Nick Hanauer is a founder of Second Ave Partners in Seattle. Courtesy of Nick Hanauer

Samantha Lee/Business Insider

Nick Hanauer is a wealthy, Seattle-based venture capitalist and progressive political activist.

He credits today's massive inequality in the United States to four decades of neoliberal ideas, with the notion of shareholder value maximization at the forefront.

He believes that true value is created when companies invest in their workers and products.

This article is part of Business Insider's ongoing series on Better Capitalism.

The pushback against shareholder value maximization, the idea that public companies primarily exist to serve shareholders, has been part of the business world for years. But for Nick Hanauer, an influential Seattle-based investor and activist, it's time average Americans get in on the debate.

In an episode of his podcast "Pitchfork Economics," Hanauer called shareholder value maximization "the world's dumbest idea," a reference to a line from former General Electric CEO Jack Welch.

Hanauer said that "it's super important for people to recognize that, so that when they see that policies ask corporations and rich people to pay more in taxes or more of their fair share," they won't believe the arguments that such policies will "crush the economy."

Hanauer is a proud capitalist and isn't ashamed of his wealth (he was an early Amazon investor and sold his company to Microsoft in 2007 for $6.4 billion), but he thinks that today's capitalism is warped by four decades of bad policy - and shareholder primacy is at the top of the list.

Economist and Nobel laureate Milton Friedman, a key figure of the Chicago School of economics, wrote in 1962 that in a free economy, "there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud." That idea, which was radical for the time, did not catch on until the late 1970s (when Ronald Reagan became president in 1981, he brought Friedman on as an economic adviser).

Shareholder primacy went from theory to dogma, and it was assumed that if a corporation did everything it could to pursue profits, all other stakeholders would benefit. It's the same basic principle behind trickle-down economics.

As another Nobel Prize-winning economist, Joseph Stiglitz, told Business Insider, the reign of this ideology also saw complementary changes to securities and tax laws, including relaxed antitrust laws. CEO's salaries also became increasingly tied to stock performance, and that's how the average ratio of CEO-to-median-level-employee pay went from 20-to-1 in 1965 to 295-to-1 today.

Read more: The economist Joseph Stiglitz explains why he thinks the late Milton Friedman's ideas have contributed to rising inequality in the US

As Hanauer put it on his podcast, referring to the neoliberal theories that rely on the theory of a free market: "It is this magical neoliberal principle that if you just do that, the markets will be very efficient and more prosperity would be generated for all, and so on and so forth. And that idea was adopted in a very widespread way, both because no one offered a really compelling counter theory, but being honest, if you are an executive or a shareholder, the idea that you are serving the public interest by narrowly serving your own self interest is extremely appealing. Who wouldn't want to believe that!"

Hanauer pointed to rising profits and stagnant wages over the last 40 years as proof of both policy failure and a toxic interpretation of a public company's purpose. It's why he's been an active supporter of the fight for minimum wage increases to $15 around the country.

Last year, S&P 500 companies spent $910 billion of profits on stock buybacks to reduce the number of existing shares and drive up price, and Goldman Sachs projects a similar number for 2019. Hanauer is a proponent of 2020 presidential candidate Sen. Cory Booker's Worker Dividend Act, which would force public companies to invest in their employees with each stock buyback.

In a separate interview, he told us that he was open to significantly larger taxes on the wealthy, as proposed by other presidential candidates like Sen. Elizabeth Warren and Sen. Bernie Sanders. To him, the way to revere the lasting effects of a destabilizing inequality in America would be to let go of the ideas we've taken for granted for far too long.

"One of the anchor claims of trickle-down economics and neoliberalism is this idea that the more profitable corporations are, the more jobs that will be created and the better off everyone else will be, and the more investment that's created, and there's this sort of enduring idea that the lower taxes are on corporations, the more money they will invest and make everyone better off," he said on his podcast. "And all of that turns out to be bulls---. Just a straight up lie."

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