Back in 2019, entrepreneur Nick Hanauer gave a Ted Talk called “The Dirty Secret of Capitalism – And a New Way Forward.” Recently, a quote from the talk (which starts at the 14:53 mark of the linked video) has been making its way around 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 unchangeable natural law, but in fact it is social norms based on pseudoscience.  If we want a new economics, all we have to do is choose it.”

This statement by Hanauer is confused.  He conflates three very different things: 1) economic laws, 2) economic theory, and 3) social norms.  Theories are distinct from laws.  Different theories can use the same laws to arrive at different outcomes.  For example, both socialist and liberal economic theory accept the validity of the Law of Demand (which he bizarrely calls “equilibrium” at the 4:30 mark), but the theories contain different assumptions.  Economic laws derive from the problem of scarcity, just like many physical laws derive from conditions of the physical world.  We can no more choose to do away with scarcity than we can choose to do away with gravity.

Then, he dismisses what he calls “neoliberal economic theory” as “social norms based on pseudoscience.”  But all science is, to some extent, based on social norms.  Science is a process done by humans who exist within larger professional and societal institutional frameworks.  Those, in turn, all have their own societal norms which influence behavior.

In the video he is trying to argue that “neoliberal economic theory” is attempting to impose social norms onto a group.  Perhaps, but again, any theory that becomes policy is doing the same thing.  COVID-19 policy, for example, attempted to impose many social norms onto groups including (but not limited do) constant masking, social distancing, and following technocratic advice without question.  So, it’s not clear why he thinks “neoliberal economic theory” is any different.  To the extent that “neoliberal economic theory” is a theory, then it is not attempting to impose social norms onto a group, but rather explain what is; social norms are generally taken as given.

There is a lot to criticize in Hanauer’s talk. The talk is very confused and he makes very basic mistakes.  But I want to end with praise.  In one of the few items he gets conceptually correct, Hanauer criticizes modern economic theory’s over-reliance on utility maximization.  Classical liberal economics, from Adam Smith in 1776 through Friedrich Hayek, James Buchanan, Deirdre McCloskey, and my teachers at GMU have been arguing against strict utility maximizing and more “sympathetic” behavioral explanations of human behavior.  One of the virtues of free market economics is that it treats people as people rather than mindless utility maximizers who simply respond predictably and unerringly to incentives.  I agree with Hanauer that economics should refocus along virtuous behavior and social behaviors.  But that means embracing liberal economics and capitalism, not rejecting it.

 

Jon Murphy received his PhD in economics from George Mason University and is an Instructor at Western Carolina University.