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The Birth and Upbringing of a Mixed-Economy Nation

By Stephen Hicks

October 10, 2018

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Beware the compromisers—a lesson from this generation’s history.

Beware the compromisers—a lesson from this generation’s history.

In 1998, President Bill Clinton announced: “We have moved past the sterile debate between those who say Government is the problem and those who say Government is the solution. My fellow Americans, we have found a Third Way.”

Third-Way politics became popular in the 1990s after the final collapse of the Soviet Union. Socialists were feeling chastened and adrift. But middle-of-the-roaders were uncomfortable with moving further towards free-market capitalism. The fall of the Soviet Union was an indictment of socialism, but what exactly was the lesson? Two positions emerged.

1. Socialism has failed, so free markets are the future.

2. A certain kind of socialism has failed, but we should combine the strengths of the private sector with the virtues of government management.

Position 2 prevailed among leading intellectuals and politicians. British Prime Minister Tony Blair joined Clinton’s call: “The Third Way stands for a modernized social democracy … it is a third way because it moves decisively beyond an Old Left preoccupied by state control, high taxation and producer interests; and a New Right treating public investment, and often the very notions of ‘society’ and collective endeavour, as evils to be undone.”

The mixed economy would be adopted, not merely as a de facto result of faction politicking, but as the guiding ideology of a new era.

The mixed economy had of course long been a reality in the United States and Britain in both practice and theory. The 1930s brought Franklin Delano Roosevelt’s industrial management and John Maynard Keynes’s interventionism. Thirty years later, the 1960s brought Lyndon Johnson’s Great Society and John Kenneth Galbraith’s new industrial state.

The mixed economy had of course long been a reality in the United States and Britain in both practice and theory. The 1930s brought Franklin Delano Roosevelt’s industrial management and John Maynard Keynes’s interventionism. Thirty years later, the 1960s brought Lyndon Johnson’s Great Society and John Kenneth Galbraith’s new industrial state.

So again thirty years later, 1990s explicit Third Way politics was to embrace co-management of the economy along these lines:

• The Federal Reserve and Wall Street will jointly direct financial policy.

• Fannie Mae, Freddie Mac and the real estate industry will work out housing.

• The Department of Transportation and the major automotive and airline companies will manage the transportation sector.

• The Department of Energy and the energy corporations will cooperate on energy policy in oil, gas, and renewables.

• And so on.

By their fruits shall ye know them.

In the decade that followed President Clinton’s announcement, the regulation of business accelerated and the United States was rocked by financial crises, ethics scandals, and dog-eat-dog fights over who would get subsidies and bailouts. “Crony capitalism” became the new favorite epithet. And every major player was an enthusiastic practitioner of the Third Way.

In the decade that followed President Clinton’s announcement, the regulation of business accelerated and the United States was rocked by financial crises, ethics scandals, and dog-eat-dog fights over who would get subsidies and bailouts. “Crony capitalism” became the new favorite epithet. And every major player was an enthusiastic practitioner of the Third Way.

• The scandal-ridden Countrywide mortgage giant was tightly politically connected.

• The energy sector’s Enron — now deservedly a classic case study of ethical failure — dined regularly on government-business partnerships and actively sought more.

• The financial corporations that received huge bailouts, loan guarantees, and subsidies — e.g., Citibank and Goldman Sachs — had all played ball.

• So too had the transportation sector’s General Motors, and the green-energy darling Solyndra, and many, many others.

So not only had socialism failed everywhere it’s been tried — now the world’s leading Third-Way economies had also failed. What was the lesson for our generation? Once again, two positions have emerged:

1. Maybe we should try free-market capitalism.

2. This generation’s bad politicians and businessmen have corrupted the ideal of government-business partnership, but we will get it right the next time.

We all know the line about failing to learn from history. We also know that President Clinton’s and Prime Minister Blair’s policies from a generation ago seem ancient and irrelevant history—even to the few people who are aware of them.

