The Middle Class Is Dead. Long Live the Long Tail Class.

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Economists and policymakers aspire to bring back the 20th Century. They seek a world with a broad middle class where standardized education produces standardized employees who fit into clearly-structured organizations and produce linear output through consistent effort.

But the 20th Century is never coming back. A networked economy cannot produce a middle class. A creative economy does not reward standardized skills. Linear input is no longer sufficient to produce valuable output.

A growing number of professions are becoming scalable. From software engineers to fitness instructors, a small minority can service a large group of customers. Even in occupations where time remains a constraint, having a global reach means matching with the people who are willing to pay the most for your services at any given moment.

But the winners in such a world are not at peace. They rely on the network for their livelihood, leaving them at the whims of crowds, algorithms, and complex dynamics that no one can predict or control.

The economy is becoming a lottery. Chance events play a growing role in determining the winners, and the winners are becoming bigger than ever. Instead of a "Middle Class" of near-average earners, we are moving to a world characterized by a "Long-Tail Class" where most people earn much less than the average.

How do we respond to this shift? The first step is to understand that it is happening. The next step is to maximize the benefit to society.

How do we do that?

We need to tax lottery winners hard. But we also need to ensure that these winners emerge as often as possible and become as successful as possible. We need these "economic lottery winners" to successfully produce innovations that benefit all of humanity and produce enough wealth to be redistributed to ensure a "Minimum Viable Lifestyle" for all other participants. By "Minimum Viable Lifestyle," I refer to whatever will keep the masses happy and calm.

I see two ways to achieve this. The 1st option is to produce public goods that make life wonderful and increase the pool of potential winners: Great schools, excellent healthcare, healthy and safe environments, and opportunities for community-building and positive interaction with other humans.

That 1st option is financially feasible only through urban density. Density enables people to share public goods. And it creates local non-tradable jobs that are sheltered from the vicissitudes of the lottery economy.

And yes, I know some countries already offer good healthcare and schools, but I am talking about a more radical shift in approach. I have not fleshed it out completely, but it involves the following:

1. Sovereign Talent Funds that harvest the profits from remarkable individual success and invest them to ensure long-term prosperity. A good model could be Norway's Oil Fund, whose mandate is to "ensure responsible and long-term management of revenue from Norway's oil and gas resources so that this wealth benefits both current and future generations." Such funds differ from traditional fiscal policy because they are not managed by politicians and are not directly focused on immediate policy needs. (I will write more about this idea later this week. Subscribe, so you don't miss it.)
2. More fundamentally, the shift I have in mind means that instead of trying to force society back into some normal income distribution, we embrace "top-line inequality" to maximize "bottom-line prosperity." By that, I meant that we try to create a system that enables the biggest winners to emerge and have the most significant impact and to ensure that the fruits of that impact are used to ensure that the pool of potential future winners is as large as possible. Note that we need the pool to be larger not just for moral/political reasons but because it is economically more efficient to tap into a larger pool of potential winners. So, the more people with the skills and leeway to engage in creative activity, and the more we enable them to interact, the wealthier society will likely become. And by "creative activity," I don't mean posting on Instagram — I mean science, engineering, design, writing, and education, as well as posting on Instagram.

As mentioned above, there is also a 2nd way to keep the masses happy and calm: A matrix-like provision of entertainment, distraction, and sugar, with people "living" predominantly online. This option is not morally desirable. It is also not likely to maintain political stability over time.

The bottom line is that the normally-distributed world is not coming back. We need to adjust to a power-law world where lottery winners produce innovations and wealth that benefit everyone else (and where everyone else has a chance to produce or contribute to the production of such innovations). Cities have a critical role in producing and distributing such wealth and innovations, providing the masses with a minimum viable lifestyle and sheltering as many people as possible from the volatility of the lottery economy.

More on this soon. Subscribe, so you don't miss it, and follow me on Twitter for something to nibble on in the meantime. As you can see, I am still processing and wrapping my arms around all the ideas in my head. Your feedback and ideas are welcome. Reply to this email to share what's on your mind.