Mises Daily

Home | Mises Library | No Third Way

No Third Way

November 27, 1999

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


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

Follow Mises Institute