Wednesday, November 12, 2008

A Population Bubble?

I've been watching the collapse of the financial markets and marveling at the complete inability of all our largest financial institutions to see it coming, or at least, to resist the urge to make short-term profits in a market with long-term instability. You can do classroom simulations where people will happily invest in a bubble: make up an investment that pays off one dollar every ten minutes over two hours, and let people buy and sell the assets as they please. You can calculate the real value of the investment by how many payments it has left, but even though everyone knows this, they're still willing to trade in it above that value. The idea is that you buy the investment for an inflated price, collect a few payments, and sell it to someone else for possibly a higher price, and you come out ahead. It all works fine, so long as you can cash in on the hot potato and you're not left being the one holding the bag. (which for our financial crisis, would be the US taxpayers)

The problem is that no real wealth is being created, it's only worth that much money so long as there's a bigger idiot out there willing to buy it from you. Most sensible economic activity is a non-zero sum game, you're adding wealth to the economy and everyone can be made better off. Chasing a bubble is just trying to cash in on someone else being a sucker and trying not to be a sucker yourself. And as we've seen, it distorts the whole market when people start assuming prices and values will rise forever, right up until they don't.

All of which got me thinking about what may be the largest area of unfettered human growth and expansion that's led to a lot of investment: population. We had a billion people in 1800, 2 billion people by the roaring twenties, 3 billion by the 60's, and we've been adding roughly a billion every decade since, scheduled to hit 7 billion in 2011 or so. Population, and consequently consumer demand, GDP, and industry are in a never-ending cycle of growth. This is what allows us to continually grow our industries and even do things like borrow money from future generations, since presumably there will always be more of them than there are of us.

This has all held up pretty well so far, and since we've gotten a handle on disease, farming, and war, there have been few obstacles to growth. Half the planet is 28 or younger. But let's say, for the sake of argument, that ceases to be the case, and population ceases to grow or levels off. The indefinite expansion of the population bubble finally bursts. What then?

This would be different from a bubble like the housing market in which things are simply overvalued, it'd be more like computers suddenly hitting a brick wall of progress for how much space they can manage or how fast they can go. Value's still been added, it's just that the predictions of growth without limits prove to be inaccurate, and all the investments and future prospects have to adjust. Our social security system is a pyramid scheme that assumes each level of the pyramid will be larger than all the ones above it, current workers support current retirees, which so long as you're always having more and more people enter the workforce than are retiring, you're fine. Each generation enjoys a better retirement than the previous generation because more people are working and producing things for them to buy. You could even go so far as to say that the tendancy of men to date women younger than themselves is made easier by the fact that the selection is better in every subsequent generation since there are more people. 

A few countries such as Japan and parts of Europe are beginning to see what it looks like when all this isn't the case. In addition to avoiding most of the things that kill people off young, modern societies have gotten excellent at giving people alternatives to breeding large families as their chief source of joy and entertainment. The US's birth rate is just sufficient to replace its population, we grow simply because of immigration, many european countries are substantially lower than that. The prospect of an aging population and dwindling workforce may force people to work longer, no longer expect their standards of living to keep scaling upwards, and limit our ability to keep borrowing against future wealth when we may not always have more of it to spend than we do now. Population growth may be at the core of what makes us assume that indefinite GDP growth and rise in wealth is normal.

The questions are, how likely is all this, and would it be good or bad? Developed nations do tend to have lower birthrates, and as societies and women in particular become more secularized and have access to more options and education, family size tends to decrease. That said, the countries leading the growth of the world's population aren't the developed ones, and there's even a strong demographic element to all this. Religious couples tend to have far more kids than nonreligious ones, the makeup of the world in the future may be composed of people who have the strongest attitudes about believing in large families. Most religions grow more due to having kids than making converts, and in the battle for the survival of the fittest, certain religions may have the necessary traits to guarantee they endure. That said, societies also get less religious and that element is muted as they become more secular, but it's the poorer and heavily Catholic/Muslim parts of the world driving demographic trends at the moment.

Finally, how good or bad is all this, if world populations keep increasing until a country becomes wealthy enough to find better things to do than having kids, then starts declining? Some estimates say that the planet has enough resources for 2 billion people to enjoy the lifestyle of someone living in the United States. The fewer people we have, the more natural resources there are to go around, along with less workers, scientists and engineers to produce other forms of wealth. And who knows if we'll undergo any quantum leaps of technology that make resources less of a factor, or space less of a concern. The United States is in an easier position than a lot of the world when it comes to growth since we're sitting on huge amounts of undeveloped land still, China's gone so far as to violate human rights and mandate a one-child policy, which has resulted in a nasty side effect of "planned births" leaving 5 men for every 4 women. One wonders how the fifth wheel in that situation is going to get by, some societies in the past seemed to resort to war to correct gender imbalances from polygamy.

Right now, the smart money is still being bet on indefinite growth and barring any catastrophes or radical social or technological changes, it may take a long time before things even level out. But if population ever does decline globally, or more dramatically for a particular country, it'll be interesting to see how we react to a world where every generation's core services and businesses have to shrink from what the previous generation was supplying, rather than keep growing forever.


Unknown said...

You know, I've thought that population growth itself has been the driving force behind all economic expansion. Assuming the population stabilization you posit, I can only think that economic expansion would then be driven exclusively by increases in personal productivity.

The two (of course) do tend to interact. For example, you could argue that improvements in farming efficiency has been a (if not the) driving force behind population growth.

From an economic standpoint, I would think that a stabilization in population levels (or worse, contraction) would at a minimum dramatically reduce demand. The effects would vary from location to location, of course, owing to differing local standards of living (and population growth rates).

All in all, it doesn't sound like a terribly fun situation.

Chip Gibbons said...

Nice article. I think about this a lot. I think your assumptions are correct and group-think has blinded us to the inevitable economic outcome of the pyramid shrinking at the bottom. It might not happen in my lifetime but it's going to happen at some point in the not-too-distant future.