Some say that capitalism leads to a greater gap between the rich and the poor, but the middle class didn’t exist before this system. The reason for this was discovered by the classical economist David Ricardo (1772-1823).
Competition Makes People More Equal
Ricardo saw that no matter what industry he looked at, companies made about the same amount of money. He thought the factories would make more money than agriculture (farming) because lots of workers were leaving farms to work in the cities. But the factory owners earned about the same as landowners. Then, one day he realized the landowners were selling their farms and going to the cities to start factories.
When the first factories were made, the profits were higher than in farming. Many farmers who could afford it went to the cities to start factories to make more money. This made factory owners to compete with each other. They had to sell things cheaper, and so they made less money.
Since so many people had moved to the city, there were fewer farmers left. The farmers who stayed had less competition and could charge more for the food they grew.
Ricardo realized this was true in all markets. This kind of competition resulted in a race to the middle. This is how the middle class was made.
Why the Differences?
If competition creates a race to the middle, why are there still poor and rich people? If we all had the same abilities and interests, there would be no differences. Today, pro-basketball players earn a lot more than, say, janitors. In a clone world, the janitors could become just as good at basketball as the top players. They would switch jobs to earn more money. This would create competition and drive down the basketball players’ salaries until they earned the same as janitors.
But we are not all identical. Being a janitor is a valuable job, but it is one that almost everyone can do. Therefore, their salaries (money they make for working) will be lower.
Competition works to make us all more equal, but since all people are unique in so many ways, there will always be economic differences.