For at least the past half-century, market “efficiency” and the maximization of shareholder profit have been the paramount goals of U.S. capitalism. The result: a proliferation of billionaires, soaring inequality, and growing doubts about the fairness of the U.S. economy.
A majority of California voters, for instance, say they support the “billionaire tax” on the ballot in November. New York City’s mayor is a democratic socialist. Many Americans have begun to question the merits of capitalism; Gallup finds that just 54 percent of Americans see capitalism favorably.
Capitalism is yet worth saving, argue entrepreneur Nick Hanauer and scholar Eric Beinhocker. But they also argue for a radical rethinking of what capitalism should achieve. Their solution: a philosophy they call “market humanism,” which elevates “human flourishing” over efficiency as goals for the economy.
Eric Beinhocker is a professor of public policy at Oxford University, and Nick Hanauer is a philanthropist, civic innovator, and entrepreneur. They are the authors of a new treatise, Markets Built for Humans.
This transcript has been edited for length and clarity. The full interview is available at Spotify, YouTube, and iTunes.
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Anne Kim: Both of you, I think it’s safe to say, are capitalists and very successful ones at that. Eric, before becoming a professor at Oxford, you were a partner at McKinsey & 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. But what did you see in your experiences in the private sector that made you think that the current economic system isn’t working for everyone?
Nick Hanauer: Eric and I both came to the same conclusion, first based on an intuition and as we worked 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 obviously working super well for a small minority of people at the very top and not working for most people.
By way of example, in 2006 or 2007, I got a look at the IRS tax tables, which showed that in 1980, the top 1 percent of Americans shared about 8 percent of national income. And by 2007, it had risen to almost 23 percent. The bottom 50 percent of Americans shared 18 percent of national income in 1980, and it had fallen to 12 percent by 2007. You don’t have to be a rocket scientist to look at those numbers, extrapolate them forward, and recognize that, given that trend, the country would transition from a capitalist democracy to some sort of feudal autocracy.
If you go out 30 years, it’s not 23 percent [of national income] the top 1 percent has, it’s 40 percent or 50 percent. And the bottom 50 percent are now sharing not 10 percent or 11 percent, but 5 [percent]. And so you have the kind of crisis, frankly, of democracy that we’re now facing.
Both of us had this intuition that the neoclassical/neoliberal framework that was governing policy was organized in a way and biased in a way such that the only thing that could happen was the rich would get richer, and everyone else would get poor.
Anne Kim: Eric, what led you to this intuition?
Eric Beinhocker: For me, it was a collision between what I learned from economic theory from my studies and what I saw in reality, both working in the tech sector and 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.
At the same time, the theory said that by boosting productivity, keeping wages down, and shoveling the difference between those back to shareholders, that would trickle down and benefit everybody in the economy. I was pretty good at my job of raising productivity and shoveling those gains to shareholders. But I wasn’t seeing the results of trickle-down. In fact, I was seeing the opposite, where normal working people were struggling to make ends meet and have a decent, sustainable life. Both in our own ways, we saw that the theory wasn’t working in practice, and it was leading us to a dangerous place politically, as Nick alluded to.
Anne Kim: 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 said? What are the natural forces within the current paradigm that are forcing this outcome?
Eric Beinhocker: We like to use an analogy to the game of Monopoly. If you play that game to the bitter end, it always ends up with one person as the plutocrat and everybody else poor. When you ask why, you look at the structure of the game. You have luck playing a role and people taking different paths, and at one point, it leads to a compounding effect of more properties and houses, and the richer you get, and so on.
Those three factors all exist in the real-world economy. 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 in an upward spiral. You can likewise have some bad luck, and that leads to a downward spiral. The natural workings of markets tend to 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 it still always leads to this outcome.
Anne Kim: That’s true. We all start out with exactly the same amount of money in that game.
Eric Beinhocker: And in the real world, of course, we don’t start that way. So it’s even worse.
Nick Hanauer: We did the calculations once. I can’t remember exactly, but if the game of Monopoly was like real life, one person would start with like two million dollars and half the players would start either with zero or with debt.
Eric Beinhocker: And this isn’t to say that things merit and hard work don’t play a role. Of course they do. But the key point is that markets left to their own devices don’t naturally create a healthy middle class. They tend to pull the distribution apart and create a plutocracy. And when you look back in history, strong middle classes have always been created by active policies to invest in working families.
