The Third Way Is Here

Neither capitalist nor socialist,
Japan and Mondragon are a different kind of nation

One of the articles in The Next Agenda (IC#19)
Originally published in Autumn 1988 on page 54
Copyright (c)1988, 1997 by Context Institute

In considering the USSR’s restructuring, Yuri Burtin asked (see
Living With Perestroikain this issue), "Is a third way possible? And what is it going to be like?" Terry Mollner suggests that it’s not only possible – it already exists. Terry is President of Trusteeship Institute (23 Baker Road, Shutesbury, MA 01072), which consults with corporations converting to employee ownership on the Mondragon model.

Capitalism and socialism, we can rest assured, are not the end of history. Quite the contrary: like tyranny, theocracy and monarchy, they will someday be discussed primarily in historical terms.

What will a post-capitalist-socialist economic system look like? Is a "Third Way" already in our midst but unrecognized as such by us? Will it do a better job of ending poverty than capitalism? And will it do a better job of ending mediocrity than socialism?

The store windows of the U.S. and Europe are stocked with an abundance of high quality items – but a drive through any of their major cities provides ample visible proof that capitalism has not succeeded in ending poverty. In contrast, a drive through any major city in the Soviet Union or China reveals that while very few live in prosperity, fewer still experience real poverty. Yet it is hard to find even enough mediocre products in the store windows of those countries. The purpose of this article is to look at economic systems which have evolved beyond capitalism and socialism, in the hopes that we might learn from them how to end poverty in the United States without compromising the freedom of the individual, as well as how to allow for a continuous increase in the spiritual and material standard of living for everyone.

Let’s begin with Japan. Our purpose is not to argue that Japan, or any of the other nations we will discuss later, is a perfect Third Way society. They are all first efforts at the task. The purpose of this article is to hold up for review the ideal of a Third Way economic system. Japan has many flaws as a society, not the least of which is its extreme paternalism.

It is generally accepted that Japan is a capitalist nation: priority is given to individual freedom, and people are free to form businesses which compete for profits as well as political parties which compete for control of the state. However, a close look at Japan reveals that it operates much like a socialist nation. There is for all practical purposes one political party, and the interests of the nation are given a high priority in individual action and in business decisions. So what is Japan? Capitalist or socialist?

It is neither. It is the most visible emergent "Third Way" nation. For reasons we will state below, we in the West cannot easily see that this is the case. However, some socialist nations in the East – including the Soviet Union and China – understand what is truly occurring in Japan. Japan is the reason the Soviet Union and China have suddenly awakened from their long ideological sleep, because in Japan they can see the future of their socialist experiments; and they are moving rapidly to reorganize their societies with "socialist Japan" as the secret model in their minds.

Just as Americans in October of 1929 and 1987 were acting as if the stock market could never fall again, we could easily find ourselves thinking that the Third Way is not upon us and get left behind. If that were to happen, it would not be the first time in history that a dominant nation failed to notice the emergence of the next phase of evolution and ceased to be dominant as a result. So let’s take a good look at Japan to see if it is, indeed, a post-capitalist-socialist nation.


Japan is a nation in the East. As anyone who has journeyed to the East knows, the fundamental metaphysical assumption about reality there is the exact opposite of that held by the West. In the West, freedom of the individual takes priority over the interests of the group. In the East, however, the interests of the group take priority over the freedom of the individual. These patterns were present long before the emergence of capitalism and socialism; as a result, the West developed capitalism and the East easily accepted socialism. Notice that while Europe and the United States have championed capitalism, the Soviet Union and China have championed socialism, even while being bitter enemies.

Japan is in the East, yet after World War II the United States established a capitalist democracy there. The result has been the emergence of something completely different from capitalism and socialism. The top priority of a Japanese individual is to act in the interests of the group first and himself or herself second. The Japanese are a free society where the individuals have chosen to behave like a socialist society. This is a "Third Way."

A capitalist society is structured to place as few restrictions on the freedom of the individual as possible. The individuals give priority to self-interest as well. In a socialist society, people are usually forced to act in the best interests of the society first and themselves second, the assumption being that they would not freely make this choice. This often results in oppression, rebellion, and the hoarding of one’s creative energies for private life.

