Tuesday, February 28, 2017

Selling Slavery: Conflating Profits with Prosperity in the Early Republic

Apologies for the last post but I hit both the ASSA/AEA and the AHA this year, while teaching an intensive January course to boot! So this slipped my mind until now.

Selling Slavery: Conflating Profits with Prosperity in the Early Republic
Robert E. Wright, Augustana University, at the American Historical Association Conference, Sheraton Denver, CO, 7 January 2017, 1:30-3:00 p.m. Governor’s Square 15

Slavery in America was often called the “Peculiar Institution” but what is truly peculiar is the historiography of slavery. From about 1850 until about 2010, people opposed to slavery held that slavery hurt economic growth, defined as increased, inflation-adjusted per capita aggregate output and measured by indices like GDP, and development, defined as the capacity for growth and measured by various indices of literacy, education, technology, and infrastructure. People who argued during that period that slavery aided economic growth and development were racist, pro-slavery advocates like George Fitzhugh, or, like Robert Fogel and Stan Engerman, they were castigated as racist, pro-slavery advocates by various liberals and progressives.
That equilibrium made good intuitive sense because it allowed anti-slavery thinkers to advocate abolition on both moral and economic grounds. No tradeoff between morality and growth was necessary on either side; either slavery was all bad or it was all good. In recent years, however, a spate of books by Ed Baptist, Sven Beckert, Robin Blackburn, Walter Johnson, Calvin Schermerhorn, and others has attempted to break the equilibrium by maintaining that slavery, while a moral evil, aided, nay caused, U.S. economic growth and development. None of those authors has been called racist because their goal is to make a case for general reparations from taxpayers to the descendants of slaves. Such a policy, though, would be fraught with difficulties, the most important of which is that slavery actually hurt the overall U.S. economy.
As I show in Poverty of Slavery: How Unfree Labor Pollutes the Economy, which Palgrave is publishing in early March of this year, slavery creates profits for enslavers but it does not stimulate growth or development. Most obviously, only a few slave nations grew rich and some grew rich without, or before, becoming slave powers. Without having to run a single regression, we therefore know that slavery is neither a necessary nor a sufficient cause of economic growth.
Poverty of Slavery also shows that slavery could not have aided growth or development at the margins either. That is because slavery creates huge negative externalities, or costs not born by enslavers. So while slavery was often profitable for enslavers, its marginal net effect on the economy was clearly negative when the costs of controlling slaves and numerous other negative externalities, like decreased innovation, population, and non-slave wages, are accounted for. That holds not just for the antebellum U.S. but for every slave society the globe over since prehistoric times. Those few slave nations that attained wealth and development did so despite slavery, not because of it.
Without the concept of negative externalities, which economists did not formally name until the early 20th century, identifying the poverty induced by slavery is difficult to discern. That is why prior to about 1850 or so abolitionists were often silent about the economic effects of slavery. They knew that slavery was a ubiquitous institution because it was usually profitable and feared that those profits meant that slavery stimulated growth and development. So they remained fixated on the moral and religious aspects of the institution, a message that many Americans did not find compelled them to action. Early proslavery thinkers also did not calculate the negative externalities created by slavery, yet they often downplayed the profitability of enslaving others for rhetorical and competitive reasons, so they, too, generally concentrated on the cultural and religious effects of enslavement.
Those who came to see the negative externalities created by slavery became abolitionists because it removed all doubt from their minds. Hinton Helper was the most famous of these. His Impending Crisis is basically an extended, if somewhat sloppy, analysis of the negative externalities created by slavery. “Slavery,” he wrote, “benefits no one but its immediate, individual owners, and them only in a pecuniary point of view.” “Does the slaveholder, while he is enjoying his slaves,” Helper wondered, “reflect upon the deep injury and incalculable loss which the possession of that property inflicts upon the true interests of the country?” Or my favorite: “Slaveholders! … You are daily engaged in the unmanly and unpatriotic work of impoverishing the land of your birth. … Your conduct is reprehensible, base, criminal.”
Helper was not the first to separate profits from growth and development, nor was he the first to point to the many costs that slaves imposed on the larger economy. In 1764, Philadelphia merchant Nicholas Waln wrote to Richard Waln: “The illicit Trade wch has been carryed on a long time has probably enriched the Individual, but I believe in the Event will extremely derogate from the Good & true Interest of the Colonies.” A few years later, a writer in New York also noted that “a Merchant may, and often does, get rich by a Trade that makes his Country poor.” In one of his famous state papers, Alexander Hamilton also noted that profits and economic growth were sometimes incompatible. In 1817, Littleton D. Teackle of Maryland noted that “merchants, speculators, stock-jobbers and money changers … may flourish and get rich though the country be ruined.”
