Editor's Note: The Disappearing Middle

Nick Hanauer takes on classical economics and the income gap.

Nick Hanauer, an early investor in Amazon, is a venture capitalist who has launched or funded more than 30 companies. He is also a social activist who played a role in promoting Seattle’s adoption of a $15 minimum wage. When he recently spoke at Seattle’s Museum of History & Industry about the economics of innovation and social change, people listened.

The ideas aren’t all new. He introduced some of them in a 2012 TED talk that has received 1.2 million  views and expounded on them later in an article for The Atlantic he co-wrote with Eric Liu on what they call “middle-out economics.” 

The term comes from Liu and Hanauer’s argument that a robust economy requires less concentration of wealth among the top one percent and greater income among the middle class. It draws heavily from what has come to be known as “innovation economics.”

Unlike classical economics, which focuses on the role of the invisible hand to set prices in ways that make the most efficient use of scarce resources such as capital, innovation economics focuses on the role of innovation and entrepreneurship in driving economic growth.

Hanauer argues that the true scarcity today lies not in capital, which is so abundant interest rates are reaching record lows, but in ideas. And the economy is strongest not when price and wage competition drive down prices and income, but rather when people create innovations like antibiotics and indoor plumbing that solve important problems. The economy, he argues, is a “complex adaptive ecosystem” in which there is a virtuous cycle between entrepreneurs who offer new solutions to problems and consumers who select the solutions — that is, products and services — they like best.

A healthy economy is one in which there is a large middle class wealthy enough to take the risks involved in starting new businesses and also to buy the products and services produced by those businesses. Inclusion is important because a resilient economy requires “the participation of as many people as possible as innovators, entrepreneurs, workers and consumers.”

While Hanauer’s focus has been on ways to reduce wealth inequality and promote inclusion, innovation economics also looks at other elements of the equation, such as how companies and governments can improve the innovation economy. At a national level, this means renewing the focus on research and development, rebuilding poor infrastructure and fostering policies that encourage local manufacturing. For companies, it means developing cultures that encourage creativity and risk taking.

Our city and state governments must also do their part. In a recent study by the U.S. Chamber of Commerce, Seattle ranked a poor 11th of 25 cities in its ability to support and encourage entrepreneurship. Our region needs to do a better job of encouraging innovation while also addressing the dislocation that comes with disruption. Our schools, nonprofits and government agencies must work together to strengthen the ability to respond to such disruption by training workers to take on the new jobs that are created in our new economy. We need to find creative ways to bridge the huge divide between the surplus capital slushing around the world and the shortage of capital that still exists in the startup world.

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