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]

Thursday, August 25, 2016

Hillary Trumped?

These are the slides I showed at the Republican Women of Minnehaha and Lincoln County monthly meeting/luncheon today. I ad libbed, so no text is available but the general gist of the argument was that anyone interested in a market-based economic model, which is basically anyone interested in American economic prosperity, should vote for Libertarian Gary Johnson because both Trump and Clinton, while not actually fascist and socialist as claimed, do have economic platforms that are state-centered, and hence ultimately growth negative. Plus Trump and Clinton both have some economic ideas that are quite dangerous macroeconomically.
NB1: This was a very interactive slide presentation so the overlapped pics below are from layering.
NB2: Yes, I am aware that Trump has changed his immigration proposals over the last few days and discussed the change orally.


























Monday, August 01, 2016

The Next Big Thing Redux



The Next Big Thing Redux

Robert E. Wright, Nef Family Chair of Political Economy, Augustana University

For Sioux Falls Downtown Rotary, Sioux Falls, SD, 1 August 2016


You’re all conversant with the concept of tipping points, or critical turning points when X rapidly changes into Not X. And you probably realize that tipping points can cascade, or cause changes that spur yet more changes, eventually leaving the world transformed. Tipping points are important in business, too, and who among us isn’t involved in business as an employee, investor, proprietor, or consumer? People who see a tipping point coming can make billions. Just ask George Soros or Warren Buffett. People who don’t see tipping points coming can lose billions. Ask the executives of Kodak, Xerox, or Enron, if you can find them, or even recall their names. Those folks were trend line followers, or na├»ve optimists.
Predicting tipping points or other types of reversals is of course much more difficult than following trends, which helps to explain why the remuneration is so much greater. Spotting a truly new trend can be lucrative – just ask the people who bought tickets to the Hamilton musical in 2014 -- but following an existing trend will earn tenuous rewards at best. That is because everything changes sooner or later.  The key question is not “if” but “when” or “how.”
Change over time is at the core of only one of the traditional liberal arts disciplines, History, and yet most business people, and even most business professors, do not make a serious study of it. That is probably because most equate History with dry political facts or, perhaps worse, arcane cultural minutia. The most successful value investors, however, know a good deal of history, especially business history.
That’s right, there is an entire subfield of history devoted solely to the study of individual innovators, key corporations and other business organizations, important industries ranging from coal mining to banking, and the economic growth and development of local communities, states, regions, nations, and continents. Unfortunately, business history is usually only taught at the graduate level and only in the best business schools, places like Harvard, Stern, Penn, and Darden. I’ve tried to integrate it into the curriculum at Augie, only to be met with silent, blank stares from professors and administrators alike, at least until Pam Homan joined the Augie team last fall.
The only other Augie leader to show an understanding of the importance of business history is Harry Thompson, head of the Center for Western Studies. It was Harry who encouraged me to write a book about the history of entrepreneurship in South Dakota. Nobody expected the book, which we titled Little Business on the Prairie, to make any bestseller lists but we have been disappointed in sales nevertheless. Once again, business leaders are leaving cash on the table, or exposing their businesses to losses, by failing to see the importance of business history.
I guarantee that in a decade your line of business, regardless of what it is, will be vastly different from what it is today. That is because the city, state, regional, national, and global economies are in flux, as are the technologies with which you purchase inputs, coordinate your work flows, and sell your output. Blockchain technology and so-called smart contracts, for example, are poised to revolutionize how businesses work even more fundamentally than the Internet did.
Instead of going with the flow and hoping a waterfall does not loom around the next bend, you need to be able to peer into the future, if only enough to avoid disaster. And the best way to understand the future is to understand the past, which, after all, is nothing more than a chronological series of presents, of moments of uncertainty about what the next present would bring. Study how previous presents changed over time and patterns much more sophisticated than following the current trend begin to emerge. Place those changes into ever larger contexts and those patterns become more nuanced and hence robust. Soon you will see that history does not literally repeat itself but it does rhyme and slant rhyme. You will never be able to predict the future with certainty, of course, but you’ll be able to assign relatively accurate probabilities to the more likely major outcomes. That is exactly what successful economic prognosticators like Bob Shiller and Nouriel Roubini do, and forms a large part of the strategy of successful value investors like Charlie Munger.
