← Pitchfork Economics with Nick Hanauer
Pitchfork Economics with Nick Hanauer
What Comes After Neoliberalism? (with Nick Hanauer & Eric Beinhocker)
00:31:55
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A
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory. The last five decades of trickle down economics haven't worked. But what's the alternative? Middle out economics is the answer because the middle class is the source of growth, not its consequence. That's right.
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This is Pitchfork Economics with Nick Hanauer.
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A podcast about how to build the economy from the middle out. Welcome to the show. Hey, Pitchfork listeners. Goldie here. This week we're putting Nick on the other side of the mic by airing a conversation he and his thought partner Eric Beinhocker had with Washington Monthly's and Kim about market humanism, the new economic paradigm we're unleashing on the world. Give it a listen and hope you enjoy.
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Want some big ideas for a better future? Well, you're in the right place. I'm Ann Kim and welcome to the Washington Monthly. In each episode, I'll bring you fresh ideas and fresh perspectives from experts working to tackle some of the nation's biggest challenges.
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Challenges.
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In this episode, a scholar and an entrepreneur have a plan for fixing capitalism.
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We should be arguing about how to maximize human flourishing in all its dimensions, rather than providing higher and higher returns to owners of capital.
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Measures like GDP count equally activities in the economy that cure cancer versus cause cancer. But those two things have a very different impact on human well being. Our measures of success should be real impacts on human well being, on our standards of living, our health, our opportunities.
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My guests today are Eric Bijnakker, he's a professor of public policy at Oxford University, and Nick Canauer, who is a philanthropist, civic innovator and one of America's most successful entrepreneurs. They are the authors of a new treatise titled Markets Built for Humans. And they are the creators and synthesizers of a new economic philosophy they call market humanism. Welcome, Nick. Welcome, Eric. Great to see you.
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A
Thank you.
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C
Yeah, thanks for having us.
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B
I want to talk about market humanism, but I also want to set some context. So first of all, both of you, I think safe to say, are capitalists and very successful ones at that. Eric, before becoming a professor at Oxford, you were a partner in McKinsey and Company where you worked for 18 years. Nick, you were the first non family investor in Amazon. You have founded multiple companies, including a venture capital firm. You sold one of your own businesses to Microsoft for more than $6 billion. So capitalism has been very good to you both, right? But what did you see in your experiences in the private sector that made you think that maybe the current economic system isn't Working for everyone.
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A
Well, let me jump in and just say that I think in similar ways and in different ways. Eric and I both came to the same conclusion. First, based on an intuition and, as we work together, a conviction that while markets are the greatest social technology probably ever invented for creating prosperity in human societies, the way in which we have chosen to organize our markets, the form of capitalism that we use today was clearly, I mean, just obviously working super well for a small minority of people at the very top and not working for most people. And, you know, by way of example, in 2006 or 7, I got a look at the IRS tax tables, which showed that in 1980, the top 1% of Americans shared about 8% of national income, and by 2007, it had risen to almost 23%, while the bottom 50% of Americans shared 18% of national income in 1980, and it had fallen to 12% by 2007. And you don't have to be a rocket scientist to take a look at those numbers and just sort of extrapolate forward and not recognize that we would, you know, given that trend, the country would transition from a capitalist democracy to some sort of feudal autocracy. Because if you go out 30 years, it's not 23%. The top 1% has. It's 40 or 50%. And the bottom 50% are now sharing not 10 or 11%, but 5. And so you have the kind of crisis, frankly, of democracy that we're now facing. And both of us had this intuition that the economic paradigm that we lived in, the sort of neoclassical slash neoliberal framework that was governing how we did policy, just was organized in a way and biased in a way such that if you took it seriously and enacted policy on the basis of it, the only thing that could happen was the rich would get richer and everyone else else would get poorer. And we both had this intuition that it was not just not good for most people, but it was just technically wrong. And that instinct or intuition turned into conviction as we began to peel back the layers of the onion.
