1998. An article defining a non-capitalist and non-socialist economy. Contribution to the discussion in the New Statesman concerning the third way. Not published.
Obviously the present-day economy is not as efficient as it could be. Looking how rapidly the natural sciences and technologies improve, trade globalises and people become smarter, it is well-founded to expect a reasonable improvement to just everyone’s life. Yet the poor get poorer even in the most developed countries and the condition of the nature gets worse in quite too many places. It seems that free capitalism does not work like it is supposed to. On the other hand socialism is doing even worse. How could their mixture do better?
No wonder some people are looking for a third way. However, so far the finds are poor. I have read tens or hundreds of books and articles emphasising the need to get rid of the right-left ideological model, to find a new way to regulate the market economy, to teach people to think global and act local, to generate an ethical model of economy, to produce a new mixture of market sector and non-profit sector etc. But I haven’t seen a single writing about what is the functional difference between the third and the second or the first way; not a single writing containing any kind of theoretical analysis defining third way economic procedures.
If we take seriously the question about a third economic way – I really believe we should – we have to neglect the present political and ideological tinkering and focus on a simple theoretical question: can we define capitalism and socialism so that also a non-capitalist and non-socialist economy is functionally defined. That is the only essential question to find a third way.
There are two opposite ways a state can intervene in economy
The previous is said in order to prepare the reader for the following. I will introduce a reasonable theory which clearly defines functional rules to an non-capitalist and non-socialist economy, and I ask my reader not to criticise it about the lack of political realism – I am afraid it is a part of the picture with every social invention above everyday politics.
Firstly, we have to define socialism and non-socialism functionally, i.e. without ethical or purposeful contents. Such socialism is recognised as an economy planned and controlled by any kind of political power. It is run by laws and regulations concerning prices, wages, taxes, licenses to produce, rights to consume etc. However, this definition is not exact enough, because – like many third way searchers have pointed out – also market economy needs some kind of legislation. If we didn’t have laws regulating private property, money, companies and procedures of trade, there would be no market economy. It would be an economy ruled by the most powerful, like an economy without a state strong enough to restrict the ”trade” controlled by Mafia, native clans or communist units. Under the authority of such groups the economy is functionally socialistic.
A market economy is possible only if a state or a larger coalition restricts the socialistic power of smaller organisations. So there are two fundamentally opposite ways a political power can intervene in an economy.
In a socialist way a political group uses and increases its own economic power by regulating the economy; i.e. categorising people, production and consumption and giving different rights, obligations and prices to different categories.
In a non-socialist way the political group decreases the economic power of its subgroups by legislation which restricts their socialist power to categorise things.
Today, for instance, EU is acting non-socialistic when it begins to use Euro and doing so prevents the member nations to regulate their currencies, but EU is acting socialistic when it begins to regulate Euro. The total effect is non-socialistic only if EU doesn’t build a larger bureaucracy to regulate Euro.
There are two market economies: a perfect market economy and a free market economy
Secondly, we have to define capitalism and non-capitalism without ethical or purposeful contents. For this purpose it is essential to recognise that in theory there are two functionally different market economies: a perfect(ly competitive) market economy and a free market economy.
The perfect market economy is a theoretical model which is supposed to be the foundation to the whole market economy. It is based on individual freedom to trade; so the market consists of independent individuals free to equally participate in every market as buyers as well as sellers. No-one controls the economy and resources and products allocate righteously and effectively by the famous ”invisible hand”.
The free market economy is a not so theoretical model based on an idea of economic freedom. In a free market an individual is free to buy and sell plus to make special economic contracts and organisations with other individuals. It is evident that the idea of the free market is contradictory to the idea of the perfect market. If there is a right to particular contracts there cannot be a right to equal participation. For example, some producers may agree with some clients that they don’t give the same market accessibility to all clients. The fact that everybody is free to make such agreements doesn’t change the case. If we consider such a system free, even socialism is free because everyone is free to make socialistic agreements and to get into a position where he can control other people’s economy. This principle leads to an economy of organisations buying and selling their products, as well as each others, on unequal terms. Resources and products allocate by a more or less visible hand of owners and corporations as they classify market participants and direct different rights, obligations and prices to different participants. This is the idea on which capitalism is built.
