THE THIRD WAY, Second Verse

 If there is a term that has shown extraordinary vitality in this century, it is the Third Way--a course of action between socialism and free market capitalism. The term has had many iterations from German social democracy to Yugoslav economic experiments to Gorbachev's perestroika. At no time however, has it received the kind of attention it is getting at the moment.

 President Clinton describes himself as a devotee and Prime minister Tony Blair waxes lyrical with the mere mention of the words. What both Blair and Clinton contend is that government entities can mitigate the negative effect of market forces and conversely, that harnessed public action need not interfere with the positive effect of free markets.

 Yet the Third Way is not so much a formulation of political leaders seeking an ideological identity as a response to roiled financial conditions that have triggered a reassessment of market forces. The so-called global financial crisis has impoverished 20 million Asians; has led to the devaluation of the ruble which has produced a dramatic reduction in Russian gross domestic product and employment and has precipitated Brazilian financial instability which could trigger a continental convulsion.

 The fear generated by the financial crisis has been the catalyst for a "soft landing psychology", the realization that you cannot leave people vulnerable before global markets. This explains Clinton's interest in "the governance of the world economy" and an emergent skepticism with unfettered market conditions. Some economists now contend there must be limits on the international flow of capital, others contend fixed exchange rates are needed, still others believe cutting of interest rates should be considered and some believe all of the above should be entertained.

 As one might guess, those from a dirigiste political tradition like Germany and France want more controls and economists who value the free market such as Milton Friedman want few, if any, controls.

 The former maintain a "Darwinian world" creates insecurity and stress and the permanent fear of unemployment, while the latter argues government intervention expands public markets and decreases private markets thereby reducing economic growth. Hence the quest for the Third Way.

 The conventional argument advanced by Prime Minister Mahathir of Malaysia among others is that the movement of capital across frontiers has triggered devaluation and ravaged economies. A second, often mentioned theme is that "Russian capitalism" demonstrates the futility of free markets in nations without a rule of law.

 James Wolfensohn, president of the World Bank, said, "We have to learn to have a debate where mathematics will not dominate humanity." So far, Mr. Wolfensohn's words have translated into billions of dollars of aid from the World Bank and the IMF to nations in financial risk. Whether this aid is a band-aid, a firewall, or a prophylactic depends on perspective and which metaphor you prefer.

 What cannot be denied is that free markets, with all of their ups and downs, have produced more wealth than the world has ever known. It has allowed for the emergence of a middle class and has turned Hobbes on his head by making life increasingly wealthy, increasingly healthy, increasingly safe and increasingly long.

 To suggest that a market downturn presupposes a market failure is an error of gross distortion. No one ever suggested a market system is without imperfections, but it would be a mistake to confuse imperfection with ineffective. Capitalism has been the most revolutionary force in history, introducing millions to the miracle of compound interest, mutual funds, stock holding and a degree of unprecedented wealth.

 Arguing there is a Third Way - a balance wheel - that can mitigate the negative consequences without affecting the benefits of a market system is an illusion consistent with other illusions in a risk averse world.

 If there were a Third Way Gorbachev would still be ruling the Soviet Union, Tito would be president of Yugoslavia, France would have a four percent unemployment rate and Tony Blair would be president of the European Union.

 The search for Nirvana is a human quest that never ends. Moreover, paradise is now sought without risk and without consequences. Yet it should be apparent to anyone who looks that free markets, with their risks, have accomplished more than government engineers, even the subtle ones. A person has not yet been born who is smarter than the aggregate wisdom of the market.

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