The Nature of the Middle Class and why its Growth is Important for Business and Economic Development
Introduction
Many explanations have been offered for the differences between states concerning their economic development. Some sources attribute these differences to saving rates while others attribute it to national policies. These explanations still leave gaps, as there are no explanations as to why some states save more than others do and why some governments have worse policies as compared to others. In order to fill these gaps, literature now concentrates on the characteristics of societies and states that determine economic development.
This paper argues that the growth of the middle class which will be discussed in terms of middle class consensus is a crucial determinant of the business and economic growth. The growth of the middle class in this context refers to a situation where the middle class has a greater share of income implying a reduction in class differences as well as ethnic differences. This paper links the characteristics of the middle class and their growth so as to determine the effect on business and the economic growth.
According to economists, the middle class is very significant for the development of any economy (Decornez 1998). They argue that the prospering economies are those, where the wealth flows to this particular social class. According to Landes (1998), the ideal growth and development society is one that has a comparatively large middle class. According to this author, England became the first industrialised nation because of its middle class. Findings also indicate that economic development is greater in systems whose middle as well as the working classes have a greater portion of the wealth. The notion of bottom up is therefore very crucial for the prosperity of a certain country.
It is argued that the middle class was the driving force in the economic growth of the Western Europe (Adelman Morris 1967). According to these authors, studies on the economic growth of various countries indicate that the growth of a middle class that is robust remains critical particularly in the currently low-income nations. India is one of the examples of states that have experienced business as well as the economic development due to liberalisation of the economy as a result of the growth of the middle class. The research shows that since 1980, when the countrys middle class began to grow (up to 250 million people), it has experienced an increase in economic rates (Sridharan 2004). The growth rate of the Indias annual GDP is averaged to be more than 5 percent compared to the previous 3 percent prior to 1980 (Sridharan 2004). Other sectors that have experienced growth due to the growth of the middle class in India include agriculture and industry which have grown at annual rates of 3.3 and 6.6 respectively. The country has also experienced a high rate of investment which soared to 25 of GDP in the early 1980s from 19 of the early 1970s (Sridharan 2004). Based on this example, it is clear that inequality is related to growth and that a more robust middle class is absolutely related to economic development.
Theoretical Background
Most theoretical literature addresses the middle class in capitalist societies. Most literature takes the Marxist approach when discussing this social class. When taking the Marxian approach, class is defined with respect to who owns the means of production (Greenberg 1998). So who belongs to the middle class The main classes in the capitalist societies are capitalists (who own the means of production) workers (whop sell their labour to the capitalists in exchange for wages) (Sridharan2004). In the Marxian scheme, the only other important class apart from the capitalists and the peasants is the bourgeoisie, which is a stratum that is in the middle of the two main classes and consisted mainly of small proprietors such as shopkeepers, small manufacturers and independent artisans (Sridharan 2004).
This approach is however not appropriate in analysing contemporary societies and particularly in the developing world where capitalism depends on the establishment of a regulatory state apparatus, and on science and technology (Sridharan 2004). This has resulted to development of a social stratum that is the intermediate between the capitalists and the peasants in white collar professions who are either salaried or self employed and which is characterised by rising levels of education (Urry 1973). The income of this class falls between those of manual workers (peasants) and capitalists. In addition to forming a large portion of capitalist societies population, the middle classes have a propensity of producing intellectuals as well as politicians. They therefore play a crucial role politically and ideologically (Sridharan 2004). The importance of this social class has also increasingly grown as global economies shift towards the services sector.
Theoretical literature also relates an inconsiderable middle class to the low economic growth and the human capital accumulation. Gailor Zeira (1993), hypothesize that the poor who are economically disadvantaged are liquidity constrained from accruing human capital. They argue that higher inequality in the society, that is a small middle class, implies that a large portion of the population will be liquidity constrained consequently therefore causing the society as a whole to accumulate less human capital which is detrimental to growth. Authors such as (Alesina Rodrick 1994) associate high inequality in the society to low growth by arguing that a poor majority will impose a high tax on the few rich. High inequality also increases chances of political instability which destroys an environment that is conducive for business development hence reduces economic growth (Perotti 1996).
