AI Wealth Truth (08): Why the 'Middle Class' Is a Postwar Historical Anomaly

I. We assume the middle class is society's "normal state". A healthy society should have a large middle class. An "olive-shaped" social structure is the inevitable direction of development. This is the belief we have been taught.

II. But historical data tells us: a large middle class is the exception, not the rule. For most of human history, social structure was pyramid-shaped. A tiny minority of the rich at the top, the vast majority of the poor at the bottom. The "golden age of the middle class" existed only during the 35 years from 1945 to 1980. And it was concentrated mainly in Western developed countries.

III. In 1955, American economist Simon Kuznets proposed the famous Kuznets curve. He observed that as economies develop, inequality first rises, then falls. Forming an inverted U. His conclusion was: economic growth will eventually, automatically, bring a more equal society. This theory made many people believe: as long as the economy grows, inequality will solve itself.

IV. But Kuznets' data has a fatal problem: his study period happened to be 1920 to 1950. What happened in that period? The Great Depression. Two world wars. The New Deal. Large-scale government intervention. The decline in inequality did not "happen naturally". It was forcibly produced by war and policy.

V. French economist Thomas Piketty completely overturned the Kuznets curve in Capital in the Twenty-First Century. He collected 300 years of tax data and found: Inequality declined only during the two world wars. The long-term trend before and after was: inequality kept rising. After 1980, the rebound accelerated.

VI. Why did the two world wars reduce inequality? First, capital was physically destroyed. War destroyed factories, real estate, infrastructure. The rich held tangible capital, and it was physically wiped out. The poor had little capital to destroy. War was the most extreme form of "wealth redistribution".

VII. Second, war required mass mobilization. Governments needed workers to produce weapons and soldiers to fight. Labor became scarce and valuable. Workers' bargaining power rose. Unions grew stronger. Wages rose sharply during wartime.

VIII. Third, war required huge financing. Governments funded war spending through high taxes. Top marginal tax rates once exceeded 90%. The rich's incomes were heavily extracted to pay for the war. This "wartime tax regime" carried into the early postwar years.

IX. Fourth, postwar policy choices. After WWII, Western countries widely built welfare systems. Free healthcare. Free education. Pensions. Unemployment insurance. These institutions transferred wealth from the rich to the poor. Meanwhile unions remained strong and ensured workers shared the fruits of growth.

X. The period from 1945 to 1975 is known as the "Glorious Thirty" (Les Trente Glorieuses). The economy grew rapidly, and the gains were broadly shared. The middle class expanded quickly. Buying a home, buying a car, sending kids to college. Lifestyles previously reserved for the rich became achievable for ordinary workers.

XI. But around 1980, this began to change. Reagan came to power in the United States, and Thatcher in the United Kingdom. They pushed policies such as tax cuts, privatization, union weakening, and financial deregulation. This package is called "neoliberalism".

XII. The theoretical basis for neoliberalism was: tax cuts stimulate growth, and then it "trickles down" to the middle and lower classes. But forty years of data shows: The economy did grow, but the top captured most of the gains. From 1979 to 2019, the incomes of the richest 1% in the U.S. grew 160%. The middle 50% grew only 25%. The bottom 50% saw almost no growth. Trickle-down never happened.

XIII. Why could the "Glorious Thirty" not last? Because maintaining a middle class requires continuous external intervention. High taxes. Strong unions. Tight financial regulation. Robust welfare systems. These are all resistance against the market's "natural tendency". Once intervention weakens, the market returns to its default state: winner-take-all.

XIV. Piketty identified a core inequality equation: r > g. r is the return on capital. g is the economic growth rate. If r > g, capital grows faster than the economy. Those who own capital become richer, and those who do not fall further behind. Historically, r is almost always greater than g. Only war and intervention can temporarily change this.

XV. From 1945 to 1975, r and g were closer, because capital was destroyed by war and had to be rebuilt. Workers could share growth through wage increases. But once capital accumulated to a certain level, r again exceeded g. Capital returns again outran wage growth. The middle class started getting squeezed.

XVI. Globalization accelerated this process. Capital could move freely to wherever labor was cheapest. Workers in developed countries were forced to compete with workers in developing countries. Wages were pushed down. Employment became unstable. Meanwhile capital owners enjoyed the dividends of globalization.

XVII. Technological change further intensified the trend. Automation replaced many middle-skill jobs. Jobs that once needed skilled workers were replaced by machines. Labor markets became polarized: high-skill high-pay and low-skill low-pay both grew, while the middle shrank. Middle-class jobs disappeared.

XVIII. AI is the ultimate accelerator of this trend. Traditional automation replaced physical labor and repetitive cognitive labor. AI can replace cognitive labor: analysis, writing, programming, design. Fields once believed to require human intelligence are being invaded by AI. The last fortress of the middle class is being breached.

XIX. At the same time, AI's returns are extremely concentrated. Training a large model requires hundreds of millions of dollars of investment. Only a few companies can afford it. Once trained, marginal cost is near zero and the model can serve the world. AI's value is captured almost entirely by capital owners.

XX. What conditions are required for a "golden age of the middle class"? Scarce labor, caused by war. Capital destruction, caused by war. Strong government intervention, driven by a postwar consensus. Limited globalization, driven by technological limits. These four conditions do not exist in the 21st century.

XXI. More worrying: we are experiencing a "peaceful destruction of wealth". Not bombs destroying poor people's assets. But inflation, housing prices, and healthcare and education costs eating away at the middle class's accumulation. You think you are middle class, but if your assets grow slower than housing prices, you are actually getting poorer. Wealth transfers in peacetime are more hidden, and more brutal, than war.

XXII. If history tells us anything, it is this: The middle class is not a natural product. It is the product of intervention. The postwar middle-class boom from 1945 to 1980 will not automatically reappear. It requires special historical conditions, or extreme policy intervention. At the moment, neither is in sight.

XXIII. The AI era may accelerate a return to the historical default. A few people control AI and capital and capture most of the fruits of growth. Most people provide labor that becomes less and less valuable. The social structure shifts from "olive-shaped" back to "pyramid-shaped". This is not a prediction. It is extrapolation from historical data.

XXIV. The golden age of the middle class may have ended. We may be sliding into a new "Gilded Age". The extreme inequality of the late 19th century. A few oligarchs control everything. This is not pessimism. It is a historical cycle. The "middle class" may have been only a 35-year historical interlude. In the AI era, that interlude is closing.