Mostly: Classical

[Frank Pembleton]

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"
http://www.amazon.com/exec/obidos/tg/detail/-/0679424733/qid=1038576542/sr=8-1/ref=sr_8_1/103-246129...

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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