Socialism in the Classroom – And A Free Market Alternative

There is an anti-Obama anti-Socialism anecdote that regularly does the posting rounds on Facebook. Here it is:

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”… All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy.

When the 3rd test rolled around, the average was an F.

As the tests proceeded, 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, ALL FAILED and the professor told them that 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. Could not be any simpler than that. (Please pass this on). These are possibly the 5 best sentences you’ll ever read and all applicable to this experiment:

You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

What one person receives without working for, another person must work for without receiving.

The government cannot give to anybody anything that the government does not first take from somebody else.

You cannot multiply wealth by dividing it!

When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

Can you think of a reason for not sharing this?
Neither could I.

So the above is a terrible argument. And yes, I can think of some reasons to not share it.

Some observations:

Can we take a moment to appreciate the absurd amount of exaggeration that is going on in that example?
That aside, modern socialism is not an out-and-out equaliser – that would be communism.
Here’s a more accurate version of modern socialism:
1. For illustration’s sake, let’s quantify the grades and say that an “A” is a score above 80%, a “B” is between 65% and 80%, a “C” is between 55% and 65%, a “D” is between 50% and 55%, and anything below that is some variation of a fail.
2. But the final grade is still a letter grade.
3. This means that an A student would be almost ambivalent between scoring 82% and scoring 95% – because in the end, an A is an A.
4. So the modern version of socialism would involve the professor taking the extra percentage points off those people who had an A and would still have an A after that – and giving it to those who were borderline fails and letting it push them up to a D.
The people with As still have As.
Some of the people who had failed would now have Ds, and would now be in a position to progress to next semester’s course, where they’d have the opportunity to learn more and possibly do better.
The people with As, who are naturally competitive, are still getting As – and if anything, they’ve got a larger class to compete against, so more incentive for them to work.
And we end up with more better educated people all round.
Is that so unreasonable?
In my world, the only real conclusion that you can draw from the economics professor’s argument is that socialism doesn’t work when it’s badly implemented.

When I first made this argument, I was told that I was missing the point. And that I was manipulating results to suit my conclusion. And, like, totally assuming that only the intelligent get As, not the hard-workers.

So let me pre-empt those particular responses by saying:

Firstly, you cannot argue that the socialist professor might be “manipulating the results”, when the free market professor proudly professes “he had never failed a student before”.
Secondly, I don’t think I’m missing the point of the experiment – I’m just saying that the results of the experiment aren’t linked to the conclusion. If you use socialism unreasonably (by making everyone the same), then it doesn’t work, agreed. But that’s not a reflection of socialism – it’s just a reflection of badly-applied socialism.
It’s much like bad free market economics gets you a world of credit. Socialism, in itself, can work. Just like free market capitalism, in itself, can fail.

Oh, and one more thing – people seem to think that discrediting the socialism part makes the “free market” version the only acceptable option. This is simply bad logic.

Mainly because the current education system is not a free market system. It is, in fact, a Big Government state, where the economics professor sets the rules and arbiters the grades.

And as for the free market argument, allow me to re-tell the story in its Free Market version:

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that free market capitalism worked and that everyone would get the exact grade that they deserved.

The professor then said, “OK, we will have an experiment in this class on the free capitalism plan”… All grades will be up for sale…A students can trade their excess marks to D and E students in exchange for favours and IOUs…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the initial grades were distributed and everyone got to trading. The students who had done well sold their excess marks on credit to the students who had failed. The students who had failed were not so good at their economics, so they accepted a 100% interest rate between tests – that is, for every percentage point that they had borrowed in Test 1, they would have to repay two percentage points in Test 2. By the end, everyone had passed.

As the second test rolled around, the students who had done well in Test 1 could study at their own pace, confident in the knowledge that they could recall their investments to top up their grades. The lack of pressure made their studying more relaxed, and they were better able to grasp the more complicated principles being examined. Meanwhile, the borrowers from Test 1 felt pressured to do doubly-well in the second test, as they’d need to give up some of their grade in order to repay their earlier debt. This made them stressed and the studying was difficult.

When the second test results came out, the good students did just as well as in test 1! Sadly, many of the initial borrowers had not coped as well under the pressure, and had to do a little more mark borrowing on credit.

When the 3rd test rolled around, the process repeated itself.

As the tests proceeded, the average score stayed pretty much constant – but the indebted students continued to rack up debt, while the lending students continued to accrue returns on their earlier good performance.

About two-thirds of the way through the semester, some of the more successful students had accrued enough mark capital that they were able to score A grades off their interest alone, so they began to miss the occasional lecture and go partying instead. This made the indebted students quite resentful, but the successful students insisted that they were simply enjoying the fruits of their earlier labours, while the indebted students were suffering the consequences of their lack of earlier effort.

At the end of the semester, there was a really difficult final exam. The high-graders began to call in on their loans – but by this point, many of the poorly-performing students were underwater in mark-debt, and they defaulted in a massive mark-to-market credit crash.

To everyone’s great surprise, ALL FAILED and when they appealed to the ~~government~~ professor for a mark bailout, the professor told them that free markets would also ultimately fail because when the going is great, the effort to succeed is not really that important, but when the going inevitably gets tough, then no one will be able to succeed. Could not be any simpler than that. (Please pass this on). These are possibly the 5 best sentences you’ll ever read and all applicable to this experiment:

You cannot bring the poor into prosperity by allowing the wealthy to freely credit them into a debt trap.

What one person receives interest, another person must work for twice as hard in order to repay both the capital and the interest while continuing to take care of their own as well.

The free market cannot give to anybody anything that the free market does not first take from somebody else’s future.

You can, in fact, multiply wealth by trading it – unless the bubble pops at an awkward moment!

When half of the people get the idea that they do not have to work because their investments are going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

Can you think of a reason for not sharing this?
Neither could I.

Just to be clear: I’m not saying that free market capitalism isn’t the answer. I’m simply saying that all economic systems have the potential to be wildly flawed.

And that is worth acknowledging.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.