“If you change the way you think about the economy you can change the economy,” Nick Hanauer, businessman and venture capitalist.
Economics is not an exact science. The economy, and the way we carve up the economic pie, is a political and social process. It is not set in stone and can be improved. This article provides documentation from sources with much more experience and credibility than I. Although I am an old crank, the ideas I write about are not just the rantings of an old crank.
Mr. Nick Hanauer is a wealthy venture capitalist and one or the original investors in Amazon. Public sources do not state his level of wealth, but he is definitely in the 1%. Although he is a capitalist, he is not your typical free market ideologue. In fact he is a critic of standard “neoclassical” economic thinking. This is what he says about what really drives the economy,
“…people over the last 40 years have been relentlessly told that selfishness is righteousness, and that your only responsibility is to advance your own narrow self interest, and if you do that the public interest is served. And that is just a complete lie…human societies are built from reciprocity and cooperation. And cooperation in turn is built by trust…And trust is the product of justice…which enables cooperation from which all human prosperity is built. It’s not competition that does it, its cooperation”
He is also founder of an economic policy think tank called Civic Ventures. Their website says they are “a small group of political troublemakers devoted to ideas, policies, and actions that catalyze significant social change…that improves the lives of our fellow citizens and community.”
Several quotes from the Civic Venture mission statement explain their thinking:
- We believe that the point of politics and economics is to maximize the rate at which we improve the lives of the typical family in our community and country.
- We believe that a thriving middle class is the source of [economic] growth, not a consequence of growth.
- We believe in capitalism, but recognize that the form capitalism takes defines whether the economy benefits the many or the few
- Our view is that the only sensible long-term policy is to maximize the benefit to the many.
Civic Ventures and Mr. Hanauer have put his economic beliefs and ideas into a very good series of educational podcasts called “Pitchfork Economics.” The audio programs explain basic economics principles, critique main stream conservative economic thinking, discuss current policy issues, and offer provocative ideas on how to make the economy work for everyone and not just the few at the top. Pitchfork Economics has many good discussions.
The podcast “Is Econ 101 a Lie?” discusses Mr. Hanauer’s (and other economists’) criticisms of standard economic theory. The basic criticism is that standard economics is based on assumptions about human behavior that do not reflect the way people actually behave. People are supposed to be perfectly rational, motivated by self interest, and able to make the best choices for themselves. Free markets allow consumers and producers, through free choice, competition, and supply and demand, to arrive at mutually beneficial trades (of goods, services, labor or capital) that set the best prices (and wages) and create the maximum benefit for everyone.
This model is not necessarily wrong. But it is incomplete, and simplistic in describing a complex economy. It ignores the obvious fact that many people are not well informed, are emotional, and easily manipulated. Neither does this model take into account the many differences in power, control, and knowledge between individual people and massive corporations. It does not include the greed, fraud, manipulation, and exploitation that results from these differences. Free market boosters fail to accept the obvious fact that for hundreds of years unregulated free markets have not benefited everyone and have created extreme income inequality.
Economist James Kwak is interviewed in the above podcast. In his book “Economism, Bad Economics and the Rise of Inequality,” he disagrees with the standard free market thinking. He calls this “economism” and defines it as “the invocation of basic economics lessons to explain all social phenomena.” Basic economic principles teach that “the forces of supply and demand essentially create a perfect world because everyone gets paid exactly what they deserve, and all products cost exactly what they should, and all resources get allocated to their best uses.” He says this is a “misuse of very simplistic models from first year economics to try to make claims about the world, claims that are politically convenient to some people…[but] virtually never hold true in the real world.”
Professor Kwak does not agree with the advocates of “economism.” But it is a great excuse for justifying extreme wealth and opposing social policies to create a more fair society. The authority of “basic economics” is a powerful tool for conservatives to justify opposing public policies like minimum wages, unemployment, consumer protection, progressive taxes, and government regulations. These and other social programs violate free market principles and create more harm than good. Minimum wages result in low income people losing their jobs. Environmental protections kill jobs. Taxing the wealthy more, especially with capital gains taxes, stifles investment and economic growth. Similar arguments have been used for almost all social improvements.
This quasi-religious belief in the infallibility of free markets is really a rationalization for maintaining the status quo. It justifies the existing inequality, privileges, and power of the few. As economist John Kenneth Galbraith wrote many years ago, “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”
Mr. Hanauer again, “The reason you [should] care about these academic issues is that these academic assumptions will end up framing everything in your life about how we organize a society and who gets what and why.”
We all need to be more informed and not just opinionated. Pitchfork Economics is a good way to be more informed about the economy and how it really works.