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 — perhaps with some adjustments to account for more subtle things such as human well-being.
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