Although Japan uses the language of capitalism, it operates very much like a socialist nation created as the result of individual free choice. For example, there are a number of political parties. But there is only one ruling party, the Liberal Democrats, who have controlled Japan for the last 32 years and show signs of being able to stay on for 32 more. The only significant function of the opposition – a weak collection of Socialists, Communists, and centrists backed by a Buddhist sect – is to seek out and check potential ruling party excesses.[1]

Because the Eastern tradition of giving priority to the interests of the group involves fostering cooperation within the group, there is a requirement for broad consensus. Thus the anti-Government forces, no matter how small, cannot be taken for granted on important issues. Sometimes the opposition parties can combine to unravel Government initiatives, as they did in the early part of 1987 when, led by the Socialist Party, they killed a proposed new sales tax.

What is even more significant is that the factions within the Liberal Democratic Party, who cover the spectrum from right-wing ultra-nationalists to moderate liberals, do not fight for control. Instead these factions accept on faith their right to take turns at the helm. This cooperative rather than competitive process of managing differences in a group is the essence of the Third Way.

The replacement of Prime Minister Yasuhiro Nakasone with Noboru Takeshita is a case in point. It was up to the Liberal Democratic Party to choose a new party president, who automatically would become Prime Minister. The party decided that putting it to a vote of the 445 Liberal Democratic members of Parliament would have perpetuated division rather than cooperation. Instead, the three presidential candidates were asked to sort it out among themselves in a cooperative manner. They were unable to do so, but the party still did not turn to competitive voting. They chose to give Mr. Nakasone the responsibility of choosing the next Prime Minister, and he chose Takeshita – a paternalistic move, but consensual nonetheless.

The party’s strength is its flexibility in adapting to new national needs and sustaining the process of broad consensus. "In the 1970s," reports Clyde Haberman of the New York Times, "[the party] yielded to public pressure for expanded welfare systems and other expensive services. In the cost conscious 1980s, it has preached belt-tightening, turning over to private hands such important agencies as the deficit-hounded railways." The preference for solving problems within a cooperative rather than competitive context was particularly visible in the 1986 elections. "Theoretically, Liberal Democratic candidates should have fared poorly. Unemployment was up, and a suddenly strong yen threatened exports. Yet the party won big."


In the area of economics, Japan has a governmental division which no other capitalist nation has: the Ministry of International Trade and Industry (MITI). MITI is the equivalent of an economic Board of Trustees for Japan, Inc., through which the heads of government, industry, labor and banking cooperate. It sets the course for Japan economically in the same way that the Board of Trustees of IBM does for that company. The difference is that the top priority of IBM is profits through the sale of its products, while the top priority of Japan, Inc. is continued employment and prosperity for all the people in Japan, from generation to generation, through the control of markets. Thus as the value of the US dollar has fallen, making Japanese products more expensive to Americans, Japanese companies have accepted far lower profit margins, even losses, rather than give up market share and be forced to lay off workers.

Like IBM, MITI takes a look at the needs of consumers and decides what products will sell. For example, not too many years ago it decided that video cassette recorders (VCRs) would be in demand. Once it identifies a potential profitable market, the government makes capital available to the major corporations for the research and development of very advanced, high-quality products. It adjusts depreciation rates for these growing industries. The banks make low interest loans available for production, unions and management cooperate and the major corporations of Japan send the finished VCRs around the world.

When an American walks into an electronics store to purchase a piece of equipment, he or she compares the General Electric, RCA, Sony, Mitsubishi, Panasonic and Sharp models as if they were competing companies. The fact is that Sony, Mitsubishi, Panasonic, and Sharp are all operational divisions of Japan, Inc. The result of such sophisticated cooperation at the national level is that no major American company produces VCRs any longer.[2]

The experience of General Electric in its bid to build the Mae Moh power plant in Thailand is an even more graphic example. When in the final stages of assembling bids, GE considered itself the leading candidate: Thai officials had called its equipment technically the best. But only ten hours before the deadline for bids, Japan’s export-finance agency said it would offer the Thais subsidized loans and an $8 million grant to help them pay for the project. Fuji Electric Company of Japan got the contract.[3]