The notion that the enslavement of others was one of the activities by which a few became enriched at the expense of the whole can be dated back to at least Jean Bodin, a sixteenth century French philosopher, who argued that the profits created by slaves were offset by the fear induced by the institution in both slaves and the general population. As Bodin put it, slave societies were “always in daunger of trouble and ruine, by the conspiracie of slaves combining themselves together: All Histories being full of servile rebellions and warres.” Eighteenth century German scholar Johann Gottfried Herder also clearly saw that slavery created social costs not borne by slave masters. He attributed to slavery the spread of syphilis and the devastation of three continents.
In the early nineteenth century, the notion that slavery imposed large costs on non-slaveholders gained traction in America. In 1805, Thomas Branagan of Philadelphia compared slavery “to a large tree planted in the south, whose spreading branches extends to the North; the poisonous fruit of that tree when ripe falls upon these states, to the annoyance of the inhabitants, and contamination of the land which is sacred to liberty.” George Mason had also likened slavery to a “slow Poison” and in 1832 fellow Virginian Henry Berry argued that slavery was akin to raising tigers, something the state certainly had an interest in arresting, even if it was “a very lucrative business.” Virginians would not be allowed to raise “the far-famed Upas tree” (the “Tree of Death”), he argued, even if it grew entirely on their own private land. That same year, Charles James Faulkner said the same thing but much more directly before the Virginia House of Delegates: “Slaves are injurious to the interests and threaten the subversion and ruin of this Commonwealth.”
Just a year later, on the other side of the Atlantic, Joseph Conder argued that free laborers cost society less than slaves did because slavery encouraged “a wasteful and deteriorating husbandry” due to its reliance on monoculture and primitive tools as well as “contingent social evils, which demand a precautionary provision.” “The ultimate cost of slavery,” he concluded, also included “the state expenditure which it renders necessary in order to provide against the dangers inseparable from the existence of a servile class.”
Such arguments could at first be dismissed as mere rhetoric but as the years turned into decades one of the greatest natural experiments in history, the division of the United States into free and slave slaves, helped observers to test the negative externality hypothesis. As early as 1824, the economies of Pennsylvania and Virginia were compared and the former found superior. Several decades later, the economic differences between otherwise comparable free and slave states were even more pronounced, a point made forcefully by Cassius Clay, a Kentucky slaveholder ‘mugged by reality’ and converted to the antislavery cause. Despite Virginia’s natural advantages over New York, the latter exceeded the former in “the elements of National prosperity and glory; wealth, numbers in new countries, literature, industry, the mechanic arts, scientific agriculture, &c.” Slavery, Clay concluded, was clearly to blame. “The twelve hundred millions of capital invested in slaves is a dead loss to the South,” he declared, predicting, accurately, that the free North would defeat the slave South in a civil war.
At the outset of that war, Irish economist John Elliott Cairnes established the orthodox view that held until about 2010:
Those who are acquainted with the elementary principles which govern the distribution of wealth, know that the profits of capitalists may be increased by the same process by which the gross revenue of a country is diminished, and that therefore the community as a whole may be impoverished through the very same means by which a portion of its number is enriched. The economic success of slavery, therefore, is perfectly consistent with the supposition that it is prejudicial to the material well-being of the country where it is established.
Before closing, I need to make clear that the issue of externalities and the economic effects of slavery is not a merely academic one. In case you haven’t heard, slavery did not end in the nineteenth century, it merely changed form, into debt peonage, bonded labor, sex trafficking, child soldiers, and myriad other forms. Although unfree laborers compose a much smaller portion of the global work force than ever before, in absolute numbers they are now more numerous, between 30 and 45 million by common estimates, than at any time in history. The notion that slavery can jumpstart economies can, and has, been used to justify enslaving people today. Claims that Britain and the U.S. grew rich due to slavery have emboldened those in developing nations to ignore international anti-trafficking protocols on the supposition that it is not fair for the rich nations to prevent poor nations from catching up economically by outlawing a key growth driver. What this paper, and Poverty of Slavery, re-establish is that slavery is not just immoral, it is bad economics because any economic benefit produced by enslavers’ marginal profits, the profits earned above and beyond what would have been earned using a less coercive labor regime, is more than wiped out by the societal costs created when people are forced to work against their will. This in no way diminishes the sacrifices of African-American slaves or indeed any other group enslaved in the past, which, by the way, would include most people alive today. It does, however, suggest that general reparations for slavery are not merited and that the descendants of slaves should look to the profits created by their ancestors for recompense.
Thank you.

