Thursday, July 5, 2007

The Coming Demise of Growth Economics

"Growth is the Holy Grail of Economics."

I will let that statement stand on its own. I am certain that informed readers need no elaboration, with the proviso that I am referring to the last 150 years, or so.

Economic growth (positive or negative) is simply a measure of the rate of change in human activity and thus directly related to global population growth. So, here is a simple population chart with decennial population growth rates (click to enlarge).

Data: UN

We immediately understand why we chose "growth" to describe economic activity in the 20th Century: human population has been rising fast. The peak decade of 1960's even saw population rise by an astonishing 22% - the Baby Boom. More mouths to feed, more clothes, more of everything - "Growth", made entirely possible by cheap and abundant fossil fuels.

But this is not a posting about Peak Oil, though it is obviously of overwhelming relevance. Rather, I am making a more basic observation: if the UN's population projections prove accurate, in the next few decades we will witness a fundamental growth slowdown, simply because global population will rise at a much slower rate. Indeed, by 2040 global population will be growing at almost half the rate it grew between 1800 and 1850.

Certainly, one could argue that higher economic activity could be sustained by making fewer people work harder, but this is an apparent oxymoron. Work harder for what? If the number of consumers is not rising fast enough to use the goods and services of this more productive labor, there will simply be no sense in doing so. High productivity is a boon when the number of potential buyers is rising fast, but a curse when it is not.

What I am trying to say is that we should all start thinking hard about what is inexorably coming down the road. Population dynamics is like a steamroller: slow and deliberate, but also possessing immense inertial force. Pension funds, who by nature are forced to think long-term, are sweating bullets about covering retiree benefits and are already going out on a limb in their risk/reward profiles, investing in hedge and private equity funds, CDO's of sub-prime mortgages, structured finance bonds, etc. But it is a fool's errand, of course. They may patch things up for a short while, but the steamroller will eventually first reach and crush exactly those portfolio holdings that depend on consistent growth: equities and residential real estate.

If anyone thinks 2040 is too far away to worry about, just ponder this: it is as far in the future as the US Bi-Centennial celebrations are in the past. I bet lots of you clearly remember 1976 and Jimmy Carter getting elected President. Or, for those younger and just starting their families: a girl born in the US today will have another 50 years to live by 2040.

Bottom line: Growth economics is going to get crushed by the population steamroller, even if we avoid resource crises and environmental disasters. What's next? I think we need a whole new paradigm. Medieval Economics, anyone?

P.S. A comment by a reader (thks miju) prompted me to include a chart of the regional breakdown of population projections, also by the UN (click to enlarge).

Contrary to popular wisdom and based on population dynamics alone, Asia may be the worst place to invest, given that it will be the region with the fastest drop in population growth rates.


  1. invest in Africa ! that the place where population growth will be higher that in ther rest of the world and normally where economic growth will follow.
    The game ahead is no more a global call, it is about an arbitrage between regions

  2. I just happened to read this
    some of it seems to be gobbledygook, but I especially like the points about K wave theory and charts 10 and 11 on page 13. It seems to come to the same general conclusion you do.

  3. Dear miju,

    You are correct: Africa will experience the slowest drop in population growth.

    From a regional population perspective ALONE, the absolute worst place to invest is... drumroll...ASIA. This goes so far against current perceived wisdom I am tempted to think it will come true.

    Checking the UN projections in depth, I find that in fact Asia will have the steepest drop in population growth between now and 2050, from 1.25%/yr now down to 0.25%. I find this quite important, so I am including the relevant chart to the main post.

    jason b.

    Thanks for the link.


  4. Population is important, but not more so than civilian labor force. The developed nations, especially the U.S., got a huge growth windfall just about the time Peak Population was hitting, as tens of millions of women joined the workforce from 1960-2000. Now, that wave is over. The civilian labor force and participation rate is starting to decline gradually as Baby Boomers retire, and it will probably fall from 66% now to 60% or so in a decade. We are likely to have "full employment" for some years, without much job growth.

  5. I imagine that you have read Herman Daly from the world bank and his views on growth. I am still digesting his thoughts and was wondering if you had any comments or insights.

  6. Dear anon,

    Yes, labour force is important from the perspective that a working person eventually consumes more and boosts GDP more than a non-working one. This is currently the "plan" for China and India, pushing hard to transform subsistence farmers into wage labourers. It is impossible to achieve that goal, unless mankind comes up with more and cleaner energy sources (and other resources).

    As for Daly, I have not read his works extensively, but I have this to say: he focuses on non-economic growth, or "alternative" GDP measures and makes adjustments for imbalances in income and wealth distribution, etc. I believe we should also start making negative adjustments for debt load, because we are currently using borrowed money to artificially boost consumption (and thus GDP).

    If we were using debt to build infrastructure or invest in capital equipment we would not need to subtract it, because the present value of the expected future earnings from them would likely exceed the debt.

    But this does not hold for repeated trips to the tanning salon charged to a credit card...

  7. You missed my point about civilian labor force. A farmer is part of the civilian labor force, whether in the U.S. or India/China.

    My point is that a big part of the economic growth we have expeienced in our lifetimes was from a one-time windfall -- which was the entrance of tens of millions of U.S. women into the labor force. It raised the participation rate by almost 10% at the peak.

    Even as population growth slows, civilian labor force participation rates (as % of all adult Americans) has started to decline, and will keep declining for some time. It's the opposite of what we have experienced for 40 years. And it means slower growth.

  8. as every recession, slump, depression demonstrates, the capital system has limits to growth which are inherent, not determined by population growth or nature.

    one of these limits is seen as the tendency to overaccumulation, a natural tendency for a system of profit maximizing, competing, individual firms.

    but how can there ever be too much capital?

    1. 'too much' relative to the labor created surplus value required to perpetuate capital as capital, a circumstance which rises from the drive to greater productivity and with this also an at least relative decline in living labor to the total mass of capital.
    2. this very same labor dependent system becomes, in its unconscious struggle to hold costs, employment and wages so low as possible, perfectly unable - other than in neoclassic theory - to generate sufficient monetarily effective demand other than through expanding credit, yet, as debt accumulation, this 'solution' has its own limits.
    3. the combination of 1 and 2 can be seen as what one author termed a 'planet of slums', i.e. an inability to generate sufficient development and with this the globally rising number who are pushed or born into the informal sector.
    but more importantly from the perspective of capital, 1 and 2 also manifest as greater difficulties in maintaining an average rate and sufficiency of profit.

    in short, the barrier to capital is capital, recognizing that capital is not only or even things, money, and claims to money, but also a historically specific set or constellation of social relations along with the legal political structures developed to perpetuate these relations.