Brilliant Professor

I’m not sure if this is a true story or not, but the underlying principle is infallible: you cannot multiply wealth by dividing it. Special thanks to my friend Allison for sending this my way!

A college economics professor made a statement that he had never failed a single student before, but had once failed an entire class.

That class had insisted that the free market had failed, and under a “fairer system” no one would be poor and no one would be rich – a great equalizer.

The professor replied, “OK, we’ll have an experiment in this class using that system.”

All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A, unless those were the averages.

After the first test, the grades were averaged and everyone got a B. The students who had studied hard were upset and the students who studied little were quite pleased with themselves.

As the second test rolled around, the students who had studied little studied even less and the ones who had studied hard decided they wanted the free ride they were entitled to as well, so they also studied very little.

The second test average was a D!

No one was happy.

When the 3rd test rolled around, the average was, you guessed it, the average grade was F.

The scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, every student failed the class, and the professor told them that their system of economics, socialism, would also ultimately fail because when the reward is great, the effort to succeed is great. But when government takes all the reward away, no one will try or want to succeed.

profbbrown

I remember that story. There was a follow-up the next semester.

Having heard about the failed socialism experiment in the previous class, the next group of students were eager to try a different system–a capitalistic one.

Test scores would be assigned as usual, but each student would be awarded the points in the form of Monopoly money. For example, a score of 96 would result in that student receiving 96 Monopoly dollars which he or she had to keep until the end of the semester. At that time, the dollars would be totaled up and the student with the highest amount would receive an A. Students who had 90% of that amount or more would also receive an A. 80% or above earned a B. And so forth.

The competition to earn high test scores was fierce. Many students stayed up all night studying for the first test in order to garner the most points. Indeed it worked; twelve of the students earned 100% on the test and the majority of students earned a B or better.

A few days after the test, word got around that three of the students had cheated. Although it was pointed out to the professor, he did nothing about it, noting that a capitalist system rewards the most competitive and creative players.

On the second test, nearly every student cheated and almost everyone earned a B or better. The majority got perfect scores, having obtained a copy of the test from the previous semester's students.

Shortly after the students left the classroom that day, four of them were attacked and mugged on their way back to the dorms. Their Monopoly money was stolen and their backpacks destroyed. Two of them went to the hospital with injuries.

The next day, eight more students were mugged and their Monopoly money stolen.

The students, fearing for their money (and grades), wanted to store their dollars in their rooms, but felt that even there the money wasn't safe. Sensing an opportunity, a student offered to hold onto the others' money for safekeeping, but would charge them a weekly fee of $5 to do so. Despite the high fee, 26 students opted to do so, earning the “banker” a cool $130 each week.

Muggings continued regularly. Some students claimed to offer protection from the muggers, if the victims would forfeit 25% of their earnings. Out of fear for their safety, over half the students in the class opted to pay the fee and the muggings became less frequent. Some students suspected that the muggers themselves were offering the protection services by extorting the victims into paying NOT to be mugged.

The weeks dragged on. The vast majority of students were working hard to earn money in the class, but most of their earnings were going to pay bankers, insurers, and extortionists. They had little left over to “pay” for their grade.

At the end of the semester, the money was tallied up. The top student had earned almost $15,000. Collectively, the top five students had over $36,000. They all got As or Bs. The remaining students, almost a hundred of them, had less than $10,000 in total — an average of about $100 each — earning them Fs. Additionally, twelve students had been sent to the hospital at one point or another.

The students learned a hard lesson that semester: capitalism ultimately fails. When the rewards are great, greed soon takes over and individuals will expend lots of energy figuring out how to work the system to do as little work as possible for the greatest payback. Consequently, the majority of the wealth becomes concentrated among a few people at the expense of everyone else. While those few “succeed,” the majority “fail.”
http://www.aaronklein.com aaronklein

That's a cute story, but not one based in reality. A truly free market system does not allow such unequal wealth distribution. (It doesn't ensure precise equality, either, but that's not my point.) Government has a very critical role to enforce antitrust laws and stop big business from stamping out competition and innovation. When innovation is thriving and monopolies cannot be preserved, a much more equitable distribution of wealth ensues.

Assuming that you're a public education professor, it's also important to note that capitalism generated the taxpayer dollars to fund your salary. And if you aren't, capitalism generated the tuition payments to do so. Either way, don't be too bitter about the system that is paying you your living!

You'll enjoy tomorrow's post on this blog…
profbbrown

You're absolutely right: there are no “pure” capitalist societies, as such societies would by definition have no laws and no government.

Likewise, there are no pure socialist societies, in which all wealth is equally distributed. Even the ones that claim to be socialist have some capitalistic features, such as taxing only a portion of your income and letting you keep the rest.

The US, too, has some socialist features: public education, law enforcement, firefighting, unemployment insurance, and so forth.

The “professor” was right: pure socialism usually fails. But so does pure capitalism. The practical answer is somewhere in between.
Dan Lee

I remember a lesson from my last economics class that socialism obviously robs the desire to innovate and grow, and 'absolute' capitalism will inevitably result in socialism as well – once somebody has all the marbles.. or monopoly money as you put it. There is a very fine line to walk and it requires eternal vigilance in order to maintain the balance.
http://www.aaronklein.com aaronklein

Well said.
http://www.aaronklein.com/ AaronKlein

The most vehement defenders of capitalism — and I count myself as one of them — have nothing against small and effective government providing core services, a basic safety net and a level playing field to its citizens. I firmly disagree that the items you listed there are socialist in nature.

It is when that government crosses the line — into determining what is “fair”, redistributing wealth as it sees best, and ensuring that all incentive for great achievement is taxed to oblivion — that you've crossed the line into socialism.
http://www.aaronklein.com/ AaronKlein

By the way, I didn't recognize you by your e-mail address. It wasn't until I clicked through to the blog and saw your photo that I knew who this was! Thanks for sharing your thoughts, Professor.
Dan Lee

I almost forgot to mention that too much government also leads to socialism, you see that happening in countries in Europe as well as in Canada. It's the same type of things that are now happening here, once the government gets overly involved in the economy such as bailing out business' IT selects especially without considering public input creates resentment and hampers people's hopes/desires of actually running a SUCCESSFUL business.
http://benmavy.wordpress.com/ Ben

Prof, I'm glad you're teaching computer science and not economics or political science:) You've confused the science of economics with the function of government in sustaining law and order. No economic system will be successful without law and order. If you apply your confusion to the first story Aaron shared, about a professor applying socialism to his grading system, the students wouldn't have failed. They all would have been awarded A's after unionizing and giving the teacher an offer he couldn't refuse.

Capitalism is the most successful economic system this world has seen. Admittedly, it can only work with a virtuous people when they are protected in their inalienable rights…

One last thing, I just love listening to socialists like Obama and other college professors lament the greed of capitalists. As if the resentment, jealousy, and coveting of a socialist is somehow more virtuous than that of a capitalist. Give me a break. One respects individual liberty, the others insist government knows best.

Brilliant Professor

Markets change. Do your investments still fit you?

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