Capitalism, Socialism, or a "Third Way"?

Political economy has been debated for many years and yet relatively little progress has been made. The debate is littered with false alternatives and other fallacies that keep us locked into thinking that guarantees eventual stagnation and then decline.

The recent summit of industrial countries in Denver is a case in point. An article in the Washington Post made much of the fact that the leaders of those nations had a spirited discussion of the American way of running an economy versus the European way. Yet the difference is not so stark.

As the Post put it, "For many, this Rocky Mountain standoff only seemed to confirm a widely held view that there is a stark, fundamental choice to be made between a hardhearted capitalism, in which workers are sacrificed at the altar of lower prices and higher profits, or a softhearted capitalism that sacrifices jobs and growth for economic security."

Were that the choice, the world would indeed be an unfortunate place. But the statement is barely coherent. In the marketplace, lower prices and higher profits indicate rising productivity, which in turn expands opportunity and raises incomes. There is no sacrifice of workers. The notion of "softhearted capitalism" is also incoherent. How can you have economic security at a cost of jobs and growth? Real security comes from burgeoning opportunities and rising living standards.

Economists, we are told, think we can have the best of both: security and growth. This is the so-called "third way," the Holy Grail of political economy. If by both, they mean a comprehensive government safety net and a vibrant market economy, no one has found out how to accomplish this. Europe doesn’t know what growth is. The United States grows sluggishly. In contrast, the nineteenth-century economy grew dramatically, lifting an entire society out of poverty, lengthening lives, and creating the most advanced society in history.

According to the Post, "Advocates of a ‘third way’ say there is nothing wrong with redistributing the rewards of a market economy after it has done its job, as long as it is carried out in a way that doesn’t significantly alter basic market dynamics." But there is no time that can be described as "after it [the market] has done its job." The production of wealth is a continuing job. If government "redistributes" rewards today, it affects how the market will operate tomorrow because producers will have observed the redistribution. Why should they go on producing if they cannot keep their earnings? Taxation, the engine of the transfer machine, must alter market dynamics.

Some economists think a consumption tax leaves incentives in place. But the very purpose of production is consumption, and the purpose of savings is future consumption. Tax consumption and you tamper with the marketplace fundamentally.

Economists like to point to cases, such as the Netherlands, where government spending is as high as 50 percent of GDP but unemployment is not much higher than in the United States. These anecdotes are misleading. What would those economies look like without government intervention? To the extent that the entrepreneurial process is stifled, people are worse off than they would have been. Social programs can’t make up for that lost wealth and opportunity.

Worse than that, social programs rot the human spirit. They may provide cash and services, although at the expense of productivity. But they also tether citizens to the state, eroding their independence and dehumanizing them. That is the real story of the welfare state.

Besides that, the entire system rests on the use of physical force against peaceful, productive people. Considering that freedom is fully capable of producing what the social programs are supposed to produce—medical care, day care, pensions—there is simply no case for the welfare state.

The basic fallacy in the search for a third way is the belief that freedom and free markets are not enough. But they are enough. There is no third way because there is no compromise between freedom and force. We’d sooner find a triangle with four sides.