For the first time in Pitchfork Economics history, Nick Hanauer is on the other side of the mic.
Goldy and Paul sit down with Nick to discuss Market Humanism: the emerging economic paradigm he and Eric Beinhocker believe can replace the trickle-down ideas that have shaped American policymaking for the past 50 years.
Why have wages stagnated while inequality soared? Why does conventional economics treat policies that help ordinary people as threats to growth? And what changes when we recognize that markets are human-built institutions—not forces of nature?
The conversation exposes the failures of the old economic model, how power shapes who gets what and why, and why a fairer economy is also a more prosperous one.
Nick Hanauer is a Seattle-based entrepreneur, venture capitalist, and civic leader dedicated to building a more inclusive and sustainable economy. He is the founder of Civic Ventures, a public policy incubator, and co-host of the podcast Pitchfork Economics. A leading voice for “middle-out” economics, his commentary has appeared in The Atlantic, Politico, Bloomberg, and The New York Times. He is the author of The Gardens of Democracy , The True Patriot, and a frequent advocate for policies that put working people at the center of economic growth.
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Further reading:
Democracy Journal – Market Humanism: A New Paradigm for a New Era
The Atlantic – The Economic Experiment That Upended Reality
Markets Built for Humans – A Guide for Policy Professionals to the New Economics
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Goldy:
The last five decades of trickle down economics haven’t worked, but what’s the alternative?
Nick Hanauer:
Middle out economics is the answer.
Goldy:
Because the middle class is the source of growth, not its consequence.
Nick Hanauer:
That’s right.
Announcer:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
Paul.
Paul Constant:
Hi.
Goldy:
Oh, it’s always fun to have you on the pod filling in for Nick or sometimes filling in for me.
Paul Constant:
Uh-huh. Yeah.
Goldy:
And today it’s a really special episode of Pitchfork Economics with Nick Hanauer because this is-
Paul Constant:
Wouldn’t miss this to the world. Yeah.
Goldy:
This is the first, first time we’ve ever done this. This is actually Pitchfork Economics with Nick Hanauer. With Nick Hanauer. Yeah. So the reason why you’re joining me, the two of us here, is we’re going to actually interview our boss today, which is something we-
Paul Constant:
Very fair and balanced interview.
Goldy:
That’s right. A little caveat upfront. He pays us. So keep that in mind. We like to wear our bias on our sleeve and we want you to judge us in that context. But the reason why we’re doing this is because longtime listeners know that we’ve been talking about what we’ve called middle out economics for a very long time. We have started using this term “market humanism” to describe the fundamental economic paradigm that informs middle out economics. Middle ed economics is a pretty simple high level political and policy narrative that is meant to provide rules of thumb for how to manage the economy and how to talk about it. But it has always been informed by a much deeper scientific foundation. And it’s something we’ve been working on in the office. And more importantly, Nick and his co-author, Eric Beinhocker, have been working on a book forever. I think certainly the entire time you’ve been working here, Paul, which is almost-
Paul Constant:
Yeah. 12 years.
Goldy:
Right. 12 years, they started going public with it. There’s a little handbook, which is a summary of this much bigger book, which will be coming out in a year or two called Markets Built for Humans. And recently in the past couple weeks put their flag in the ground with a couple pieces in major publications. There’s a piece in The Atlantic and a piece in Democracy Journal, which goes into with much greater detail. So we thought it might be a good time to turn the mic on and put Nick on the other side of the mic and have a conversation about what market humanism is and why now.
Paul Constant:
To be clear though, he is going to still be using this end of the mic to talk into.
Goldy:
Yes.
Paul Constant:
Because if we put him on the other end of the mic, that would make for a bad podcast.
I just want to clarify one thing you were saying, Goldy, because you were throwing some terms around. When we talk about neoliberalism, for instance, and we talk about trickle down economics, neoliberalism is sort of the economic paradigm. It’s the overarching thing that they teach in schools that is in the textbooks and things like that. And trickle down-
Goldy:
Well, neoclassical economics is the thing they teach in textbooks. Neoliberalism is the broader economic ideology that has dominated our policy and the way we think about economics and the economy for the past 50 years. All these terms, and if you don’t like the term neoliberalism, some people use the term market fundamentalism. This idea that tries to reduce all of human activity to market interactions. And they teach you how to think like an economist in terms of, I don’t know, dealing with your children.
Paul Constant:
And then trickle down as a term, generally, we use it when we’re talking about the policy and the political argument around it and things like that, sort of the ground level, right? So what we’re talking about here is market humanism. And that kind of holds the same place in the model as neoliberalism or neoclassical. Which would you say?
Goldy:
In a sense. It’s confusing, but both. What we are talking about is not just replacing that neoliberal ideology, which is dominated, but actually replacing what we teach in introductory economics courses. The fundamental principles of economics, the textbook that is taught is titled Principles of Economics. Market humanism argues that those principles are wrong. It’s a big plane. And so since Nick earns a thousand times more than us a year, who better to go and support this claim?
Paul Constant:
Exactly. Since he’s clearly a thousand times better than us at explaining it since the market is open.