High inequality which characterises capitalism has generated politically the powerful elite who are parasitically seeking to drain all they can from the masses just for themselves. According to a study carried out by Engerman Sokoloff (2000), the elites in Latin America feared to invest in public goods such as mass education for fear of being displaced by educated lower classes from power hence the slow rate of the economic growth in the region as compared to its North American counterparts. Studies show that societies that are more diverse (ethnically or religiously) experience lower growth than those societies with ethnic homogeneity. Homogeneity raises trust or rather social capital which is characterised by faster growth as well as higher output per individual. Middle class consensus is a way of enhancing equality and homogeneity which fosters higher levels of growth, income and public goods (Partridge 2005). The growth of the middle class is therefore very crucial to the growth of business and economy. In most economies, the emergence and growth of the middle class has broadened the base for capitalism increasing support for economic liberalization ultimately increasing the business as well as economic development.
The Nature of the Middle Class
The middle class consists of two sub-groups the upper middle class and the lower middle class. The upper middle class consists of professions who are distinguished from those of the other sub-group by attainment of exceptionally high education and a high economic security. The lower middle class on the other hand is made up of semi-professionals (Sridharan 2004). This group is characterised by a lower educational achievement, lower income and reduced workplace autonomy as compared to the upper middle class.
It is clear from the above definition that education and income are the main determinants of a social class status. The educational attainment symbolises expertise which is one of the key constituents of the capitalistic market system. Ownership of education is perceived to be the ownership of one of the dynamics of production. The middle class and particularly the upper middle class is distinguished by attainment of exceptionally high education which they use to derive career, income and, lifestyle opportunities as well as expectations (Trends 2007). In most developed countries such as the United States and the United Kingdom, approximately half of all upper middle class householders hold baccalaureate degrees or more and at least one in every five holds a graduate degree (Trends 2007).
The attainment of high educational levels among the middle class fuels social and economic aspirations in these individuals both for themselves and their children (Trends 2007). As such, the middle class engage in economic activities that will help increase their status and general way of life. They also have the educational aspirations for their children so that college is almost the only option after the high school education. In doing so, the middle class increases the number of experts in an economy which fuels business as well as the economic growth. The desire to engage in income generating activities also increases business as well as the economic development. Increasing the size of the middle class in different countries is therefore one sure way of developing business and the economy as a whole.
The middle class households are also characterised by both partners having a source of income. The implications are that such families are able to afford to satisfy the basic needs and even save money for investment in other development projects. A large middle class in a system implies growth in business as in addition to availability of expertise to produce goods and services, there also is a large market for these goods as there are many people with the ability to purchase them.
Other characteristics of the middle class that distinguishes them from other social classes include their view on various things such as money which they believe should be managed. Where time is concerned, they regard the future to be most important and make decisions based on future consequences. Their language is mostly about negotiations whole their social emphasis is on self-sufficiency and governance. They view the world in terms of the national setting and are driven by work and achievement. Off all the classes, the middle class is the most hardworking. They also are the highest spenders. According to Trends (2007), many middle class families do not often save and usually end up borrowing heavily so as to finance their spending.
The characteristics of the middle class can be summarized into three entrepreneurship in the economic as well as commercial activities, activism as well as participation in politics, and unobstructed mobility in both of these areas. However, the most significant characteristic of the middle class is its autonomy and independence from the state, a key feature of capitalism.
Why the Growth the Middle Class is Important for Business and Economic Development
The middle class plays two important roles in the society. One is that it lays the bedrock for market-based economy that is vibrant (Forbes 2000). The middle class can be viewed as a natural resource which can be utilised to develop the economy. In the western societies, the development of the middle class has created the employment characterised by rising wages, education with access increased on all levels and ownership of property such as homes, businesses and other assets (Forbes 2000). It is these elements that make the middle class valuable to business and economic development.
