Shake, Shake, Shake

What the Shakers can teach us about the importance of property rights

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Here at Economic Forces, we like to emphasize the role of property rights in decision-making. There are various different components of property rights that matter for economic decisions. For example, we typically think of property rights as giving the owner the right to the flow of services generated from that property, the ability to exclude others from using the property, and the ability sell these rights to other people. Of course, property rights don’t always have these characteristics. Sometimes people have a right to property, but they are unable to sell those rights or there are restrictions on how the property can be sold (for example, land that cannot be divided into smaller plots). Also, sometimes the property rights are assigned to a group rather than an individual. In that case, how the flow of benefits from the property accrue to each member of the group will affect incentives of the individual members. It is this last characteristic that I would like to discuss today.

To discuss this characteristic, I would like to discuss the “Shakers.” The Shakers were a religious group that arrived in the U.S. around the time that the Declaration of Independence was written. Upon arrival, they had 12 members. Over the next 60 - 70 years, the group grew to about 4,000 members across 18 different groups. What made the group unique is that the members had to commit to a life of celibacy. In addition, the group held its property in common with each member getting an equal share of the group’s output. Given the vow of celibacy, group membership could only grow by attracting new members to the group. There were no requirements for entry into the group (other than religious beliefs) and the group rarely kicked anyone out (again, because the primary concern of the group was its religious beliefs).

During this early period, the Shakers were quite prosperous and produced a wide variety of goods including agricultural goods, textiles, baskets, and their well-known “Shaker chairs.” An important characteristic of their production is that they produced a number of goods that required high levels of human capital.

However, by the mid-19th century, the group’s numbers began to dramatically decline and various groups disbanded. The common explanation of the decline of the Shakers is that the group was celibate. After a certain amount of time, the lack of reproduction catches up with you. However, that argument seems weak. The Shakers had previously grown large from the admission of new members of the group. If celibacy is a proximate cause, one would also have to explain why they failed to grow their membership. Fortunately, an economic theory of property rights can help us explain their decline.

Since all property was held in common, people were paid the average product of their labor rather than their marginal product. As a result, there is a redistribution from those with marginal products higher than the average product to those whose marginal products are lower than the average product. A person’s marginal product is a function of human capital. Since human capital requires investment, a plausible hypothesis is that this sort of organizational structure would disincentivize investments in human capital. Those with high level of human capital would have an economic incentive to leave the group

Of course, given that this was a religious group, it is also possible that religious beliefs would trump the economic incentive to invest less or leave the group. Nonetheless, we also have to consider the role of entry and exit. On this point, it is important to note that those with low levels of human capital would have an incentive to join the group. Thus, even if those people with high levels of human capital were not inclined to leave immediately, as the level of human capital of their peers declined, they would have a growing incentive to leave the group as the average product continued to decline.

One of my mentors, John Murray, was able to test this hypothesis in a novel way. It is hard to measure human capital. However, human capital is correlated with literacy — especially during this time period. Murray argued that one could measure literacy rates by looking at legal documents. If a person signed their name to a document, that was an indication that the person was literate. Those who were illiterate would simply use a mark in place of their signature. If the human capital hypothesis is correct, then one would expect to observe illiteracy rates rise throughout the 19th century. This is precisely what Murray finds. The illiteracy rate was approximately zero among male Shakers in 1810 whereas the rate was nearly 30 percent for the surrounding male population. However, by the late 19th century, illiteracy rates increased to around 25 percent for members of the Shakers whereas the illiteracy rate of the surrounding male population had decline to the single digits. The same pattern is true of women. Shaker women had illiteracy rates near zero in 1810 as well, which is quite remarkable considering that other women in the population had illiteracy rates above 80 percent. But by the end of the 19th century, female illiteracy for the general population had fallen to the single digits, whereas Shaker women now had illiteracy rates around 20 percent. Thus, whereas the early members of the group were more literate (and therefore likely had higher levels of human capital) than the surrounding population, the trend of both the Shakers and the general population had reversed this observation by the end of the 19th century.

Murray supplemented these results by examining the persistence of membership. By tracking the group over time, he can determine what sorts of characteristics of the group were predictive of lifetime membership in the group. What he finds is that for cohorts in the early 19th century, literacy rates were a positive predictor of lifetime membership. However, for cohorts in the mid- to late-19th century, literacy rates became a negative indicator of whether someone was likely to be a lifetime member.

What all of this analysis suggests is that the experience of the Shakers can tell us a lot about the role of property rights in economic decision-making. Members of the Shakers chose to hold their property rights in common and share equally in the flow of benefits generating by that property. Initially, the group attracted religious and productive people with high levels of human capital. However, the incentives provided by the organizational structure and its handling of property rights discouraged human capital accumulation and attracted members of society with low levels of human capital, exactly as an economic theory of property rights would predict.