Can innovation save capitalism?

Self proclaimed ‘zillionaire’ Nick Hanauer says capitalism is in big trouble. The US tech entrepreneur says that wealthy people like him need to rethink the way the world works – to save capitalism from itself.

He was speaking via video link from Seattle at the InnovationAus.com Civic Nation forum. “I have made a lot of money out of the tech industry,” he said. “And I have created this wealth by predicting future trends.”

And one of the biggest trends in the modern world, he says, is that capitalism is in trouble. He didn’t quite invoke Karl Marx, who said that capitalism contains the seeds of its own destruction, but he was not far off.

“Capitalism is reverting to feudalism,” he told the Civic Nation audience. “The wealthiest people need to wake up to this. In its current form, capitalism can’t last.

“People need to realise the difference between creating and appropriating wealth. We have to redefine what prosperity means. GDP is an inadequate measure – it can increase but with the wealth directed to just a small percentage of the population. That is what is happening now.”

Mr Hanauer is well known in the US venture capital community. He was an early investor in Amazon and is an outspoken proponent for greater equality in the economic system.

His comments came in the form of answers to questions put to him at the forum by Andrew Charlton, co-founder of AlphaBeta and author of ‘Fair Trade for All’ and other books on society in economics. He was also author of Data61’s Digital Innovation report.

Dr Charlton’s interview-with Mr Hanauer was a keynote session titled ‘Redefining Capitalism in the New Economy’. Dr Charlton set the scene by mentioning examples of the populist wave sweeping the world, and the ways capitalism is under threat in the post-truth era.

“Donald Trump says the system is rigged against capitalism. Democrat Bernie Sanders also says the system is rigged but that it is capitalism that is evil. In Britain the alternative prime minister, Jeremy Corbyn, is an avowed socialist.

“There are increasing worries about inequality in Australia and faith in capitalism is declining. Why are people losing faith in capitalism?” Dr Charlton asked of Mr Hanauer.

“It comes down to the basic rules, the ideas and explanations we use to frame our understanding. We need to start with the bad ideas in orthodox neoclassical economics.”

“They are based on the assumption that homo economicus is a rational being. If you assume that is true, then you assume that selfishness is the cause of prosperity, and that enriching corporations is what enriches societies, said Mr Hanauer.

“Our narratives, our ideology, and our policy frameworks, are based on this philosophy. But it is a corrosive thought. We need to go back to basics and redefine a few things. Prosperity should be defined as the accumulation of solutions to human problems, not the accumulation of wealth.

“We need to ask ourselves whether we are solving problems or creating them. Someone curing cancer is creating more wealth than somebody trading in derivatives and bankrupting other people or even whole countries. They are not creating wealth – they are appropriating it and actually destroying value.”

The solution, says Mr Hanauer, involves policies that may be uncomfortable to the wealthy, such as increasing the minimum wage or increasing taxes on rich people. “It’s all about a more inclusive society. History shows us that inclusive society is a more successful than those that are not.

“We know with scientific certainty that it is moral behaviour and the sharing the fruits of success that creates real prosperity in human society,” he said

“Humans can be selfish, but it is not selfishness that defines homo sapiens. It is reciprocal rights. It is a lie to say that it is the role of capitalism to make corporations wealthier. It should be to make society wealthier.

“But we can’t think of this in the abstract. It is very complex. It is impossible to create wealth without cooperation. Look at the large numbers of people in super complex organisations.

“Ultimately it’s all about trust and justice. Successful societies are fair societies that generate trust and prosperity. There are simply no counter-example in human history. And inclusion is how you create justice.

“That is why capitalism works so well, because it can be very inclusive – buyers interacting with sellers. Any policy that improves inclusiveness will work. It is a flywheel effect. The test for any policy should be the degree to which it improves inclusiveness.”

What did his fellow rich entrepreneurs think of his thesis? “Many of them were antagonised and angry,” said Mr Hanauer. “They saw it as an attack on their lifestyle and themselves. But I meant it as a warning.

“They need to change, and they need to continue to change. They needn’t feel they did anything wrong – they didn’t create the inequity, but they are part of the system. They need to work to improve that system.”

“Now many very wealthy people acknowledge that there is a growing problem. The big question is what to do about it. It may involve some uncomfortable answers,” he said.

“It means raising wages, educating people better, building better infrastructure. These all drive justice and prosperity.”

“A lot of this new wealth is not really new. It is the result of a zero sum game. In many cases it is not wealth creation, it is wealth appropriation. It is taking advantage of the system. This is not necessarily the fault of capitalism, but how we are organised.”

Mr Hanauer has set out his thoughts in his book ‘The True Patriot’, and in many talks and articles. He says that the population will come for the wealthy class with pitchforks society and the economy is not reformed.

In 2012 he achieved some notoriety when the TED Talks organisation censored one of his talks because it was ‘too partisan’ – as if other TED talks were not. As often happens with attempted censorship, that simply gave his comments more prominence.