Lessons on Human Nature

A friend told me a story this week about an experiment conducted by a professor at a major university.   I cannot verify whether the story is true, but it easily could be true if it is not.   The story demonstrates basic human nature, and I am sure all of us—if we are honest with ourselves—will be able to relate to it.    

As the story goes, an economics professor at the university said he had never failed a single student but had once failed an entire class. The class had insisted that socialism worked and that under socialism no one would be poor and no one would be rich, a great equalizer.  The professor decided to conduct an experiment with his class.  He announced that all grades would be averaged and everyone would receive the same grade so that 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 for the first test were upset, and the students who studied little were happy.   As the second test rolled around, the students who had studied little for the first test studied even less, and the ones who had studied hard for the first test decided they wanted a free ride too so they studied less.  The class average for the second test was a D!   No one was happy.   When the third test rolled around, the class average was an F. 

The scores never increased as bickering, blame, and name calling all resulted in hard feelings, and no one was willing to study for the benefit of everyone else.  Everyone failed.  The professor pointed out that socialism would ultimately fail for the same reasons.   People are willing to work hard if the rewards for hard work are great.   When the government takes away the rewards for hard work, no one will succeed because no one will try. 

This story reminds me of another example of human nature sent to me by another friend several months ago.    Under this story, an economics professor demonstrated the problems of government tax policies through the following example: 

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.  If they paid their bill the way we pay our taxes, it would go something like this: 

The first four men (the poorest) would pay nothing. 

The fifth would pay $1. 

The sixth would pay $3. 

The seventh would pay $7. 

The eighth would pay $12. 

The ninth would pay $18. 

The tenth man (the richest) would pay $59. 

So that’s what they decided to do.  The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day the owner threw them a curve.  “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”   Drinks for the ten now cost just $80. 

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected.  They would still drink for free.  But what about the other six men—the paying customers?   How could they divide the $20 windfall so that everyone would get his “fair share?”   They realized that $20 divided by six is $3.33.  But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.   So the bar owner suggested it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.  And so: 

The fifth man, like the first four, now paid nothing (100% savings). 

The sixth now paid $2 instead of $3 (33%savings). 

The seventh now paid $5 instead of $7 (28%savings).
 

The eighth now paid $9 instead of $12 (25% savings).
 

The ninth now paid $14 instead of $18 (22% savings).
 

The tenth now paid $50 instead of $59 (16% savings).  

Each of the six was better off than before.  And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.  “I only got a dollar out of the $20,” declared the sixth man.  He pointed to the tenth man, “but he got $9!”   “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too.  It’s unfair that he got nine times more than I!”  “That’s true!!” shouted the seventh man.  “Why should he get $9 back when I got only two?   The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all.  The system exploits the poor!”   The nine men surrounded the tenth man and beat him up. 

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him.  But when it came time to pay the bill, they discovered something important.  They didn’t have enough money between all of them for even half of the bill! 

The economics professor concluded by pointing out that his example demonstrates how our tax system works.   The people who pay the highest taxes normally get the most benefit from a tax reduction.   If you tax them too much, and attack them for being wealthy, they just may not show up anymore.   

Both of these stories, whether true or not, contain an important lesson.   Both stories are very realistic and demonstrate the risks of reducing the rewards for hard work and imposing excessive burdens on the wealthiest members of our society.