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No Third Way

Mises Daily: Saturday, November 27, 1999 by

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Socialism was shown back in 1922, in Ludwig von Mises' book by that name, to be an impossible economic system. Von Mises demonstrated that a planned economy cannot allocate resources effectively, so that those who need things and those who can produce them are properly linked up to communicate with one another. Only in a free market is this possible because the price system--whereby individuals pay for what they want from assets they have--serves as the means of communication between consumers and producers.

Since that time all the brutal as well as so called humane socialist experiments have failed, yet it took the collapse of the Soviet Union to finally convince the majority of intellectuals and politicians around the globe that socialism is a non-starter.

Still, even now many people do not get it. They are championing what is called "The Third Way," a system of wealth redistribution that is supposed to keep all productive people working hard despite the confiscation of much of their wealth.

At the just concluded meeting in Florence, Italy, of six major Western leaders, all of the center-Left persuasion, much hoopla was made of the goal of spreading the wealth around so everyone can get an equal chance. In particular, President Clinton weighed in with his much heralded idea that "we should shoot for a goal within the developed countries of having Internet access as complete as telephone access within a fixed number of years." He said, "It will do as much as anything else to reduce income inequality."

Never mind that most people have phones despite the fact that they weren't given to them by means of government wealth redistribution! Still, this notion that wealth needs to be redistributed keeps hanging on for dear life, despite the death of socialism. And the reason is not all that difficult to fathom.

One thing that lies beneath all the desperate efforts to shore up various half-way socialist measures is the belief that those who produce and thus can consume must be forced to share with those who will not or cannot. As an ethic some of this has a point--people who are well enough off ought to look out, in times of emergency, after those less fortunate than they are. But as politics it is vicious and intolerable because it isn't a matter of ethical choice but via government coercion that the behavior is supposed to be secured.

Indeed, we see that most people believe this, given the massive amounts of money they all spend on lawyers who help them fend off the tax collector and other regulators who try to accomplish the mission.

There is, furthermore, an interesting reason why the semi-socialist policies of much of the world can continue, despite their evident failure to do any good and their contribution to massive economic shortages and unproductiveness. This is related to a phenomenon identified some time ago by Arthur Laffer, an economists at the University of Southern California. Laffer identified what has since then come to be called the (bell shaped) Laffer Curve that illustrates the way taxation and other forms of assault by government can continue despite its nasty impact on people's lives. Up to the top of the curve people will tolerate the violence because to fight the tax collectors and regulators costs too much. But after that point--which for different people may turn out to be different--people will being to resist either by rebelling or by refusing to produce.

There is a simple way to grasp this: Imagine that you are burglarized every year once but not enough is taken to make it worth your while to get the police involved, nor do they have the resources to go after the burglars, and preventive equipment such as an alarm system also costs too much. You will probably respond simply by working harder.

However, if a great deal of what you have gets stolen from you and often enough, the effort to resist and track down the thieves becomes worth it or if you fail, you'll just give up and stop producing. The Third Way approach to public policy involves figuring out, with all kinds of trial and error and related machinery, just how much government expropriation the majority of the productive people in society are willing to tolerate without serious--either active or passive--resistance. In most European and other countries, that amount can be quite a lot, since citizens tend to defer to public authority, given their long history of feudal rule where the inhabitants were deemed to be subjects, not sovereign citizens.

In the United States of America, which began to establish the political recognition of individual sovereignty, the point at which people are likely to resist is far greater. But still, not all assault and robbery is worth the time and effort to combat, so a good deal of government expropriation is tolerated by even the most productive people in society.

Add to this several other facts, such as the phenomenon of vested interest demand for handouts and the little resistance to it that people offer. That is because, again, they seem to be losing their wealth only bit by bit, which doesn't seem to be worth protesting effectively, and one can appreciate why the Third Way is working--i.e., people aren't up in arms about it in sufficient numbers to bring about significant change.

One reason the American Founders and framers wrote a constitution is that they hoped that thereby the temptation to degenerate into the equivalent of a Third Way could be avoided. That, also, is the reasoning behind the balanced budget approach to public finance, but if politicians lack integrity and the public is less than vigilant, such measures are inadequate.

In the meanwhile millions and millions of people continue to be unproductive and the rest are struggling to make up for the losses they suffer through the erosion of their wealth, thus producing a far less prosperous society than they could have without all this legalized crime.

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TIBOR R. MACHAN teaches philosophy at Chapman University and is an adjunct scholar of the Mises Institute.