Punched in the Gut, Twice

This first appeared on the blog of Historians Against Slavery.

Whenever I hear anyone earnestly claim that slavery is/was good for the economy, I feel like I have been punched in the stomach, twice. That is because I’m a neo-abolitionist and a scholar of economic growth who knows that slavery causes only poverty.

My first seven books, from my dissertation (unpublishable at 1,300 pages) through Financial Founding Fathers, explored the finance-led growth hypothesis, the notion that financial services like intermediation and risk management cause economic growth. While writing those books, I noticed the crucial role played by the protection of human rights, especially the rights to life, liberty, and property, underlying financial development. That led to books like One Nation Under Debt and Little Business on the Prairie. I also noticed that economic growth was often impeded by irrational institutions and public policies of dubious quality, themes I explored in books like Broken Buildings Busted Budgets, Bailouts, Fubarnomics, Corporation Nation, Genealogy of American Finance, and, ultimately, The Poverty of Slavery.

Nobody seriously doubts the claim that slaves were important components of many economies, especially the economies of slave societies like the antebellum U.S. South. But many important factors of production can be adduced and none of them are causal in any fundamental sense. What differentiates wealthy (high real output per capita) economies from poor ones is the incentive to produce goods for market. People in poor countries fear for their lives and property, just as the colonists in British North America did before, during, and just after the Revolution. The Constitution, and the policies enacted during the Washington administration, changed that and the U.S. economy has been growing at more or less modern rates ever since, subject only to the periodic and temporary reversals associated with business cycles.

The U.S. economy should have, indeed would have, grown faster early on but it was held back by slavery, which created enormous negative externalities, or costs not borne by enslavers. Slave patrols, public whipping stations, standing military garrisons, and fugitive slave acts were among the most palpable ways in which enslavers milked taxpayers to keep their wretched system alive. The fact that slaveholders were heavily subsidized became widely understood by the late antebellum period and helped lead to the sectional break that ended in civil war.

The Poverty of Slavery describes the negative externalities created by enslavement in great detail, not only in America but in every major slave society across the globe, from 10,000 BCE to the present. It pays particular attention to the ways in which enslavement changed in response to the Great Emancipations of the nineteenth century and, while doing so, defines slavery along a 20-point scale of freedom designed to allow scholars and activists to identify subtle differences in the lived experiences of sundry types of laborers, both free and unfree, across time and space.

The final chapter explains that slavery must be ended, once and for all, because it is always a moral abomination and a drag on prosperity. Eradication must entail catching and convicting enslavers and stripping them of their wealth. Then, and only then, will they conclude that slavery does not pay and give it up. We will all be the better, both spiritually and materially, for de facto abolition.

Monday, February 13, 2017

Bad News: Banning Muslims May Be a Prelude to Killing Them

Follow me here:

If X wants to kill Y, X is going to figure out a way to kill Y. If Y tries to stop being killed by banning X, all that will do is induce X to look like ~X to get around the ban. Y would be much better off by discovering why X wants him/her dead and coming to terms.* If it is not possible to resolve the dispute (or if Y won't even bother to try due to prejudice), then the only rational solution is for Y to kill X first (or be prepared to die but the ban suggests Y is not up to that). So, bad as the ban is, it may only be the tip of the proverbial spear.

*What Trump should do instead of a ban, then, is to pull the U.S. military and oil interests out of the Middle East. We don't need the oil there anymore and Israel can take care of itself at this point (and we'll always have missiles, drones, aircraft carriers, and submarines if necessary). That essentially would turn Americans into Canadians in the eyes of Muslims. Americans are safe and we can redeploy our military assets or, better yet, wind them down.

Wednesday, November 30, 2016

Can the South Dakota Constitution check the Tyranny of the Majority?

South Dakotan voters, in their infinitesimal wisdom, have in recent years passed laws that prevent poor people from working unless they can convince employers that their labor is worth at least some minimum wage per hour and from borrowing small sums for short terms unless they can convince lenders that their credit is good enough to merit a negative interest rate (the interest rate cap recently established is so low that lenders will actually lose money by lending no matter how punctual borrowers are about repaying).

Here is what I had to say about the matter on KCPO's "The Facts" on 27 November 2016:

In other words, the tyranny of the majority is in full force thanks to South Dakota's carefree system of ballot measures. In case you are unfamiliar with the term, the "tyranny of the majority" refers to two wolves and a sheep voting on what is for dinner! The term is generally attributed to Alexis DeToqueville, who wrote over a dozen pages about it in his masterful tome Democracy in America:

If you accept that one man vested with omnipotence can abuse it against his adversaries, why not accept the same thing for a majority? ... What is most repugnant to me in America is not the extreme freedom that reigns there, it is the lack of a guarantee against tyranny.