Goldy:
Let’s see if that’s true. So why don’t we talk to Nick?
Nick Hanauer:
My name is Nick Hanauer. I am the founder of Civic Ventures and the host of Pitchfork Economics. And happy to be here on the Pitchfork Economics podcast.
Goldy:
On the other side of the mic for a change.
Nick Hanauer:
Yes, exactly.
Paul Constant:
So Nick, you and Eric Beinhocker, you have two new pieces out making a pretty big argument.
Nick Hanauer:
We do.
Paul Constant:
What are you trying to do with these pieces? Let’s start there.
Nick Hanauer:
Yeah. Well, as listeners of the podcast know, we have been hard at work for a really long time on a new economic paradigm. Why? Because the existing economic paradigm is mostly a pack of lies. And in its current form it functions effectively as a protection racket for the rich. That if you take that paradigm seriously, what we call neoclassical economics or neoliberalism and enact policy on the basis of it, only one thing can happen, and that is the rich will get richer and everybody else will get poor. And the people who represent that paradigm want you to believe that it is the objective truth about how economies work and that there is no alternative to it. And that also is not true because all of the underlying assumptions of that paradigm are just objectively measurably false.
And you can start with one of the oldest of those assumptions, the idea of being utility maximizers. This is a thing that Jeremy Bentham thought up in 1787. He ran no experiments. He had no empirical basis upon which to decide this is how the world operated, but it sounded good and it was mathematically tractable and people grabbed onto it and just assumed it was true.
Goldy:
And why wouldn’t you? I mean, after all, this is a guy who, in his will, had himself mummified and is now in a glass case like in the lunchroom at the London School of Economics.
Nick Hanauer:
That thing’s ugly.
Goldy:
So what could be more credible than that?
Nick Hanauer:
Exactly. Exactly.
Goldy:
Not a weirdo at all.
Nick Hanauer:
No, not a weirdo at all.
Goldy:
I can’t see why he had this deep insight into human nature.
Nick Hanauer:
Yeah, exactly. Not a weirdo at all.
Paul Constant:
Could I ask a follow-up actually?
Nick Hanauer:
Yeah.
Paul Constant:
For people who are now, they’re going to the grocery store, their prices have been rising nonstop for four years, things like that, why is it important to be talking about paradigms right now? Why is that where you’ve been putting your energy?
Nick Hanauer:
Why would anybody care? Why should anybody care? Yeah. So that’s a great question. It is the question because economics, how we see economic cause and effect, which is what a paradigm is, is the operating system of the world. It defines for us how we see the world, what we see in it, and what we think we should do to make the world a better place.
By way of example, the existing paradigm tells you that the existing distribution of income is the socially and economically optimal distribution by definition and that anything we do to change that distribution will harm welfare for everybody, will make the economy less efficient. And as a consequence of that belief, the minimum wage, by way of example, has not been increased since 2009 and sits at $7.25 an hour or $2.13 an hour plus tips for tipped workers because the consensus economic view held by both Republicans and, to a great extent, Democrats is that because of all that stuff, if you raise the minimum wage, it will create a corresponding amount of job loss.
Now, none of that is true. It’s the farthest thing from the truth. And one of the reasons is not true is that academic economics has made a category error by insisting that the economy is this Pareto-optimal equilibrium, which it is not. It is an ecology of increasing returns. So if you understand the system correctly, as our new paradigm does, as effectively an ecology, claiming that when wages rise, the number of jobs in the economy will fall would be like claiming that when plants grow, animals shrink. This is obviously not how the system works.
Affordability crisis that people feel that they have isn’t really an affordability crisis. It’s a wage crisis. If the minimum wage had tracked productivity gains for the last 50 years or something like that, as it once did-
Goldy:
Over 30 years, it did.
Nick Hanauer:
That’s right. It did. And it stopped exactly when the neoliberal revolution took over in the mid ’70s. But if the minimum wage had tracked productivity gains as it once did, instead of being $7.25 an hour, it would be in the range of $25 an hour. And if the overtime threshold, which now covers 10% of salaried workers had tracked productivity gains or basically kept up with the economy, it would include two-thirds of workers.
Goldy:
Which it once did.
Nick Hanauer:
Which it once did.
Paul Constant:
Right.
Nick Hanauer:
And if that was true, the median income in America would be someplace between 50 and 100% higher and we would not have an affordability crisis. And that’s why people should care, is because your policymakers, whether they be Democrats or Republicans with a few small counter examples, still believe that if they raise the minimum wage, it will be a job killer. And what the old paradigm does, neoliberalism effectively, is that it takes off the table any policy intervention that could actually help ordinary people because it codes all of those things as bad for the economy, even though they’re not.
Goldy:
And by bad for the economy, the economists mean bad for average working people?
Nick Hanauer:
It does, right, for you.
Goldy:
If you raise the minimum wage, it’s bad for workers. If we tax Nick Hanauer, it’s bad for me and all.
Nick Hanauer:
Correct. Correct.
Goldy:
Which might be true because you pay us, but-
Nick Hanauer:
That’s right.
Paul Constant:
In this very particular case. Yeah.