All the three elements require an access to the credit markets. The ability to have access to, secure and use long term credit that is reasonably priced is essential to ownership of home mainly through mortgages, to starting of small businesses through business loans and for post high-school education by providing student loans. In as much as all these three areas reveal the key features of a middle class as well as indicators of the state of this class, they are restricted to credit which depends on the establishment as well as regulation of a banking sector that is modern.
The second role of the middle class is that it serves as the foundation for political stability within the society (Barro 1996). Growth of the middle class reduces inequality in the society. It reduces violence aimed at minority ethnicities or by these groups. Various studies have shown that powerful elites holding governmental positions usually are reluctant to invest in public goods and services such as mass education for fear of being replaced by those groups they regard minor. A large middle class however ensures that public services are available to the masses and that no group is discriminated against (Barro 1996). This is attributed to their tenancy to participate in politics and activism. Most political leaders also often seek to meet the needs of the middle class as they are perceived to be the majority and their needs representative of those of the society as a whole. The growth of this class reduces cases of the civil wars and other forms of the political instability which are also not conducive for economic growth particularly through trade and business.
The growth of the middle class increases the homogeneity within a society which in turn increases democracy (Barro 1996). This eliminates chances of one social class particularly the rich from suppressing the democratic rights of other classes in fear of the threat posed by human capital accretion those classes would vote for themselves and replace them. A large middle class that is homogenous however has got nothing to lose in democracy has hence is more likely to allow universal suffrage. Once established, the middle class rather than some small ruling classelite generally represents the interests and welfare of the society as a whole. It is this advocacy role of this class that ramparts political as well as economic reforms, and confronts political demagogues and any economic oligarchs (Barro 1996).
When the middle class is serving in the civil society, it allows various advantageous aspects such as free press and ultimately a responsible political opposition that checks on the serving government. This increases political stability of a society and increases investor confidence consequently resulting to growth of business and growth in economic development.
It can therefore be argued that the growth of the middle class initiates the development of the capital market as they need to have an access to credits. The connection between such an access to the capital as well as credit and the general stability that is associated with this class, its growth has a positive impact on business, economic growth, modernisation, poverty reduction and expansion of capital markets in the society.
The positive effects of the growth of the middle class is evident in several countries, such as Mexico, Brazil and a number of Asian countries particularly India in which governments have seen the value of investing in this class of people by increasing accessibility to capital through strategies such micro-lending and mini-lending. The sole purpose of these strategies is to increase the size of the middle class in these societies by engaging more people in business activities which help reduce levels of poverty and increase rates of economic development. Study carried out in India reveals that the country has experienced an economic growth since 1980 when the size of its middle class started to increase. The growth is being experienced in various sectors (industry, trade, agriculture and investment) (Sridharan 2004). A study carried on the effect of income distribution on the United States state economic growth by Partridge (2005), also reveals that states which have a stronger middle class have a higher growth rate than those with a weak and smaller one. This study found that the middle class has a strong influence on per capita income. The activities of this class increases per capita income hence economic growth. The income share of the middle class also has a positive effect on infrastructure which is inherent to business. It increases access to telephones, sanitation and the number of roads paved.
Conclusion
The contemporary middle class forms the majority of a capitalist population and is mainly characterised by an exceptionally high level of the education attainment, employment with increasing salaries and ownership of property. This class is the most hardworking of all the three social classes and is driven by the desire to achieve. As such, it can be considered a human resource which any nation that is seeking growth should invest in. The middle class is very innovative because of hard work and the desire to achieve. It also has expertise due to the high education. Innovation and expertise are key factors in business development. A large middle class also decreases inequality and promotes homogeneity in the society increasing political stability creating an environment that is conducive for business. Growth of the middle class implies increasing the size of this class as well as its income share. Increasing its income share would increase business activities due to availability of capital and accessibility to public goods and services such as sanitation, education, health, transport and communication. The middle class is the engine of the countrys economic growth. Its growth is therefore positively related to business and economic development.
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