Well, South Dakotans, ALL South Dakotans whether in a majority of all or a minority of one, are supposed to be protected from tyranny by the state constitution, particularly its bill of rights (Article 6), and especially Sections 1 and 27. They read:

§ 1.   Inherent rights. All men are born equally free and independent, and have certain inherent rights, among which are those of enjoying and defending life and liberty, of acquiring and protecting property and the pursuit of happiness. To secure these rights governments are instituted among men, deriving their just powers from the consent of the governed.

§ 27.   Maintenance of free government--Fundamental principles. The blessings of a free government can only be maintained by a firm adherence to justice, moderation, temperance, frugality and virtue and by frequent recurrence to fundamental principles.

How can either of those constitutional rights be reconciled with laws that force people, against their will, from entering into contracts (employment, credit) that they feel to be in their own best interests? I do not think they can, so the minimum wage and usury laws need to be struck down, now, and as harshly as possible. And in the future, measures that are patently unconstitutional should not even be allowed on the ballot. As a general rule, ballot measures should deal with the government's powers, politics, etc. NOT with the regulation of individuals, especially in matters economic. That is clearly a "fundamental principle" as the only early ballot measures that dealt with socioeconomic matters was Prohibition and it was an even bigger disaster at the state level than at the national one.

Wednesday, November 09, 2016

South Dakota Voters Overwhelmingly Approve Loan Sharks

Yesterday (11/8/16), three out of four voters in South Dakota approved a measure inviting loan sharks into the Coyote State by approving Initiated Measure 21, which caps interest rates on short-term loans at 36 percent per annum and imposes Arkansasian limits on work arounds.

This is what happens when initiated measures are twisted away from their original intent, which was to check government power, not to extend a tyranny of the majority over economic policy.

Replacing, not just repealing, Obamacare

Trump has promised to repeal Obamacare. To prevent its reinstatement down the line, or its replacement with something even worse, however, he ought at the same time to introduce a new system. I made the following proposal in Fubarnomics and think it still our best alternative:

1) make it illegal for employers to offer health insurance and for insurers to offer group health policies, i.e. all policies become INDIVIDUAL. This way job loss does not mean loss of benefits/uninsured status.
2) allow the creation of federally-chartered MUTUAL LIFE/HEALTH INSURERS that will offer individual variable premium policies throughout the NATION that cover life, own occ. disability, and health insurance in a single policy, with the payoffs tied to premium payments (i.e., savings) and actual claims. So holding premiums constant, somebody healthy who dies in an accident at 45 gets a big life insurance payout while somebody disabled at 25 gets none and somebody with average health insurance claims gets a medium life insurance payout. (Simple concept, somewhat tricky actuarially but I've never, ever met a dumb actuary and I know about a dozen of them. Can't say that for any other profession.)
3) randomly assign uninsured Americans to the mutual insurers so there is no serious adverse selection.
4) going forward, mandate pre-testing in utero coverage so there is no serious adverse selection. Any mother who does not start a policy for her embryo/fetus before it is tested or born shall pay a substantial fine and the baby shall be randomly assigned to a mutual insurer.
5) policies can never be cancelled and can never lapse but will lose value over time if premium payments stop.

If these ideas do not make sense to you, you don't understand insurance or behavioral finance and you should bone up or shut up. The proposals are designed to:

A) limit uninsured individuals by breaking the tie to employment and not allowing cancellation or lapses
B) limit adverse selection through random assignment and in utero coverage
C) encourage young, healthy people to make premium payments by compensating them with more life/disability insurance
D) make elderly patients face the trade off between extending life via expensive medical treatment vs. leaving assets to their heirs
E) keep costs low through the mutual form (i.e., ownership by insureds not stockholders) & competition & creation of a large, powerful interest group (mutual insurers and their policyholders) interested in finding ways of reducing medical expenses
F) bond insurers to pay for healthcare via the life insurance tie in: they will rationally spend money to save someone's life to prevent a life insurance payout.
G) if income redistribution is desired by the electorate, it can happen through government premium payments on behalf of the poor, veterans, or other subsidized groups

How to Stop Michele Obama from becoming POTUS in 2020 or 2024

Democratic party leaders are already planning to re-take the White House in 2020 or 2024 (depending on how Trump's first term goes), by using their largest remaining asset, Michele Obama. The easiest way to stop her is to clarify that the 22A includes SPOUSES. It was passed right after World War II, in response to FDR's unprecedented 4 terms (the 4th cut short by his death), when nobody believed that a woman could become president. Well, that ship has sailed so we have to make sure that we do not turn into a banana republic and subvert our own Constitution thru such a ruse as spousal succession. I think Michele would make a fine president but this isn't about her per se, it is about preserving de facto term limitations for POTUS. I think the American people sense that HRC was overstepping by trying to serve a third term, which is why her own party rejected her in 2008 and the national elector sent her home in 2016. Granted the discussion was personal, about her lying and being part of the establishment, rather than on the principle of term limitations. But now that the smoke is clear, we should act. (I'd like to include parents-children and siblings as well but that is more of a stretch than husband-wife as the former do not share a bed.)