Nick Hanauer:
In this very particular case, right? But for sure, the reason that the vast majority of Americans have fallen farther and farther and farther and farther and farther behind every year for the last 50 years is because of the old economic paradigm.
And look, let’s be clear, part of what’s animating that paradigm is the intention of terrible people who just do not care about anyone but themselves, who understand perfectly clearly that raising wages doesn’t kill jobs, but just say it because it’s the most effective way they’ve ever found to keep wages low and profits high. And those people will not be healed by better information about economics. Those people need therapy. But the broader problem has been this consensus, which is not nefarious, which is just wrong. We’re wrong. We were wrong about what the economy is. We were wrong about human behavior. We were wrong about the origin’s prosperity and the nature of it.
And while we will never get rid of the terrible people, they will always exist. Incredibly rich people who do not care about anybody else and who are absolutely convinced that what is good for them is good for everybody, that will never go away. But what we can do for the other 95% of people is show them that we’ve been understanding economic cause and effect, not just wrong, but effectively backwards.
Raising wages doesn’t kill jobs, it creates them obviously because if nobody has any money, who will buy the stuff in the economy? That’s why this is essential work, is that if we let the existing paradigm continue to dominate policymaking, all of the things that policymakers should do to improve the lives of ordinary Americans will be taken off the table as big government job killing attacks on freedom or whatever it is. And that’s why it’s such essential work.
Goldy:
We’ve been talking about these ideas and you have started using the term market humanism a little bit on the pod.
Nick Hanauer:
Correct.
Goldy:
But we’ve been starting talking about the ideas for years now. All of a sudden, Nick, you and Eric have two pieces simultaneously won this larger piece in Democracy Journal, which talks directly about paradigms and lays out what’s wrong with the old paradigm and what the new paradigm teaches us.
Nick Hanauer:
Yes.
Goldy:
You also have a piece in The Atlantic-
Nick Hanauer:
Correct.
Goldy:
.. which focuses on the minimum wage.
Nick Hanauer:
Yeah. Narrows the analysis to the minimum wage. Right.
Goldy:
And I want to talk a little bit about why focusing on the minimum wage is so important, what it does in terms of tearing down the old paradigm.
Nick Hanauer:
Yeah. I mean, we like the minimum wage. We call it the minimum wage the gateway drug of political economy, because it’s the simplest thing if you can use the minimum wage as a way to understand economic cause and effect in a very clear, discreet way. And again, that canonical idea that if you raise wages, it will automatically kill jobs, it’s one of the central claims of neoclassical economics and neoliberalism.
Goldy:
It’s even more central because… And for those who are watching on YouTube, I’m holding up Principles of Economics. It is Mankiw’s Textbook, The 10th Edition. This is the textbook most widely used to teach introductory economics around the nation. It’s by a Harvard professor. It’s taught at Harvard. And one of the core principles of neoclassical economics, of Orthodox Economics, is that there is an inverse relationship between price and demand. When the price of something goes up, demand for it goes down and that is the driving force behind this equilibrium system that is the economy. And we all know from our own behavior, it’s somewhat true depending on the things you’re talking about. But the illustration, the literal textbook illustration of that inverse relationship is the minimum wage.
Nick Hanauer:
Yes.
Goldy:
They use the minimum wage to demonstrate this fundamental law that when the price of something goes up, people purchase less of it.
Nick Hanauer:
Yes. And this is obviously… It may not be obvious to our listeners. It is demonstrably false. Why? Because there isn’t a profound connection between how much people are paid and how much they can buy.
Goldy:
Right. Even if you don’t buy that causal relationship, Nick, we have 30 years of empirical evidence showing that it’s not true.
Nick Hanauer:
Correct. It’s just so important for people, both political leaders and policymakers, but also just the ordinary citizens that go about trying to make a way in the world, to understand this stuff because we have to start to push back on these terrible ideological lies.
Goldy:
Right. And when you say, Nick, that it’s wrong about the minimum wage, what we’re saying is it’s wrong about the law of supply and demand, right?
Nick Hanauer:
Of course.
Goldy:
That it is not a fundamental law. And this is what I love about focusing on the minimum wage. You call it a gateway drug. I like to call it the wedge issue. If it’s wrong about that-
Nick Hanauer:
It’s wrong about everything.
Goldy:
Yeah.
Nick Hanauer:
It’s wrong about everything.
Goldy:
You got to start questioning everything because if it’s not a law, the whole thing unravels. None of the rest of their theory works.
Nick Hanauer:
Correct.
Goldy:
It has to be true. And that’s why they teach it is true, because the rest of it falls apart.
Nick Hanauer:
That’s right. That’s right. Just to your point, Goldy, the reason that we’re now talking about marketing humanism is that Eric and I and dozens of other scholars have been at work on this stuff for a very long time. And what our contribution has been, my colleague, Eric Beinhocker, and I, what we did is we could see the hazy outlines of an alternative paradigm in the scholarship but spread across disciplines. There was all this amazing scholarship within the economics community, but also in anthropology, psychology, physics, mathematics, sociology, so on and so forth.
