Why Socialism Fails: A Parable

By Atanu Dey, Speakers Panel, FTI, from his blog here.

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.