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B
Eric, what led you to this intuition?
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C
Yeah, Well, I think for me, it was a collision between what I learned from economic theory, from my studies, and then what I saw in reality. Both working in the tech sector in venture capital, and then at McKinsey for 18 years, the theory talked about efficient markets and rational actors. And I never met a rational actor or saw an efficient market in all my time there. And at the same time, the theory said by boosting productivity and keeping wages down and shoveling the difference between those back to shareholders that that would sort of trickle down and benefit everybody in the economy. And I was pretty good at my job of raising productivity and shoveling those gains to shareholders, but wasn't seeing the results of tricklenet, in fact, seeing the opposite, where more and more people, just normal working people, were struggling to make ends meet and have a decent, sustain life. So both in our own ways, we saw that, you know, the theory wasn't working in practice and also it was leading us to a dangerous place politically, as Nick alluded to.
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B
Eric, you've already kind of alluded to this, but what are the exact mechanisms in the current economic paradigm that make it inevitable that the rich get richer and the poor get poorer? As Nick just said, like, what are the specific, not even so much policies, but, you know, the natural forces within the current paradigm that are forcing this outcome?
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C
We like to use an analogy to the game of Monopoly, which most of your listeners will have played or be familiar with. And if you play that game to the bitter end, it always ends up with one person as the plutocrat rich and everybody else poor. And when you ask why, you look at the structure of the game, you have luck playing a role and people taking different paths. You have where you were at one point leads to where you were the next point. And then there's a compounding effect. The more properties and houses you get, the richer you get and so on. And those three factors all exist in the real world economy. You know, you, you get a lucky break and have a good teacher, that leads to you doing well at school, that leads to a good first job and you go on an upward spiral. You know, you can likewise have some, you know, bad luck and things, and that leads to a downward spiral. So the natural workings of market markets do tend to kind of pull the paths of people apart and lead to inequality that's not necessarily based on merit or even a lack of equality of opportunity. Remember, the game of Monopoly has perfect equality of opportunity, but still always leads to this outcome.
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Yeah, yeah, that's true. We all start out with exactly the same amount of money in that.
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And in the real world, of course, we don't start that way. So it's even worse.
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A
We actually did the calculations once. I can't remember exactly what it is, but if the game of Monopoly was like real life, one person would start with like $2 million and half the players would start either with zero or with debt.
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C
Right? And this isn't to say that things like merit and hard work and all that don't play a role. Of course they do in the economy. But the key point is that markets, left to their own devices, don't naturally create a healthy middle class. They actually tend to pull the distribution apart and create a kind of plutocracy. And when you look back in history, strong middle classes have always been created by active policies to invest in working families.
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A
Well, if I could jump in, use the word natural, I think we would like to push back on that word. So markets are not natural constructions. Markets are always human built constructions. And the question is not are they optimal? The question is, who are they optimal for? And the neoliberal paradigm snuck in a bunch of assumptions that made them optimal for capitalists. The highest good within the existing paradigm that we live in, which is this neoliberal form of capitalism, is that capitalism, capital efficiency is the highest good. And therefore the only purpose of the corporation, for example, is to enrich shareholders. And the same logic applies to raising the minimum wage, because it's what's called a parade of optimal equilibrium. If one thing goes up, another thing goes down. And the thing is that while these ideas were plausible, they're not true. It's just not true that if you raise the minimum wage, there's job loss. And that's because the neoliberal consensus made a category error. Because the economy actually isn't an equilibrium system. It's an ecology of increasing returns. And so claiming that when you raise wages, you'll have fewer jobs. Like claiming that when you when plants grow, animals shrink. This is just not the way the system works. And by reconceptualizing the economy in 21st century terms, understanding it in a 21st century way, not as an equilibrium system, as an ecology, it completely changes how you think about how you see causes and effect. So rather than seeing the minimum wage as a threat to growth, you see it as one of the things that increases growth. Because obviously the more money everybody has, the more they buy. And the more they buy, the more demand there is. And the more demand there is, the more jobs you create. That's how markets work. They're an ecology of increasing returns. And so it was this change in perspective on what the economy actually is that leads you to a fundamentally different way of understanding how the economy works and what policies will, you know, will benefit it and what won't.
