What's Special About the Middle Class?

The belief that the middle class matters for economic growth because of its entrepreneurial spirit goes as far back as John Stuart Mill, who said “The virtues of a middle class are those which conduce to getting rich—integrity, economy, and enterprise.” (quote is from The Economist)

However, using household surveys in 13 developing countries, Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology, USA, find little evidence to back the belief (see the paper). The authors analyze the pattern of consumption and investment by the middle class, which they define as those whose daily consumption per capita is between $2 and $10 in 1993 purchasing power parity (that is allowing for cross-country differences in price levels). They conclude that people in the middle class are more likely to prefer a steady well-paying job to running their own business. On family and spending patterns, the authors find that middle class families have fewer children, and spend much more on education and health.

What is equally important but missing from the study is what factors help or hinder the creation and sustainability of the middle class. For instance, the role of education and health in increasing labor productivity (human capital in general) and income, and therefore in the expansion of the middle class. Evidently, the lower class (the poor) in developing countries can not invest or consume as much they like by borrowing because of credit constraints. This is related to underdeveloped capital markets and not necessarily lack of entrepreneurship.

In any case, the notion that the middle class is more of a wage-earning class and less of an entrepreneur class has some merits; see Robert Reich's comment in the Financial Times: America's middle classes are no longer coping.