To illustrate one of the pernicious effects of socialism to my classes, I will often ask students what would happen if I decided to minimize failure by taking away points from the A students and give them to the F students. What happens to the incentives faced by hard-working students who get good grades? What lessons are learned by the stereotypical lazy student who customarily just gets by in school? Also, what would likely happen to the overall class performance, over time, when such a grading policy is in place?
It’s sad to see a similar policy being applied right now to the banking industry. But here, banks that correctly identified and reacted to risks are being told that their smarmy competitors are being thrown life-lines in the form of credit infusions, all courtesy of the hapless U.S. taxpayer. And they don’t like it. Today’s Washington Post reports:
Community banking executives around the country responded with anger yesterday to the Bush administration’s strategy of investing $250 billion in financial firms, saying they don’t need the money, resent the intrusion and feel it’s unfair to rescue companies from their own mistakes. …
And in offices around the country, bankers simmered.
Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was “much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government.”
At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. “We don’t need a bailout, and if other banks had run their banks like we ran our bank, they wouldn’t have needed a bailout, either,” Adams said.
Addendum1: Has anyone noticed the eerie similarities between Paulson’s surprise meeting with the chief executives of the nine largest U.S. banks and Hoover’s White House conferences with leaders of industry that began in November 1929? In both cases, the attending parties were given offers they couldn’t refuse. From a New York Times account: ” ‘[The $250 billion banking deal] was a take it or take it offer,’ said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. ‘Everyone knew there was only one answer.’ ”
Addendum2: As others have predicted here, the press is now acknowledging that the initial $700 billion bailout package will potentially cost $2.25 trillion, according to the Times article linked above.
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Trillion schmillion! What, you don’t believe that the government will get every dime back and more? Why, even CNBC talking heads “know” that this program may solve the SS/Medicare crisis.
I have actually tried the very experiment suggested by Mr. Westley. I had the students in my economics class take a quiz, but rather than give them the points they earned, we pooled all the points together and then a committee of elected students decided on point distribution. Needless to say, the classroom politics got pretty ugly. The committee took care of themselves and their friends (who helped elect them), and the more productive students learned a valuable lesson: working hard does not pay.
“To illustrate one of the pernicious effects of socialism to my classes, I will often ask students what would happen if I decided to minimize failure by taking away points from the A students and give them to the F students.”
Your class is a very select sub set of the general population: those with sufficient money, GPA, and smarts to attend a private, liberal arts college. What response would you expect from a class of children with mild cases of Downs Syndrome? Does it matter?
I have read that when people are questioned about their personal abilities that almost all consider themselves to have above average ability. This is certainly true about by Libertarian friends. Why, if only the government would leave them alone . . . they could all be rich.
Who is smarter, the median person who thinks he has superior intelligence and ability or the median person who thinks he could do better by working at a union shop with under a labor contract?
billwald,
your libertarian friends are quite right. If the state were to leave them and their fellow man alone, the increase in psychic satisfaction would be rich indeed. The increase in goods available, the reduction in state encroachment on liberty, and the overall increase in the ability to act unhampered are all rich rewards for a reduction of the state. Thank you for bringing this to our attention. Let us see that happy day in our lifetimes.
billwald asks:
Who is smarter, the median person who thinks he has superior intelligence and ability or the median person who thinks he could do better by working at a union shop with under a labor contract?
You mean, who is smarter: the man who overestimates his intelligence but is nonetheless willing to rely on it in a free market — or, the man who knows his limitations and proposes to get around them by using physical coercion or threat thereof, which is what unions almost always do.
The former is not only the smarter but also the only moral man in the question.
The second man may, for a time, have a higher income — but he will also know how he got it, and that it had nothing to do with his ability, his talent or his effort.
Michael Smith:
Couldn’t have said it better myself.
Even if being free made me poorer, I would still rather be free. There is something about freedom that just appeals to me.
There are plenty of dystopian novels featuring free men in poverty outside the warm, safe, prosperous and stagnant environment of civilization. The hero is always trying to escape the comfortable prison for the freedom of the unfettered wilderness.
I will gladly take my chances with the wilderness if I could just find a way to escape the omnipresent State.
Why, if only the government would leave them alone . . . they could all be rich.
Well, at the very least, we would all be richer, if the government wasn’t busy redistributing income and diverting economic activity to less productive uses. Is it really so hard to understand that?
Billwald, meet hornet’s nest.
Hornet’s nest, meet Billwald.
Banks In All States Can Say “No!!!!!!!!”
When the right of secession by States is rekindled in the most alert and most productive enterprises (as evidenced by the banks that ‘kept their houses in order’) then resistance and the discovery of alternatives will spark the ‘revolutionary’ act of securing trustworthiness (which means becoming severed from the unethical and corrupt schemes of the unConstitutional coup).
Secession by States is one of the most potent elements of our Constitutional Republic and the unConstitutional coup will act like Lincoln when faced with its rising tide. But not to worry, the unConstitutional coup is bankrupt!