And what we’ve spent the last 10 years doing is excavating all of that scholarship and organizing it into a coherent hole that you can now see as an economic paradigm that can replace the old one. Just to be clear, there’s almost no original ideas from us in this new paradigm.
Goldy:
Right. You’re not doing science.
Nick Hanauer:
No.
Goldy:
You’re doing narrative.
Nick Hanauer:
We’re doing narrative. And what we’re doing is organizing the science into a narrative that people can understand and use. And when you do that, when you organize all of the recent scholarship, you end up with this framework that is unbelievably compelling because it’s rooted in actual empirical science where people actually did scientific tests to determine if this stuff was true, tests about human nature, tests about the origins of prosperity, all this stuff.
Again, when you see it in its whole form, it totally transforms how you see economic cause and effect and it opens up a huge amount of interesting territory for the exploration of new policies and new ways to understand how we should organize a society.
Goldy:
And that’s why it’s important.
Nick Hanauer:
And so the piece in The Atlantic, which narrowly focuses on the minimum wage begins to explore this new paradigm. The piece in the Democracy Journal, which is longer, explains both what a paradigm is, what the old paradigm is, and explains to a certain degree what the new paradigm is.
And I hope, in fact, I insist that we also provide a link to the booklet that we call Markets Built for Humans, which is an abbreviated version, although it’s quite large, it’s 150 pages long or something like that, of the paradigm itself where all of the detail is located. And all of this stuff is free to download. We hope that everyone downloads a copy, reads it, and then shares it with everybody that they know. Because here’s the thing, citizens are going to have to get the word out about this stuff because the academic economics community is not likely to do it. And the forces of evil are definitely not fired up about this new way of understanding economic cause and effect. So we’ll take a lot of work to get the word out.
Paul Constant:
So what does it mean to say that markets should be built for humans as opposed to the reverse, which I think is what we’ve been living in for my entire life?
Nick Hanauer:
What neoclassical economics did, neoliberalism did, is it elevated capital efficiency, effectively returns to capital as the highest social and economic good. And anything that in any way took away from the advantages that owners of capital get by deploying capital was understood to be terrible for everybody.
The word efficiency, for example, in modern parlance, simply means returns to capital. And as a consequence, all the policymaking that took place within this framework helped capital returns and harmed everything else because the word efficiency should be interrogated, right? Efficient for whom?
Paul Constant:
Right. Right.
Nick Hanauer:
Is it efficient for workers to be laid off? But there’s all sorts of ways of looking at it. By way of example, corporate profits as a share of GDP have doubled over the last 50 years from about 5 or 6% to 12% or 13%, while labor’s share of GDP has fallen by exactly that amount, more or less. It’s in the range of $2 trillion a year now. That extra $2 trillion a year in profits isn’t profits because it needs to be or should be or has to be. It’s profits because powerful people prefer it to be. That’s not more efficient. That’s just a different way of cutting up the value created by enterprise in the society. There’s nothing more efficient about making risk people richer.
Goldy:
It’s more profitable. And I think a great example, I think-
Nick Hanauer:
It’s more profitable, Goldy, but worse for the economy overall.
Goldy:
I think a great example was provided by COVID and the supply chain crises. Those global supply chains were very capital-efficient.
Nick Hanauer:
Yes.
Goldy:
It cost less. Rather than having manufacturing here and paying people, western wages and keeping large inventories of protective equipment, we outsourced all of that to China and we had just in time delivery of these things. You didn’t need to have a big inventory. And when that crisis hit and everything shut down, we had doctors wearing garbage bags for lack of protective equipment. We had this huge shortage. And that was not necessary. It was not efficient in that moment, obviously. It was extremely costly to deal with that supply chain crisis, both in terms of money and in human lives. People unnecessarily died-
Nick Hanauer:
That’s right.
Goldy:
… because they did not have masks and other protective equipment. You had that trade-off between efficiency and resilience. And what we have built is an economy that is not very resilient to shops.
Nick Hanauer:
Yes.
Goldy:
Is it efficient? Sure, when it works.
Nick Hanauer:
Yeah. Well, I mean, but, again, the word efficient, efficient for whom and for what?
Goldy:
Yeah. And is that good?
Nick Hanauer:
Right?
Goldy:
I’d rather be resilient.
Nick Hanauer:
Yes.
Goldy:
Beneficient.
Nick Hanauer:
And you’d rather have a society where no one working for a large company is paid less than it takes to live in dignity without government assistance. I consider that to be efficient. It is not efficient to have these giant companies paying people so little that they all require food stamps and Medicaid and rent assistance and they’re always having to hold down three jobs and stuff like that. That is not efficient. That’s capital efficient.
Goldy:
So let me ask you something, Nick. I’m going to cuss play Fox News host here. You are a venture capitalist who became extraordinary wealthy investing in companies, creating companies, investing. What turned you into a communist?
Nick Hanauer:
Yeah. So I definitely don’t feel like I’m a communist or a socialist because even though capitalists and neoliberals and neoclassical economists misunderstand what markets are and why they’re good, they are correct that they are a great social technology. So the conventional view is that markets allocate scarce resources efficiently. And that is not true.
Goldy:
Right.
Nick Hanauer:
There is nothing efficient about how a market works.