Little Business on the Prairie does not provide readers with off-the-shelf predictions applicable to their specific business niches but it does give those heavily involved in the state’s economy with the context needed to stimulate their own thinking and research. Foremost, it establishes that South Dakota has long enjoyed one of the highest levels of economic freedom of any of the states or provinces of North America and that stimulated considerable amounts of entrepreneurship, especially replicative entrepreneurship, throughout its history. That is important because entrepreneurship begets more entrepreneurship. People are much more likely to be self-employed, to form their own businesses, or to innovate in the workplace if they know someone else who is self-employed, owns his or her own business, or makes improvements in his or her job.
Once the state generated a reputation for economic freedom it attracted free spirits, like shepherd turned author Archer Gilfillan, who called South Dakota quote A great land! A free land! unquote because it gave him quote the opportunity to live his own life in his own way unquote. Conversely, statists and socialists generally eschewed the state until recently.
Cultural selection certainly occurred as well. In other words, the least risk-loving settlers were the ones most likely to leave the state. The quote unquote stickers, as the ones who stayed behind called themselves, were the ones who most readily adapted to rapidly changing economic, political, and climatic circumstances.
Freedom loving stickers like Gilfillan naturally voted for politicians who were freedom loving stickers too, policymakers who saw value in innovation, entrepreneurship, self-reliance, and self-employment. Unsurprisingly, early South Dakota lawmakers tended to be friendly towards business, especially small and local companies. That is the deeper context and background of South Dakota’s business friendliness or relatively high level of economic freedom today.
As a result of its business-friendly legal and political atmosphere, the history of South Dakota can be told as the history of one quote unquote BIG THING after another. Today, I’ll survey the state’s big things in the hopes of ascertaining what might be coming next. Note at the outset that these Big Things did not disappear completely but rather continued to the present, albeit in smaller ways. For example, the first Big Thing, dating to about 10,000 years ago, was BIG GAME HUNTING AND PROCESSING. Those activities still occur in the state today, they just are not as important to the overall economy as they once were, declining from an estimated quarter of GDP then to less than one percent of total economic activity today. Augie archeologists, for example, tell us that on Firestone Creek in present day Mitchell there existed a site where Indians processed bison into pemmican, a mixture of fat and meat resistant to spoilage, that was sent down the Missouri River to Cahokia, near present day St. Louis, for purposes of trade or tribute. By 800 AD and possibly earlier, RIVER VALLEY HORTICULTURE AND LONG DISTANCE TRADING were probably even more important than big game hunting. South Dakota’s river valleys were by then already part of a corn belt and the ecotone, or transition zone, between the woodlands of the east and the plains of the west. Eastern South Dakota was by then an important zone of long-distance trade, as demonstrated by the artifacts recovered from the Blood Run site along the Big Sioux River just outside of Sioux Falls. By about 1325 AD, if not earlier, SLAVE RAIDING and TRADING was also a Big Thing, as evidenced by the skeletons at the Crow Creek massacre site near present-day Chamberlain, which included the expected distribution of both genders and all ages, except young women, who presumably were enslaved. And you thought sex trafficking was new.
During the sixteenth, seventeenth, and eighteenth centuries AD, after indirect trading and then direct contact with Europeans, the FUR TRADE became the next Big Thing. That included bison and bear hides and elk and deer skins for sure but also the pelts of beavers and other small furbearers.
The BLACK HILLS GOLD MINING BOOM took place in 1870s but the placer prospectors actually did not find much gold compared to what would eventually come out of the Homestake Mine. Instead, what boomed were the various businesses that found it lucrative to supply the miners with what they needed, which included clothing, food, shelter, and something euphemistically called entertainment. This shows that sometimes it is better to supply the producers of the next Big Thing than to be directly involved oneself. Internet backbone manufacturer Cisco Systems, for example, continues in operation while Boo.com, Boxman.com, Clickmango.com, Etoys.com, and thousands of other tech startups live on only as examples of irrational exuberance in various blog posts.
The 1880s witnessed the Great Dakota Boom, the rapid expansion of EAST RIVER FARMING. Efficient farmers and railroads were the big winners here, along with successful town boosters in places like Aberdeen and Huron. The boom ended with the rains so some South Dakotans in the 1890s turned to FINANCE, especially COMMERCIAL and MORTGAGE BANKING, and also CORPORATE LEGAL SERVICES. That might sound odd but the state tried to unseat New Jersey as the corporate charter capital of the country, only to lose the contest to Delaware after South Dakota’s lightly regulated chartered corporations gained an unsavory reputation among investors for fraud and chicanery. South Dakota officials have made noises about making another run at Delaware and I’ve publicly argued that it is possible it could win so CORPORATE LEGAL SERVICES could become a Big Thing in So. Dak. once again.