Soon the unConstitutional coup will be wiped off the books as will the bogus numbers kept by its corrupt keepers of its accounts – the Treasury and the Federal Reserve. Purged of the deceitfulness of the interventionists our Constitutional Republic will create an environment that will nurture working and saving, guaranteeing its way back to prosperity!
This is just such an obviously wrongheaded example, but predictable for adherents of a a theory of economics that has no theory of society.
To make this example anything like realistic, you’d have to allow people to come in with all sorts of capital relevant to their grades. They could inherit good grades from their parents, trade them with others, come up with elaborate pyramid schemes to defraud the gullible of their grades…
Then compare that to the “socialist” example. Not nearly so clear cut a distinction. Hm?
To the owners of this blog: step out of the nineteenth century. Society is much more real and complicated than your models allow.
Society is much more real and complicated than your models allow.
Society is much more real and complicated than any pro-government advocates think, too!
Sssss,
This is just such an obviously wrongheaded example, but predictable for adherents of a a theory of economics that has no theory of society.
It was an example of the simplistic approach that egalitarians take regarding society and equality. Mr. Westley likely does not think society is simple.
Then compare that to the “socialist” example. Not nearly so clear cut a distinction. Hm?
It would seem that, by defining society as being more complicated, you made the point that the socialist example (which is simplistic) would be even more different and non-applicable. How does then your comment improve the case for socialism? Can you explain?
“To make this example anything like realistic, you’d have to allow people to come in with all sorts of capital relevant to their grades. They could inherit good grades from their parents, trade them with others, come up with elaborate pyramid schemes to defraud the gullible of their grades…”
*sigh*
friend, your ellipsis is why the free market is preferable to government coercion. (i would leave it unsaid, but you clearly haven’t connected the dots in your head to this point in your life, so: you used an ellipsis bc there are an infinite number of variables that you couldn’t possibly list. there are similarly an infinite number of variables in the economy that no technocrat could ever hope to incorporate into their model. every model that would seek to redistribute the economy in line with the social good is limited).
please, be honest. come out and say it:
based on my experience, education, and morals I have identified what I believe to be the social good. further, i believe my idea of the social good should be imposed on everyone else.
sssss,
this model is very useful in showing how much socialism defeats the incentive to produce. It robs a man of the dignity of working hard and keeping what he earns. The fact that it doesn’t take into account every little detail of an economy does not detract from the few things that it does well. If we can instill in the formative years the flaws of socialism, there is much less chance of these individuals falling for its seductions later in life. That will lead to a wealthier world and less destruction of life.
I’m not a regular reader of this blog and find Austrian (or Chicago, for that matter) economics to be wrongheaded in lots of ways. But I got some thoughtful responses to my comment, so I’ll try to respond in kind.
“this model is very useful in showing how much socialism defeats the incentive to produce. It robs a man of the dignity of working hard and keeping what he earns.”
But it’s a dishonest example. You take a well-regulated grading system (you can not buy, barter, or trade for grades, and that’s a good thing) and compare it to some sort of sliding scale grading system in order to demonstrate the superiority of un-regulated markets. The example is incoherent. The example suggests, at best, the effectiveness of a carefully regulated grading system from which the market is strictly prohibited. This pedagogical technique simply does not show what it purports to show.
I am accused of secretly holding that:
“based on my experience, education, and morals I have identified what I believe to be the social good. further, i believe my idea of the social good should be imposed on everyone else.”
Well, not exactly. I simply recognize that an absolute separation of the good from right is as much a fiction as that of the above example. You proponents of supposedly unfettered markets have a conception of the social good (a trade system based on illimitable property, defensible by the threat of legitimate institutional violence) that you claim is freedom and that you pretend follows inexorably from non-normative science. But this conception of the good, and of the relation of humans to non-human property is a particular historical artifact. You uphold it as a utopia but don’t have the intellectual honesty to admit that this is the case, claiming, instead that it is science.
So do I have a conception of the good that I want to impose on everyone else? Well, to some extent, sure, but so do you, you just don’t admit it. My, more Rawlsian conception of the good recognizes that freedom is a precious human good, and it also recognizes that threats to freedom can come from illimitable property rights as much as they can come from institutions like states.
Next time, I suggest that those who want to use the pedagogical example be more honest and compare an open market in grades to the socialist grade example. Which is going to make for a better classroom? They’d both stink.
i fail to see how choice equates to impose.
Quote from sssss: “You uphold it as a utopia but don’t have the intellectual honesty to admit that this is the case, claiming, instead that it is science.”
You obviously know very little about libertarianism or Austrian economics. It’s never upheld as a utopia and never purported to be science. It’s simply a way to live in liberty, and without coersion and aggression.
Quote from sssss: “So do I have a conception of the good that I want to impose on everyone else? Well, to some extent, sure, but so do you, you just don’t admit it.”
The libertarian’s desire to impose his concept of “good” is simply that each person should be allowed to have there own concept of good and live there life based on that concept, as long as it doesn’t impose this concept on to anybody else.
When you can explain how this is wrong or bad or won’t work, then maybe you’ll be taken more seriously.
sssss: “…threats to freedom can come from illimitable property rights…”
I would be interested in some examples of how that might happen, since our freedom from state tyranny is based on property rights.
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