How the Third Way lost its way

Enhancing social security and curbing inequality were major achievements, to be sure. But the political architecture of the non-communist Left, forged in the class struggles of the industrial era, appeared increasingly outdated in the closing years of the 20th century. The focus of market economies was beginning to shift away from manufacturing toward services, finance, and knowledge-intensive productive processes.

A class of educated professionals with non-traditional views on gender, culture, the environment and much else was emerging. Old expectations about job security were giving way to new realities of constant change. If the centre-Left failed to respond to the new economic and class structures, it risked irrelevance.

The task of reconstructing the centre-Left began in the United States. After the Democratic Party had lost its third consecutive presidential election in 1988, a small band of Democratic dissidents (myself included) undertook to modernise their party, succeeding just four years later with the election of ‘New Democrat’ Bill Clinton. This achievement attracted global attention from supporters of the centre-Left. As a White House official during Clinton’s first term, I can attest to the fact that representatives of Tony Blair’s New Labour movement were in the building from Day One, taking notes.

The final link in the chain was forged when Blair, who had by then become prime minister, and Germany’s newly installed SPD chancellor, Gerhard Schroeder, issued a joint manifesto, Europe: The Third Way/Die Neue Mitte, which crisply articulates the movement’s main themes. “Most people have long since abandoned the world view represented by the dogmas of Left and Right,” it began. “Social democrats must be able to speak to these people.”

Overall, the document declared, the old version of social democracy overstated the weaknesses of markets and undervalued the importance of individual and business enterprise to the creation of wealth. It assumed that public expenditure as a share of national income could rise indefinitely. It assumed that government could row the boat, not just steer it, and that public programmes could be effective as they proliferated without coordination or consolidation. And it assumed that the economy and polity would remain strong as family and community ties weakened.

Although the values of social democracy are timeless, the document continued, its policies must be modernised in response to changing circumstances. This means revising social democrats’ long-held beliefs about the relationship between the market and the state: “government does all it can to support enterprise but never believes it is a substitute for enterprise”.

It means distinguishing between social justice and equality of outcomes: the latter entailed “a neglect of the importance of rewarding effort and responsibility”, burdening work with “ever higher costs”, and failing to celebrate creativity and excellence. It means questioning the relationship between social justice and “ever higher levels of public spending”, which can negatively affect competitiveness, job creation, and living standards.

It means righting the imbalance between rights, which have proliferated, and responsibilities, which have withered. It means limiting state regulations designed to address market failures, because “universal social safeguards can exact an excessive toll on entrepreneurship, individual responsibility, and community spirit.

In retrospect, it is clear that the Third Way rested on optimistic assumptions about the new world we had entered. We assumed that the fall of the Berlin Wall and collapse of the Soviet Union represented that triumph of democracy, which had become (as the cliché ran) “the only game in town”. We assumed that unipolar American power would spread a protective canopy over a global order of free governments and free markets.

We took for granted the “Washington consensus” that prudent fiscal policies, deregulation, and markets open to trade and capital flows would accelerate the entrance of developing countries into this order. And we believed that China could be peacefully integrated into a system of rules that the United States and other market democracies had created.

Our assumptions about the domestic sphere were equally optimistic. We were confident that globalisation and technological change would be compatible with vigorous, broad-based economic growth; that government could manage the transition to the knowledge economy and reduce the amplitude of economic cycles; and that the fruits of suitably managed markets would allow us to come together across class, ethnic, and geographical lines, ease racial tensions, and promote social inclusion, increasing diversity.

Needless to say, our hopes were not realised. History did not end as, in 1992, Francis Fukuyama assured us it would; after a brief slumber, it returned with a vengeance, bringing with it a resurgence of nationalism, populism, and alternatives to liberal democracy. Russia regressed to autocracy; radical Islamism went to war against the West; China became far more prosperous without becoming a whit more democratic, confuting decades of modernisation theories.

Developments at home were no less disappointing. Market forces and new network effects combined to produce rising economic concentration, declining entrepreneurship. After a brief burst of shared prosperity in the late 1990s, growth slowed while inequality surged. The financial crisis and ensuing Great Recession showed that the managers of the economy were not really in control and that the vaunted Great Moderation was an illusion.

The economic and cultural gap between highly educated, densely populated metropolitan areas and the more homogeneous, less educated hinterlands of small towns and rural areas widened, with fateful consequences for politics throughout the democratic West. The ideal of equal opportunity curdled into a new meritocracy that threatened to become self-perpetuating. And citizens went into open revolt against the free flow of peoples across borders embraced by the European Union and US progressives.

In country after country, Third Way reformers found that the culture of rights was more than strong enough to impede the birth of a new culture of responsibility: families and communities continued to weaken, and programmatic efforts to create an ethos of service fell short. Presented with President Clinton’s programme of paid national and community service, the Left wanted funds without individual responsibility, while the Right wanted responsibility without funds.

The Third Way principle of reciprocity proved strong enough to launch the programme, but too weak to take it to the scale needed to transform a hyper-individualist culture.

In the face of so many confuted assumptions and dashed hopes, it is tempting to conclude that little of the Third Way is relevant to our current circumstances. This proposition is over-broad, I think, because history has not overtaken all Third Way premises.

Globalisation, rapid technological change, and the knowledge-based economy are here to stay. Suitably regulated markets create wealth while mitigating social and economic disruption. Government works best when it steers rather than rows, coordinates rather than fragmenting its programmes, and weighs the costs of regulations against their benefits. Vigorous economies and sturdy democracies depend on strong families, vibrant communities, and a reciprocal balance between rights and responsibilities.

When we move from principles to policies, however, the obsolescence of the Third Way is harder to deny. Its inability to foresee or adapt to the economic and political changes which were arguably created by its dominance at the end of the century has, for the time being, pushed its ideas and leaders to the curb. The Third Way’s programme of incremental adjustments to social democracy within a framework of optimism about globalisation, democratisation, and demographic diversity can do little to address today’s much deeper structural problems.

New circumstances require new policies.

To stem rising economic inequality and geographical divergence, we will need more government intervention and regulation than the creators of the Third Way contemplated, along with much greater investment in the fundamentals of equal opportunity. To sustain a rules-based international order, the rules must pay less attention to economic aggregates – and more to sectors, regions, and economic classes – than the proponents of the WTO imagined. To be sustainable, immigration regimes will have to pay more attention to the economic and cultural effects of entrenched practices. What works in San Francisco will not necessary work in Scranton; the Midlands may reject what London cherishes.

In the international domain, the decision to allow China to enter the World Trade Organisation without committing to the practices of a market economy has produced distortions that the West must address – but from a far weaker position than it enjoyed two decades ago. We need a grand coalition of market democracies to persuade China’s leaders that its current course is unsustainable and that abiding by the spirit as well as the letter of the global trading system is their best strategy for the long-term.

Drafting his Annual Message to Congress just weeks before signing the Emancipation Proclamation, President Abraham Lincoln was in a reflective mood. “The dogmas of the quiet past are inadequate to the stormy present,” he wrote. “As our case is new, so we must think anew, and act anew. We must disenthrall ourselves.” And so we must today.

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