Why Socialism Fails: A Parable
This is a parable that succinctly illustrates why socialism fails. It fails because of one fundamental feature of human nature: people respond to incentives. Actually, the most important lesson one learns from a study of economics is just that – incentives matter. Here’s the story.
An economics professor said he had never failed a single student before but had, once, failed an entire class. That class had insisted that 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 socialism.
All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A. 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.
But, as the second test rolled around, the students who studied only a little had studied even less and the ones who studied hard decided they wanted a free ride too; so they studied less than what they had. The second test average was a D! No one was happy. When the 3rd test rolled around the average was an F.
The scores never increased as bickering, blame, name calling all resulted in hard feelings and no one would study for the benefit of anyone else. All failed, to their great surprise, 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.
[I am not entirely sure which source to credit for the story. It seems that this could be it but I don't know.]
The idea of sharing stuff equally is not a bad idea, actually, if it is confined to a small closely-knit group of people who all care for each other deeply – as in a family. The usual problems associated with interactions among large anonymous groups of people, problems identified as “prisoner’s dilemma”, or “the tragedy of the commons”, don’t usually arise in such small persistent groups. In any case, free-riders in small groups can be easily identified. Also, most people value the welfare of their own family members more than they value the welfare of strangers. That curbs any impulse to free-ride.
Indians need to understand why socialism fails. That is a necessary, although not sufficient, condition for India to get out of poverty.
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Isn’t China Socialist ? How is it working for them then ?
The experiment you described is very likely from Dan Ariely’s book “Predictably Irrational: The Hidden Forces That Shape Our Decisions” (Ariely 2008).
I think the problem with Socialism is not that it does not provide incentives. It provides some sort of a perverse incentive.
The incentive is to get as close to the median (actually average in this case would be better).
This is probably one reason why Socialism as an idea will remain long after we are gone despite clear evidence of its failure. It rewards a lack of merit. And since the majority would like to get something for nothing, they prefer Socialism. Of course you know this, but this point should have been brought out in your post.
This is also the reason why India remains, at its heart, a socialist nation. It is very difficult to convince someone with minimal knowledge of economics (which even our most “educated” people have) that competition and choice is good. We are hardwired to believe that there is always one single pie and more competition means that one’s own share of the pie will be reduced.
And the only way, we can challenge this is by making people (and I mean the ones who vote) very clearly understand that Govt. handouts and doles are simply a way of making them progressively and increasingly dependent on these. Again, the typical Indian would rather look at short term benefits rather than long term ones.
“Socialism? But Chacha Nehru recommended socialism for India, therefore it must be good!”
This was a very good example, indeed.
Another good, but longer and more elaborate illustration of how socialism fails, which you anyway must know, comes from Ayn Rand’s Atlas shrugged, where in she’d described the policies of a motor-making unit, and the psychological impact it had had on workers and their family members. That example was so perfect, I can’t understand how sane people could disagree with it, and yet bat for socialism/communism.
I am a staunch believer in incentives too, but your analogy is childishly naive. Infinitely more sophisticated material abounds for and against socialism.
Incentives are ok. But upto a certain point. Just ask what compelled mathematicians, physicist, writers, etc to work much harder, to burn the midnight oil. It wasn’t fame/material riches/facilities. They did so because of their love for specific fields. They were in pursuit of knowlegde.
In scriptures, it is mentioned that there are 3 kinds of happiness or pleasures. First is material pleasure like having a 46-inch 3D-LED TV to watch HiDef Avatar movie
. Second is mental/emotional pleasure. Best example would be tendency of lovers to give gifts to each other or the love of child in the heart of mother. Third is intellectual pleasure. Scientists working for pure knowledge. No amount of material satisfaction could match up for the “Ahhh” moment which Einstein had when he discovered Relativity.
Just have a look at Scandinavian countries. They have around 50% taxes but still people are happy and not cribbing about high taxes. Because government provides for all the basic facilities at a very low cost. Housing, public transport, free education, etc are almost free to all the citizens.
Maybe your definition of Socialism of everything should be strictly equal is what causing you to think that way.
Dinesh,
Responding specifically to your point on scientists not requiring monetary incentive, I’ve few things to say:
1. Not everyone fits the bill. The idea that only those who are willing to contribute to science despite hardships are dedicated scientists is not a good one. Let, knowledge be an incentive, but we can still have additional incentives. That would attract even those who love research but abhor hardships. Remember, mere dedication does not equal brilliance. And more the number of scientists involved better would be the odds of new discoveries/inventions.
