In 2019, entrepreneur Nick Hanauer gave a TED talk called “Capitalism’s Dirty Secrets – and New Ways Forward”. Recently, an excerpt from the talk (which starts at the 14:53 mark of the linked video) has been doing the rounds on social media. Hanauer says:
“Unlike the laws of physics, the laws of economics are a choice. Neoliberal economic theory has sold itself to you as an immutable natural law, but in fact it is a social law based on pseudoscience. If we want a new economy, all we have to do is choose it. “
This statement by Hanauer is confused. He combines three different things: 1) economic law, 2) economic theory and 3) social norms. Theories are different from laws. Different theories can use the same law to reach different results. For example, both socialist and liberal economic theories recognize the validity of the law of demand (which he oddly calls “equilibrium” at the 4:30 mark), but the theories have different assumptions. Economic laws arise from problems of scarcity, just as many physical laws arise from conditions in the physical world. We cannot choose to eliminate scarcity any more than we can eliminate gravity.
Then, he dismisses what he calls “neoliberal economic theory” as “social norms based on pseudoscience.” But all science is based to some extent on social norms. Science is a process carried out by people who exist within a larger professional and social institutional framework. These, in turn, all have their own social norms that influence behavior.
In the video he tries to argue that “neoliberal economic theory” is trying impose Social norms in a group. Perhaps, but again, any theory that becomes policy is doing the same thing. For example, the COVID-19 policy sought to impose a number of social norms on groups, including (but not limited to) constant masking, social distancing, and following technical advice without question. So, it is not clear why he thinks “neoliberal economic theory” is different. To the extent that “neoliberal economic theory” is a theory, then it is not trying to impose social norms on a group, but rather explains what it is; Social norms are generally taken as givens.
There are many criticisms of the Hanau talks. The talk is very confusing and he makes very basic mistakes. But I want to end with praise. In one of the few items he got conceptually right, Hanauer criticized modern economic theory’s overreliance on utility maximization. Classical liberal economics, from Adam Smith in 1776 through Friedrich Hayek, James Buchanan, Deirdre McCloskey, and my teachers at GMU, argues against strict utility maximization and more “empathetic” behavioral explanations of human behavior. One of the virtues of a free market economy is the way it treats people people than irrational utility maximizers who respond predictably and irrationally to incentives. I agree with Hanauer that economics should refocus with ethical behavior and social behavior. But that means embracing, not rejecting, liberal economics and capitalism.
John Murphy received his PhD in economics from George Mason University and is an instructor at Western Carolina University.