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Capitalism, Socialism, or a Third Way?


Political economy has been debated for many years and yet so 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 hard-hearted capitalism, in which workers are sacrificed at the altar of lower prices and higher profits, or a soft-hearted capitalism that sacrifices jobs and growth for economic security.”

Were that the choice, the world would 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 “soft-hearted 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 it. Europe doesn’t know what growth is. The United States grows sluggishly. In contrast, the 19th-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 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.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.