RANCHING was the Big Thing of the first decade of the twentieth century, especially WEST RIVER, where the open prairie was enclosed by barbed wire fences for the first time, forcing small scale operators like Bruce Siberts out of the free range cattle and horse business.
In the 1910s and 1920s, WHOLESALING was the Big Thing as companies like Brown Drug Company of Sioux Falls cropped up and grew by supplying various RETAILING establishments throughout the Northern Plains. Competition was intense, especially as automobiles proliferated, which they did amazingly quickly in a state terrorized by its own vast spaces. The aggregate number of trade centers in South Dakota, where most retailers naturally located themselves, declined by just one during the 1920s. Turnover, however, was 50 percent. In other words, half of the little towns in existence in 1920 were gone by 1930; the retailers that inhabited them went bankrupt or moved on to the next trading center.
That brings us to the 1930s, the decade of the Great Depression, when the Big Things were the PUBLIC DOLE and PHEASANTS. When people think of the Great Depression on the Great Plains, they think of the Okies of John Steinbeck’s Grapes of Wrath. A higher percentage of South Dakotans, however, were on the public dole than the residents of any other state in the union. Meanwhile, pheasants, which had been introduced in the 1910s and 1920s with mixed results, thrived in the state’s many uncultivated fields, supplementing the diets of many a rural family with cheap protein and cementing the state’s reputation as one of the world’s premiere pheasant hunting destinations.
The 1940s brought World War II and renewed prosperity that manifested itself in many ways, the most important of which was EAST RIVER FARM MECHANIZATION AND CONSOLIDATION. Steam tractors had appeared on the prairies in the 1880s and modern gasoline ones in the 1920s but it was not until the 1940s that it was clear that pack animals would soon completely disappear from the state’s farms, replaced by efficient but expensive mechanized critters that devoured farmers who were not shrewd businessmen as well as keen agriculturalists. Innovations included the proliferation of so-called sidewalk farmers who lived and worked in town during the week and tended their farms on evenings and weekends and also suitcase farmers who, like giant mechanical geese, worked multiple farms in multiple states by following differential seeding, weeding, and harvesting schedules.
In the 1950s, the federal government stepped in to provide the next Big Thing, the RENEWABLE HYDROELECTRIC ENERGY produced by the dams of the massive Pick Sloan Missouri River improvement project. To this day, South Dakota gets well over half of its electricity from its hydroelectric dams, something this old boy from Western New York, which gets most of its electricity from Niagara Falls, surely appreciates.
Aided by another federal project, the interstate highway system, TOURISM was the Big Thing of the 1960s. The state of course had always attracted visitors, especially to the Black Hills. At first many came by rail but in the postwar period the automobile reigned supreme. And the motorcycle. The 1960s was when the Sturgis rally really began to take off as a national event. Pheasant hunting remained important and the so-called great lakes formed by the Pick Sloan project began to attract notice as one of the Midwest’s premier fisheries too.
In the 1970s, MANUFACTURING grew by leaps and bounds in the state, though admittedly from a low base. Between 1969 and 1984, about 100 manufacturing businesses left Minnesota for South Dakota to reduce their tax and wage bills. Litton, Sencore, Grant, Raven, and others built everything from air balloons to microwaves to motorcycle helmets in the state. Some folded, moved, or were bought out, but others, like Trail King Industries, took their places.
The 1980s saw the revival of the state’s FINANCIAL SECTOR with the entry of Citibank and other banks into the CREDIT CARD PROCESSING INDUSTRY. Well educated, hardworking, inexpensive workers without strong accents located in the center of the country was a dream come true for Citibank executives, who, contrary to myth, decided to move operations to Sioux Falls before the state dropped its usury cap. Ironically, liberal do gooders with little understanding of history, business, economics, or even rudimentary arithmetic are currently trying to cap interest rates on small consumer loans in South Dakota once again. If they succeed, the next Big Thing might be businesses that work around their silly little law.
In the 1990s, HEALTH CARE was a big growth industry in South Dakota. That was the decade when Sioux Valley Hospital, now Sanford, Avera McKennan Hospital, and Regional Health in Rapid City began to rapidly expand and consolidate. By the first decade of the twenty-first century, agriculture was once again on a solid footing, after terrible troubles in the 1970s and 80s, because of improved techniques and technologies but also due to SPECIALIZED “NEOAG” PROPERTY RIGHTS that separated land ownership from agricultural rights, water and mineral rights, and hunting rights. Because of this intricate system of contracts, an octogenarian living near Madison can lease land he owns in western Miner County to a resident rancher, a nearby farm operator, and a hunter from Sioux Falls, thereby maximizing both the use of the land and his income. And in dry years, he can sell excess water on his land to his neighbors. ETHANOL is another recent Big Thing thanks to bumper crops of corn, POET, and government subsidies.