Our first response may be that such actions are not fair play. This reaction would be the result of assuming that our own capitalist model is the right model. We assume that corporations should compete with one another without the involvement of the state in a free and fair market. On the other hand, within a corporation we expect a high degree of cooperation. Even if we use competition within the corporation to stimulate greater productivity, such as competition among salespeople, we expect it to remain within the confines of the corporation. Our top priority is to cooperate as a company and beat the competition. Japan does exactly the same thing – but it is moving the line between those areas where we primarily compete and those where we primarily cooperate. Japan is moving that line from between the corporation and other corporations to between the nation and other nations.

We may also conclude that such behavior is malicious on their part. I don’t think so. It is the result of being an Eastern culture which had a Western political-economic system imposed upon it by its conquerors after a war. Most probably the Japanese would not have chosen this system themselves. They have just been themselves inside a capitalist system, and this national cooperation is what has emerged. They are surprised at our anger because they believed they were doing their best to compete within our system and, naively, that it was okay to win. They are shocked by our unwillingness to lose honorably. After all, we expected the Japanese to do so, and they did – they accepted our system of capitalism and have done their best with it.

When the new generation of Soviet and Chinese leaders look at Japan, they see a more mature socialist state talking capitalist language. Thus the intention of the Soviets and Chinese is to create a Third Way society based on the Japanese model. The main difference here is that they will do so while talking socialist language. What all three nations have in common is a recognition of the next phase of social evolution – to a society where people freely choose to give priority to the interests of the society as a whole and act upon those priorities through a process of cooperation rather than competition.

When Americans look at Japan, we see a sister capitalist nation. When we look at the changes occurring in the Soviet Union or China, conservatives see nothing but socialism with style changes while liberals see the first stages of a conversion to capitalism. No one, to my knowledge, perceives the emergence of something fundamentally different from both these systems.


Metaphysically, capitalism and socialism are both based on "the competitive assumption," which holds that the universe is separated into an immense number of parts locked in a state of constant competition for each one’s self-interest. Although both socioeconomic systems accept the competitive assumption, the difference is that while capitalism champions it, socialism outlaws it.

The Third Way is based on "the cooperative assumption" – the belief that the universe is an immense number of connected parts, each of which is constantly cooperating with all the other parts for the interests of the whole, and only secondly for any one part or parts. Many would argue that these are the two most fundamental assumptions about reality, and that they have been fighting for the loyalties of people in nearly every culture since the beginning of human society. Each side believes the other is living in illusion.

If we create a continuum with the competitive assumption on one side and the cooperative assumption on the other, we discover that those who hold the competitive assumption believe compromise to be the highest possible form of cooperative relationship, because each party places its self-interest first at all times. On the other end, those who hold the cooperative assumption believe the higher level relationship of consensus – a sincere unanimous vote, without the feeling of compromise – to be possible because each person places the interests of the group as one body first. They genuinely believe they are all part of one thing, and they do not want their arms going one way while their legs are going another. Interestingly, they also believe that competition unto death (war) is the lowest form of cooperation. They do not view competition as possible outside of a cooperative context, because in their view we all act in the best interest of the whole at all times, whether we are aware of it or not. Under this model, competition (or war for that matter) can only occur as a secondary activity within a consensual agreement (the cooperative context) that something is valuable and worth fighting over.

If we place the United States, the Soviet Union, China and Japan on this cooperative continuum, we find that the United States is still based on the assumption that success is accomplished by giving greater priority not to cooperation, but to competition. Compromise is seen as the highest value, and our system of government succeeds at forging compromise without the participation of the army. If my reading of the Soviet Union and China is correct, they are in the earliest stages of acceptance of the cooperative assumption. Finally, Japan is a significantly more mature cooperatively-based nation.


There are two other nations which are further along the continuum than Japan. They are not nations in the normal sense, yet they may represent the nations of the future. They are the Mondragon Cooperatives in the Basque region of northern Spain, and the Central Union, a similar association of cooperative enterprises in Poland. As organizations they provide nearly all the governmental, economic, and social activities and services of a nation for their members, but they are not identified with a particular geographic territory. They could be models of a new, non-geographically based nation which may become common in the decades ahead.

