Some say that capitalism leads to a greater gap between the rich and the poor, but the middle class didn’t exist before this economic system. Around the world, people who live in socialist countries are not more equal than those who reside in capitalist ones. The reason for this was discovered by the classical economist David Ricardo (1772-1823).
Competition Makes People More Equal
Ricardo noted that no matter what market he investigated, companies had roughly the same profit. He found this very curious. He expected the industrial sector to be far more profitable than agriculture, because workers were leaving farms to work in factories in the cities, and yet the factory owners earned the same as landowners. Then he had a brilliant idea: It wasn’t just the workers who were leaving the farms. Landowners were leaving, too. They sold their farms and went to the cities to start factories to make a better profit.
When the first factories were begun, the profits were higher than those in farming. People with plenty of money went to the cities to start factories and take part in the higher gain. This resulted in competition between the factory owners. They had to sell their products cheaper, and therefore they made less money. At the same time, when landowners sold their properties, fewer farmers were left to produce food. This resulted in less competition between farmers, and therefore, the remaining farmers could charge a higher price and earn a larger profit. This migration of workers and capitalists from a less profitable market to a more profitable one continued until people earned about the same in both.
Ricardo realized this was true not just in farming and industry, but in all markets. This resulted in a race to the middle. Competition makes people more equal. That’s how the middle class came into existence.
Why the Differences?
If competition creates a race to the middle, why are there still poor and rich people? If we were all identical clones with the same abilities and interests, there would be no differences. Today, professional basketball players earn a lot more than, say, janitors. In a clone world, the janitors could become just as good at playing sports as anyone else. They would switch professions to earn more money. This would create competition to drive down the basketball players’ salaries until they would all earn the same.
But we are not all identical. Very few people can become the best in their fields, and even fewer have the interest needed and the will to work as hard as it takes to be the best. Being a janitor is a valuable job, but it is also something that almost everyone can do. Therefore, salaries in that profession are lower.
Competition works to make us more equal, but since all people are unique in so many ways, there will always be economic differences. No political or economic system can make these go away — not even capitalism.