Nick Hanauer: If I could jump in, you use the word “natural,” and I think we would like to push back on that word. 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?”
The neoliberal paradigm snuck in a bunch of assumptions that made it optimal for capitalists—that the highest good within the existing paradigm is capital efficiency. Therefore, the only purpose of the corporation, for example, is to enrich shareholders.
The same logic applies to raising the minimum wage under what’s called a “Pareto 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—the economy isn’t an equilibrium system. It’s an ecology of increasing returns. So claiming that raising wages will lead to fewer jobs is like claiming that 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 not as an equilibrium system, but as an ecology, it completely changes how you see cause 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, right? That’s how markets work. They’re an ecology of increasing returns. This change in perspective on what the economy is leads you to a fundamentally different way of understanding how the economy works and what policies will benefit it and what won’t.
Anne Kim: I noticed that you still have the word “market” in your paradigm, which means that you are not discarding markets. As you say, it’s about organization, right? I want to ask about this exceptionally bold statement you make in your treatise, which is ultimately the heart of the “market humanism” paradigm you’ve constructed. You say, “A morally good economy is also a prosperous economy.” That seems to me a foundational value statement for what market humanism is, but there’s also a lot embedded in there that I want to tease out.
You have this critique of the current economic paradigm, the “neoliberal consensus,” which has been the reigning paradigm of the 1980s: Reaganism, Clintonism, Thatcherism, you name it. You imply within your statement thatneoliberalism is not “morally good.” Do you agree with that statement fundamentally? Are there ways in which neoliberalism is immoral? Are there values that underlie it that are not morally good? Does it lead to outcomes that are not morally good?
Eric Beinhocker: It’s a great question. So, you mentioned 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, in which this famous character, Gordon Gekko, gives a speech saying “greed is good,” and that greed drives the economy. And that became kind of part of the popular culture of neoliberalism.
A lot of people think this idea that 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 people broadly. But as we note, Adam Smith didn’t believe that. 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.
You need to have good virtues and behaviors to create the kind of social cohesion and trust that allows markets to operate. Markets only work well when there’s high social trust and feelings of fairness and reciprocity in the economy. We argue that the hyper-individualist, “greed is good” culture that neoliberalism promoted has been very corrosive to markets, and it has led to the weakening of our anti-competition and anti-monopoly laws, and to an excess concentration of corporate power that has made markets less competitive and even less innovative in some cases. It’s also frayed the social fabric on which a healthy democracy is based.
By the way, “market humanism” is our label for a collection of research done by a whole community of people. It’s not just Nick and Eric’s crazy ideas. But one key finding is that fair economies tend to be prosperous. Economies with fair social contracts, good treatment of workers, and high levels of trust and social cohesion can create the networks of knowledge and cooperation that ultimately lead to prosperity. Hyper-individualistic, transactive, extractive economies tend to be poor and not very innovative.
Nick Hanauer: The 21st-century economic paradigm that we call market humanism has a completely different way of understanding what prosperity is and where growth comes from.
The core idea is that prosperity isn’t about money or GDP. It’s the accumulation of solutions to human problems. What defines whether your life is improving is your access to solutions to human problems.
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. But that only works if there’s justice, which creates trust, which enables cooperation, which enables the problem-solving that really is the core of all human progress.
Anne Kim: 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 mention in your book. These paradigms also set out to solve some problems, but they failed spectacularly. Why?
Eric Beinhocker: Well, one bit of good news is that if we’re unhappy with the neoliberal paradigm, paradigms do change. We’ve been through four of them, in fact, in just the 20th century, beginning with the laissez-faire, free-market paradigm that led up to the Great Depression. Then that transitioned to the Keynesian paradigm in the post-war period. We also saw the rise of Marxist socialism. And then lastly, neoliberalism came in during the 1970s after the stagflation crisis.
Each one of them, as you said, 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 based on flawed theories of human behavior and understandings of human institutions. When you dig into them, you find that a lot of the behavioral assumptions in traditional economics were literally just a philosopher sitting in an armchair making stuff up.
The advantage we have today is that there have been revolutions in behavioral science and our understanding of how things like markets work. Part of what we’re doing is bringing that modern 21st-century perspective to things that have some evidence behind them.
Anne Kim: So why isn’t populism an economic paradigm? Why isn’t Trumpism an economic paradigm? He got “values,” he’s got a theory, he’s got policies. Why doesn’t that add up to the fifth winning paradigm?