We should also consider creating a new body, sort of like a grand jury, that vets people BEFORE they are allowed on presidential ballots regarding age, non-spousal relationship to a 2 term prez, and birth. I'm thinking 105 people drawn randomly from the population, 2 from each state, the District, and PR, plus one at large to preside and break any ties. This is so we do not ever have the embarrassment of electing someone ineligible.

Thursday, October 13, 2016

Wells Fargo Is Still an "Evil" Bank

John Stumpf, not to be confused with Donald Drumpf, has finally stepped down as the head of Wells Fargo. But guess what? The culture of Wells Fargo has not changed; it is still one of America's "evil" banks. Check out my Genealogy of American Finance, which shows that some of America's 50 largest bank holding companies are "good" banks that make their profits the old-fashioned way, by earning them. Others, like Wells Fargo, are "bad" banks that are more akin to vampires than legit businesses. It's a fun read and there are lots of pictures, hence the relatively high price. But if you want to avoid banking with "bad" bankers, it is an essential resource.

Monday, September 26, 2016

Pioneer Entrepreneurs in South Dakota

Pioneer Entrepreneurs in South Dakota

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana University. For South Dakota Festival of Books, Brookings, SD, 24 September 2016.

Since its publication in 2015, Little Business on the Prairie:Entrepreneurship, Prosperity, and Challenge in South Dakota has been a critical success but a commercial failure. When I’ve asked South Dakotans why they are not interested in buying, for half the price of a box of new thirty aught six shells, the first economic history of their state, the first history of entrepreneurship in their state, I’ve gotten responses that all boil down to what one cowboy-looking smart alec said: It must be an awfully short book. Well, it is not the longest of the 17 other books I’ve published, but it could have been. South Dakotans should be proud of what their state has done economically, without the aid of any fossil fuel deposits to speak of, by fostering innovation and self-help. [A less charitable hypothesis also presented itself at the book festival: too many SDers are uncomfortable with 5 syllable words.]
Surely the problem is not with the book’s main title as every self-respecting South Dakotan knows that the real Laura Ingalls Wilder grew up in South Dakota, not in Minnysooota like the television character of the same name [CLICK ... NB, The CLICK notations indicated change to the next slide. But I'm not posting the slides here as most are from the book I want you to buy! If you want to see the slides buy the book or go to the presentation. ;-)]. Maybe I should have used the term proprietorship instead of entrepreneurship, a French word that tends to evoke images of great inventors like Benjamin Franklin or Thomas Edison. South Dakota hasn’t really produced any of those, yet, but neither have many counties in the eastern part of the country with populations larger than those of this state. Moreover, early South Dakota produced a number of interesting inventors before invention became the almost exclusive playground of large corporations and private universities.
For example [CLICK], in 1892 Henry Hall of Hill City patented a go-devil, a mining hand cart and track mechanism. Frank Carpenter of Deadwood patented in 1899 an improved process of separating precious metals from their ores that was especially adapted to the dry ores found in the Black Hills and central Colorado. Ten years earlier, in Sioux Falls, Isaac Lawshe patented a device that kept time for musicians, like a metronome. In 1893, Yankton’s Theodore Mehring patented an improved beer faucet attachment. In Huron the following year Godfried Laube patented a gopher extermination system remarkably similar to the one employed by Bill Murray in the movie Caddyshack some fourscore years later [CLICK]. Laube also improved the clothes washing machine and a wheel especially designed for the board walks commonly employed as sidewalks in prairie towns.
In 1896, Wallace Houts of Parker teamed up with an Iowan to patent an improved automated telephone switchbox. Telephones, like cars, were really important to early South Dakotans. That same year, Walter Gripman of Sioux Falls received a patent for a new and improved lathe attachment “designed for cutting gears, grooving taps and reamers, splining shafts, cutting T-slots in chucks, and for various other work done on a milling machine.” In 1898, Elmer Gragert of White Rock in the farthest reaches of northeastern South Dakota applied for a patent for an improved crank to be used “in actuating wheels, shafts, &c.” Two years later, Woonsocket’s Charles Holmberg sought a patent for an improved piston engine. Abraham Lincoln Jones of Canton invented a new type of sewer pipe, one he believed would be more watertight and easier to install than the ones commonly in use in 1903.
Even the automobile was improved in South Dakota. [CLICK] Here is the Fawick Flyer, the first four door automobile made in America. Good thing Thomas Fawick put the steering wheel on the wrong side of the vehicle or Sioux Falls might be a barren industrial wasteland today, overrun by pheasants like Detroit. [CLICK] I’m not kidding about the second part of that statement, as the Motor City’s many blighted areas are chock full of ringnecks like these.