Most remarkably, this form of nation is not found threatening by the capitalist and socialist states within which they exist. In fact the Mondragon Cooperatives have been warmly embraced by capitalist Spain, just as the Central Union has been warmly embraced by socialist Poland. Yet both are Third Way social systems. This reveals another characteristic of Third Way societies: they emerge freely and non-violently within existing nations.

Mondragon is an association of nearly 200 enterprises (mostly industrial factories which manufacture durable goods, intermediate goods, and capital equipment, as well as producing electronic and high technology products), schools, and farms owned and managed by over 20,000 owners, who are also the only workers. They have guaranteed jobs for life, fully adequate take-home incomes, nearly equal participation in their firms’ profits and losses, equal shares in the democratic control of their enterprises, broad health insurance plans for their families, a private unemployment program which pays 80% of take-home pay if they are ever laid off, and a pension program which pays 60% of their salary from the last day of work until death.

There is an entrepreneurial organization within Mondragon which has chosen as its highest priority the creation of owner-worker jobs (new members of the voluntary, non-geographically based nation), and its new businesses rarely fail. It has helped to start and build the companies which are now Spain’s top manufacturers of domestic appliances, machine tools, and industrial machinery. The association of over 100 owner-worked, democratically controlled commercial enterprises sold nearly a $1 billion worth of goods and services in 1986.

They have their own bank, the Caja Laboral Popular ( the Bank of the People’s Labor), whose growth in deposits has far outpaced its competitors. Its managers operate the bank as if it had a near infinite supply of money. (They define money as an accounting and exchange system, not as a commodity, and do not allow the amount of it in circulation to limit the number and kind of exchange agreements among people.) It has a most unusual commercial loan policy: "The riskier the loan, the lower the interest rate." They have rarely experienced a default in over 25 years of making uncollateralized loans to both new and existing businesses.

Each owner-worker cooperative enterprise shares in the ownership and democratic control of the bank; the entrepreneurial organization; a sophisticated, long-range research institute which focuses much of its work on developing automation; and the health and social security system. They have enthusiastically embraced hierarchical management structures, within the context of and subject to their democratic control, as the most efficient way to run their enterprises and their nation.

These owner-workers are more productive per person than any other group of workers in Spain, and their businesses are more than twice as profitable as the average conventional Spanish firm. During the deep European business recession in the late 1970s and early 1980s when 20% of the employees in the surrounding economy lost their jobs, this group of owner-worker companies increased its net employment by 36%.

They have created their own cooperatively owned and democratically controlled educational system, which provides a full range of programs, from day care to doctoral studies. It also includes a student-owned cooperative business which allows working students to fully pay their own tuition and living expenses for high school and college. They have also built a 200-store network of consumer cooperatives, varying in size from corner grocery stores to medium-sized department stores and reaching into nearly every Basque town and village.

What makes them more of a nation than a business is that they have created their own governance system: every piece of legislation passed by the representatives in their Congress is subject to a veto by referendum of the citizenry, i.e., the members of the owner-worker enterprises both for-profit and non-profit. As you can see, there is hardly any service or activity of a geographically identified nation which they do not provide within their system. Yet their land holdings and enterprises are scattered throughout the Basque region, and the government of Spain, even under the dictator Franco, was not threatened. In fact, it was appreciative of them because they provided economic and community development and as a system did not confront Franco (although many individuals did so privately).

The story of the Central Union in Poland is a similar one; however, when they became very large (there are more than 500,000 members), the state insisted that the Central Union become a division of the state. It did so, but it operates as a part of the state in name only.