Goldy:
By the way, again, going to the textbook, literally the definition of economics in the textbook is the study of how a society distributes scarce resources. That’s what economists do, okay?
Nick Hanauer:
That’s right.
Goldy:
I’m just saying that I’m not making it up. This is what they teach impressionable youth.
Nick Hanauer:
Yeah, that’s right. And that’s just not true. The reason that markets are so fundamental to creating prosperity, enabling the human spirit to a great extent, is that they’re evolutionary systems. They’re like an ecology where firms act like organisms and this structure enables groups of people to cooperate to solve complex problems, which is what prosperity actually is.
Prosperity isn’t money or GDP. It is the accumulation of solutions to human problems. Going from aspirin to antibiotics, that is economic progress. That’s creating prosperity. And you do that by having groups of people come together with different ideas, putting old ideas together in new ways and creating new technology, new innovations that can improve our circumstances. And this is what markets do better than anything else we have ever devised. And so I am a huge fan of markets but not of capitalism, which sees markets simply as a way to extract value from the rest of society.
I mean, that’s not intrinsic to markets. You can structure markets in a way so that they do serve human flourishing, right? You can use government to ensure that businesses are solving more problems than they’re creating. I mean, this is what regulation is. Regulation is merely the act of encouraging economic activity that improves people’s lives and discouraging economic activity that harms people’s lives. And when you do that, you end up… Look, you’re never going to have a Utopia and there will always be, again, sociopaths who run companies who try not to do the right thing, but we can very much change the standards by which we operate markets in ways that will both ensure that they are sort of directionally pointed at helping people, not harming them, and minimizing the damage when there’s stuff that goes wrong.And again, market humanism is not a Utopian paradigm, but it does point towards a way to organize a society where we will all live much better lives.
And I want to make one very important point. Listening to this, you may hear that it’s worth making a trade-off against growth for a fair economy. I am not saying that. What I am saying is that a fairer economy will grow faster than an unfair economy.
Goldy:
Right.
Nick Hanauer:
Right? We are not trading off against growth here. By way of example, just so folks know, we used to have an economy that grew at 4, 4.5% a year, even given that GDP is its a terrible measure, but just stipulate that you’re using that measure. And as soon as the new liberals took over, it fell to 2%. Why? Because all the money in the economy left the pockets of ordinary citizens who actually make the economy go and ended up in the offshore bank accounts with people like me parked in places that don’t help the economy.
Putting a $200 million painting on your wall is not driving the economy forward. I’ve said this a million times. I make a thousand times as much as the ordinary citizen, but I don’t have a thousand times as many pairs of jeans. I only get a haircut every two months.
Goldy:
I’ll just rub it in that you need haircuts.
Nick Hanauer:
Yeah, there you go. Yeah. Yeah. But anyway, so that’s the core of the thesis, is that our economy would grow faster if we included people more robustly in it.
Goldy:
And this is the core middle out argument that we’ve been making for years when we use that term that this idea that the middle class is a consequence of growth is backwards, that it’s a large growing robust middle class that grows the economy.
Nick Hanauer:
Correct.
Goldy:
And the middle class is not a consequence of market capitalism. It was a political choice that was made in the wake of two World Wars and a great recession-
Nick Hanauer:
Correct.
Goldy:
… and the rise of communist dictatorships in the Soviet Union and elsewhere that, “Ah. We need to prove that our system works.” I mean, it was a bargain. People negotiated over this. The leaders of industry agreed to it. There was the Treaty of Detroit.
Nick Hanauer:
Yeah. That’s right.
Goldy:
We had both parties. We had… What was it? During the Eisenhower administration when the top marginal tax rate was 94%.
Nick Hanauer:
That’s right.
Goldy:
I mean, this was a choice that was made to build the middle class mostly for white people, but you have to put it in the context of our racist past, but it was a political decision. Political and policy decisions were made and then were later unraveled from the mid 1970s onward.
Nick Hanauer:
That’s right. I mean, I think you raised a very important point. One of the central distinctions between the neoclassical paradigm and the new economics, it’s relative understandings of the underlying mathematical dynamics of these systems. And the old system assumes that the system effectively is stable. It’s like if you compared it to games and the old system, we’ll be playing rock, paper, scissors where what happened before has no effect on the future.
But the modern economics, market humanism, acknowledges that that is not how a modern economy actually works. It’s called a non-ergotic system, but basically means that what happened before matters a lot. That’s called path dependence. And luck is also an incredibly important factor and compounding is also an incredibly important factor. And that game is a lot like the game of monopoly. And the thing about monopoly is it doesn’t matter if you go to monopoly school. If five people sit down to a game of monopoly and they play it long enough, one person will own everything and everyone else will own nothing. It’s in the nature of the game. And this is how a modern market economy works.
Goldy:
Right. And it’s not necessarily meritocratic.
Nick Hanauer:
No. No.
Goldy:
Right? It’s who lands on boardwalk first and has the ability to buy.
Nick Hanauer:
Exactly. And it just compounds.
Goldy:
Right. And it compounds over time.