And the first part of the claim is not quite as outrageous as it might at first appear because South Dakotans adopted the automobile with alacrity. It was seventh in the nation in per capita ownership in 1928 because automobiles helped to reduce the state’s vast expanses, the tyranny of distance as it was sometimes termed. Automobiles spurred quite a bit of entrepreneurship as blacksmiths and liverymen gave up shodding and feeding horses for fixing engines and pumping gas. [CLICK] The automobile made the tourism industry more competitive by opening up entire routes, like Federal Highway 14, the “Black and Yellow Trail” as it was called, to entrepreneurs formerly relegated to the larger towns where passenger trains made regular stops. Over the course of the 1920s, tourist camps turned into strings of motels, or hotels that catered to people in motor coaches.
Air travel, by balloon and airplane, was also rapidly adopted by South Dakotans who wanted to overcome their state’s vast expanses. In April 1897, Henry Heintz (1848-1918), the postmaster of Elkton, received a patent for an airship, a semi-rigid balloon powered with an engine, or an early dirigible in other words. It took him and Aurora blacksmith Frank Wulf three years to develop a prototype, which promptly crashed after leaping just eight feet off the ground. A native of Luxembourg, Heintz formed the Northwestern Aerial Navigation Company in early 1902 to build and operate airships. The company was apparently a vehicle for a bid at a prize at the Louisiana Purchase Exposition to be held in St. Louis in 1904. Heintz and his machine never appeared but others in the state continued to experiment with lighter than air vehicles [CLICK].
The first airplane demonstration flight in the state occurred in April 1911 in Rapid City and was an act of entrepreneurship according to the local paper. “This event was of some importance. Rapid City had demonstrated that she had the enterprise to secure the first attraction of this kind ever offered in the state.” The event was successful enough to induce the State Fair Board to hire the Curtiss Exhibition Company to fly “every day of the fair, morning and afternoon” during the annual September state fair in Huron. It drew huge, enthusiastic crowds. More shows soon followed, including ones in Deadwood and Yankton, and the State Fair in 1912 enjoyed record attendance. South Dakota also attracted a large number of daredevils or stunt fliers who believed that the state’s air quality and climate were ideal for sensational flying. [CLICK] By the early 1920s, South Dakota had its own airline, Rapid Air Lines, Inc. of Rapid City. It was also home to Nellie Zabel Willhite, a member of the 99 Club, or one of the first 99 women in America to become a licensed pilot.
I could go on and on about South Dakota inventors but I won’t because entrepreneurship is about much more than invention, or even novel innovation [CLICK]. In fact, economists have identified three types of entrepreneurs: innovative, replicative, and extractive. As just described, early South Dakota did produce some inventive or innovative-style entrepreneurs. It also produced a few extractive ones but thankfully the state has been able to tame their worst excesses because, by definition, extractive entrepreneurs engage in theft, sometimes lawful theft but often of the Tony Soprano variety. Unlike the other two types of entrepreneurs, they are bad for economic growth. There is a whole book just waiting to be written on bank robberies in this state.
The bread and butter, or rather corn palace and chislic [CLICK], of South Dakota’s economic history are replicative entrepreneurs, or common folk who take somebody else’s innovation and extend it to new markets, typically geographically. They include farmers, ranchers, shopkeepers, professionals, and everybody else who is self-employed, who works on his or her own account rather than for some big, distant corporation. Without replicative entrepreneurs, South Dakota would never have become inhabited.
In fact, the first replicative entrepreneurs in the state hailed from Asia, where they learned from some innovative entrepreneur how to kill and process hairy elephants [CLICK] and sundry other species of megafauna, most unfortunately long since extinct. Here is a stone etching of a bison hunt, one of the many illustrations in the book [CLICK]. Later, other replicative entrepreneurs, also descended from Asian immigrants, came from the south with corn and the knowledge of how to grow it. Evidence of their long residence can be found just outside of Sioux Falls at Blood Run, at the Archeodome on the south side of Lake Mitchell [CLICK], and numerous other sites along the state’s undammed river bottoms.
The first replicative entrepreneurs of Euroamerican descent in the state were also hunters and trappers after fur, meat, and bones, including the bones of long extinct dinosaurs [CLICK]. Then came the placer miners in the Black Hills [CLICK]. Cattlemen soon followed, along with wholesalers, retailers, and professionals. Then came waves of corn and small grain growers, also followed by commercial and professional service providers from teachers to lawyers and pharmacists to doctors [CLICK]. The vast majority came as proprietors of their own little businesses, not as the employees of corporations, though some who failed as entrepreneurs or who wanted to set themselves up as proprietors would work for one of the railroads, mining companies, lumber corporations, or meat packing plants for a spell [CLICK].
