The dirty secret of capitalism -- and a new way forward

Rising inequality and growing political instability are the direct result of decades of bad economic theory, says entrepreneur Nick Hanauer. In a visionary talk, he dismantles the mantra that "greed is good" -- an idea he describes as not only morally corrosive, but also scientifically wrong -- and lays out a new theory of economics powered by reciprocity and cooperation.

I am a capitalist,

and after a 30-year career in capitalism

spanning three dozen companies,

generating tens of billions
of dollars in market value,

I'm not just in the top one percent,
I'm in the top .01 percent of all earners.

Today, I have come
to share the secrets of our success,

because rich capitalists like me
have never been richer.

So the question is, how do we do it?

How do we manage to grab

an ever-increasing share
of the economic pie every year?

Is it that rich people are smarter
than we were 30 years ago?

Is it that we're working harder
than we once did?

Are we taller, better looking?

Sadly, no.

It all comes down to just one thing:

economics.

Because, here's the dirty secret.

There was a time
in which the economics profession

worked in the public interest,

but in the neoliberal era,

today,

they work only for big corporations

and billionaires,

and that is creating
a little bit of a problem.

We could choose to enact economic policies

that raise taxes on the rich,

regulate powerful corporations
or raise wages for workers.

We have done it before.

But neoliberal economists would warn

that all of these policies
would be a terrible mistake,

because raising taxes
always kills economic growth,

and any form of government regulation

is inefficient,

and raising wages always kills jobs.

Well, as a consequence of that thinking,

over the last 30 years, in the USA alone,

the top one percent has grown
21 trillion dollars richer

while the bottom 50 percent
have grown 900 billion dollars poorer,

a pattern of widening inequality
that has largely repeated itself

across the world.

And yet, as middle class families
struggle to get by

on wages that have not budged
in about 40 years,

neoliberal economists continue to warn
that the only reasonable response

to the painful dislocations
of austerity and globalization

is even more austerity and globalization.

So, what is a society to do?

Well, it's super clear to me
what we need to do.

We need a new economics.

So, economics has been described
as the dismal science,

and for good reason,
because as much as it is taught today,

it isn't a science at all,

in spite of all
of the dazzling mathematics.

In fact, a growing number
of academics and practitioners

have concluded that neoliberal
economic theory is dangerously wrong

and that today's growing crises
of rising inequality

and growing political instability

are the direct result
of decades of bad economic theory.

What we now know is that the economics
that made me so rich isn't just wrong,

it's backwards,

because it turns out

it isn't capital
that creates economic growth,

it's people;

and it isn't self-interest
that promotes the public good,

it's reciprocity;

and it isn't competition
that produces our prosperity,

it's cooperation.

What we can now see is that an economics
that is neither just nor inclusive

can never sustain the high levels
of social cooperation

necessary to enable
a modern society to thrive.

So where did we go wrong?

Well, it turns out
that it's become painfully obvious

that the fundamental assumptions
that undergird neoliberal economic theory

are just objectively false,

and so today first I want to take you
through some of those mistaken assumptions

and then after describe where the science
suggests prosperity actually comes from.

So, neoliberal economic
assumption number one is

that the market is
an efficient equilibrium system,

which basically means that if one thing
in the economy, like wages, goes up,

another thing in the economy,
like jobs, must go down.

So for example, in Seattle, where I live,

when in 2014 we passed
our nation's first 15 dollar minimum wage,

the neoliberals freaked out
over their precious equilibrium.

"If you raise the price
of labor," they warned,

"businesses will purchase less of it.

Thousands of low-wage workers
will lose their jobs.

The restaurants will close."

Except ...

they didn't.

The unemployment rate fell dramatically.

The restaurant business in Seattle boomed.

Why?

Because there is no equilibrium.

Because raising wages
doesn't kill jobs, it creates them;

because, for instance,

when restaurant owners are suddenly
required to pay restaurant workers enough

so that now even they
can afford to eat in restaurants,

it doesn't shrink the restaurant business,

it grows it, obviously.

(Applause)

Thank you.

The second assumption is

that the price of something
is always equal to its value,

which basically means
that if you earn 50,000 dollars a year

and I earn 50 million dollars a year,

that's because I produce
a thousand times as much value as you.

Now,

it will not surprise you to learn

that this is a very comforting assumption

if you're a CEO paying yourself
50 million dollars a year

but paying your workers poverty wages.

But please, take it from somebody
who has run dozens of businesses:

this is nonsense.

People are not paid what they are worth.

They are paid what they have
the power to negotiate,

and wages' falling share of GDP

is not because workers
have become less productive

but because employers
have become more powerful.

And --

(Applause)

And by pretending that the giant imbalance
in power between capital and labor

doesn't exist,

neoliberal economic theory
became essentially

a protection racket for the rich.

The third assumption,
and by far the most pernicious,

is a behavioral model

that describes human beings
as something called "homo economicus,"

which basically means
that we are all perfectly selfish,

perfectly rational
and relentlessly self-maximizing.

But just ask yourselves,

is it plausible that every single time
for your entire life,

when you did something
nice for somebody else,

all you were doing
was maximizing your own utility?

Is it plausible that when a soldier jumps
on a grenade to defend fellow soldiers,

they're just promoting
their narrow self-interest?

If you think that's nuts,

contrary to any reasonable
moral intuition,

that's because it is

and, according to the latest science,

not true.