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B
Let's probe a little bit into that. Now, I noticed that you still have the word market in your paradigm, which means you are not discarding markets. As you say, it's about organization. Right? And I want to ask about this exceptionally bold statement that you make in your treatise that is ultimately the heart of this market humanism paradigm that you've constructed. What you say is, I'm quoting here, a morally good economy is also a prosperous economy. Now that is, it seems to me, like a foundational value statement for what market humanism is. But there's also a lot embedded in there that I want to tease out. So you've begun doing this critique of the current economic paradigm, the neoliberal consensus. And just for those of us who might be a little bit on the younger side, that was the 1980s, Reaganism, Clintonism, Bachelorism, you name it. And you imply within your statement that neoliberalism is not morally good. Do you agree with that statement fundamentally? I mean, are there ways in which neoliberalism is actually immoral? Like, are there values that underlie it that are not morally good? Does it lead to outcomes that are not morally good?
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A
Take it away, Eric.
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C
Yeah, yeah, it's a great question.
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It's complicated.
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It's a great question. You mentioned that the 1980s, and some of your listeners may not remember that era, but there was a great movie I'd recommend they watch called Wall street where this famous character, Gordon Gekko, gives a speech saying greed is good and greed drives the economy. And that became kind of part of the popular culture of neoliberalism. And it has roots in economic thinking. Now, a lot of people think this idea, greed is good comes from Adam Smith and his theory of the invisible hand, that pursuing your self interest in markets leads to good outcomes for, for people broadly. But as we note, actually Adam Smith didn't believe that. So this idea that a morally good economy is a prosperous economy is actually a very old idea. It's not a new idea of ours. Adam Smith in fact understood that, that you need to have, you know, good virtues and behaviors to create the kind of social cohesion and trust that allows markets to operate. Markets really only work well when there's high social trust and feelings of fairness and reciprocity in the economy. So we argue that the kind of hyper individualism, greed is good culture that neoliberalism promoted has actually been very corrosive to markets and it's led to weakening of our anti competition and anti monopoly laws, excess concentration of corporate power that has actually made markets less competitive and even less innovative in some cases. And it's also frayed the social, you know, fabric that a healthy democracy goes on. And a key point that we find in the, in the newer research and by the way, we should say market humanism is our label for a collection of research done by a whole lot of people. It's a real community of people. It's not just Nick and Eric's crazy idea.
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Yeah, yeah.
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It's the crazy ideas of a lot of people.
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Yeah.
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But one of the key findings is that actually fair economies tend to be prosperous economies. Economies with fair social contracts and good treatment of workers and high trust and social cohesion are able to create the networks of knowledge and cooperation that ultimately lead to prosperity. Kind of hyper individualistic, transactive, you know, extractive economies actually tend to be poor and not very innovative.
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A
Yeah. And again, the sort of 21st century economic paradigm that we call market humanism has a completely different way of understanding what prosperity is and where growth comes from, which undergirds that view that a fair economy is a prosperous economy. And at the core of it is this idea that prosperity isn't money or gdp, it's actually the accumulation of solutions to human problems. Right. That's what defines whether your life is improving, is your access to solutions to human problems. And markets are the greatest social technology ever invented, not because they efficiently allocate scarce resources, that's the conventional view, but because they enable huge groups of people, millions of people, to collaborate across kin and country to combine knowledge and know how to solve human problems. And that only works if there's justice, which creates trust, which enables cooperation, which enables the problem solving that really is the. This, the core of all human progress. So those two things are inextricably intertwined.