2. Incentives are not required only for those who do research, but also for those who finance them. The days when research could be carried out merely by tinkering with toys in dingy laboratories are over. Almost no real research can be done with just pen & a paper.
3. Those who’re happy with other spheres of life are likely to contribute with greater enthusiasm for longer periods.
4. Monetary incentives is not merely a tactic, but ethically speaking, is a return from the society to innovators for bringing new ideas into the world. A doctor might be interested in social service, but that’s not to mean he must not be paid for it (though, that’s what government seems to be thinking)!
Atanu Dey: Why Socialism Fails: A Parable…
Indians need to understand why socialism fails. That is a necessary, although not sufficient, condition for India to get out of poverty….
Hi Ketan,
Thanks for responding but I think you misunderstood me. I am not against incentives. But I disagree with the author about Socialism being a failed system. We have a working model right in Scandinavian countries.And those countries have employed incentives in ways that has helped society on the whole. Foods with additives are highly taxed while green vegetables, natural foods are subsidized. Public transport is encouraged while 100% tax is levied on luxury cars.
Maybe we disagree on what constitutes Socialism. I don’t go by the book definition. I can give you a personal example. My sister developed a very complicated condition in her stomach. She required an operation which would have cost 2 lacs in private hospitals but because my father is in Indian Railways, we could do the operation at a very nominal cost at one of the Railway hospitals.
My point is if government is making sure that all its citizen receive basic needs at a nominal cost then it is socialist government.
To rephrase, all I am saying is that government should make sure that all its citizen are above a certain established baseline. Above that baseline “inequalities” can flourish so to say. And from time to time those baselines should be revised i.e raised. For example, Finland makes having a 1MBPS broadband connection to every citizen as a legal right.
As a rule I never believe in ultimate applicability of stories/analogies/morals, because all of these are context dependent. You will find the reason why in my blogpost
http://dineshdharme.blogspot.com/2010/07/morals-and-their-context.html
Let me tell you another story (albeit an extreme one) about the same class. The teacher is very cruel. He announces anyone getting below D will be stoned to death ( stoning is in fashion these days so yes why not). Naturally, every student will try his best to do in studies. But unfortunately some students are not able to clear it (may be because of medical reasons). These students are now facing death. But there is another rule which the teacher announces after the test i.e students can trade grades. i.e they can give grade points to weaker students (to make it more than D) so that they avoid death penalty.
I end my story at this point. You could guess what could have happened.
Atanu, and what are your incentives (in the sense you used the word in your post) that keep you writing this blog?
What that parable describes is not socialism.
“Socialists advocate a method of compensation based on individual merit or the amount of labour one contributes to society.” – wikipedia
Socialism isn’t about everyone gets equal benefits, it’s quite the opposite, it’s based on the idea of those who CREATE the wealth, the working class, should be the ones receiving it, rather than having it passed up the ladder to the “owners.” But it doesn’t mean that everyone gets paid equally, or that everyone benefits the same, it isn’t “lets all work together for the common good and then well divide all the results equally amongst ourselves.” That would be COMMUNISM, which has a different name for a reason.
what is your opinion about Unemployment benefits given out by the Capitalistic countries? Isn’t that a crude form of socialism?
Kaffir wrote:
Thanks, Kaffir.
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a very childish and naive example to illustrate disadvantages of socialism/communism.
@kaffir that experiment is not part of ariely’s book. besides, i doubt any american university (esp duke/mit where ariely has worked) would take kindly to such an endeavor.
Hi Atanu,
Your story seems a bit farfecthed. But more that, the conclusion that you’ve drawn from it. The best of students (I’ve been one a point of time, and have studied among and seen quite a few in any case), invariably study for the sake of knowledge. In any case, socialism here would mean that the university enforcing particular courses to be taken by particular number of students, enforcing research in particular strictly pre-decided areas only, etc. I do not see any logical connective linking socialism to equal grades being given to students irrespective of merit.
You have hypothsized what would happen in case equal grades were given to all students. In ‘Zen and the Art of Motorcycle Maintenance’, Pirsig has described a similar case where NO grades are given to students. The results, i.e. the increase in knowldedge content of the students are poles apart in both cases. See http://techforschools.com/handouts/zenartofmotorcyclemaintenance.pdf
Pages 8-11.
To add to Aniket’s comment:
I think the word “socialism” has become so debased that nobody understands what it meant or what was its objective.
The CORE component of socialism is not “distribute everything equally no matter what”, the core component is “worker’s control over means of production”, or in other words “those who work in the factory ought to own it”.
The equivalent here would be students deciding amongst themselves what the course curriculum should be, how much and what they should study. They should organize themselves into groups (the equivalent of trade unions and local chapters of trade unions). The “professor” here would be somewhat like a graduate school advisor – helping students discover new stuff.