So, finally, we have reached the present and can start to think about what might be the state’s next Big Thing. Certainly OTHER FORMS OF RENEWABLE ENERGY, ESPECIALLY SOLAR and WIND have to be on the short list because of the state’s history with hydro and ethanol and its seemingly never ending supply of moving air and sunny days. Many of the first jokes about the state referenced its wind, which allegedly required that South Dakotans scream at each other to be heard and that they double stitch the buttons of their shirts lest they be ripped off. Photographs of early settlers taken in summer often reveal the effects of the sun. Some members of the audience may recall the time when South Dakota called itself the Sunshine State. If not, take a good, long gander at the state’s flag.
Another possibility is that entrepreneurship itself will be the state’s next Big Thing. In other words, DIVERSIFIED ENTREPRENEURSHIP, a little of this and a little of that, might be what drives the state economy in the 2020s. If anyone outside of South Dakota would read Little Businesson the Prairie and discover the worlds of opportunity available here, entrepreneurs and innovators might start to flock to the state at least to get started, much like Gateway computers did before it slunk off to California and sold itself to Acer. Institutions like The Bakery, a new 8,000 square foot small business incubator in downtown Sioux Falls, combined with the state’s business-friendly atmosphere and culture, might make South Dakota the next big place to start a new business in the Midwest or even the nation.
MEDICAL RESEARCH could also be the state’s next Big Thing. The healthcare systems that emerged in the 1990s have matured and are now looking not just to practice medicine but to advance the frontiers of medical knowledge in areas like genomics and genomics counseling and some other specialties.
A closely related and certainly not mutually exclusive possibility is that South Dakota’s next Big Thing will be AUGUSTANA UNIVERSITY, if it can transition from a liberal arts college into the state’s first great private research university. That will require more institutions like Sanford and more individuals like Rudy Nef, who endowed the chair that I hold at Augie, to step up and donate resources. Good, private research universities like Stanford, MIT, and others of course drive innovation in high tech industries but also across a broad spectrum of economic activity. Harvard, for example, originated many famous business consultancies, including McKinsey, while New York University, for better or worse, helped to create the nation’s modern financial system.
South Dakota’s Indian Reservations may prove to be a superior asset. Some tribes near major cities got rich from their casinos but the Indians of South Dakota did not because of the tyranny of distance and the state’s relatively liberal non-Indian gaming laws, like Deadwood and all those electronic casino competitors. But there are plenty of other stupid laws, like those against marijuana, that the state’s Indians could help to subvert. Because of fuzzy jurisdictional lines, the state’s Indian tribes have more policy leeway than non-Indian governments do and hence could help Americans to dodge Dodd Frank and Obamacare, among other policy monstrosities, and make a bundle in the process.
By design, the possible next Big Things just mentioned are tied closely to South Dakota’s unique history. But of course the state is part of larger regional, national, continental, hemispheric, and global economies, any of which could spark an exogenous Big Thing in the Mount Rushmore State, much as the Eisenhower administration did with the Pick Sloan project and the interstate highway system. Of course I can’t pretend to know every new trend and fad throughout the world, but I do know of some movements that tie in nicely with the state’s history. For example, due to the rise in sex trafficking over the last few decades, prostitution and pornography have become major political issues again. Some policymakers and pundits want to abolish them completely while others think that they should be decriminalized, taxed, and regulated. I don’t want to take a position on the matter here today, I just want to remind you that prostitution in Deadwood was de facto tolerated until the early 1980s. To my knowledge, the state has never been a serious producer of pornography but of course that could change. After all, movies have been produced in the state and it has not always been a bastion of family values. In addition to rampant prostitution, in the late nineteenth century South Dakota was a haven for rich folks who wanted to get a quick and easy divorce by the standards of the day.
I would be remiss if I did not also note that South Dakota’s future is not necessarily rosy. It could be shocked by forces outside of its control, ranging from natural catastrophe to global recession to piss poor policies emanating from Washington. The biggest threat that South Dakotans can control, I believe, is the recent abuse of ballot initiatives, several of which have reduced economic freedom and vitality. Plebiscites are a horrible way to establish economic policy because it is too easy to use language to obscure the true costs of the measures, or to hide the identities of their ultimate beneficiaries and victims. Ballot initiatives should be used to check the state government should it behave tyrannically, not to establish a tyranny of the majority.
Adam Smith once claimed that all that was necessary to turn a barren desert into an opulent state was quote peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things unquote. For the present, South Dakota has those three things and it is better than a barren desert, most years anyway. All that is left is for the natural course of things to occur and that means for you to discern the next Big Thing in your own area of expertise and make the most of it.
Thank you!

