NEW YORK ¨C Free-market capitalism is a success because it does the most efficient possible job of allocating a society¡¯s resources, or so goes the prevailing logic. But what if capitalism¡¯s true value lies elsewhere? What if its most important attribute is actually inefficiency?
That¡¯s the provocative and surprisingly compelling argument recently put forth by venture capitalist Nick Hanauer and economist Eric Beinhocker of the Institute for New Economic Thinking. If they¡¯re right, rising socioeconomic inequality may represent a threat to the creative engine of capitalism itself.
Much of modern economics rests on the notion that price is the best measure of worth. Economists decided half a century ago that the value of something is best reflected in the marketplace: How much is someone willing to pay for it? Accept this way of thinking, and it¡¯s natural to take gross domestic product, measured in dollars, as the best indicator of a society¡¯s wealth and prosperity ¡ª perhaps with some adjustments to account for more subtle things such as human well-being.
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