Nick Hanauer: Well, if you want to make rich people richer, it’s a fantastic way to go.
Eric Beinhocker: There are some values that he’s trying to promote—many of which we would disagree with—and he certainly has some policies and political speech. But that layer in the middle of explanations, good economic theories, evidence—all the stuff that you really want in a paradigm that you can believe in and act on—is really missing, and it’s actually a jumble of different things.
There’s a big dose of neoliberalism. The “Big Beautiful Bill” was a neoliberal jamboree of tax cuts for rich people, deregulating polluters, and stuff like that, combined with an incoherent economic nationalism of doing favors for politicalsupporters and just throwing in a little dose of outright corruption to finish it off.
Anne Kim: So, finally, we are at the point of talking about “market humanism,” 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.
Nick Hanauer: It is a big word, and we don’t have all the answers, but it’s the right question to ask.
The existing approach only permits you to ask optimization questions. So, for example, raising the minimum wage within this framework is an optimization question: “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?”
What market humanism says is that the trade-off is false. 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?” Likewise, the distinction between human flourishing and maximizing GDP or maximizing capital efficiency is dramatic and profound.
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.
Eric Beinhocker: Just to make it tangible, 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. We’re arguing that our measures of success should be real impacts on human well-being, on our standards of living, our health, our opportunities, our family lives, and our social connections.
GDP is missing all those dimensions. There’s a very rich body of work out there now on going beyond GDP and finding other measures that capture the real impact on people’s quality of life.
Anne Kim: 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 to make human flourishing a reality? What are some examples of the kinds of policy choices that are enabled by this sort of framework? You’ve mentioned raising the minimum wage, but what else?
Eric Beinhocker: Well, for example, in labor market policies, the neoliberal paradigm would just focus you on efficiency and costs and things like that. But if you’re looking at things from a human flourishing perspective, support for childcare becomes part of an economic policy that supports flourishing families.
By focusing on a broader notion of quality of life, which pulls other dimensions into the economic conversation that have often been ignored or positioned as a trade-off versus economic interest. So, our view is that fixing these things is part of fixing the economy. They aren’t separate things.
Nick Hanauer: Another great example 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 percent of hourly workers and about 65 percent 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 or 12 percent of salaried workers. 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. 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. Effectively unlimited demands from your employer for work hours have savaged the ability of American families to help their kids with homework and just have a functioning life. In the neoliberal framework, the only thing that matters is how much profit corporations make.
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. Corporate profits as a percent of GDP have effectively doubled during the neoliberal era, while the percentage of GDP that’s 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.
Eric Beinhocker: 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. But that’s not how the economy is wired today.
Anne Kim: I have a final question about narrative change and about dislodging the current framework. A lot of companies would argue that doing the right thing is a luxury. And we do have these so-called “triple bottom line companies” that pursue social and environmental good as well as profits. But the companies tend to be kind of niche right now. The biggest companies in the world don’t think this way. What’s your strategy for trying to get these folks on board?
Nick Hanauer: Laws. The world has never run on the kindness of strangers. There is no way that people can either will or can unilaterally become the ideal company in a world where none of their competitors do, right?
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 their competitors continue to exploit their workers.
The thing about the economy is it’s largely a collective action problem. So the only way to address these challenges is to change the standard for everyone, to raise our standards. A lot of people push back on this idea that we should expect more from capitalists, but the story of civilization is the story of an ever-widening circle of concern.
We used to think that chattel slavery was fine. We used to think that child labor was fine. It’s not that capitalism in the current form that we have was all wrong. We have just outgrown it. It’s 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.
Eric Beinhocker: The system we have of being focused on maximizing shareholder value isn’t that old. It really got going in the late ‘70s and ‘80s and came out of academic theories by Milton Friedman and folks at Harvard Business School.
Not all CEOs are sociopaths. Many of them are very good people. They’re problem solvers. What they like to do is make good products and services and do things that are positive for the economy. This sort of slavish focus on quarterly earnings is not what they wake up and get out of bed wanting to do. But they’re stuck in this race to the bottom without some common rules on fiduciary duty and laws and things like that.
The ones that want to do good and be problem solvers, not problem creators, find themselves stuck in this dysfunctional system. Coming back to Adam Smith, one of the things he said is that we should design our institutions to help our better angels, not reward our inner devils. Our current system rewards the worst kinds of behavior.
