Can the economy grow if the population shrinks?
June 7, 2016 1:08 AM   Subscribe

It seems to be a given that population growth helps the economy. Is there any way the world economy can grow if the number of people is stable or declines?

Japan has a falling birthrate, a shrinking labour force, and a stagnant economy. But do these things necessarily go hand in hand? Is there any way that an economy could remain strong despite a fall in population?

This question asked why there's no spare money, and many answers emphasised the importance of workforce growth. But the planet must have a maximum capacity of humans, whether it's determined by environmental sustainability or just plain overcrowding.

On a global level, what would it look like if the world population started to fall? Would we have more resources per capita, and individually be better off, or would a falling GDP mean a fall in quality of living?

I have exactly no background in economics, so would love to hear from better informed people. And if anyone thinks falling population is a good thing from an economic perspective, please speak up. I'm super worried about climate change and want to know if there's an alternative to growth-at-any-cost.
posted by superfish to Society & Culture (5 answers total) 6 users marked this as a favorite
Yes. Gains in efficiency (such as through automation) can enable an economy to produce more goods and services even when population is declining.
posted by Nerd of the North at 1:33 AM on June 7, 2016 [1 favorite]

Japan's twin predicaments of population decline and (on paper, if not in reality) economic stagnation are not exactly connected; Japan's asset price "Bubble" burst in 1991 while the population was still growing. The stagnation is connected to slowing consumer demand, but the stagnation is also caused by a shift in the labor market: companies are hoarding cash and are not willing to hire as many full-time employees as they used to. This means that people have less money to buy things. Car ownership is down.

Japan's population started to contract for the first time in 2015 (although there is a mini-baby boom happening in Japan right now), but Japan's population started to grow more slowly in the 1990's as people started having fewer children. A lot of Japan's economic prosperity was tied to the postwar Baby Boom, when a large and growing population needed new infrastructure, new homes, new material goods. It's true that Japan's population just isn't buying as much as they used to.

But the stagnation we're seeing in Japan is fiscal in nature. I'm not even sure if it can be called "stagnation." It's deflation caused by a massive amount of money pumped into the economy by bond issues, coupled with low demand and very cheap imports.

The cost of living has plummeted in real terms in Japan over the past 25 years. Food is cheap. Consumer goods such as household appliances are cheap. Clothing is cheap. Rent is cheap. It's a very pleasant place to live if you have some money.

But a women in her twenties typically earns the equivalent of $1200 a month. Men earn double that. The problem is that it's not enough to raise a family on. So people don't get married, don't have kids, and consumer demand is sluggish.

So the problem Japan has is economic, I would argue.

The twin problems of an aging society and deflation are not unique to Japan, by the way. Every single OECD country is confronting the challenge of an aging population. The exception is the United States, which has high levels of legal and informal (illegal) immigration, which boosts the population.

The US, however, also is dealing with low wages, and is also confronted by the deflation trap. Growth used to be 3%, now if we're lucky it's half that.

Japan is just one flavor of the future we all face, including in what is currently the developing world.
posted by My Dad at 2:08 AM on June 7, 2016 [2 favorites]

I do economics, but I am not a growth economist, but what an economist would tell you is, yes you can have economic growth without population growth.

In the long run, you can think of growth as being driven by something like the ability to produce stuff. So you can produce more things, roughly speaking, if you have more factors of production (things you combine to produce stuff) or through technological progress - creating more with the same amount of factors of production.

A population increase is an increase in the number of people, say, labor hours, which are an important factor of production. In order to produce more without increasing the population (which is what you would need to have per-capita growth, after all...) you could get more of other factors. Physical capital, for instance, can let you produce more with fewer people. In the limit this is "robots taking all the jobs," but you could also think about the many many labor saving devices you probably use frequently. My girlfriend's mother just went to India and was telling me over the weekend about the sheer number of people who were employed doing laundry by hand. We don't have that in the US because laundry machines are ubiquitous, and so we are able to produce a greater amount of clean laundry with many fewer people.

Physical capital is only one aspect of this. You could also make your existing stock of people more productive by investing in human capital of various kinds. Although there are other reasons people with more education get paid more, part of it is that education increases peoples' ability to produce stuff (writ large) - perhaps to perform more complicated tasks in the same amount of time, or to work with physical capital. So you could, with the same amount of human hours, effectively produce more because the people you have are better educated. Similarly, health investments can matter. In developed countries, maybe the gains from these kinds of investments will not be dramatic, but they might be. (Think about what a tragedy it is that in many places people don't have access to good schools or clean water!)

You can also have different types of technological progress, which an economist would think of as anything that lets you produce more with a given amount of the factors of production. This could be an improvement in technology the way we usually casually think - machines just working faster or breaking less, wasting fewer materials, etc. But it can also be improvements in organizational capacity, management practices, etc, that make firms more efficient. (For example, suppose you have a society where certain groups - such as women - were routinely denied access to particular jobs. If the culture shifted away from that, and qualified women replaced under-qualified men, that might increase production with the same amount of hours, physical capital, and materials. I don't know if this is a hypothesis that people have studied but it wouldn't surprise me if it were the case in the United States.) It could be a financial system that is more effective at channeling money from savers to people who want to borrow to invest. (There is some evidence that financial development gets tapped out as a source of growth or perhaps becomes a drag on growth, but at least up to a point having a banking system that is able to lend to people who want to borrow in order to start or expand businesses is probably helpful).

There are diminishing returns to all of these alternative routes - there is only so far you can substitute physical capital for labor. (Someone has to operate machines). But a rising average standard of living is not incompatible with population remaining constant or declining. And of course, I'm not talking about distributional concerns, which are a challenge (although not one I think is insurmountable).
posted by dismas at 7:49 AM on June 7, 2016 [2 favorites]

Of course it's possible. If the remaining people are more productive, the economy will grow. This is the herd of buffalo analogy. In practice, this is accomplished by technology. As people (especially those in less developed countries) adopt technology, they become more productive. This increased productivity can actually lead to reduced birth rates, as machines allow one person to do the work of several. (Think about the amount of labor needed to harvest a field manually, compared to how much easier it is with a combine.)
posted by kevinbelt at 9:29 AM on June 7, 2016

Google steady state economics.
posted by wilful at 6:11 AM on June 8, 2016 [1 favorite]

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