In fact, South Dakota was home to numerous corporations, mostly small ones that can also be thought of as examples of replicative entrepreneurship. Circa 1910, just 30 years after statehood, South Dakota was home to 2,151 for-profit corporations active enough to be taxed by the federal government. As this graph shows [CLICK], most were small. Three in four had capitals less than $25,000 and 9 out of 10 had capitals less than $100,000.
Almost one in three early South Dakota corporations were in the financial sector, mostly small unit banks spread across the state even in hamlets like Carthage, Doland, Hurley, Kimball, Summit, Toronto, Underwood, and Winfred. Those banks provided short term financing for entrepreneurs large and small. Here is the breakdown by economic industry [CLICK]. Within those general categories were numerous businesses engaged in a variety of interesting pursuits including playing baseball, ferrying people across rivers, harvesting ice, staging operas, and digging wells.
Early corporations were not all located in Sioux Falls and Rapid city, either [CLICK]. The state average was 3.68 corporations per 1,000 residents. Those counties with more than 4.5 corporations per 1,000 residents are here underlined in red. Urban areas throughout the state and the Black Hills counties tended to have more corporations per capita, as did some lightly populated counties that still needed several banks, telephone companies, and so forth.
As this graph shows [CLICK], half of the corporations in business in South Dakota in 1910 had formed within the last five years. That was typical of highly dynamic, highly entrepreneurial economies where many tried and many failed. Business failure was never looked down upon in South Dakota, as long as one failed honorably, with ones boots off so they were available to creditors.
In fact, many South Dakotans were serial entrepreneurs who moved from proprietorship to proprietorship as the economic winds and their personal preferences dictated. Some were homegrown but early on most came from other states or countries. In 1907, for example, a serial entrepreneur and author named Frank Moody Mills, who had experience as a steamboat clerk, publisher, and electricity magnate in exotic places like Illinois, Iowa, and Michigan, established the Sioux Falls Traction Company over the objections of rivals who claimed to have offered the city better terms [CLICK]. Voters thought otherwise, approving a 30 year franchise. Mills came to Sioux Falls on the behest of his son Dan, who noted that Sioux Falls was “the largest small city in the United States without a street railway.” Later, Mills also developed intercity bus lines that connected Sioux Falls to nearby cities in adjoining states as well as towns in southeastern South Dakota.
Other serial entrepreneurs were less precocious than Mills. Charles Allen, for example, was a mule driver on a wagon train, a soldier, a homesteader, and a blacksmith before becoming a newspaper reporter. Tom Brick did unskilled agricultural work, then worked as a carpenter’s helper, then tried homesteading, then assembled machinery in Aberdeen, then worked as a millwright in Sturgis, then tried homesteading again before bartering his claim for an automobile that he ran as a taxi in Vermillion and Yankton during the Great War [CLICK], while the state’s younger men, like Lieutenant Cleveland Abbott, who was born in Yankton in 1892, were serving in France. For two years Brick was Vermillion’s only policeman before he bought a candy store and ice cream parlor. He sold that business to his son in 1939, a few years after Prohibition ended, and opened a liquor store. During his co-called retirement, Brick repaired firearms and made violins. He died in 1979, aged 98. Serial entrepreneur Kate Reynolds, a African-American woman, ran a restaurant but then worked as a nurse and a miner before owning a boardinghouse, a timber dealership, and a dairy operation.
Do not be surprised by Reynolds as early South Dakota was home to many female entrepreneurs and some entrepreneurs of color. Up to thirty percent of homesteads in some areas of the state were owned and operated by single women, many of whom doubled as laundresses, missionaries, teachers, or ladies of the night. Widespread proprietorship made the state a relatively convivial place for African-Americans, women, homosexuals, and Indians. For every business that banned members of some group, a business arose to serve that group. Russian immigrant and single mom Bertha Martinksy, for example, sold to Indians on credit. An Orthodox Jew, Martinksy at age 19 fled anti-Semitism at home, the Czar’s notorious “Pale of Settlement.” After a stint in the Eastern European Jewish district of Des Moines, she remarried after being abandoned by her first husband, a peddler, soon after the birth of their third child. Unimpressed by her second husband, a common laborer who gave her little more than two daughters, Martinksy left for the promise of a better life in South Dakota. It was not to be, not at first anyway, as she barely scratched a subsistence from poor, dry land seven miles northwest of Interior, now part of Buffalo Gap National Grassland [CLICK]. She eventually abandoned the claim, which nobody would buy even for just the back taxes.
