Using set_include_path() (or ini_set('include_path', ...)) allows you to specify multiple folders that would contain your library code. For instance, if your application relies on a variety of different frameworks/libraries, e.g. PEAR and Zend FW, you might have something like,
ini_set('include_path', '/usr/local/php/pear:/usr/local/php/zendfw');
The disadvantage to that approach is that it will use whatever file it finds first; if you have a file called "Mailer.php" in more than one of your include paths, it will include the first one it finds, causing subtle bugs if that's not your intention. Good code organization typically resolves that issue. Also, include_path goes through the realpath cache (http://us2.php.net/realpath), which sometimes needs to be tweaked to get better performance depending on your setup.
Both ways are fine, however using the define() method is more explicit.
FWIW, I generally use ini_set('include_path', ...).