Nothing in the principle says that people are allowed to slack off and not do any work. Of course there are many other things a “socialist” class must implement which I’ve not mentioned.
To come back to the real world…how many factories in India were owned by the “workers”? Did they run the day-to-day activities of the factory or did some government beuraucrat or manager do? Did the trade unions
To also come back to the real world, there are indeed many schools where grades are not given and students manage to succeed in later life, however you define “success”.
The main point in this story is that there never was “socialism” in India. It was some form of statism.
I lived in East Germany for a while and one of their jokes was:
“Capitalism is the exploitation of man by man. …under Socialism, of course, it is the other way around.”
Has Atanu bothered to ask why socialism is required or why it arises?
Socialism is required or it arises when capitalism fails to do its job, when the usual downstream flow of rewards is clogged by cartelisation, cronyism,and assorted diseases.
But then people like Atanu are blind optimists, not only are they blind to structural defects that creep into capitalism and cripple it, but they are also like the proverbial ostriches who think that dunking their head in sand will make problems vanish.
Nobody is crying for socialism per se, they are only asking for equitable distribution of rewards and when that fails, some kind of socialism is going to rise, like what has been witnessed in Latin America, where capitalism was blamed for many recent economic ills.
Socialism is a corrective, and needs to be taken in that aspect. And the ideas that underlie it,like the equality of man are not bad, they are worthwhile, and are uplifting.
Just because one asserts something does not mean one is right. and analogies, they get one only that far.
And Atanu has been in this mode since time immemorial, so no point contesting him. It might be worth our while if he exits this mode and does a little deeper thinking about issues.
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I agree.. Socialism fails.. Just few questions to those who go ga-ga over socialism:
i) Would you like a less educated doctor to perform your surgery or the one who studied a lot..
ii) Why you want to buy a car which is best… not any one..
iii) Why you want to marry a beautiful and sarv gun sampan girl.. Why not the one who is ugly (???)
iv) Why people run to US or countries which are capitalist..
V) Why China labors are the most ill-treated… many journalist are murdered and farmers are killed if they don’t give land to goverment.. ???
vi) Why West Bengal failed as a state.. after being ruled by COmmunist ??
Reasons why it fails:
)….
i) People study hard because of competition.. yes many people study for their own.. but most of us study only when their is pressure.. Why students from Middle class or lower class study most of time.. Because otherwise they cann’t survive.. Why our Rahul baba failed.. even when he has gene of best (who ruled our country.. specially when someone still consider Nehru to be Chacha
ii) We want best.. this is our nature.. so than how we can be lazy… Communism also means marrying not beautiful girl.. but how many of you will do this when you have a choice between beautiful and not beautiful.. Specially when you don’t know their nature ??
iii) Those states which were under quotas/communist are the most poor… because they were not able to invite companies and eventually.. there were no jobs… no jobs.. no good teachers.. no good teachers.. no education.. I have meet many people from these states.. who are now well educated.. they talk about socialism but they don’t want to go back to their states…. why ?????????
There is one famous saying.. the people who are weaker.. when given power.. are the most dangerous.. Only those people should have the power who are strong…. A weak teacher.. A weak doctor… A weak bureaucrat.. A weak Businessman.. A weak student.. A weak Engineer.. A lazzy worker.. All are the perfect combination to stop a country from progress.. This is what communist/quota has given to us… Human nature is bad.. who so ever.. get power get corrupt.. I agree capitalist is bad.. but socialism is worse.. because.. it takes freedom and pay nothing……. Capitalist make unequal rich… while Socialism make equally poor…
Also, when government use to control petrol price.. there were long line for petrol and people never get LPG.. but now.. everyone get.. and with this.. our pay also increase… I still remember.. when there was ration.. people use to stand in long line for rice/ wheat/ floor and most of time it was sold already or was of bad quality… but when government end her control.. quality increased and there was no shortage… I have many examples to give just from my 27 years life.. that Socialism is totally failure…
Regarding the grade system.. I don’t agree.. getting D or F grade is just like failing…. it will do no wonders… Also, for suicide.. I blame parents.. not the competition…. We should teach the kids to take failures like a winners… and also we need to have attitude that education is important but marks don’t mean education.. Many educated person can’t use their brain.. while many uneducated are more intelligent..
Sorry for long comment.. but I was hurt when I see so many thinking socialism as their future.. COme on guys.. don’t do the mistake which our politicians did to our society……….. Just think.. we were able to afford cars, good grains.. good life only when capitalism arrived…….
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