Comment: The Third Way can only lead us into a cul-de-sac

AS Tony Blair and Bill Clinton prepare to sit down in New York tomorrow for their Third Way seminar, there is no sign that they have any idea where they want to go. Perhaps they think the Third Way is a handy way of escaping their troubles. It's hard to say. If asked to discuss "vision", both Blair and Clinton might reply in James Bond's words: "Some people call it spots in front of the eyes".

We may learn something about their philosophy by reading Anthony Giddens, resident thinker at the court of King Tony. Writing in Friday's Times Higher Educational Supplement, he says the central principle of the Third Way is "the inadequacy of the left-right division". Liberals may be forgiven a hollow laugh: we have been saying that ever since the division was invented. Giddens says class divisions have shifted dramatically. Asquith, who said in 1923 that "the Liberal Party has not been, is not, and while I have the privilege to lead it, will not be a party based on class", is entitled to a posthumous vindication.

When Giddens gets to real politics, he says: "[The Third Way's] prime motto might well be 'no rights without responsibilities'. Unemployment benefits, for instance, should carry the obligation to look for work." Here there is a central confusion, which Tony Blair shares. What both Giddens and Blair say is undoubtedly true as a matter of personal morals. It is a rule by which we should guide our conduct. But the state cannot be made the sole judge of how people discharge those responsibilities. The state risks both judging in ignorance and being judge and party in its own cause. Take, for example, the case of a woman who was disentitled to benefit before appeal, because she was not "actively seeking work". Her offence was that she had not applied for any jobs in the week she spent attending her husband's deathbed. Here the architect of the Third Way is Michael Portillo, author of the Jobseekers Act.

Giddens seeks to "rediscover a role for active government" in the management of the family. Here the architect of the Third Way is Keith Joseph. I remember a Liberal Democrat peer intervening in one of Keith Joseph's speeches on the family to ask: "Is not this a matter of subsidiarity?" Anthony Giddens says "third-way politics seeks to restructure the welfare state". Bill Clinton has done that, with the result that 10 per cent of the total population of the US now depends on private charity for food. A third of these unfortunates used to be in managerial and professional jobs. As the slogan has it: "It could be you".

What have Blair and Clinton been doing about the economic situation in the past week or two? Tony Blair visited the Fujitsu factory which is closing in his constituency, only to tell the workers, in effect, that "you can't buck the markets". When Margaret Thatcher said that in the Commons in 1989, Nigel Lawson began an earthquake whose aftershocks are still in progress. Tony Blair is one of them. Bill Clinton's orders to Russia to pay all its debts are, in the 17th-century poet Andrew Marvell's words, "begotten by despair upon impossibilities".

The question Blair and Clinton ought to be discussing is: "Does the state still matter in economic policy?" The state and the market have always constituted a see-saw, but has the global market become too powerful - too heavy, as it were - for the state? The money which crossed our exchanges on Black Wednesday was more than the whole of our GNP for a year. The UN Human Development Report claims that the three richest men in the world have assets that exceed the combined GDP of the 48 least developed countries. If these people, like Goldfinger, "act like a damn federal bank", and move their money about the world seeking the best return, can the state do anything to control them? Are Blair and Clinton like the fabled "silly fly on the wheel, who imagines he has raised the dust"?

George Soros has just said that world capitalism is at the point of meltdown. He may be exaggerating, but in the past few months, world stock markets have lost $1,000bn. Even Britain, one of least affected, has lost $300bn. Can the state cope with sums of this kind?

The answer, surely, is not "in isolation". States which wish to survive the market must act in concert, and this is what Blair and Clinton ought to be discussing.

The tidal wave of money is not always good for the real economy. Acting in its own interest, it looks for the highest interest rates. The effect of these high rates on the real economy is visible. It looks for low inflation. It will not stop doing that. When I worked in the US from 1979 to 1984, money I left in England lost 60 per cent of its value through inflation, while money I kept in the US only lost 12 per cent of its value. I cannot expect investors to ignore this any more than I did. That deflationary measures hurt the real economy is nothing to do with them. If they are investing in manufacturing, they seek low taxation and low wages. That that means low demand in the country concerned may affect their long-term sales, but it will not affect their short-term profit in any way. The pursuit of each person's convenience leads to everyone's inconvenience.

There is nothing philosophically wrong with the state uniting with others to limit these effects. Money, like water, will find its own level, but like water, it cannot safely be left to do so without assistance.

What is needed is a doctrine of the level playing field between states, rather like that which exists inside the European Union. There should be attempts at agreement, not just to keep interest rates down, but not to cut wages, taxes or even inflation too far below their competitors'. Otherwise, the deflationary effects of competition for travelling money will be disastrous for everyone concerned.

People who adopt deflationary philosophies should try harder for accurate costings of their real effects. When the Thai currency, the baht, was devalued, BBC2's Newsnight filmed an enchantingly beautiful woman collecting her cards from a bankrupt firm, and asking her what she was going to do next. She was engaged to be married, but she also had to support her aged parents in her village. She replied: "Well, I might go into prostitution - but I don't want to." The moral reactions to that story are of course of no economic relevance, but what of the economic effects? In the short term, her unemployment will hurt British exporters, among others: there will be less demand for their goods. If, in the long term, she gets Aids, she might well infect 200 people. What will that do to world public expenditure and to world demand?

One of the deflationary effects of unfettered capitalism is the number of people who, in effect, drop out of world demand. When recession hits the US, the fact that the 10 per cent relying on private charity for food are effectively generating no demand will hurt economically, as well as morally. In the world at large, the poorest 47 per cent - some 2.5 billion people - have a combined income less than the assets of the richest 225 individuals. The global market is carrying too many passengers. Morals apart, might spending some more money on employing them be the best engine of reflation that we could devise?