But there is the very difficult issue of assigning blame and praise in a mixed system. When the economy is working well, which part of the mix gets the credit? And when it’s dysfunctional, who gets the blame?

The general pattern of argument is this:

1. The economy is in a mess. We once had a relatively free market. Then the government increasingly regulated it. The resulting mixture led to major problems. Consequently, the solution is to get rid of the government regulations and return to a free market.

2. The economy is a mess. The current system is a free market. Government either hasn’t regulated it much or has deregulated it. The resulting chaos is capitalism in action. So the solution is to increase government control and move towards socialism.

Two particular examples:

• After the 2008 meltdown in mortgages and Wall Street, for example, position 1’s advocates argued that the housing and financial markets were skewed by many government interventions. Position 2’s advocates disagreed and argued that those markets were mostly unregulated or deregulated and so spun out of control.

• In the 2010 debates over health care, position 1’s advocates argued that the dysfunctions in medical services resulted from skewed incentives and obstructions created by government involvement. Position 2’s advocates disagreed and argued that the high costs and lack of access to health care demonstrated capitalism’s inability to provide.

How do we evaluate these opposing narratives, without falling back on knee-jerk ideological prior commitments?

It’s important to focus first on a critical prior question: To what extent is the economy capitalist or socialist? Clearly, it is a mixed economy with elements of both capitalism and socialism. But what is the degree of mixture? Is it mostly one or the other? And how do we measure this?

I’m using capitalism and socialism as antonyms along the spectrum of economic power. Under free-market capitalism, all decisions and actions about production, trade, and consumption are individualized, i.e., made by private individuals or institutions on behalf of their own values. That is to say, economic decision and action is decentralized and voluntary. Under socialism, by contrast, all decisions and actions about production, trade, and consumption are socialized, i.e., made by the government on behalf of society as a whole. That is to say, economic decision and action are centralized and compulsory. We can measure degrees of capitalism or socialism by economic activity:

• Taxation rates (e.g., federal, state, local)

• Percent of overall spending (e.g., relative size of government and non-government budgets)

• Controls on production (e.g., regulations on what, how, and when)

• Controls on trade (e.g., tariffs, contract protection, price controls)

• Controls on consumption (e.g., prohibitions)

• Property ownership (e.g., usage restrictions, eminent domain)

• Privacy (e.g., accounting publications, ownership disclosures, data security)

• Money (e.g., controls on wealth and the media of exchange)

• Human capital (e.g., barriers to entry to professions, immigration policies)

We can also measure how free-market or socialist each economic sector is, since government regulation is not equal across all sectors:

• Manufacturing

• Agriculture

• Financial
• Education

• Research

• Technology

• Energy

• Health care

That’s a huge project, but the social science data matter critically when we ask evaluative questions about any mixed system: When the economy or economic sector is functional, which part of the mix gets the credit—the free-market aspects or the government controls? And when it’s dysfunctional, who gets the blame?

As a start, we are now fortunate to have available several indicators with easily-available data. Here are three:

Regulation: In every key sector of our economy, the trend is increasing regulation, and for every partial deregulation there are many new regulations.

In 2016, we decided who would be the President of the United States in 2018, which is the twentieth anniversary of Clinton’s and Blair’s proclamations. My best guess, then, was—and still is—that we should plan to stay tuned for a re-publication of this article ten years from now with only the names changed.

Money: Money is the lifeblood of a modern economy, and it’s worth dwelling on the significance of government monopolies on money. Only the government may print money. The government decides how much money will be in circulation. And the government determines the borrowing cost of money, i.e., the base interest rates.

Ideology: We all know how politicians and bureaucrats like power and almost always want more. But we may be surprised at how few professional economists advocate free markets.

In 2016, we decided who would be the President of the United States in 2018, which is the twentieth anniversary of Clinton’s and Blair’s proclamations. My best guess, then, was—and still is—that we should plan to stay tuned for a re-publication of this article ten years from now with only the names changed.
 

 

This essay first appeared on Every Joe as “Third-Way Politics and Its Bitter Fruits.”

 

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