Friday, June 03, 2016

Uses of History or Abused Historians?

I posted these comments in response to this recent Los Angeles Times op ed by American Historical Association's executive director James Grossman:

History isn't a 'useless' major. It teaches critical thinking, something America needs plenty more of


Not everyone can read the comments on the native page for some reason, so I have copied them here for "posterity."

The amazing thing to me is that history can teach more than skills, it can relate actual everyday useful information about business and the economy. But mainstream history organizations, like that Dr. Grossman represents, regularly eschew business and economic historians, save for a few "historians of capitalism" who don't know the difference between a leading economic indicator and a negative externality. As I noted in the Chronicle of Higher Education over a decade ago, the problem is that departments make hiring decisions and they hire their own, people who think about the same things they do in the same tired, old ways. Despite having a Ph.D. in History and authoring almost 20 books, most from major university publishers like Chicago and Penn or major commercial publishers like McGraw Hill and Wiley, I couldn't land a tenure track job in history, so I had to make more money (much more money) teaching out of business, economics, and policy departments! If Grossman himself knew how to think critically, he'd make sure that people like me were able to teach out of history departments because then enrollments would be going up, not down. Instead, he writes an op ed and checks a box on his To Do list.




Stephen Campbell
@HistorianSteveC
Jun 03
 
@robertewright but I'm sure Grossman does indeed have critical thinking skills even if you disagree with his approach, conclusions, etc

To which I respond, I don't disagree with his approach, conclusions, etc. per se, I don't think he is approaching the issue in a critical way. Instead of whining that people don't understand the benefits of his increasingly unpopular product and banal generalities he ought to actually improve the product by ensuring that those of us with proven track records of making history relevant to the real world (business, economics, policy) are accorded our fair share of jobs, professional laurels, etc. What he is trying to do, in essence, is to shove the same old product down the throats of clients instead of listening to what his clients are telling him and responding accordingly. He hasn't even considered the correct metrics, which are the number of students taking history courses offered out of all departments, not just the number of history "majors." What he would see is that history is thriving while his narrow view of history is the one dying.