Nick Hanauer:
That’s right. Four lucky roles in a row and you own the game, right? That’s it, which is exactly how it is in life. Which is not to say that talent and luck don’t play a role. They do. At least 50% of the role, but not all the role. And what that means is that there is no middle class in the history of middle classes that was not created without deliberate policy aimed at ameliorating these internal mathematical compounding dynamics. And that means that if you want to have a middle class, you have to deliberately create one. And that’s why the idea of this laissez faire, just let the free market sort it all out, stuff is such utter nonsense. Unless you’re the Koch brothers, in which case you don’t care, you just want to get richer, right? You don’t care about other people.
Goldy:
And this is where democracy comes in, Nick.
Nick Hanauer:
That’s right.
Goldy:
Because one of the big things that’s missing from the old paradigm, deliberately and ridiculously missing, is power.
Nick Hanauer:
That’s right.
Goldy:
There is no power in the old economics, right? It assumes that it’s everything set by prices.
Nick Hanauer:
Yeah. Does the word even appear in the Mankiw textbook? I can’t remember, but-
Goldy:
Only in the context of market power.
Nick Hanauer:
Okay.
Goldy:
The idea that you could get some type of monopoly, large share of a market, and then you’re able to set prices. But it doesn’t talk about the power imbalance between me and you, Nick.
Nick Hanauer:
Yeah. Correct. Right.
Paul Constant:
So in the Mankiw view, this is just three equal economic actors having a chat.
Nick Hanauer:
Three terms.
Paul Constant:
Yeah. Three economic… Yeah. Okay.
Goldy:
Right.
Paul Constant:
We all have equal… Okay.
Goldy:
It’s funny, you say this and we never… One of your phrases, Nick, is that employers don’t pay you what you’re worth. They pay you what you’re able to negotiate. And we never get to negotiate with you over our raises more.
Nick Hanauer:
Exactly.
Goldy:
You’ve taken yourself right out of the equation because that’s what rich people do. There is a natural power imbalance. And even Adam Smith talks about that in the wealth of nations that employers have more power naturally.
Paul Constant:
That’s right. That’s right.
Nick Hanauer:
Yeah. I mean, one of the tricks of the neoclassical paradigm was literally taking power out of the equation. And an economic theory that doesn’t account for power would be like a physics that didn’t account for gravity. It’s absurd. It’s absurd.
Obviously, power has a huge impact on these arrangements. One of the great examples of this trick is the principle of marginal productivity. This is the theory of economics that says that what you are paid perfectly represents the value you create in the enterprise. The history of this idea is so instructive and such a great parable about how this framework was put together. I’m going to get these dates more or less right. In about 1879 or something like that, a guy named Henry George writes a book called Poverty and Progress, which basically says the richer stealing from you. And there’s no reason for us to be poor. It’s just this unfair and scandalous.
Goldy:
Those of you, the urbanists out there, it’s the land tax guy, the land value tax guy.
Nick Hanauer:
That’s right.
Goldy:
That was his main argument.
Nick Hanauer:
So this book doesn’t just become a bestseller. It becomes the bestselling book in the history of the United States up until that time. And the powers that be freak out. So was it Morgan? JP Morgan? I think it was JP Morgan freaks out, hires an economist named John Bates Clark, brings him to the University of Chicago and says, “Fix this.” And John Bates Clark comes up with this idea called the theory of marginal productivity. And basically, what it says is that no matter what you’re paid, that’s what you’re worth. But in the book that he writes, “Clark, he says what he shouldn’t have said out loud, the quiet part out loud, which is, ‘Hey, you guys, we have to tell people that they earn what they deserve because if they don’t believe that they’re getting paid what they’re worth, they will be angry, they will revolt and they will kill us and we can’t have that’ So we have to persuade them that no matter how much you’re paid, that’s the reflection of the value you create.”
And this idea will not surprise anyone listening to this podcast, that that idea sounded great to a whole bunch of rich people and they swept it up into the economic paradigm and worked it in. And today when you take Econ 101, they tell you that no matter how much you earn, that’s all you’re worth. So if you earn $12 an hour as an EMT saving people’s lives, that’s because 12 bucks represents the value you create. And if you rub money together to make more money on Wall Street and earn $100 million a year, well, that’s because that’s the value you create, which is obviously nonsense. It’s just nonsense.
Goldy:
It’s because you’re doing God’s work according to the CEO of Goldman Sachs.
Nick Hanauer:
Yeah. Exactly. But it is a belief that is very hard to root out because everyone has to be the hero of their own story. And I guarantee you that Ken Griffin believes that his $50 billion in net worth is absolutely a reflection of the enormous amounts of value he has created in the world and has absolutely no compunction about the fact that school teachers can barely put food on the table. Not a problem for him, right? But these narratives are incredibly important to people because the cognitive dissonance that would be created by having to wrestle with the fact that you’re a parasite and you manipulate markets in a very particular way in a context that rewards that, that doesn’t feel great.
Goldy:
We’ve been talking for a while. This brings us full circle back to paradigms. What you and Eric are calling for, what we’ve been essentially working for on this podcast for the past 150 years that we’ve been doing it feels like that sometimes.
Nick Hanauer:
Feels like.
