The Market and the Middle Class

With regard to the changing winds of the American middle class, I don't know how we got here (I'm not an economist) or how to get us out of it. What I do understand is how "the market" of businesses creating goods and services will respond. It's not pretty, and the writing is already on the wall. My prediction: businesses will chase dollars and more new products and services will serve the upper classes, especially as the size of the middle class shrinks. This will accelerate income inequality as the lower and middle classes have less access to the products and services that they need to maintain or increase their income and productivity.

Here's an example of what I mean. Imagine all the new products and services launched in recent years. Since apps are a very visible product for readers of this blog, let's use those as an example. I will make two points, first that entire categories of products are less accessible to the middle class and second that the selection of products in categories accessible to the middle class will wane.

The mobile app market is booming, with revenues that will reach $25 billion this year. The point of category accessibility is a simple one. Unless you can afford mobile devices and data, you can't afford apps. So, if you are not wealthy enough to have a smartphone / tablet / etc. you can't take part in a new and very important echelon of the economy. If you can't pay up front, you can't play.

I don't think this is unique to apps, this problem exists in pharmaceuticals, cleantech, or any innovative industry. If you don't have a certain level of wealth / income to pay the up-front cost of entry to use a new product or service, you can't even begin to reap the benefits of that new and emerging industry.

Another problem is that the middle class shrinks, less and less versions of a product will be made for them. In apps, what this means is that fewer and fewer quality apps will be at an affordable price for middle class buyers. If you were a businesses wouldn't you cater your product (and your prices) to customers who could pay more, especially if the amount of middle class people you could potentially sell too was shrinking? In the app world, I think this will mean more and more apps worth downloading will need higher and higher levels of payment.

In the app world, this may seem trivial (even though I'd contend it's not because apps can increase productivity and therefore affect learning and income). But extend this effect across the economy to clothes, consumable goods, cars, education, healthcare, and others. In aggregate, middle class people will have less and less products they can use to be more productive, educated, or otherwise attractive as employees, putting them at a disadvantage for maintaining or increasing their income. The wealthy will have more and more products developed for them which will allow them to be healthier, happier, and more productive - begetting them more wealth.

But wait, another reason the market effect of product and service selection will perpetuate inequality is because of cultural distance. As income inequality increases, those developing products (who are presumably wealthy and educated, especially in innovation industries) will have less contact with those of lower classes. This means they'll have less awareness of the product needs (and potential business opportunities) of the lower classes. Because you can't make a product without knowing what the customer's need is, the lower and middle classes will have less products made for them which make their life better.

The writing of this happening is already on the wall. Think of all the new businesses you've seen get big in the past few years (either from friends, the news, or even kickstarter). How many of those products could a lower or middle class person afford? How many of those products were even catered to the needs of a lower or middle class person? Most of the new stuff I've heard about definitely does NOT cater to a lower or middle class person. (I'm not giving examples, because I don't want to be mean to friends who are launching businesses. I support them wholeheartedly).

I'm a big proponent of entrepreneurship, so I'm not trying to trash entrepreneurs who don't serve the lower or middle class. And, all of what I'm saying is fair and legal by the law of our land.

What I am pointing out is one, often unrecognized, way that the market will perpetuate and increase income inequality if left to its own devices. I point it out because it doesn't sit well with me. Because it doesn't seem right. Because it doesn't leave our world in a better place then we found it, it seems like it leads to a world with more suffering.

I also point this out because income inequality shouldn't just be a concern of "poor people" anymore. It's a very real issue for many more Americans these days and in ways they may have never considered, such as the products and services that are even available to them. As a child of a middle class family, I never thought that income inequality would be such an applicable issue to me. And now it does.

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Another interesting tidbit about the middle class from The Brookings Institution. Also, here's a decent summary. Has anyone heard of a study examining how levels of inequality affect the types of products and services that launch? I can't find one.