In our principles textbook, Modern Principles: Macroeconomics, Tyler and I illustrate the importance of property rights with the incentive effects of collective farming and the secret agreement of Xiaogang village. We write:
The Great Leap Forward was a great leap backward – agricultural land was less productive in 1978 than it had been in 1949 when the communists took over. In 1978, however, farmers in the village of Xiaogang held a secret meeting. The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep. The agreement violated government policy and as a result the farmers also pledged that if any of them were to be killed or jailed the others would raise his or her children until the age of 18. [The actual agreement is shown at right.]
The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased. “You can’t be lazy when you work for your family and yourself,” said one of the farmers.
Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides. But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property. In Beijing, Mao Zedong was dead and a new set of rulers, seeing the productivity improvements, decided to let the experiment proceed.
For more background, NPR’s Planet Money has a great story on this secret agreement including this:
“Back then, even one straw belonged to the group,” says Yen Jingchang, who was a farmer in Xiaogang in 1978. “No one owned anything.”
At one meeting with communist party officials, a farmer asked: “What about the teeth in my head? Do I own those?” Answer: No. Your teeth belong to the collective.
In theory, the government would take what the collective grew, and would also distribute food to each family. There was no incentive to work hard — to go out to the fields early, to put in extra effort, Yen Jingchang says.
“Work hard, don’t work hard — everyone gets the same,” he says. “So people don’t want to work.”
…Before the contract, the farmers would drag themselves out into the field only when the village whistle blew, marking the start of the work day. After the contract, the families went out before dawn.
“We all secretly competed,” says Yen Jingchang. “Everyone wanted to produce more than the next person.”
It was the same land, the same tools and the same people. Yet just by changing the economic rules — by saying, you get to keep some of what you grow — everything changed.
(Crossposted at SeeTheInvisibleHandResourceBank.com)