Goldy:
We’re talking about a paradigm shift, right? We’re talking about going from the way they teach economics in these textbooks, the way it’s been understood and taught for half a century and the way people view their own role in the economy and what it does, what the economy is basically, what economics is. And you’re talking for a complete paradigm shift.
Nick Hanauer:
Yes.
Goldy:
We’ll admit it’s big, but explain why that’s not impossible.
Nick Hanauer:
Well, it’s not impossible because it’s happened before, right? The neoliberal paradigm was created by a small group of people who were committed to the cause. As much as I hate neoliberalism today, it’s worth acknowledging that the people who created it created it in a context where it made a lot more sense. So that was the context within which the sort of Soviet and Chinese style authoritarian socialism was on the rise, which was distinctly worse than what we had. And they were, I think, appropriately worried about those paradigms taking over the world. And so not all of it was nefarious. Some of it was well-meaning. Like all things, the pendulum swung too far and the worst actors got ahold of it and weaponized it to their advantage. And this is not unprecedented in human history. This is just kind of often what happens. So there’s that. There’s precedent for these paradigms changing. And the other thing is that this paradigm is good for about 99% of the people on earth. Good for 100%.
Goldy:
It’s good for you, too, Nick, if it means that the people don’t rise up and murder you.
Nick Hanauer:
Exactly. But Goldy, even then, even if I wasn’t afraid of that, a world in which the median worker earned twice as much as they presently do, in other words, if the median worker had maintained their same share of GDP since about 1975, they would earn in a range of twice as much. Instead of about $60,000 a year, they would earn the range of $120,000 a year. If we had done that, our economy would be effectively twice as large, which means that all of my businesses would have twice as many customers. Or if not twice as many customers, customers who could buy twice as much stuff and the country would have effectively zero budget deficit because there would be so much more tax paid by everybody, by the way, both federally and locally. And we would have 1 jillionth of the political polarization that we currently have and none of the political craziness because everyone would feel like, “Well, I was kind of included in this.”
That’s all people wants. They just want a fair shot. They don’t expect everyone to be equal. They just want to feel like it’s moderately fair that, “If I work hard, play by the rules, I will get ahead.” And I don’t think that you’re likely to be able to build a society on planet earth that’s much better than that. I think that’s all people want.
Goldy:
Right. There will always be haters, Nick, but it’s hard to blame trans people and immigrants for all your problems when you don’t really have that many problems.
Nick Hanauer:
You don’t have that many problems. Right. Right. Yeah, you’re going to retire and your kids are doing fine and you can afford to send them to college and your healthcare is not going to bankrupt you and all the things. People are not unreasonable. They just want kind of the basics. And especially when they can see with their own eyes a small group of people doing nothing which appears to be very productive, living beyond the dreams of Avarice, which is the situation we find ourselves in.
Goldy:
Right. And let’s be clear, when you say that it’s happened before, paradigm shift, I mean, shifts happen and they happen pretty regularly and long-
Nick Hanauer:
Yeah, 50 to 100 years.
Goldy:
Right. Right. We had that shift in the 1970s. Before that, what neoliberalism replaced was the old Keynesian consensus that came out of the Great Depression and guided us through World War II and beyond. Before that was the old laissez-faire paradigm-
Nick Hanauer:
That both Roosevelts addressed, right? Teddy and FDR.
Goldy:
That’s right. And before that, I guess Mercantilism before… And so these things happen.
Nick Hanauer:
And for that, [inaudible 00:45:32].
Goldy:
Right. So these things happen. Shifts happen essentially. And what’s important about the past few shifts is that they came out of intellectual movements, very concerted efforts to change people’s minds about how markets worked best. And now we have all this science saying that the old paradigm is wrong and that what we’re calling market humanism is directionally much more scientific and-
Nick Hanauer:
That’s right. And Goldy, I mean, as you know, we’ve only been showing this paradigm to people for about 90 days or something like that, but the reaction from people has been absolutely incredible. Obviously it’s pretty technical, but for people for whom these sorts of ideas are mission-critical, they are flipping out, flipping out about this paradigm because it reframes everything. It just makes everything clearer and it makes doing the right thing see rational rather than irrational. So again, I just really encourage folks who are listening to this podcast to download all this stuff, take a look and then share it with everybody because that’s what it’s going to take to begin to push back on this orthodoxy.
Paul Constant:
Yeah. We’ll have links to The Atlantic piece, the Democracy piece, and the booklet in the show notes. Do you have a preferred reading order in that order? Maybe The Atlantic piece and then the Democracy piece and-
Nick Hanauer:
Yeah, I might read the Democracy piece first just because it’s all encompassing.
Paul Constant:
Okay.
Nick Hanauer:
It’s a big reading list. Sorry, folks. We’re weighing you down, but hey, if you don’t want to live in a authoritarian hellhole, it’s going to take work.
Paul Constant:
A little bit of reading is all. Yeah. Yeah.
Nick Hanauer:
Yeah. It’s going to take a little reading.
Goldy:
Okay. I want to take advantage of this very special situation, Nick, to ask you the final question. Why do you do this work?