In order to make the difference clear and fundamental even the definition of the perfect market has to be specified. Traditionally a market is supposed to be perfectly competitive if every individual has freedom to sell and buy or not to sell or buy everything there is to be traded in a way he likes. However, if people have freedom to sell or not to sell (to anyone they like) everyone cannot have freedom to buy or not to buy (from anyone they like) because a seller has a freedom not to sell to everyone. And vice versa: if people have freedom to buy or not to buy (from whom they will), they don’t have freedom to sell or not to sell (to whom they will). It is a logical necessity to choose only another from the opposite freedoms.
To choose the right freedom it is necessary to distinguish selling from buying, just like we usually do. Selling is on the side of organised production and buying is on the side of individual, random consumption. People organise themselves to produce but not to consume. If the freedom to trade is on the side of selling, it gives the owners of capital and production the possibility to organise and control markets by classifying clients. If the freedom to trade is on the side of buying, it gives buyers and consumers a full possibility to choose products but not to use controlling power over anyone. It goes without saying that the idea of the uncontrolled ”invisible hand” economy demands the latter way. So we can say:
The capitalist market economy is based on the free market idea according to which an individual as a seller has freedom to sell exclusively, to categorise buyers and to build unequal trading organisations.
The non-capitalist market economy is based on the perfect market idea according to which an individual as a buyer has freedom, in the widest sense, to buy anything anyone sells at the same price he sells it to others.
The final step of the definition is to integrate the non-socialist way and the non-capitalistic market. There is no difficulty; it means that with a non-socialist legislation which restricts the ”socialist” power of sellers to control markets by categorising buyers it is possible to change the economy to a non-capitalist direction. There really is the Third Way, the perfect market economy, the old acquaintance but in a new framework.
A free market economy cannot escape a global competitiveness dilemma
A primary and – it seems to me – a new conclusion this three dimensional model leads to is the actuality that the perfect market economy is not only different but functionally opposed to capitalism. It is related to capitalism the same way capitalism is related to socialism. When the other increases the other decreases. The wider and denser the contract net merging companies and linking trades, the smaller the space for a random individual and the weaker the invisible hand.
This makes it possible to answer the question to which two dimensional economics is incompetent to answer: why the present-day economy with all its possibilities, improving technologies and widening free trade, is not doing better. That is because the capitalist allocation, forced by the owners’ and producers’ power to categorise and control markets, is not developing towards an equilibrium. It accumulates capital from random consumption to organised money making, so both the economic balance and the social well-being gets worse even in a time when economic numbers are good and production is growing. The balance is achieved only by crashes followed by socialist regulations and socialist unbalance – or taking the third way out.
(Knowing this it is painful to see people speaking and acting as there were only one market economy meaning capitalism opposed to socialism. It means that people react to economic difficulties by freeing the markets even more. People believe in – supported by most economists – eventually getting what the perfect market idea promises but again they’ll get the opposite, just because they are not following the perfect market theory but the free market idea.)
There is also another viewpoint to the same issue. I call it the global competitiveness dilemma and the question is: what happens on the global level when every state and every company improves its competitiveness? Can everyone’s rank rise? Since Adam Smith’s ”The Wealth of Nations” economics is considered mainly a science for a nation to prosper in a contest with other nations. The economics which improves the competitiveness of a nation or a company is good and correct. However, on the global level that is not a right ground for estimation, because in a contest one’s win is another’s lose.
Evidently it is not enough for a company in a capitalist market to make good products for consumers. The competitiveness also contains the low cost of products and a company’s power to control resources, trading channels and consumers. There are a quality competition, a cost competition and a power competition. From the viewpoint of a consumer – which is the fundamental one – the quality competition is a win-win game; every producer can improve his quality endlessly and all this benefits consumers. The cost competition is a win-lose game in which the essential cost is workers’ wages which on the other hand are needed to buy products. If consumers win by cheaper products they lose by lower wages. The power competition is a lose-lose game because it is only a ranking contest. No matter how much the companies invest in it, there won’t be better ranks; consumers get nothing but pay everything.
Classical economics doesn’t differentiate the competitiveness parts but tells companies to improve the whole package. Everyone’s economy should develop the better the freer the trade and the wider the competition. However, there is a disturbing connection between globalisation and the different games. Globalisation means that the competition gets harder in all its parts. It becomes harder in the quality game, which is good. It becomes harder in the cost game, which is not so good, because it presses down lowest wages everywhere toward the level of lowest wages somewhere and this disturbs the social and economic balance in most countries. The essential competition is, however, the power game, because it is a zero-sum game and globalising markets means that the number of competitors increase but there will be only the same ranks. So the power competition becomes harder and harder, which evidently is bad. That is why the money used to sales promoting, company mergers, capital trade and lawyers grows much faster than the money used to production – or to protect the environment. Contradictory to the free market doctrine, globalisation is now on the way where the losses of the competition will exceed the profits of it – just like in a war.
