Aristotle: a successful society focuses on the middle class

Those who have too much of the goods of fortune, strength, wealth, friends, and the like, are neither willing nor able to submit to authority....On the other hand, the very poor, who are in the opposite extreme, are too degraded....Thus arises a city, not of freemen, but of masters and slaves, the one despising, the other envying; and nothing can be more fatal to friendship and good fellowship in states than this: for good fellowship springs from friendship; when men are at enmity with one another, they would rather not even share the same path. But a city ought to be composed, as far as possible, of equals and similars; and these are generally the middle classes.

....Thus it is manifest that 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, or at any rate than either singly; for the addition of the middle class turns the scale, and prevents either of the extremes from being dominant. Great then is the good fortune of a state in which the citizens have a moderate and sufficient property; for where some possess much, and the others nothing, there may arise an extreme democracy, or a pure oligarchy; or a tyranny may grow out of either extreme — either out of the most rampant democracy, or out of an oligarchy; but it is not so likely to arise out of the middle constitutions and those akin to them.

From Aristotle. Twenty-three hundred years ago Aristotle recognized this truth. Why do modern conservatives not understand it? A democracy and a successful economy both require a strong and economically healthy middle class. Greatly unequal income leads to a plutocracy, or as I have frequently written before, the Latin American model of society in which there are about ten percent very wealthy and 90 percent poor or struggling.

The absence of an effective progressive income tax system and a strong inheritance tax leads directly to the Latin American model of society. The Latin American model fails both as a democracy and as an economy. Politically it becomes a plutocracy in which society is ruled by the wealthy because most power is held by members of wealthy families.

An even greater problem is that a plutocracy with a small middle class has a great deal less total wealth to distribute. Consider the basic macroeconomic equation.

Total Demand = Consumption + investment + government expenditure.

Consumption is about 70%, investment is about 20% and government is the difference, about 10%.

Gross Domestic Product is the same as total consumption. Everything that is produced is consumed at some price. And the goal of producers is to have their goods consumed. Producers plan to produce the amount of goods and services which will be consumed, and so they look primarily at consumers when they plan to produce and invest what is needed to do so. That's 70% of the markets. The consumers reliably spend most of their income on consumption. They are the primary market producers plan to produce for.

Some producers produce investment goods to supply the producers who supply consumers. These investment goods add to total consumption, but the planners who spend those investment goods base their planning on anticipated consumption. Since consumption is 70%, much of investment is also based on anticipated on that 70% if consumption, with a factor built in for changes in anticipated consumption. That is, if consumption is expected to increase, investment will increase based on that anticipated increase in consumption. Unfortunately, if consumption is expected to decrease, then investment will also decrease. So investment spending is largely based on anticipated consumption spending.

Investors spend their money unpredictably, based on how they think they can get better returns in their investments. Those expenditures are too unpredictable to be planned for, so the consumption of investors does not guide other investments. It is not part of the consumption that investors use to guide how they spend money. The key point is that only the 70% of GDP that is consumption predicts future expenditure, and that prediction of future expenditure is the key to how well the economy will function. Assuming constant government expenditure, if investors withhold investment, the economy will drop. If they increase investment, then the economy will increase.

Consumers are mostly the middle class. The poor are too poor to spend much. The middle class still spend most of their income on consumption items, but they can spend on education, health-care and business training. The more well-off consumers will also save money and invest it, but only the more well-off middle class will do so. They don't have that much investment money to spend.

The wealthy are investors. They don't have to spend most of their income to survive. Instead they spend what they need and want to spend as consumption, then invest the remainder to add to future income.


[h/t to Kevin Drum as he riffs off of Andrew Sullivan's sudden revelation. ]