Martinksy moved her shack to Interior, where she baked bread and doughnuts that she sold to the denizens of the Pine Ridge reservation. Learning Lakota as she went, she began to sell beads and other goods out of a wagon at rodeos and powwows. Her reputation for fair dealing with the natives, combined with her willingness to extend them credit, ensured their continued patronage when she moved her business to Kadoka in 1917. Her general store, which ran under the somewhat clunky slogan “if it’s to eat or wear or use, get it at Martinsky’s,” carried clothing, dry goods, and groceries. Martinksy lived in frugal quarters at the rear of the store, which was said to smell of apricots, vinegar, and dry goods. Her penurious ways, and good business practices, allowed her to save up to buy a building that she leased to a creamery company, and several other properties. She also established a tourist camp that unlike her early foray into agriculture she was able to sell for a profit.
I hope that you see that these are more than just interesting stories. Early entrepreneurs paved the way for South Dakota’s business-friendly climate today in several ways. First, entrepreneurship begets more entrepreneurship by providing would-be entrepreneurs with role models to emulate. Somebody who knows a self-employed individual or small business owner is much more likely to become self-employed or to start his or her own small business than somebody who knows only employees. South Dakota’s leaders have never had to wring their hands, wondering how to attract entrepreneurs to the state. They have always been here and hopefully always will be.
Second, business owners planted deep stakes in their communities that they wanted state and local governments to foster rather than to exploit. They created a government and political climate that is not just pro-business but pro-efficient government and that has kept state taxes and debt much lower than in most other states without starving the economy of important public goods. That means that South Dakotans who want to start their own businesses can do so more easily than the denizens of other states can and the results are palpable.
A Silicon Arroyo, for lack of a better term, is starting to develop along the I-29 corridor connecting USD’s Vermillion to Augustana’s Sioux Falls to SDSU’s Brookings. That is the same area that attracted many light industries disgusted with Minnesota’s high tax-high regulation regime in the 1970s. And of course Bill Janklow was able to create a Plastic Falls in the state by luring numerous credit card issuers here [CLICK]. Although the influx of corporations created many jobs, they also spurred entrepreneurship. South Dakota remains one of the bastions of self-employment, even outside of the agricultural sector, which was one of the reasons why the economy remained so buoyant in the wake of the Panic of 2008 and the Great Recession that followed.
Of course South Dakota’s economic history is much richer, no pun intended, than what I can relate to you in the few minutes we have together. That is why I wrote the book, hint, hint [CLICK].
But I also wrote the book to warn South Dakotans and indeed all Americans about the main threat to our economic prosperity. No, it is not Brexit or some international trade agreement or even illegal immigration. What could ruin us is a reduction of economic freedom, of the ability to form our own businesses cheaply and easily when we see fit. I know that this is the biggest threat we face, aside of course from another Hillbilly administration or a Trumpageddon [CLICK], because the federal government has run an insidious natural experiment in our state for the last century and a half. It allowed most South Dakotans a large degree of economic freedom but subjected a minority, like Flossie Bear Robe [CLICK], to the most egregious limitations, extending from their education through healthcare through even their right to own real property. The economically free part has one of the soundest economies in the entire nation, and a very green economy not reliant on fossil fuel extraction at that. The unfree part, by contrast, is the poorest part of the entire nation, even counting the backwoods of Alabama, Mississippi, or Alaska [CLICK]. I refer, of course, to the state’s large Indian Reservations. What the casino revolution has taught us is that Indians were not poor because they were Indians, they were poor because the federal government prevented them from getting rich by limiting their economic freedom.
The bigger lesson is that if the wrong policies had been implemented, Sioux Falls could have looked a lot like Pine Ridge. And it may in the future if Washington bureaucrats and South Dakotan voters continue to restrict economic freedom. Maybe that is too heavy a message for a Saturday morning but we have to keep the economy vibrant lest we pass on to our grandchildren a large national debt, a failed system of social security, and a moribund economy.
Thank you.
Any questions? [CLICK]