Father Don José Maria Arizmendiarrietta, a Catholic priest and the founder of Mondragon, and Dr. Bohdan Trampczynski, the founder of the Central Union in Poland, both identified this Third Way as a course of development which did not necessitate confrontation with the geographically-based social system in which they found themselves. By giving priority to the freely chosen relationships among people (rather than to the struggle to control the people living in a geographic territory) and by building upon feelings of friendship and cooperation, they found a path to the development of the next stage of social evolution within the shell of the old – not only without confrontation, but with compassion toward those who supported the policies of the capitalist or socialist state. From the very beginning both systems have had an "open-door policy" which allowed anyone, without discrimination, to join the Third Way system simply by choosing to follow the Third Way rules upon being hired.[4]

It can clearly be seen how this Third Way system puts an end to poverty. The top priority is to create new jobs for others, not to increase the wealth of a few, to the point where everyone has a job through invitation rather than through police order. Once one has a job, it is guaranteed for life – one becomes a member of a family. The entire system operates primarily for the good of all through individual free choice based on the wisdom of accepting the cooperative assumption as fundamental. The Third Way understanding of money, which cannot be fully explained in the space allotted for this article, makes it relatively easy to arrange jobs for everyone. Finally, the familial nature of the Third Way economic system nurtures an end to spiritual poverty as well.

It can also be clearly seen how this Third Way system can put an end to mediocrity. People choose to produce high quality products and services because they enjoy doing so in a familial grouping, and because they see it as a service to humanity rather than primarily for personal profit. Talking to people in a Mondragon factory is like talking to people over a kitchen table. Watching them work is like watching a group of people working on a chicken dinner fund-raiser for a church. One senses a feeling of being at home, being valued, being in control, and being creative. The high quality of – and demand for – the products of Japan and Mondragon is proof that the Third Way can be successful in a competitive marketplace.

The significant difference between Japan and Mondragon (or the Central Union) is that the former is still a very paternalistic system, whereas the latter is truly democratic in every conceivable way. Yet all three have switched from an acceptance of the competitive assumption about reality to the cooperative assumption, at least within their nation. The Soviet Union and China, as well as South Korea, Hong Kong, Singapore, Taiwan and other capitalist nations in the East, can see what is going on and are moving rapidly to convert to their own design of a Third Way system. Yet we in the West, particularly the United States, are still championing capitalism, especially emphasized during the 1980s by President Reagan and his administration.

A commitment to competition is the starting point for any legitimate participation in the social, economic, and political process in the United States. Progress is left to the "invisible hand" of competition rather than to the "visible hand" of cooperation; and any suggestion to give priority to cooperation outside the corporate walls is immediately identified as veiled socialism and an evil. The Third Way position, at the other end of the continuum from capitalism, does not yet have a place in the public mind.

However, the Third Way is here. Our focus needs to shift away from the differences between capitalism and socialism. The next major development in human culture will be from nationalism to planetarianism based on the Third Way and the cooperative assumption about reality.

There is no more appropriate people to assist the Japanese with the challenge of shedding paternalism and nationalism for egalitarian democracy and planetarianism than the United States and Canada. We are the first planetary people. Our nations are composed of people from every nationality around the planet who have learned to live together in relative peace using an egalitarian democracy. We travel the planet as if it were our nation, and we buy from the best producers on the planet with no loyalty to our geographic nation.

From Mondragon, the Central Union, and Japan we can learn to make the transition to the Third Way at every level of society and to move from competitive democracy to consensual democracy. Together, only together, can the planet move into the Third Way and a steady state of peace.

The interesting thing about truth is that once you know something is true, you can never act as if you don’t think it is true. If capitalism and socialism are not the end of history, and if the Third Way as described herein is in fact the next phase in the social evolution of the human species, then as people come to see this as true, the transition will become inevitable. Let’s not let America continue on a blind course, ignorant of the emergence of the Third Way for so long that a debacle much worse than a stock market collapse becomes necessary to stimulate our leaders. They need to stop competing and start cooperating, to stop playing "chicken" – and start playing music.


1. "In Japan, the Less Popular Man Wins," by Clyde Haberman, New York Times, Sunday, October 25, 1987, p.E2.

2. "The Danger from Japan," by Theodore H. White, New York Times Magazine.

3. "GE Caught Unaware by Japanese," Wall Street Journal, September 19, 1985, p.1.

4. Mondragon: Beyond Capitalism And Socialism, by Terry Mollner and Will Flanders (draft), Trusteeship Institute, Inc., Shutesbury, MA, 1987.

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