Entrepreneurship in South Dakota



So. Dak. So Entrepreneurial

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana University, Sioux Falls, SD for Sioux Falls Rotary West, Sioux Falls Country Club, 3 June 2016

 I often work in my office at Augie late into the evening to write because it’s quieter and with fewer distractions. So I know the night janitor in my building better than most. He’s what comedians call a quote unquote grown ass man, not a kid working his way through college or a retiree supplementing his income. Most college professors, like my colleague Reynold Nesiba, would now launch into a diatribe about needing to raise the minimum wage or the evils and inefficiencies of wealth disparities. They wouldn’t share their own money with the night janitor, mind you, but they would be happy to take some of your money to give to him!
But I’m no ordinary professor and South Dakota is no ordinary state. It turns out that the night janitor is very comfortable indeed because he owns his own cleaning business. While he toils at Augie, he has people who work for him, cleaning various businesses around town. When I asked him where he got such a brilliant idea, he responded that all his family members had been proprietors at some point in their lives. His specific story is not in my book, Little Business on the Prairie, but his story fits the theme perfectly: South Dakota is one of the most entrepreneurial states in the nation.
The claim that South Dakota is hyper-entrepreneurial jars most people on the coasts, especially those who associate entrepreneurship only with high tech startups. In fact, scholars have identified three types of entrepreneurship: innovative, replicative, and exploitative. The last mentioned one includes the sorts of activities depicted in HBO series like The Wire, The Sopranos, and Game of Thrones: extorting, thieving, killing sorts of activities. Thankfully, we have little of that here, though I did read someplace that Ian McShane of Deadwood fame is going to appear on Game of Thrones soon. Of course McShane is British and not actually from Deadwood.
As measured by patent activity, South Dakota is not home to much innovative entrepreneurship. South Dakota ranks 49th in total patents issued but of course its population is about the same as that of Monroe County, New York, the seat of which is my hometown of Rochester. In per capita terms, the state still ranks 47th in patent issuance, better than Arkansas and Mississippi but slightly worse than Alabama. No wonder the state is called South Dakota.
Seriously, South Dakota lacks several key drivers of patent activity, large corporations in manufacturing or big pharm -- that is P H, not F, A R M or a large, private research university. Augie’s a university now, in name, but very small and teaching-oriented and only a handful of public schools have achieved elite, patent producing status and ours are not among them.
Of course not all innovative activities can be patented but measuring them reliably is well-nigh impossible. Measuring replicative entrepreneurship, by contrast, is relatively easy. Replicative entrepreneurs extend innovations developed elsewhere to new markets defined by geography or market segment or niche. It is best measured by proprietorship income as a percentage of total income or rates of self-employment.
Nationally, since 1990, about 10 percent of workers have been self-employed. In South Dakota, the figure is almost twice that. Here is a snapshot from 2012 that shows that self-employment rates in South Dakota for all major categories are higher than the national average except for minorities, a point to which I will return shortly.
The vast majority of farmers are self-employed, replicative entrepreneurs who extend innovations developed elsewhere, at John Deere and Monsanto say, to the prairies and grasslands. That might seem to give South Dakota a leg up in the proprietorship stats but they don’t include agriculture. Here is what they include, which is essentially everything else.
To explain South Dakota’s lead in replicative entrepreneurship, most people point to its public policies, which are among the most business-friendly to be found today. The state has one of the highest levels of quote unquote economic freedom in all of North America and hence the world. That means that total taxes are relatively low, that entry and exit into business is relatively easy, that hiring and firing workers is fairly simple, and so forth.
But the real question is why is South Dakota so economically free? Right next door is a state that ranks considerably lower on the economic freedom scale, though it has improved from the days when it was called Taxasota or Mininumfreedomota. Okay, I made the latter one up. The only way to understand So. Dak.’s high level of replicative entrepreneurship, I believe, is by studying the state’s history backwards. I don’t mean ass backwards -- I’ll leave that to my aforementioned colleague -- I mean we need to ask “What are the root causes of present day conditions?”
