- Dollars and Cents: How Money is Made – Lesson
- Supply and Demand: It’s Basic Economics – Lesson
- What Is Credit and How Is It Used? – Lesson
- What is Interest? – Lesson
- Taxation: What is it? – Lesson
- What is GDP? – Lesson
- The Supply Chain Crisis – What Is It? – Lesson
- The Supply Chain Crisis – What Is It? – Quiz
The U.S. Monetary System
Cycles of the Economy
All About Investing
The Future of Money
Capitalism: Making People More Equal – Lesson
As the competition in any industry changes, so do profits.
Some say that capitalism leads to a greater gap between the rich and the poor, but the middle class didn’t exist before capitalism. 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 expected the urban industries to be more profitable than agriculture because workers were leaving farms to work in factories in the cities. Yet, it turned out that factory owners earned the same as landowners. One day he had a brilliant observation: The landowners were leaving, too. They sold their farms and went to the cities to start factories and make a better profit.
When the first factories were started, the profits were higher than in farming. Those who had money went to the cities to start factories and 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 the food. This resulted in less competition between farmers, and the ones who remained could charge a higher price and earn more 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 that 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 was made.
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, pro-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 and drive down basketball players’ salaries until they earned the same money as janitors.
But we are not all identical. Being a janitor is a valuable job, but it is also something that almost everyone can do. Therefore, salaries for that job are lower. Competition still works to make us all more equal, but since all people are unique in so many ways, there will always be economic differences.