Nick Hanauer:
That’s a good question. Yeah, I get asked that a lot as you can imagine. And the best answer I’ve been able to come up with is one-third is just empathy. I think I’m a reasonably empathetic person and I am happy when other people are happy. I’m not happy when other people are sad. Living in a world where most people are struggling is not the world I want to live in. There’s no reason for it. It’s unnecessary and bad and we shouldn’t do it. So there’s that.
A-third of it is that I just find this work unbelievably interesting and stimulating. It’s just a joy to work on these problems and to try to use your brain to figure them out. I mean, Goldy, I know you agree, right? Paul, you do too, right? It is such a privilege to get to work on this stuff and to think about it and to talk to people who are working on it and all that stuff. So it is fun.
And a-third is I think if I’m just self-reflective at all, I’m pathologically ambitious. I’ve always been ambitious. I never saw a problem I didn’t want to solve or a mountain I didn’t want to climb or whatever it is. And I just think that rewriting the operating, the system of the world ambitious, yeah, crazy. Like comically ambitious. But it’s just the kind of stuff I love to do and I’ve always liked to do. I’ve always wanted to start big companies and do crazy things. And so this is currently the outlet for my ambition.
Goldy:
Right. And Nick, I think something you and I really share is we both like being proven right.
Nick Hanauer:
Yes, we love to be right.
Paul Constant:
So I really liked where Nick landed at the end there when he referred to this as the operating system of the world, because I think that’s something I don’t think that we actually talked about something we say around the office a lot is that economics is the story of who gets what and why. And that’s the whole ballgame. That’s like the explanation of why we make what we do and why Nick makes what he does. And I think operating system is a relatively modern way of thinking about it, but it seems very clarifying to me in that it signifies both how it works, how this paradigm works, and also the size and scope of the challenge.
Goldy:
Right. We emphasize throughout that this is all of our claims are grounded in science. And one of the scientific claims, it’s clearly true, is that we are storytelling creatures. This is how we evolved. We understand the world and our place in it through the stories we tell. And if you understand economics as a story, as you said, a story we tell ourselves to justify who gets what and why, we begin to understand that we can interact with the economy differently, we can guide it, we can change it, we can choose different outcomes, not just different policies, but different outcomes if we tell ourselves a different story.
And that’s what that giant stupid textbook is. It’s a story you go through. And he tells little stories, make you tells little stories throughout it. It’s a story supported by graphs and charts that are grounded in absolutely fucking nothing. And I want to get to this because this is really important. I want people to understand this because I don’t think it was emphasized enough in this conversation how deeply rounded in science market humanism is. Not just psychology or anthropology, evolutionary science, but all the way down to physics. How many of the most influential thinkers that have guided the new economics, whatever it ends up being called and however its narrative is eventually formalized, how much has come out of just plain old physics, physicists, the complexity theorists, the information theorists. It is real hard science of which there is none in the old economics.
It is this fascinating thing that the old economics, neoclassical economics, its whole equilibrium system is modeled on the first law of thermodynamics, which is the conservation of energy. When one thing goes up, another thing must go down. It’s modeled on that. That is the metaphor that guides all of the old economics, Orthodox economics. And yet there’s no actual physics in it. It just adopts the metaphor and is totally unscientific after that. And it’s ironic because at the time the old economics was formulated, the second law of thermodynamics had not been discovered yet. And that is essentially entropy, that the universe is on this path towards the cold, dark, depth of the universe, that to do any sort of right work to create any sort of order, you need to use energy. And using energy, converting energy into order always creates waste, which ends up creating more disorder in the end.
And this is what life does. The organisms access energy to create order in our own bodies. This is what the economy does, what societies do. We access information, create order not just in our bodies to feed us, but in our physical world. None of that is in the old economics. It’s not mentioned at all. It’s not a part of it. And so you can’t ask economics to solve the climate crisis when it doesn’t acknowledge the central role of energy in extending our lives and creating high living standards because it doesn’t look to science at all. It’s just not scientific. It’s a bunch of theories and simplifying assumptions that have been created in order to satisfy that equilibrium model that they put together in the 1870s. And everything goes from that. If you go through and you read that Market Built for Humans books, you’ll see all the citations, you’ll see the science in there. It is scientific.
Paul Constant:
I would inherently mistrust anyone who came down and said, “I devise this system.” I like that Nick led by saying this is all out there and we organized it. Organized is an interesting word. I might have said synthesized, but yeah, it’s a tremendous amount of reading and thinking and arguing that has been going on behind the scenes for decades. And within our shop, especially within the last year, it was building up to this, on this podcast. And we’re very excited to have it out in the world and so that other people can join the conversation and argue and add and keep working on it. And so it’s a big moment. It’s a big moment for us.
Goldy:
And we’ll be obviously talking about this a lot more on the pod in the future.
Paul Constant:
Yes. And so you can start by reading the pieces in the show notes. We have a link to the booklet that Nick mentioned called Markets Built for Humans. And we also have links to the piece in The Atlantic titled The Economic Experiment that Upended Reality. And in the Democracy Journal, there’s a piece titled Market Humanism: A New Paradigm for a New Era.
Freddy:
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