How a Tiny Village Transformed China’s Economy by Proving Incentives Matter

"Work hard, don't work hard—everyone gets the same. So people don't want to work." Those were the words of Yan Junchang, the Chinese farmer who spearheaded a secret agreement that ultimately saved millions of lives.

No Private Property

In 1978, farmland in China was divided up into collectives. Courtesy of the Communist revolution, no personal ownership of farmland was allowed. "Back then, even one straw belonged to the group," said Jungchang, who was a farmer in the village of Xiaogang in 1978. "No one owned anything."

According to NPR,

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.

At the time, the produce of the farmers belonged to the government, who would then divide up the food evenly among the farmers in the collective.

Collective Ownership

Contrary to the plentiful bounty that socialists insist would result from collective ownership over the means of production, “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.”

According to China.org,

The village population was only 120 before 1958 and 67 villagers died of hunger during the Great Leap Forward from 1958-60. In Fengyang County, where Xiaogang is located, one in four people perished – 90,000 in all.

But under collectivism, some are more equal than others. As the farmers starved to death, “no civil servant suffered from hunger in our region,” Junchang recalled.

Food was not adequate to feed everyone. Families boiled tree leaves, bark and any edible wild plants; we ate whatever we could find. After consulting with some other villagers, I made up my mind to contract land to individual households no matter what penalty would be imposed on me. We didn't want to starve anymore.

According to the contract, “The farmers agreed to divide up the land among the families. Each family agreed to turn over some of what they grew to the government, and to the collective. And, crucially, the farmers agreed that families that grew enough food would get to keep some for themselves,” according to the NPR report.

Incentives Matter

Even a partial introduction of the linking of effort to reward reaped stunning results.

“Grain output increased to 90,000 kilograms in 1979, over six times as much as the previous year,” according to China.org. “The per capita income of Xiaogang climbed to 400 yuan from 22 yuan.”

Farmers, now incentivized by the opportunity to even partially benefit from their effort rather than see their produce forcibly shared with the collective, unsurprisingly exerted greater effort. "We all secretly competed," said Junchang. "Everyone wanted to produce more than the next person."

As NPR explained,

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.

“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,” NPR added. “After the contract, the families went out before dawn.”

Not everyone was pleased with the Xiaogang farmers’ actions, however. As China.org has noted, “Some people accused Xiaogang's villagers of ‘digging up the cornerstone of socialism.’ Luckily, Fengyang Prefecture's Party Secretary, Wang Yuzhao, was open-minded.”

Courageous Farmers

Yuzhao was informed of the favorable harvest yielded by the new arrangement and promised to protect the village’s secret as long as the practice didn’t spread.

Word of the farmers’ contract did spread, however. But fortunately for Yan and his fellow villagers, “there were powerful people in the Communist Party who wanted to change China's economy. Deng Xiaoping, the Chinese leader who would go on to create China's modern economy, was just coming to power,” reported NPR.

So instead of executing the Xiaogang farmers, the Chinese leaders ultimately decided to hold them up as a model. Within a few years, farms all over China adopted the principles in that secret document. People could own what they grew.

The Chinese government allowed for other economic liberalizations, as well, which helped spur historic growth credited with lifting up to 500 million Chinese out of poverty.

The Xiaogang farmers’ agreement inspired the end of communal farming in China three decades ago, but unfortunately, the Chinese government continues to refuse to legalize rural land ownership.

The courageous actions of the Xiaogang farmers illustrate a point as important now as ever. As more people, especially the young, have been developing a sympathetic view of socialism and the collectivization of the means of production, the farmers’ story reminds us of just how disastrous collectivism can be.

Private Property Rights Are Important

The elimination of the proper incentives provided by private property rights over the means of production creates not an egalitarian bounty but a paradise for parasites. Separating reward from effort kills the initiative to work.

Private property rights in a free economy, on the other hand, are indispensable for the eradication of poverty and the growth of human flourishing.

When confronted by your socialist family member or friends on social media advocating for economic collectivism, be sure to tell them the story of the secret contract that revolutionized China.