast furnaces were turning out quantities of pig
iron achieved by the British only 700 years later. The Chinese had a
water-driven machine for spinning hemp in the 12th century, some 500
years before the Industrial Revolution. In the early 1400s, China
was building hundreds of huge ships, including nine-masted 400-foot
vessels capable of carrying hundreds of sailors and soldiers. Some
ventured as far west as Africa. Chinese inventions included the
wheelbarrow, the stirrup, the compass, paper, printing, gunpowder
and porcelain
Almost every element for progress was present;
and yet nothing progressed. Why? There was no market, no incentives.
The state owned most enterprises. There was little if any private
property, and it was next to impossible to start a business. “The
Chinese state was always interfering with private enterprise
--taking over lucrative activities, prohibiting others, manipulating
prices, exacting bribes, curtailing private enrichment,” observes
David Landes in "The Wealth and Poverty of Nations." No aspect of
Chinese public life escaped official control. State monopolies
controlled salt, iron, tea, alcohol, foreign trade and education. An
atmosphere of routine, tradition and immobility made innovation and
initiative suspect.
As a result, the Chinese moved from a
position of technological superiority to the West in the 15th
century to utter poverty by the 19th century. Restrictions on trade
prevented specialization and the division of labor. (It was a
capital crime to go to sea for the relevant 300 years.)
The immigrant's tale
The
situation was no better under Communism. Among the 35 guests at
Vic’s table this Thanksgiving will be Shi Zhang, a Chinese immigrant
whose story epitomizes the rewards of drive and hard effort. Our
friendship with Zhang began about a year ago with a registered
letter from him: “Thank you very much for interviewing me last week,
and I am sorry you could not offer me a job. However, I believe I
could help you make money and you could teach me to trade.
Therefore, I would be willing to work for you for free as an
apprentice to make this happen.”
Vic wrote back: “Let’s go.
Come join us for Thanksgiving.” In a couple of days, Zhang arrived.
He proved so valuable and so friendly that Vic soon offered him a
full-time job. He now trades the bunds and the Nasdaq each evening.
He lives with the Niederhoffers and has become one of the family.
It is now one Thanksgiving since Zhang arrived. To prepare
for our Thanksgiving celebrations, we asked Zhang for an update on
incentives in China:
"Agriculture had been collectivized by Mao to a degree extreme
even for the Communist world. The land was worked by communes that
grew what the state directed and turned over all food produced to
the state for distribution. Pay was based on a system of 'work
points' that bore little relation to production: A peasant would
accumulate a certain number of work points for planting rice
seedlings.
"In 1978, the communes were abolished and
replaced with a contract system. Though the state continues to own
all land, it leases plots, mostly to individual families. Rent is
paid by delivery of a set quantity of rice, wheat or whatever to
the state at a fixed price. But once that obligation is met,
families can grow anything else they wish and sell it in free
markets. The results have been phenomenal. Chinese farmers have
increased food production around 8% in each year since 1978, about
2½ times the rate in the preceding 26 years.
"As controls
were loosened, private enterprise began to emerge. In 1982, Peking
stopped dictating all garment styles and freed the city's
factories to adopt their own designs. Blue jeans, Western-style
business suits and coats, skirts and knee-high leather boots
started to be manufactured. Industrial production leaped along
with food output. Early in 1985, it was increasing at an annual
rate of 23%.
"In August 1980, a portion of ShenZhen,
Guangdong Province, was designated as a special economy zone
(SEZ). The word 'Special' mainly means the central government gave
SEZs special policies and flexible measures, allowing SEZs to
utilize a special economic management system. Before that, its
economy was mostly agricultural with only a couple of factories
for pesticides and small farming equipment. In 1994, total
industrial revenue reached more than 1,000 times what it was 15
years before.
"A deeper question facing China is that
state-owned enterprises do not give incentives to employees for
inventions. Before the Cultural Revolution, people were still
inspired by the newly founded nation and quite idealistic about
communism. After the rough times during the Cultural Revolution,
Chinese people lost the trust base. Without the right incentives,
I don't think they will spend energy inventing things. " It is
good to think of these things as Thanksgiving approaches. It wasn’t
Squanto, it wasn’t geography that created our plenty. It was the
incentive called profit.
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