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B
Solving problems has been the goal of past paradigms. And before we embrace market humanism, I would love for you guys to walk through the other failed paradigms of the 20th century which you mentioned in your report, which is really interesting, because there was kind of this hype cycle almost associated with all these previous paradigms, you know, and if you could kind of walk through those a little bit very quickly. And they did set out to solve some problems, but they feel spectacular.
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C
Why so? Well, one bit of good news is if we're unhappy with the neoliberal paradigm is paradigms do change. We've been through four of them in fact, in just the 20th century. And very briefly they were the kind of laissez faire free market stuff that led up to the Great Depression. Then that transition to the kind of Keynesian paradigm in the post war period, we also saw the rise of Marxist socialism. And then lastly, neoliberalism came in in the 70s after the stagflation crises. And Each one of them as you and was trying to solve a particular set of problems of its era. And they all had some good things going for them and some good values associated with them, but ultimately they were actually based on flawed theories of human behavior and understandings of human institutions. And when you dig into them, you find that actually a lot of the ideas were simply made up. So a lot of the behavioral assumptions in traditional economics were literally just a philosopher sitting in an armchair making stuff up. And we don't claim to have 200
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years ago, by the way, like a long time ago.
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The idea is, you know, keep going. But the advantage we have today is there's been, you know, revolutions in behavioral science and understanding of, you know, institutions and, you know, how things like markets work. And so part of what we're doing is bringing that modern 21st century perspective into things that actually has some evidence behind it. Now it doesn't mean, you know, got all the answers or understand how everything works, but we are pretty confident that it's a lot better than the made up stuff in the past. And again, one of the key things that comes out of this is understanding humans as social creatures and what allows us to successfully work together and interact to solve problems and create prosperity and make our lives better. I would just lastly add some of this perspective probably comes from the fact both Nick and I have worked in venture capital and tech and with startups. And so we've seen how important, you know, getting good groups of people cooperating and working well together and a good social structure is to actually true innovation and wealth creation.
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A
Yeah. One of our, one of our friends and collaborators often says that the original sin of economics, orthodox economics, was starting with trade. Right. You know, what happens between firms because 99% of economics is what happens within firms. You know, it's the making of the stuff, which is the economy. And then you do a little bit of trade here and there, right? And all that making of the stuff is just this elaborate cooperative dance between people who don't know each other. And that's what we're trying to maximize, right, that the rate of innovation within those structures.
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B
That's really interesting. So one question though. Why isn't populism an economic paradigm? You know, why isn't Trumpism an economic paradigm? I mean, he kind of, you think about it, he sort of has like a paradigm stack, as you put it. He's got values, he's got a theory, he's got policies. Why doesn't it add up to the fifth winning paradigm?
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Well, if you want to make rich people richer. It's a fantastic way to go.
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C
Yeah, I'd say, you know, there are some values that he's trying to promote, not many of which we would disagree with, but. And he certainly has some, you know, some policies and political speech, but that sort of layer in the middle of actually kind of explanations, you know, good economic theories, evidence, you know, all the stuff that you actually really want in a paradigm that you can, you can believe in and act on is really missing. And actually it's kind of a jumble of different things. So there's a big dose of neoliberalism. So the big beautiful bill was kind of a neoliberal jamboree of tax cuts for rich people.
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Straight up trickle down economics.
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Yeah, Deregulating polluters and stuff like that. And then combined with a kind of incoherent economic nationalism of doing favors for political supporters and just throwing a little dose of outright corruption to finish it off.
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B
Okay, so finally we are at the point of talking about marketeemism, and you define that as an economy built to serve human flourishing. Nick, you've started talking about what that means, but how do you define human flourishing? It's a big word.