Scholars have shown that high levels of entrepreneurship lead to … you guessed it, high levels of entrepreneurship. When people, like Augie’s night janitor, have family and friends who form their own businesses that gives them the courage and knowledge to do likewise, which gets yet more people involved in business on their own account. That explanation, however, is a mere tautology unless we think about why the state’s first inhabitants were replicative entrepreneurs.
Well, the first Euroamerican residents. American Indians were obviously the state’s first inhabitants. We know they engaged in exploitative entrepreneurship well before contact with Europeans. There is a massive massacre site on the Missouri River called Crow Creek that has been dated to about 1325 AD. 10,000 years before that, American Indians killed and slaughtered mammoth in western South Dakota, a clear example of replicative entrepreneurship. Later, especially in the river valleys, Indians engaged in agriculture, planting crops, like maize, domesticated elsewhere, again clear examples of replicative entrepreneurship. If this interests you, I urge you to visit Blood Run, on the Big Sioux right outside of Sioux Falls, for further details.
If you ever find yourself in Mitchell, check out the Archeodome on the south side of the lake. Researchers from Augustana University working there discovered a facility that Indians used to process bison into pemmican, a mixture of fat and protein that keeps for relatively long periods. They may have exchanged it for pottery made downriver at Cahokia, near present day Saint Louis. Not enough of the archeological record survives to proclaim this innovative entrepreneurship, but it was at least replicative.
Unfortunately, the U.S. government did not just steal the Indian’s land, which according to the thinking of the day was justified by non-improvement. What was not justified, by law or religion, was the destruction of native entrepreneurship. Paternalistic government policies essentially infantilized Indians, stripping them of the financial and human capital necessary to start their own businesses as well as the incentives to grow businesses beyond the nano-stage, as exemplified here by Flossie Bear Robe’s sewing business.
So it is to the first Euroamerican settlers that we must turn to for the roots of South Dakota’s entrepreneurial culture. They were miners in the Black Hills, farmers in the east, and ranchers in between, along with the wholesalers and retailers who supplied them with life’s essentials. Here are goods traveling overland before the railroads came in and here are some fancy goods for sale in Sioux Falls. In short, they were almost all replicative entrepreneurs, extending mining techniques learned in California and Nevada, ranching technologies developed in Texas, and farming systems honed in Minnesota, Iowa, and Nebraska, and selling goods manufactured in the Eastern states in ways perfected in that same region.
As I show in Little Business on the Prairie, which makes a great gift if you are not into nonfiction reading yourself, replicative entrepreneurship bred more replicative entrepreneurship each generation ever since. In fact, South Dakota’s history can be told, decade by decade, as the story of the next “Big Thing,” as a series of hot economic activities that drove the state’s economy. A sketch appears on my blog, financehistoryandpolicy.blogspot.com, that’s financehistoryandpolicy all one word dot blogspot dot com, where I’ll also post a copy of this talk.
Here are some highlights:
Sturgis: an orgy of entrepreneurship as well as of the flesh
The Black Hills lumber industry
The Aeronautics industry: heavier and lighter than air
Sioux Falls’ Automobile industry: The famous Fawick Flyer
Tourism as big as the sky
Although Amerindian entrepreneurship was squelched and hence did not spur the state’s entrepreneurial culture, the American Indian’s story is an important one because it shows what the state’s economy would look like if the government were to greatly diminish the economic freedom of the state’s non-Indians. Incomes East River would not be quite as low as they are in the state’s Indian Country because the soil is better and water more plentiful, but they would be much lower than they currently are.
Some of you might be thinking that Indians are different, even racially or culturally inferior, and that explains the poverty found on Pine Ridge, Rosebud and so forth. If so, expunge the thought immediately as it is pure, unadulterated male cattle feces. Indians thrive economically when allowed to do so and, as the son of an Appalachian, I’ve seen Euroamericans living in utter despair and squalor in districts run by, and for, the coal industry.
Thankfully, early South Dakotans endowed us with a healthy skepticism of government as well as a culture of replicative entrepreneurship. South Dakota has long possessed one of the most small-d democratic governments in the world and its constitution is replete with checks against arbitrary governmental power. One reason that the same political party was able to dominate the state’s government almost every year for an entire century was that the electorate, unlike voters in many other states, felt no need to see-saw back and forth between the parties to maintain some semblance of balance.
