The Secret Of Capitalism

The economic policies of the new era are on the basis of neoliberal economists which in turn is resulting in widened economic inequality between the classes of the society. 

This report is substantiated result from Viva-voce of Nick Hanauer, an American entrepreneur and venture capitalist who is in the top 1% of the American economy have observed the major problems along with providing the solution in accordance with his apparent knowledge.

This report will prove to be eye-opening for people diving into academic media, and popular debates. Many assumptions are refuted in an honorable manner which is argumentative but the real-time scenario discussed states otherwise.

The big question which is the result of the major dirty secret of capitalism may prove to be a surprising turn of events for neoliberal economic supporters.

On the ending note, we will be generating a new economic model which is yet to be incorporated and taught in the schools but is now an ever-demanding necessity. This model will comprise of the solution to fight the big question thereby giving rise to a new era with the dusk of opportunities and a new outlook.

What is Neo-liberalism?

Neoliberalism is an economic and political model designed to transfer economic and financial controls from the public to the private sector over economic factors. Many neoliberal policies improve the functioning of free-market capitalism and try to restrict public spending, regulation, and ownership.                                                                 

Neoliberalism has lost its analytical edge due to excessive use in academia, media, and public debates. It is a concept which, simply put, is used to refer to a distorted economic system where the free market is extended to every public and private issue. The government isn’t seen as public welfare initiators but rather as a driving force urging capitalism at every bit of the country.

The major problem this concept faces is that it lends out too much power in the hands of private players who are driven with nothing but a profit motive. The economists who believe in the idea of Neoliberals are often regarded as neoliberal economists. 

It is surprising to many people who aren’t from economic backgrounds or aren’t familiar with the jargon that neoliberalism is loosely based on the assumption of neoclassical economists assumption which existed before the Keynesian Paradigm shift. Many neoliberalism arguments are the derivation of neoclassical theories. The major ones being smaller government, free trade, etc.

The Big Question

The major question which follows is whether the dirty secret of capitalism is neoliberalism theories which in turn are reasons for widening economic inequality or not?

Well, I believe the readers possess supreme power. Hence, I will let you decide by putting up mere facts which are the viva voca of none other than Nick Hanauer, an American entrepreneur, and venture capitalist. 


Understanding the Problem

For better understanding, we have bifurcated the session into three neoliberal approaches or assumptions that proved to be wrong or wayward when observed in real-life scenarios.

Assumption 1:

Neoliberal assumption says that the increase in the wage rate will result in rising in the unemployment rate. This is because as the minimum wage rate increases, the businessman or the entrepreneur empty up their extra spaces, resulting in the country’s unemployment rate, thereby causing a lower standard of living, because of which economic growth slows down.        

Real-life Scenario 1

On the increase of wage rate, the purchasing power of the employees increases which in turn demands more resulting in higher demand leading to higher production activities. The higher production activities will thereby lead to increased prospects of employment causing a surge in the employment rate.

To better understand this let’s take an example,

When Nick Hanauer was in Seattle a norm was published with regard to increasing the minimum wage rate in the restaurant industry. It was expected that the equilibrium invented by neo-liberal economists will be disturbed and that the employment rate will take a deep plunge.  However, what happened, in reality, was the reverse: the employment rate rose. On careful examination, it was observed that when employees’ wages increased, they also began visiting the restaurants, thereby causing a surge in demand resulting in an urgent need for employing more workers.

Assumption 2:

Neoliberals believed that the price of something is directly proportional to its value in the market. 

Real-life Scenario 

For example:

If you are a CEO of the company paying yourself say, $5,00,000 and your employer’s poverty wages. Then does that mean you are worth $5,00,000? Absolutely not

People are not paid what they are actually worth. They are paid what they can negotiate. Their negotiation power is the only key. The decreasing share of wages in GDP is not because workers are not efficient, it is because the employer holds more power. But how is that employer hold more power?  

The rise in the population is an obvious answer. If you don’t want the job at the existing market prices, somebody else in greater need will and this idea is exploited by the employers causing a great disbalance in the economy.  

Assumption 3:

Neoliberals believed in what they called behavioral economics. They suggested that the self-interest of the rational and relentless self maximizing consumers will result in the economy prospering. They, if simply put, regarded consumers as human economicus which means that we all are greedy and it’s our greed that results in economic prosperity.             

They further indicated that the income inequality gap is efficient and lastly that the major motive of corporations is to enrich the shareholders. If any economy is not driven by greed, income inequality gap, and corporations aiming to increase shareholder income, economic growth will be slow.

According to the psychological study, it was concluded that humans are cooperative and intuitively moral creatures. It is their moral values that resulted in economic prosperity, not greed. The cooperation sidekick self-interest to prosper the economy can be understood with an example:

Cooperation implies that talented minds should be brought together for resolving human problems. Resolving a human problem by the invention of corporealities and services is called innovation. The more human power, the more will be innovation and the more demand for purchasing these innovations will result in economic prosperity. But we all know by the basic problem of economics that our wants are unlimited and hence our problems as well. Therefore, economic and social cooperation is a never-ending loop that gives rise to the modern economy.

The Major Problem

The major problem that stands before us knowing how conversely these theories are affecting us in today’s scenario is how we should leave this neoliberalism behind and build a more prosperous and more equitable society?

Solution Provided

Nick Hanauer suggested five rules of thumb to answer and actually reach the solution.

Rule 1: Successful economies are not jungles, but gardens. Markets should be tended as they are the greatest social technology ever invented for solving human problems and unconstrained by social norms or democratic regulations they create more problems than they solve such as climate change and the global financial crisis of 2008.

Rule 2: Inclusion creates economic growth. In contrast to neoliberalism which believed inclusion as the fancy luxury which can be afforded only when there is growth is both wrong and backward, new economic theory believes the inclusion of more people will result in economic growth.

Rule 3: The purpose of the corporation is not just to enrich shareholders but also the  enrichment of workers, customers, and the community alike 

Rule 4: Greed is not good as explained earlier.

Rule 5: Unlike the laws of physics, economic laws are applied by choice. 


Towards the end, we have the following major takeaways

  1. Neoliberalism is a peril to new economic scenarios and if not treated right will lead to widening economic inequality.
  2. Inclusion of higher wages will result in employment rather than unemployment as mentioned by neoliberal economists
  3. Widening inequality will be establishing faux economic growth as the richer tend to become richer and the poor tend to become poorer.
  4. Humans are morally intuitive beings and are driven by moral values rather than their self-interest.
  5. Innovation is the ultimate key to a modern well-established economy.
  6. The real-life scenarios have given rise to new economics which is now still to be incorporated into the textbook. However, the whole economic world revolves around it.

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