But it is this behavioral model

which is at the cold, cruel heart
of neoliberal economics,

and it is as morally corrosive

as it is scientifically wrong

because, if we accept at face value

that humans are fundamentally selfish,

and then we look around the world

at all of the unambiguous
prosperity in it,

then it follows logically,

then it must be true by definition,

that billions of individual
acts of selfishness

magically transubstantiate
into prosperity and the common good.

If we humans are merely
selfish maximizers,

then selfishness
is the cause of our prosperity.

Under this economic logic,

greed is good,

widening inequality is efficient,

and the only purpose of the corporation

can be to enrich shareholders,

because to do otherwise
would be to slow economic growth

and harm the economy overall.

And it is this gospel of selfishness

which forms the ideological cornerstone
of neoliberal economics,

a way of thinking
which has produced economic policies

which have enabled me and my rich buddies
in the top one percent

to grab virtually all of the benefits
of growth over the last 40 years.

But,

if instead

we accept the latest empirical research,

real science, which correctly
describes human beings

as highly cooperative,

reciprocal

and intuitively moral creatures,

then it follows logically

that it must be cooperation

and not selfishness

that is the cause of our prosperity,

and it isn't our self-interest

but rather our inherent reciprocity

that is humanity's economic superpower.

So at the heart of this new economics

is a story about ourselves that grants us
permission to be our best selves,

and, unlike the old economics,

this is a story that is virtuous

and also has the virtue of being true.

Now,

I want to emphasize
that this new economics

is not something I have personally
imagined or invented.

Its theories and models
are being developed and refined

in universities around the world

building on some of the best
new research in economics,

complexity theory, evolutionary theory,

psychology, anthropology
and other disciplines.

And although this new economics
does not yet have its own textbook

or even a commonly agreed upon name,

in broad strokes

its explanation of where prosperity
comes from goes something like this.

So, market capitalism
is an evolutionary system

in which prosperity emerges

through a positive feedback loop

between increasing amounts of innovation
and increasing amounts of consumer demand.

Innovation is the process
by which we solve human problems,

consumer demand is the mechanism
through which the market selects

for useful innovations,

and as we solve more problems,
we become more prosperous.

But as we become more prosperous,

our problems and solutions

become more complex,

and this increasing technical complexity

requires ever higher levels
of social and economic cooperation

in order to produce
the more highly specialized products

that define a modern economy.

Now, the old economics
is correct, of course,

that competition plays a crucial role
in how markets work,

but what it fails to see

is that it is largely a competition
between highly cooperative groups --

competition between firms,
competition between networks of firms,

competition between nations --

and anyone who has ever run
a successful business knows

that building a cooperative team
by including the talents of everyone

is almost always a better strategy
than just a bunch of selfish jerks.

So how do we leave neoliberalism behind

and build a more sustainable,
more prosperous

and more equitable society?

The new economics suggests
just five rules of thumb.

First is that successful economies
are not jungles, they're gardens,

which is to say that markets,

like gardens, must be tended,

that the market is the greatest
social technology ever invented

for solving human problems,

but unconstrained by social norms
or democratic regulation,

markets inevitably create
more problems than they solve.

Climate change,

the great financial crisis of 2008

are two easy examples.

The second rule is

that inclusion creates economic growth.

So the neoliberal idea

that inclusion is this fancy luxury

to be afforded if and when we have growth
is both wrong and backwards.

The economy is people.

Including more people in more ways

is what causes economic growth
in market economies.

The third principle

is the purpose of the corporation
is not merely to enrich shareholders.

The greatest grift
in contemporary economic life

is the neoliberal idea that
the only purpose of the corporation

and the only responsibility of executives

is to enrich themselves and shareholders.

The new economics must and can insist

that the purpose of the corporation

is to improve the welfare
of all stakeholders:

customers, workers,

community and shareholders alike.

Rule four:

greed is not good.

Being rapacious
doesn't make you a capitalist,

it makes you a sociopath.

(Laughter)

(Applause)

And in an economy as dependent
upon cooperation at scale as ours,

sociopathy is as bad for business
as it is for society.

And fifth and finally,

unlike the laws of physics,

the laws of economics are a choice.

Now, neoliberal economic theory

has sold itself to you
as unchangeable natural law,

when in fact it's social norms
and constructed narratives

based on pseudoscience.

If we truly want a more equitable,

more prosperous
and more sustainable economy,

if we want high-functioning democracies

and civil society,

we must have a new economics.

And here's the good news:

if we want a new economics,

all we have to do is choose to have it.

Thank you.

(Applause)

Moderator: So Nick,
I'm sure you get this question a lot.

If you're so unhappy
with the economic system,

why not just give all your money away
and join the 99 percent?

Nick Hanauer: Yeah, no, yes, right.

You get that a lot. You get that a lot.

"If you care so much about taxes,
why don't you pay more,

and if you care so much about wages,
why don't you pay more?"

And I could do that.

The problem is,

it doesn't make that much difference,

and I have discovered a strategy

that works literally
a hundred thousand times better --

Moderator: OK.

NH: which is to use my money
to build narratives and to pass laws

that will require
all the other rich people

to pay taxes and pay their workers better.

(Applause)

And so, for example,

the 15-dollar minimum wage
that we cooked up

has now affected 30 million workers.

So that works better.

Moderator: That's great.

If you change your mind,
we'll find some takers for you.

NH: OK. Thank you.
Moderator: Thank you very much.