So there is a pressure to control markets by a global governance; separate states cannot diminish the competition pressure because they are in the same competition. This is where it is possible to choose between socialist regulation and perfect market legislation.
If we choose the socialist way, it means that there will be a global government which approves the free market grounds to the world economy, but categorises the participants and actions to good and bad ones and directs various regulations to different categories. The government can forbid too big mergers and powerful monopolies, tax speculative currency trade, state minimum wages etc. There certainly are many good and agreeable goals. However, this kind of governance confronts the same difficulties as a socialist power anywhere. The primary problem is to decide at what point a merger is too big, a monopoly too powerful, a trade speculative or wages insufficient. Lacking a theory there is no other way to draw the line than a political competition which also is a lose-lose game. And regardless of the nature of categories and restrictions established, usually they can be circumvented with the help of the approved right to make (nearly) all kinds of private agreements. This way doesn’t solve the global competitiveness dilemma.
If we choose the perfect market way, it means that the most developed countries contract on deleting both the idea of global governance and the doctrine of free market. They agree on developing their institutions and trade toward the perfect market economy. This solves the global competitiveness dilemma by lowering the competitive pressure both in politics and economy. When there is no global governance, there is no political competition to rule it. When sellers’ power to classify buyers is prohibited, the economic power game is ended and the reward of the competition diminishes. When the reward diminishes, the pressure to compete weakens.
A complete market economy will diminish the power of capitalist institutions
What then does the utilisation of the Third Way mean in practice? It means that the rules of trade and economic organisations are derived from every individual’s equal and direct freedom to buy anything there is to be sold (it is important to recognise the contrast to a socialist way, where the rules are planned according to what is thought to benefit individuals). Some rules are direct consequences from the principle, some are more or less logical necessities to fulfil needs of a free buyer. Below I shall shortly present four primary contents of the third way economy. The topics are of course more complicated than displayed here, but the reader will get a fairly good picture of questions essential to the new disparity.
1. There will be no exclusive rights. This changes trading practices in many ways. In commodity business it means that producers cannot control markets by building dominant trading groups because they have to sell their products to anyone at the same price. In intellectual property business it means that there are no exclusive patent rights or publication rights. An individual can sell his intellectual work at a price he wants to any reproducer but he is obliged to sell it also to others at the same price. This is an interesting obligation. Obviously it changes the bargaining habits and reduces the profits of leading inventors and profound artists. It also arouses a question: does this decrease people’s motivation to make inventions and works of art. On the other hand it can be argued that the rewards paid today don’t direct people’s intellect to humane and sustainable enterprises but develop the instruments of greediness.
2. There will be no price, trade or property secrecy. In the perfect market everyone must have equal information of every feature of every commodity, including the prices. In order to make buyers equal it is also required that prices are established in currency, not in assets. The principle also covers banking business so that bank accounts, credits and debts are open information. All this means a totally new philosophic aspect on economic information. In capitalism the information is considered private property, like a weapon against other competitors: if someone knows what I own he may take it from me, and vice versa. That attitude is understandable in hostile surroundings and against a totalitarian state. In the global economy it has become a weapon of the rich to avoid taxes and of deceitful debtors to avoid creditors. There are countries whose national dept could be paid by the money the rich have moved abroad. If people knew how the money have been made and where it is, they could get the robbed part back. In an open society all information is by definition free and supposed to work constructively: when every butcher, brewer and baker has perfect information about markets for his self-interest, it will work for the benefit of everyone.
