Around the globe the size of the middle class is diminishing and with it societies are becoming more unequal. The Greek philosopher, Aristotle, 2,400 years ago summarising his analysis of the Greek city states pointed out that democracy depended on the size of a country’s middle class. With a proportionately bigger middle class a democracy tends to work well as it promotes social mobility, encourages aggregate demand which in turn leads to economic growth. Notice in the graph below how the Scandinavian countries have higher social mobility compared to the other extreme of the US and the UK.
Aristotle warned that when inequality – see graph below – reaches a certain point it becomes very damaging to society. He refers to the importance of the middle class in his book Politics:
The best constitution is one controlled by a numerous middle class which stands between the rich and the poor. For those who possess the goods of fortune in moderation find it “easiest to obey the rule of reason” (Politics IV.11.1295b4–6). They are accordingly less apt than the rich or poor to act unjustly toward their fellow citizens.
A constitution based on the middle class is the mean between the extremes of oligarchy (rule by the rich) and democracy (rule by the poor). “That the middle [constitution] is best is evident, for it is the freest from faction: where the middle class is numerous, there least occur factions and divisions among citizens” (IV.11.1296a7–9). The middle constitution is therefore both more stable and more just than oligarchy and democracy.
“The best political community is formed by citizens of the middle class, and that those states are likely to be well-administered in which the middle class is large, and stronger if possible than both the other classes . . . ; for the addition of the middle class turns the scale, and prevents either of the extremes from being dominant.”
Heather Boushey in her book ‘Unbound’ argues that inequality subverts growth and democracy in three ways:
- Inequality creates barriers to the supply of talent, innovation and finance as wealthy families monopolise educational and workplace opportunities. This is done by the cost of education and the influence of social networks.
- It overturns private competition and public investment as powerful corporations force out competitors and suppress wages. Also the government underfund public goods which are essential for social mobility.
- Lower wages reduce consumer demand and lead to less buying power which in turn encourages more borrowing and pushes the economy toward financial instability.