Don’t Forget Mises — and Dump the Third Way!

March 31, 2004 • Commentary
By Michael Chapman
This article was published in Apple Daily, March 31, 2004.

F.A. Hayek’s contribution to freedom in the 20th century is incalculable. Yet so is that of his one‐​time teacher, Ludwig von Mises. The latter, in 1920, predicted the eventual collapse of the Soviet Union because of its lack of private property and a market to determine prices. This was detailed in his book of that year, “Socialism.”

In his later, extensive writings on government interventionism, Mises explained the inherent failings in what is today called the Third Way — a deadly idea that has infected the politics and economies of Asia, Europe and the United States.

The Third Way, or middle way, is said to combine the best elements of capitalism and socialism: a new synthesis for the Information age. Some people call it “economic opportunity and social justice.” British Prime Minister Tony Blair, in an interview for Chinese TV, described the Third Way as “combining a dynamic market economy with a strong sense of social provision and national unity and purpose.” He also calls it “social democracy renewed,” a term used by many political leaders throughout the European Union.

In the United States, the Democratic Leadership Council calls it “tolerant traditionalism.” President Bush uses the term “compassionate conservatism.” In Taiwan, President Chen calls it a New Middle Way, with partnerships between government and business. Mises termed it interventionism: “a method for the transformation of capitalism into socialism by a series of successive steps.” Socialism, in this case, does not mean the Marxist kind, where the state nationalizes everything. It means government intervention (and distortion) in the market and society through taxation and regulation.

The problem with this, as Mises explained, is that capitalism and socialism are irreconcilable. One relies on free, voluntary exchange; the other relies on bureaucratic control. You cannot combine the two. If you try, all you get is incremental socialism. The economy and people’s lives are manipulated, one way or the other, by the government, which leads to bad decisions, bad investments, failures, higher costs — all the problems in planned or semi‐​planned economies. Asia is no exception, as recent history shows.

The economic crisis that rocked Asia in the late 1990s was the result of Third Way policies in the region. As economist Jose Pinera explains, the Third Way was introduced as the “Asian model.” It consisted, he says, “of two interrelated third ways: one between the free market and socialism; and the other between democracy based on the rule of law and totalitarian dictatorship.” This led to collusion among government, business and trade unions.

In practice, for instance, governments in Japan, Indonesia, and South Korea intervened with their banks and affected lending and interest rates. The governments protected certain businesses through protectionist trade measures, such as restrictions on foreign investment and by steering political and financial favors to certain conglomerates. Government bureaucrats thought they could plan economic growth. Japan had MITI. Korea had planning ministries and the chaebols. Indonesia had technocratic bureaucrats. “In each case,” says Pinera, “the rationale of industrial policies proved a very convenient way to obscure huge malinvestment and, in many instances, outright corruption.”

Japan’s economy is still flat. Korea and Indonesia are still recovering. Unfortunately, leading economists in Japan, for instance, are still pushing the Third Way. Takamitsu Sawa, professor of economics at Kyoto University and a frequent contributor to The Japan Times, argues that “Japan needs its own third way” to “temper market‐​oriented reform with equality” — “third‐​way reform means creating an equitable welfare society.”

The EU is laden with Third Way policies. As former EU Ambassador Ove Juul Jorgensen has claimed, Europe has maintained its competitiveness while “continuing its commitment to social welfare.” In Jorgensen’s view, however, he’s not just talking about help for the poor. He means myriad rules and “rights,” as laid out, for instance, in the Treaty of Rome, the Maastrict Treaty, the Amsterdam Treaty, and countless other trans‐​national regulations on businesses and markets. Jorgensen argues that it is possible to be competitive, in the free market sense, while maintaining a massive welfare state. Well, it can’t, as the economies of Germany, France, and Britain, for instance, have shown.

Privatization and voluntary, contractual exchange are key to success. Margaret Thatcher got the ball rolling in Britain. John Major slowed things down and Tony Blair is back in the “social democracy renewed” camp. Unemployment is still high in France and Germany, and their economies are sputtering along because of their Third Way policies.

In the United States, the Bush administration has signed off on the biggest federal budget in U.S. history — $2.4 trillion — and expanded programs, such as Medicare and public education, in Third Way directions.

Asia (and Europe and America) needs to abandon the Third Way and introduce more free markets. Government needs to stop intervening in the marketplace. There is no middle‐​of‐​the‐​road policy, said Mises. “Either the consumers’ demand as manifested on the market decides for what purposes and how factors of production should be employed, or the government takes care of these matters.”

About the Author
Michael Chapman is editorial director at the Cato Institute.