In 1978, the farmers in a small Chinese village called Xiaogang gathered in a mud hut to sign a secret contract. They thought it might get them executed. Instead, it wound up transforming China’s economy in ways that are still reverberating today.
The contract was so risky – and such a big deal – because it was created at the height of communism in China. Everyone worked on the village’s collective farm; there was no personal property.
In Xiaogang there was never enough food, and the farmers often had to go to other villages to beg. Their children were going hungry. They were desperate. So, in the winter of 1978, after another terrible harvest, they came up with an idea: Rather than farm as a collective, each family would get to farm its own plot of land. If a family grew a lot of food, that family could keep some of the harvest.
This secret meeting, though innocuous to anyone accustomed to the benefits of private property, was dangerous in the then-wholly communist country. Most importantly, the agreement was hashed out with a document that goes hand-in-hand with private property: a contract. With a formal contract established and plots of land assigned to each family, the incentive was now in place in order for those farmers wishing to improve their own standard of living to do so by virtue of their own labor. While a certain portion of food still had to be given over to the collective, surplus quantities could be kept for private consumption.
And with that, the tragedy of commons mentality vanquished, and starvation ceased to be an issue. The simple rule of “keep what you make” had transformed the barren economy overnight. The hallmarks of capitalism which brought hundreds of years of increasingly material prosperity to the West were ironically established in a hut that lacked both plumbing and electricity. The results were immediate, as that year’s harvest was bigger than the last five years’ harvests combined. According to one farmer, “we all secretly competed — everyone wanted to produce more than the next person.”
As a man obtain the means of production — be it factory equipment, the contractual pledges of workers, land, etc. — he becomes both an entrepreneur and speculator. If he has any interest at all in maintaining the value of his assets, he will use them efficiently and judiciously to maximize their output.