3. There will be no corporations or other organisations having different economic rights than an individual has. This is required by equality in trade between people and the state. Not even the state can sell lower taxes or special treatment to people who establish organisations valued by the state. This also is a most exciting obligation. It means that corporations, trades unions, foundations, religious communities etc. are economically treated via their owners. Organisations are changed to personal possessions so that their owners share profits as well as losses by the rate of ownership and to full extent. For example there will be no ownership between corporations but every company with a different set of owners is considered an independent company, free and obliged to trade with all others. The perfect companies also pay taxes according to the same principle as an individual does and with no deductions. Factories, machines, energy, sales promotion as well as bought labour is paid with owners’ personal money like people pay their houses, cars, electricity, cosmetics and gardeners. All this arouses good questions: How could trades unions, foundations and religious communities survive if their privileges are abandoned? What would happen to the production if the tax deductions once made to improve productivity are rejected? How could companies co-operate if they couldn’t own each others? There are good answers too: Now when trades unions, corporations and religious communities have privileges, other communities, for example families and villages, are actually penalised. I don’t think it is a good thing either to subsidise production by tax deductions or other means in the world where there is a surplus industrial capacity and overpressure on the environment. To the third question an answer is: the present system, which is freely co-operative only within company coalitions, profits owners and employees, but a system where every company is obliged to co-operate with everyone, profits everyone.
4. There will be no special welfare for people. Every bargain between people and the state is avoided by giving the same basic income to everyone. The ethical as well as the economical basis of equal basic income is the fact that only a small part of the well-being that people enjoy today is actually made by them. The essence of it, the long development of agriculture, mining and natural sciences, is a contribution of former generations. If we now distribute the whole well-being in relation to what people earn in the present market, the rich can utilise the inherited infrastructure much more than their fair share and the poor get correspondingly less. This leads not only to social difficulties but to economic unbalance too. Extra reward causes extra striving toward richness, which means auxiliary greed and surplus supply ending some day at depression, shortage and a need to regulate economy. Basic income is a way to balance this wavering because being a non-socialist and a non-market income it doesn’t allot by political or economic factors. The size of an appropriate basic income is to be estimated in the degree of technical development. The more developed technology people can utilise the less both political and economic greediness is tolerated and the greater basic income is needed.
The best we can do is to trust in the best theory
As the reader may see, the Third Way does not indicate a totally new economic thinking. The idea of basic income is widely known. The supremacy of multinational corporations is an everyday topic in media. Almost everyone has suffered evident defects of secret money transactions, at least as a tax payer. Only exclusive rights haven’t been widely questioned.
What then is the novelty of the Third Way? There are two characteristics which make the Third Way a new paradigm in economics. Firstly there is the new theoretic definition of the ”invisible hand”. Until now it has been believed – or people have been made to believe – that the ”invisible hand” works in an economy where individuals have freedom as sellers to categorise buyers and to establish exclusive trading coalitions. The theory of the Third Way proves unambiguously that it is an incorrect assumption. The ”invisible hand” is a hand of a free and equal buyer, not a hand of a free and equal seller.
Secondly there is the new theoretic definition of a socialistic act. So far there has been a great confusion about which legislation is socialistic and which is required to ensure market economy. Only the discovery that the socialistic power is the power to categorise makes the difference clear. A legislation or agreement is non-socialistic if it restricts the power to make economic categories. These definitions make it possible to tell the Third Way from the First (socialism) and the Second (capitalism) as well as from mixed economies. So we can unite the above mentioned, until now separate and theoretically weak objectives, under one theory – and perhaps one political movement.
There is no doubt: the theoretic foundation of the Third Way is stronger than that of socialism or capitalism. Now the interesting question is: What does that mean in practice? Will the world economy obey the rules of Third Way economics better than the rules of socialist or capitalist economics? It would be easy to join the chorus of ”realists” and say that a scientific theory is quite different from everyday practice; today capitalists have all the power to keep the world economy as it is regardless to what the theory says. As a scientist I cannot agree on that opinion. I have to say that according to the best available knowledge also the economic systems develop, usually against the will of the old power. After the First and the Second System there will be the Third System – and then a Fourth, whatever it is. The question is how do we make it happen.
The Third Way theory implies simply that the size and power of corporations, governments and trading coalitions will diminish compared to the present world. The secret pacts will be revealed and the system will become harder to control, more random. Obviously this theory can be correct either in an unintentional or in an intentional way.
In the unintentional way the randomness is an unwanted result of the capitalist-socialist practice. The economic competition becomes harder and harder leading to unrealistic accumulations of contracts (power) which explode destroying economic structures and increasing the portion of random economy – just what is happening today in some capitalist-socialist countries in Asia, including Japan and Russia.
In the intentional way the randomness is a conscious choice. The power of corporations and governments is diminished by international agreements on taking the Third Way. I am not saying it is an easy way either, but in the end of this way I see light.