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A
It is a big word. And we don't have all the. And just to be clear, we do not have all the answers. But it's the right question to ask. I mean, I think that one of the most important distinctions between this 21st century economic approach and the existing approach is the existing approach only permits you to ask optimization questions, because within the approach, the existing system by definition is optimal. So, for example, raising the minimum wage within that framework becomes an optimization question, which is how much can we raise the minimum wage? How much job loss are we willing to tolerate before we get to the fairness that we want? And what market humanism says is that first of all, that trade off is false. And the question you want to ask is at what point are there diminishing returns to raising the minimum wage? How high would you push it before a reasonable group of people would say, ok, this is as far as this makes sense to go? And likewise, the distinction between human flourishing and maximizing GDP or maximizing capital efficiency. Those differences are dramatic and profound. And while there will never be the perfect answer to how to maximize human flourishing, what we would insist is that's the conversation we should be having. We should be arguing about how to maximize human flourishing in all its dimensions, rather than providing higher and higher returns to owners of capital.
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C
And just to make it a little, you know, to make it tangible. You know, measures like GDP count equally, you know, activities in the economy that cure cancer versus cause cancer would be treated the same way in gdp. But those two things have a very different impact on human well being. And so we're arguing that, you know, our measures of success should be real impacts on human well being, on our standards of living, our health, our opportunities, also, you know, our family lives and social connections, how our communities and place are doing. You know, GDP is missing all those dimensions and there's, there's a very rich body of work out there now on, you know, going beyond GDP and finding other measures that actually capture the real impact on people's quality of life.
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A
Right. You know, you take the American health care system, which is the most capitalism friendly, market friendly system in the world, but it produces worse outcomes than basically every other advanced society. And it costs in the range of twice as much per citizen per year. And that is because we confuse a system that is designed to create maximum returns to the shareholders of insurance companies and private equity firms versus provisioning health care in effective and efficient way for humans. The neoliberal paradigm doesn't even permit you to ask those questions, is to push back on that paradigm. That's the thing that we have to surmount. It's just silly.
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B
Now, if we do accept human flourishing as a North Star for the outcome of the economy, how does that shape the deliberate policy choices that are necessary in order to make human flourishing a reality? What are some examples perhaps of the kinds of policy choices that are enabled by this sort of framework? You've mentioned minimum wage, but what else do you have in the Equiver?
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C
Well, I think, for example, in labor market policies, again, the neoliberal paradigm would just focus you on efficiency and costs and things like that. But if you're looking from a human flourishing perspective, you know, can you have a quality family life in the, in the current labor market so things like, you know, support for child care becomes part of an economic policy, you know, that's supporting healthier, more flourishing families. You know, we talked, talked about health care, but also, you know, the quality of your infrastructure, if you're having a horrible commute to work every day, you know, that's impacting your quality of life as well. So, you know, by focusing on a broader notion of kind of quality of life, that sort of pulls other dimensions of that into the economic conversation that have been often ignored or positioned as a trade off versus economic interest. So our view is that actually fixing these things is part of fixing the economy. They aren't really separate.
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A
Yeah. Another great example, Ann, is the overtime threshold, which is the threshold below which you are automatically entitled to time and a half for work over 40 hours a week. So when we had a thriving middle class, 100% of hourly workers and about 65% of salaried workers were entitled to overtime. Today we have turned millions of hourly workers into salaried workers, and the threshold now only affects maybe 10, 12% of salaried workers. And what that means is that at the scale of tens of millions, we have turned three 40 hour a week jobs into two 60 hour a week jobs. So not only do people like me get to pocket that difference, which is on the order of, I don't know, maybe $500 billion a year, but worse, nobody gets to come home from work anymore. Right. Like the impact on family life of effectively unlimited demands from your employer for work hours has savaged the ability of American families to help their kids with homework and just have a functioning life. And that's like, again, in the neoliberal framework, the only thing that matters is how much profit corporations make. Like the stock market. But one of the reasons the stock market is so high today is because there's about a trillion and a half or $2 trillion per year in corporate profits. That used to be wages, you know, because corporate profits as a percent of GDP have effectively doubled during the neoliberal era, while the percentage, while the percentage of GDP of wages has fallen by that corresponding amount. And so everybody's lives got worse. They got poorer, they got time poor, they don't get to take vacations anymore. But good golly, the stock market is roaring. Right?
