Misconceptions of the Third Way


There is socialism, and there is capitalism. Under this terminology it is easy to see the possibility of a third option. After all, the typical modern society is neither purely laissez-faire nor one with collective ownership of the means of production. In most modern societies, some markets exist, and there is some level of public ownership.

However, economic systems can be divided in a different sense. There is a system that allocates resources through top-down central planning (command economy), and there is a system that allocates resources through private decentralized trade (free market).

Described in this manner, there cannot possibly be a third way to allocate resources. There is no third way outside of voluntary or involuntary, centralized or decentralized. Resources are either seized by force, or traded through contract.

Yes, a system can be a combination of both (as most modern societies are). But a mixture of two methods is not the same as a third, unique method.

Though there are many critiques of socialism, the most effective has been that of the socialist calculation debate, best explained in Socialism: An Economic and Sociological Analysis by Ludwig von Mises. It is the system of prices developed within a voluntary market economy that best allocates resources. Prices rise when supply falls or demand rises. High prices encourage scarce resources to go where they are needed most, and encourage others to increase supply.

A change in pricing is a clear piece of information about the scarcity of a resource. Because they are arrived at through the market process, controlled prices, or prices set by a centralized agency, lack this information. Without prices determined by the market, there is no method of knowing whether certain resources are over- or under-produced. A fully centralized socialist system cannot properly produce or allocate resources without this price system.

Non-socialists have approved of this refutation of socialism. Yet so many continue to advocate for greater central planning to replace the free market method, though they will always concede that capitalism works and socialism doesn’t.

These enlightened thinkers reject the “extremism” of capitalism and socialism, and accept that life is a compromise, and we can’t let rigid ideological dogma dominate our economic views. We know socialism doesn’t work, and capitalism has its problems (we don’t want children working for pennies a day in coal mines, do we?), so we need a third system, one that accepts the need for a market economy, but adds plenty of central planning to counteract the bad aspects of capitalism.

Sound plausible? To the layman, it’s fairly reasonable thinking. The damage done by extremist ideology throughout history is quite clear. However, that’s not how this works. To implement a third way beyond capitalism and socialism is to implement a partial market economy alongside a partial command economy. But if command economies can’t function properly (due to both a knowledge problem and an incentive problem), then a “Third Way” system will always be inferior to a free market system.

But this economic thinking isn’t backed up by history, the Third Wayers will say. Central planning has saved us from problems with free market capitalism. It is central planning that saves us from price gouging (false), depressions (untrue), pandemics (wrong), and child labor (incorrect). Central planning will, however, successfully combat the problem of free food within the market economy.

Third Wayers do bring up an interesting question for advocates of a free market system: Why all the talk of socialism? The average person is not fond of socialism, but they are fond of central planning to some extent. Though the two terms are somewhat related, terminology is important. The modern threat is less socialism and more central planning. Mainstream think tanks are not advocating for socialism, they are advocating for a “reasonable” and “pragmatic” addition of more central planning to a somewhat free market system. They endorse a capitalist, free market system, but continuously advocate for central planning.

Calling a government program “socialist” is ineffective. It is more likely to spawn a debate on whether such a program counts as socialism, instead of a debate on the problem with the program itself. But call it “central planning,” and nobody would really disagree. Now a conversation can proceed to the problems of central planning, rather than a pointless discussion of terminology.

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Nathan A. Kreider is author of the Misconceptions column for Being Libertarian, and has written for the Austrian Economics Center, the Foundation for Economic Education, and the Liberalists. He also occasionally publishes a blog and video content, including short book reviews, which can be found on his website, nkreider.com. He can be contacted by email via [email protected]