Distributing wealth and tiresome Facebook fables

by Jeremy Boo

Every once in a while, a cutesy photograph or a vacuous anecdote makes its round on Facebook, and I usually pay no heed. This time however, not only is the subject of my ire an ugly photograph and a vacuous anecdote, it is also almost always accompanied by exclamations of divine epiphany. Worse, weeks later, people are still sharing it. With Amens appended.

The story goes along the lines of:

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:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.
2. What one person receives without working for, another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it!
5. 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.

A most superficial reading of the passage would reveal it as the nonsense it really is because the author obviously does not know the difference between socialism and communism. Communism, as evinced by this little anecdote and the collapse of the Soviet Union, is in present circumstances clearly untenable. In a Communist state, citizens are trapped in a prisoner’s dilemma; when rewards are equal, the invisible hand guides citizens to maximise their own interests and attempt to free-ride on others. In the end, nobody works and the system falls apart. On the other hand, some level of socialism exists in most countries. National healthcare, public education, public infrastructure, military defence, and national pension schemes are all products of socialism.

This foolish error is merely distraction, however.

What caught my attention are five numbered points at the end of the note:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.
2. What one person receives without working for, another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it!
5. 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.

They sound almost like truisms. Surely, no one can disagree with them.

Yes, one can.

Let me offer some reworded alternatives, even if I do not entirely agree:

1. No policy, even communist ones, intends to legislate the poor into prosperity.
2. There are many who received what is gained through the exploitation of others.
3. The government must take what is gained through exploitation and return it to those exploited.
4. There is nothing morally wrong with dividing wealth, and there is nothing inherently desirable in multiplying wealth.
5. When a small group of people get the idea they can multiply their wealth by increasing the exploitation of the weaker majority and when the weaker majority have decided they will no longer tolerate their continual exploitation, that is the beginning of the end of any state.

To be clear, these are not arguments against the original five points. I had hoped that these reworded statements can offer a glimpse of an alternative perspective.

There are two main arguments embedded in the original five points, and in the arguments lie implicit premises.

The first argument (points 1 & 4):

  1. The poor benefits from higher aggregate wealth.
  2. Redistribution of wealth decreases aggregate wealth.
  3. Hence, redistribution of wealth is wrong.

The question we should be asking is: Should aggregate wealth still increase if its increase is gained by, say, the suppression of wages of the poorest, and if the increase only serves to widen the income gap? Simply, (3) cannot hold true if (1) does not.

The second argument (points 2 & 3):

  1. All we gain from our work is the result of our work.
  2. We deserve all we gain from our work because we pay the full costs of our efforts.
  3. Hence, what we have earned cannot and should not be taken away from us.

Again, we see that (3) cannot be a logical conclusion when we understand that (1) and (2) are not necessarily true. Many times, our efforts for our own benefit impose hidden costs on others, whether deliberate or otherwise. Economists call these hidden costs negative externalities. It was speculation in the commodities market, not the lack of food, that caused the prices of food to soar1.

Which brings me to point 5.

In this respect, unbridled capitalism is very similar to the Communism of our little Facebook anecdote. When unchecked negative externalities destroy the market, Adam Smith’s invisible hand would lead people to continually maximise their interest even if it is to the detriment of the entire group in the long term.

If we know certain negative externalities2 exist, then we must correct it, not perpetuate the errors of status quo. Economists suggest imposing a quota or a tax proportionate to the cost of the externality. Some see the tax as a form of wealth redistribution.

But however it is seen, not correcting negative externalities is simply bad economics, and the ‘capitalist’ system, like its Soviet counterpart, will too eventually fail.

 

Footnotes:
1. More about food speculation:
Guardian – Food speculation: ‘People die from hunger while banks make a killing on food’
TIME – Betting on hunger: Is financial speculation to blame for high food prices?
Foreign PolicyHow Goldman Sachs created the food crisis
2. The difficulty then is determining what exactly are negative externalities. Can the exploitation of low-wage, uneducated workers be considered one? What about the malaise of vast income inequality? The reduction of everything to transactions? This uncertainty is contentious and it ought to remain so; it is only through reasoned discussions we understand better the flaws of our thoughts and systems.

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