Nick Hanauer says there are 3 failures of capitalism

Nick Hanauer is a founder of Second Ave Partners in
Seattle.
Ted S.
Warren/AP

• Nick Hanauer is a wealthy, Seattle-based venture capitalist
  and progressive political activist.
• He successfully lobbied for a raise in Seattle’s minimum
  wage, and has been outspoken about raising it throughout the
  country.
• He believes that there are three foundational mistakes in the
  way capitalism has been practiced in the US for the past 40
  years.
• This article is part of Business Insider’s ongoing series on
  Better
  Capitalism.

When Nick Hanauer made a fortune off both an early investment in
Amazon and the $6.4 billion sale of his company to Microsoft in
2007, it felt only natural to him that he’d use his newfound
influence to push for the policies he passionately believes in.

And for the last decade, Hanauer has been outspoken about the
United States’ historically large inequality gap.

Through books like “The
Gardens of Democracy,” essays like “The
Pitchforks are Coming … for us Plutocrats,” and lobbying
efforts for causes like the minimum wage, he’s made his activism
its own job, in addition to both his foundation and his venture
capital firm, Second Ave Partners. He’s also
partnered with Eric Beinhocker, executive director of the
University of Oxford’s branch of the Institute for New Economic
Thinking, and the two are working on a book together.

In a wide-ranging interview with Business Insider, Hanauer told
us that he believes we should not fear capitalism, but rather
neoliberalism,
the 20th-century strain of laissez-faire economics popularized by
economists like Friedrich Hayek and
Milton Friedman.

He said that, distilling it down, this approach to capitalism “is
based on three foundational mistakes about how the world works.”

1. People are not perfectly rational and selfish.

Classical economics proceeds with the idea of humans acting as
“homo economicus,” the economical man who is a being that is both
rational and always finding ways to benefit himself.

In the second half of the 20th century, the rise of behavioral
economics argued that this theory was quite simply incorrect. The
development of this new way of thinking led to economists Daniel
Kahneman, Robert Shiller, and Richard Thaler winning Nobel
Prizes.

As Hanauer succinctly put it: “people are not rational,
calculating, or selfish; they are emotional, heuristic,
reciprocal, and fundamentally moral creatures because human
societies are based on, built on, and constructed of norms and
moral structures that enable cooperation and trust.”

2. The market is not always self-correcting.

In 1776, Adam Smith wrote in “The Wealth of Nations” that an
“invisible hand” guides and individual to act in his own
self-interest, and that this often leads to a more positive
impact on society than trying to intentionally benefit society as
a whole. Taken together, this results in a mechanism in which
supply and demand are always in balance, and that through ebbs
and flows, the market is an efficient and self-correcting one.

The economist Joseph Stiglitz told us in an interview earlier
this year that in a paper he published in 1980, he declared that
while market equilibrium can exist in theory,
it was “impossible” for it to exist in a competitive economy in
reality.

In his book “The Gardens of Democracy,” Hanauer and his coauthor
Eric Liu take the idea professed by Stiglitz and others and
compare the economy to a garden that needs trimming and pruning,
but not to an excessive degree.

Hanauer told me that the economy is subject to “positive feedback
loops, like when workers are paid more, they buy more stuff, and
the people they buy stuff from have to hire more workers, which
creates more demand for stuff. It’s an ecosystemic perspective,
an ecosystemic metaphor, if you guide your thinking about and
your intuitions about how the system works, not a mechanical
metaphor.”

3. GDP is not an adequate measure of progress.

In 1968, the presidential candidate
Robert F. Kennedy gave a speech in which he poetically
declared the shortcomings of measuring the health of America by
its gross domestic product, its GDP.

Hanauer is more to the point. “The final mistake was … to
believe that GDP was an adequate measure of human welfare and a
good way of characterizing economic progress, which it is not!”

He said that a glaring example of this is that for the past four
decades, an increasingly smaller number of people, elites, have
captured much of the growth of the economy. Earlier this year,

the French economist Thomas Piketty and a team of coauthors
wrote “the incomes of the top 1% collectively made up 11% of
national income in 1980, but now constitute above 20% of national
income, while the 20% of US national income that was attributable
to the bottom 50% in 1980 has fallen to just 12% today.”

“So when you line up those three mistakes, which is what all
economic thinking and all economic policy is currently based on,
yeah, things go wrong,” Hanauer said. But he’s hopeful, he said,
because “there’s a huge effort going on in academia and in the
philanthropic world to tear down all these old bad ideas and
replace them with new ideas. New ideas about human behavior, new
ideas about the dynamics of human social systems, new ways of
measuring economic progress and human welfare.”