“After the collapse of the Soviet Union in 1991, the 20th century’s ideological contest seemed over,” The Economist wrote in last week’s cover story on millennials and socialism. “Capitalism had won and socialism became a byword for economic failure and political oppression.” These sentences aren’t wrong, but they are misleading. It’s true that market-oriented economies fared better over the 20th century on various measures of human welfare than did centrally-planned ones. But they did so largely by abandoning their commitment to laissez-faire capitalism and inventing something new: the mixed economy.
Before World War II, public spending on social services was virtually nonexistent in OECD countries. In the post-war years it exploded and today averages just over 20% of GDP. In the middle of the 20th century, governments in these economies began providing health insurance, public education, retirement support, and more. In aggregate, these policies not only didn’t get in the way of economic growth; they likely increased it. And they enabled the so-called “capitalist” countries to deliver not just better economic outcomes than centrally-planned ones but also longer, healthier, and more-educated lives for their citizens. The mixed economy was the original “third way,” before that term came to be associated with centrist neoliberalism.
Today, as The Economist notes, “Socialism is storming back because it has formed an incisive critique of what has gone wrong in Western societies.” But the challenge of the 21st century, like its predecessor, is not about capitalism vs. socialism. It is about creating a new kind of mixed economy.