In his State of the Union address last winter, President Clinton declared that under his enlightened leadership, the United States had found the much sought-after “third way” between laissez-faire capitalism and socialism. The remark was little noticed, but it was astounding nonetheless. One might have thought that the quest for the elusive third way had been dropped with the collapse of socialism and communism. Alas, it is not to be.
Socialism and communism have collapsed so completely that only a few holdouts in American university sociology departments refuse to acknowledge the rubble before their eyes. When that largely peaceful collapse occurred, some people thought that all ideological questions had now been settled and that we had reached, in Francis Fukuyama’s words, “the end of history.”
But appearances can deceive. The ideological battle in fact is far from over. We might say that it is only just beginning. Socialism and communism were really just distractions from the main dispute. Because, in theory, they so thoroughly sought to collectivize society and throw out Western legal and economic principles, they were easy targets for many varieties of thinkers. Now that those systems are mere historical refuse and the makeshift alliances against them have cracked up, we can get on to more fundamental issues.
Some people are clearly uncomfortable that capitalism seems to be the only “ism” left standing. That’s why their search for a third way goes on. I’ll elaborate on that later. First, let’s look at the search itself.
Authors Daniel Yergin and Joseph Stanislaw are among those looking for a third way. In their new book, The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the World, and in a Washington Post excerpt, they wonder where our era will set the “frontier between government and marketplace.” (The book, incidentally, declares Ludwig von Mises and F.A. Hayek the winners in the debate over socialism.) It is ironic that in thinking about the world on the brink of the new millennium, Yergin and Stanislaw are thinking in such old terms. They discuss the frontier between government and marketplace in analog terms, as though that line can be adjusted in infinitely small steps. The task, as they see it, is to find just the right position, where marketplace and government balance each other and each prevents abuse by the other.
But we live in the digital age! Analog thinking is inappropriate in so many areas of life — including the politico-economic realm. A digital device deals with ones and zeroes. A switch in a computer chip is either open or closed. There is no in-between, no range of adjustment, no third way.
What does this have to do with government and the marketplace? A great deal. When we focus on the nature of state and economy, we see that the framework is not analog but digital. George Washington is reputed to have said that “government is not reason or eloquence. It is force.” All government can do is compel. Every activity it undertakes ultimately relies on coercion. Government does not produce or create; it directs and prohibits; and it appropriates and transfers what others produce and create.
In contrast, the marketplace is reason and eloquence arising in an environment in which people are free to better their circumstances by offering to better those of others. Every price is an offer. Every offer is an act of persuasion.
The marketplace is creative. Think about what happens there. A successful entrepreneur transforms preexisting factors — labor, machines, land, raw materials — into a finished whole for which people are willing to pay more than they would pay for all the separate parts. The entrepreneur’s profit is the difference between those two amounts; it is his reward for noticing an unexploited opportunity to improve the circumstances of consumers. At the end of the production process, after wages, rent, and interest are paid, there is money left over — because the entrepreneur created value. We know that is so: consumers voluntarily accepted the entrepreneur’s offer and bought his product. Losses represent the consumers’ penalizing an entrepreneur for “misusing” the factors by turning them into a less valuable form. He either learns his lesson or loses his ability to command resources.
A successful entrepreneur, as Israel Kirzner has so eloquently spelled out, moves resources from where consumers prefer them less to where they prefer them more, as revealed in the prices they are willing to pay. To do that, the entrepreneur has to be alert to such opportunities. Maybe that’s what Samuel Johnson had in mind when he said that “there are few ways in which a man can be more innocently employed than in getting money.”
State and market, then, are opposites, embodying, respectively, force and creativity. That is why the mission to finely adjust the frontier between the two, as Yergin and Stanislaw wish, is misconceived. It is not a proper shade of gray that we should be seeking, but the bright line between force and reason (creativity). Force is appropriate only against force. The late Leonard Read, founder of the Foundation for Economic Education, captured the proper conception of the scope of market and government in the words “anything that’s peaceful.” As he wrote, “Let anyone do anything he pleases that’s peaceful or creative; let there be no organized restraint against anything but fraud, violence, misrepresentation, predation…. Leave all else to the free, unfettered market!”
Why, after all this time, are people still looking for a third way? Wouldn’t you think that at this point in history, most people would understand that the choice is between force and reason and that reason is preferable? There undoubtedly are many reasons why they haven’t come to that realization. I will suggest one, which may be most important. Under laissez-faire capitalism, people are free to pursue their self-interest, which means that they may concentrate on improving their lives. They are under no legal obligation to help others. Charity and generosity are optional. (In Unrugged Individualism: The Selfish Basis of Benevolence, David Kelley demonstrates that these virtues can be derived from rational egoism.) In my view, the optional nature of charity is what keeps people from embracing capitalism enthusiastically. For centuries philosophers of all stripes have condemned self-interest — usually called selfishness — as immoral. Human beings were expected to serve society, their country, or some other collective — anything but themselves.
Capitalism and the liberal order, in theory, do not recognize the right of a collective to impose affirmative obligations, such as charity. Thus they are suspect. If you believe people have a fundamental moral obligation to serve others and if you believe people won’t do it voluntarily, you may be uneasy with a political-legal framework that leaves them free to hold their self-interest as their moral priority. This is not a logical necessity, but it is likely.
That uneasiness has created a tension throughout the history of America. After all, its founding document recognized among our “unalienable rights … the pursuit of happiness.” In terms of moral philosophy that was indeed a revolutionary declaration. It is sad that the American people have not yet fully subscribed to it.
As Ayn Rand suggested, the cause of winning adherents to capitalism is really a crusade to vindicate self-interest (and its basis, reason). The pursuit of rational self-interest of course creates benefits for others, as earlier classical liberals defensively argued. Human beings enjoy a basic harmony of interest. Specialization and the division of labor bring a level of general prosperity otherwise unattainable. But morally speaking, that is strictly a secondary issue. We must persuade our fellows that capitalism is good because each person is an end in himself who is justified in pursuing his happiness. Until that job is done, we will fight an uphill battle.
There is no third way, as there is no middle course between life and death. The frontier between state and market has only one right position, precisely at the point that leaves people free to do as they will so long as they recognize the same right held by everyone else.