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C
Yeah. And in some ways we're making the simplest of all points. We're saying the point of the economy is to help you and your family and give you a good life. That's it. That's not the economy.
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Not to make Jeff Bezos rich.
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Right. That's not how the economy is wired today.
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Yeah.
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So I have a final question about narrative change and about dislodging the current framework and disclosure time for me is I'm a former corporate lawyer, so I'm actually pretty familiar with this idea that greed is good. And I've, I've talked to a lot of companies who would argue that doing the right thing is a luxury. And we do have these, you know, so called triple bottom line companies, Right, that pursue social, environmental goods as well as profits. But the companies tend to be kind of niche right now and they're kind of bougie and expensive in the biggest companies in the world. Don't think this way. You know, so how, how do you persuade people that an inclusive economy is also a growing economy? You can do well by doing good. What's your strategy for trying to get these folks on board?
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A
Laws, laws. The world has never run on the kindness of strangers. There is no way that people either will or can unilaterally become the ideal company in a world where none of their competitors do. It is not fair or realistic to say to some company, you should pay your workers a living wage. You should do all these good things while all of their competitors continue to exploit their workers. And so the only, you know, the thing about economy is it's largely a collective action problem. And so the only way to address these challenges is to change the standard for everyone to raise our standards. And, you know, a lot of people push back on this idea that we should expect more from capitalists. But the story of civilization, the story of an ever widening circle of concern, right? We used to think that chattel slavery was fine. We used to think that, you know, there were all these, that child labor was fine. And, you know, it's not that capitalism in the current form that we have was all wrong. We have just outgrown it. It is time to move to the next level and have an economy that is more directly tied to making sure that everyone benefits from the arrangements, not just a few people at the top.
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C
And just to also put a little bit of optimism on it, the system we have of just being focused on maximizing shareholder value actually isn't that old. It really kind of got going in the late 70s and 80s, you know, came out of academia, theories by Milton Friedman and folks at Harvard Business School and so on. And, you know, many CEOs we know, not all CEOs are sociopaths. Many of them are very good people. Some, you know, they're actually, they're actually problem solvers. You know, what they like to do is make good products and services and try and, you know, do things that are positive in the economy. And, you know, this sort of slavish focus on quarterly earnings is not what they wake up and get out of bed wanting, wanting to do so, but they're stuck in this kind of race to the bottom, as Nick described, that without some common, you know, rules on fiduciary duty and laws and things like that, the ones that actually want to do good and be problem solvers, not problem creators, find themselves kind of stuck in this dysfunctional system. So, you know, coming back to Adam Smith. You know, one of the things he said is we should design our institutions to kind of help our better angels.
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A
Yes.
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C
You know, not reward our kind of inner devils. And our current system rewards the kind of worst kinds of behaviors as opposed to encouraging, you know, the better side of people.
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B
Perfect. Well, thank you very much, gentlemen. I'm Ann Kim, senior editor at Washington Monthly, and my guests today have been Eric Bijnakker, professor of public policy at Oxford University, and Nick Hanauer, philanthropist, civic innovator and entrepreneur. Thanks everyone for watching.
- [31:00]
A
Thank you so much for having me.
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C
Thanks so much.
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B
Thanks for listening to the Washington Monthly. I'm Ann Kim. If you like what you heard, don't forget to share, like and subscribe and check us out@washingtonmonthly.com.
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A
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate and review us. Wherever you get your podcasts, find us on other platforms like Twitter, Facebook, Instagram and threads. Itchforceconomics Nick's on Twitter and Facebook as well. Ickhanhauer for more content from us, you can subscribe to our weekly newsletter, the Pitch, over on Substack. And for links to everything we just mentioned, plus transcripts and more, Visit our website, pitchforceconomics.com as always from our team at Civic Ventures, thanks for listening. See you next week.