The myth of the entrepreneurial middle class

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A new paper in the Journal of Economic Perspectives questions the myth of the entrepreneurial middle class (subscription required). Two of the leading advocates of randomized evaluation, Abhijit Banerjee and Esther Duflo, take a look at oft-repeated claims that the middle class stimulates economic growth through the creation of dynamic businesses. Interestingly, the authors rely primarily on descriptive statistics from the Living Standard Measurement Surveys and the Family Life Surveys, although they do cite evidence from one randomized trial in Sri Lanka. (An aside: There is an on-going debate about the value of randomized evaluations - the Economist's take is here, and Dani Rodrik's is here.) By and large, Banerjee and Duflo conclude that the middle class in the developing world is not particularly entreprenuerial. Even though the returns to investment in small enterprises is generally high, most members of the middle class prefer to invest their savings into human capital, e.g. private education for their children or more frequent visits to the doctor.

In terms of business ownership, Banerjee and Duflo conclude that there is not much difference between the poor and the middle class. Rather, the big difference is in the type of employment:

Nothing seems more middle class than the fact of having a steady well-paying job. While there are many petty entrepreneurs among the middle class, most of them do not seem to be capitalists in waiting. They run businesses, but for the most part only because they are still relatively poor and every little bit helps. If they could only find the right salaired job, they might be quite content to shut their business down. If the middle class matters for growth, it is probably not because of its entrepreneurial spirit.


The reason why this matters—indeed why it might matter a lot—is that it leads us to the idea of a "good job." A good job is a steady, well-paid job—a job that allows one the mental space needed to do all those things the middle class does well. This is an idea that economists have often resisted, on the grounds that good jobs may be expensive jobs, and expensive jobs might mean fewer jobs. But if good jobs mean that children grow up in an environment where they are able to make the most of their talents, one might start to think that it may all be worth it.

While this paper is obviously an important contribution, I question the authors' conclusion. I suspect they are correct that having a steady job helps for doing "all those things the middle class does well." Having some kind of steady income stream allows for long-term planning and investment, e.g. paying for private schooling for one's children. But the unspoken assumption in their conclusion is that private entrepreneurialism cannot be identical with "a steady well-paying job." In many of the countries included in the authors' dataset, these two things may not be identical. But perhaps this just means that the conditions for small enterprises is precarious for any number of reasons - credit constraints, poor market access, arbitrary regulations. Given that the data presented in the paper is only descriptive, it is hard to preclude the possibility that the best course of action may be to improve the operating environment for small businesses so that this form of employment is much more steady.

Update: Whatever the characteristics of the middle class, it looks like it's set to grow at a rapid pace. A post over at the Adam Smith Institute discusses the expanding middle.


Ryan Hahn

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