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The 3rd Way

Mises Daily: Tuesday, November 03, 1998 by

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Politicos around the world are prattling about the glories of the "third way." The idea, embraced by the heads of state in the U.S., Britain, and Germany, is to combine economic efficiency with "social justice" (meaning high taxes, welfarism, and oppressive regulations). In short, it's just another name for the status quo.

Ludwig von Mises dispensed with the notion that you can combine the "best" of socialism and capitalism as long ago as 1921. There is no such thing as the "best" of socialism, he wrote, and even the smallest amount distorts the workings of the free society.

Even without elaborate explanation, we know that's true. The things that drive us nuts in our daily lives—using the post office, finding a good public school, negotiating clogged city streets, dealing with the motor vehicle bureau—are all tainted by heavy government involvement. Sectors of the economy that are generally free of government involvement—the high-tech industries, web commerce, and service industries—work as they should.

Prosperous and capitalized market economies can withstand the burden of "third way" policies better than less developed ones. For example, the "middle-way" policies of former socialist states in Eastern Europe doomed a decade of reform efforts after 1989. And heavy state regulation continues to trap huge swaths of Latin America, Africa, and the Middle East in poverty.

Amartya Sen, who won the 1998 Nobel Prize in economics, is the current guru of "third way" thinking. He is said to put a "human face" on economic science by introducing an "ethical dimension" and "concern for the poor." It turns out, however, that this "ethic" and "concern" have nothing with to do with how much he personally devotes to charitable causes. They are code words meaning that he supports socialized medicine, a massive welfare state, and a huge role for government in planning the economy.

Actually, we should beware all talk of a "human face" in economics. For some reason, this face invariably translates into the mailed fist of the state. Thus, Sen writes that the prosperity of Western nations "is not the result of any guarantee that the market or profit-maximization has provided, but rather due to the social security the state has offered." How interesting that the Soviets were never able to generate prosperity through state security.

The picture you get of the state in the "third way" literature is of a loving, caring, and wise public servant, comforting the afflicted and providing security for the marginalized. In fact, no such state has ever existed or ever will, for one main reason: the distinctive characteristic of the state is its use of violence, not its provision of love. It has no resources but those it acquires through aggression against people and their property.

Regulations are violent, impeding the making of voluntary contracts by imposing additional conditions on penalty of prosecution. Subsidies are violent, because they transfer wealth from one group to another without permission. Inflation is a subtle form of theft, robbing our money of its purchasing power. And the less said about taxes the better.

Mises argued that the "third way" is unstable because interventions create unforeseen bad effects, which seem to cry out for still other interventions. The result is a relentless march toward the planned economy, unless definitive steps are taken to roll back the state. One way to get around this problem, of course, is to simply assert that the bad effects of intervention (for example, reduced capital investment) are outweighed by the supposed good effects (whole classes of people relieved from the burden of working, for example).

But how can the "social costs" and "social benefits" of various policies be compared with each other? If we follow the logic of the Austrian School, they cannot. Values are the product of the individual human mind. Social planners have no access to this subjective information because something as personal as values cannot be put into equations and manipulated. There is no such thing as "social cost" or "social welfare" in any mathematical sense.

To add and subtract individual values, and thereby create an index of general welfare, is an impossibility—if logic is taken seriously. But in Sen's world, logic cannot be allowed to interfere with the "human face." In his theories of social cost, he argues for the idea that "interpersonal utilities" can be compared. After all, if we are to have a caring and loving state, we must have some means of discerning the will of the people.

Sen is more blatant than most, but the vice of most modern economics is the presumption that economists know better than people themselves what is good for society. After all, if we really want the will of the people to prevail, no system can possibly achieve the ideal better than the market economy. In a free market, all production, labor, and consumption reflect the voluntary choices of individuals seeking to better their lot in life. In a purely voluntary society, no one is forced to do anything that is contrary to his individual ends, provided they are pursued peacefully.

To understand this point is the beginning of putting an authentic human face on economics. It is the state that treats people as less than human, as objects to be manipulated for someone else's vision of how society ought to work. The true dynamic of the "third way" is not service or compassion; it is a dog-eat-dog struggle for control over the levers of power and the riches that flow from them. It is hardly a coincidence that once people like Clinton, Blair, and Schroeder achieve that power, they announce that they are in favor of it.

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Llewellyn H. Rockwell, Jr., is president of the Ludwig von Mises Institute in Auburn, Alabama.