One of those important checks against governmental overreach, however, appears to be getting out of control. Generally speaking, ballot initiatives served South Dakota’s citizens well when the prevailing ethos would not countenance laws that interfered with individual economic freedom. Due perhaps to the increasingly nationalized K thru 12 curriculum taught in South Dakotan schools and the influx of immigrants from more liberal, by which I mean statist, places throughout the United States and abroad, initiatives that would not have been countenanced even a decade ago are now making it to voters and even winning.
If left unchecked, ballot initiatives may become too democratic, too much like De Tocqueville’s tyranny of the majority, too much like two wolves and a sheep voting on the dinner menu. Rather than abandon ballot initiatives, I think we should limit their scope via the Golden Rule. In other words, policy X must apply to everybody, not just group Y. For example, if you believe that the government should be allowed to prevent people from working unless they earn at least so much per hour, then you should be prepared to allow the government to set a minimum salary for your particular occupation as well. Then imagine explaining to your daughter that you lost your job because your company can only pay you $56,000 per year for a job that the government says it needs to pay at least $60,000 to fill.
Or, if you believe that some interest rates are too high and should be capped, then you should be prepared to allow the government to set all interest rates, which is the same thing as it deciding who gets credit and who does not. Then imagine explaining to your son that you cannot buy him an automobile because you cannot find a loan for less than the 6% the government says you are allowed to pay.
In short, right now it is just too easy to vote to restrict other people’s economic freedom while continuing to enjoy your own.
Too much is at stake here to be decided by a simple majority on a specific date. As economic freedom deteriorates, so too will levels of entrepreneurship and that will snap the close connection between present and future levels of entrepreneurship. Then South Dakota will start to look like my home state of New York, where people who lose their jobs ask “how much money can I get from the government and for how long?” instead of “how can I go into business for myself” as many South Dakotans still do. What they have in New York and states like it is a vicious cycle of high taxes and restrictions on hiring and firing necessitated by high levels of unemployment. That means less economic freedom and hence less entrepreneurship and hence more need for expensive social programs when the economy turns sour, as it often does in places that cannot rapidly respond to market changes because of a dearth of economic freedom. That means more taxes and another spin of the wheel, or rather another swirl of the toilet water.
If South Dakota turning into New York sounds far-fetched, keep in mind that the state’s economy has thrice imploded, once due to drought and migration outflow, once due to drought and restrictions on economic freedom called the New Deal, and once due to drought, migration outflow, and restrictions on economic freedom called Nixon’s New Economic Plan and inflation. Well, to adapt a famous line from Game of Thrones to the West, drought is coming, we just don’t know exactly when, but it will bring zombie cattle. The state’s economy is more diverse than it was as recently as the Farm Crisis of the 1970s and 80s but it is to some extent a Ponzi scheme based on in-migration, which is a function of jobs and hence ultimately on levels of entrepreneurship and economic freedom. If migration flows were to stop or, worse, to reverse, the whole boom could quickly unwind as housing prices drop and construction jobs dry up.
Trust me on this as I saw it firsthand in my hometown of Rochester, New York, which lost 34 percent of its population in the last few decades of the twentieth century. It stabilized soon after I left in 1995 but I’m 99 percent sure my departure was more effect than cause. Okay, 100 percent. The cause was the loss of economic freedom throughout the state that led Kodak executives to ignore their company’s greatest invention, digital photography. Given the high tax rate, it was simply too much work to develop a whole new industry so they milked their cash cow, photograph development, dry until an east wind just blew it away and its plants had to be shuttered. That’s was a pun, by the way. Xerox, too, got fed up, first moving its headquarters and then most of its operations out of the state. Others were not far behind, leaving only Bausch and Laum to carry on the city’s storied comparative advantage in optics.
Can you tell that I don’t want to be an economic refugee again? But I also don’t want other people to suffer needlessly. The way to help the poor is to directly transfer resources to them, not to implement public policies the unintended ripple effects of which few voters grasp or even think about.
Thanks for your time and attention. Any questions about So. Dak.’s long history of entrepreneurship?