No Limits to Growth?
“There are real and growing threats to the long term well-being and fortunes of humanity.”
This is not a radical statement. It is not even exaggeration. The consequences of global warming, now grabbing headlines, are still in a very early phase. The regular emergence (and re-emergence) of infectious diseases is challenging even leading edge medical technology. Invasive species are now far from being a nuisance, forcing public water systems, for example, to shut down major sources of supply.
The usual attitude toward problems of this nature is that “technology will find a way”. And maybe it will. But during just the period in which solar and wind electrical generation advanced to the point of economic viability, enough additional carbon dioxide was released to guarantee world-changing climate consequences far into the future. Technologies that are today in their infancy, basically lab curiosities, will need decades before they can scale enough to make a measurable difference. Which means that global warming in particular must inevitably get worse before it can possibly get better, and we are only guessing at how much worse that will be.
So it is only logical to look for a common denominator that might offer some leverage, a way to accomplish more than our shaky collective efforts to date.
The most obvious denominator is population, in particular the growth of very affluent populations. The world’s population more than doubled within the lifetime of many now alive, and at least a billion were lifted out of extreme poverty. At least a billion more achieved the kind of middle-class affluence once enjoyed by just a few million in certain highly-developed economies. And, short of some sort of apocalyptic nightmare, this is a trajectory that will continue.
Of course, predicting the end of the world has been a fruitless exercise since early Christian times. Centuries of relentless progress apparently disproved the Malthusian thesis that growing population will inevitably limit itself by the inescapable misery of worsening living conditions, e.g. starvation. Just the reverse occurred. Technology’s forward march led to greater comforts, as well as to greater numbers of people living in comfort—and so to vastly greater consumption. Still, the short period of history during which our level of affluence rose so far, and so quickly, can not be taken as a basis for extrapolation, precisely because so much changed at such a rapid clip. The consequences of those changes are still in motion, and technology must not be confused with magic. Its accomplishments are not amenable to prayer.
So. Is it possible that Malthus may have been right?
The answer is simple. No one knows. No one really knows whether the fruits of technology can keep pace with the growth of population and advancing lifestyles, or whether even now it might be slipping. A mere dozen generations of human industrial development can not foretell the future of the planet. And it is therefore we must seriously consider whether population itself might offer the lever we need to secure the prospects of humanity.
But before unpacking that question, with all its political and ethical ramifications, we must ask whether a reduction or reversal of population growth is in fact something with which we could even cope. The answer is not self-evident. Declining population has generally been viewed, not as a boon, but a crisis.
Why should this be? Well, for one thing, it has historically been the role of those in the prime of life to support and care for aging parents and grandparents, which always meant that it was imperative to have enough children who reached adulthood in sufficient health and with sufficient knowledge to earn a living in excess of their immediate needs, and the more children the better the better the odds. As a model, this persists even in the modern welfare-state, in the form of pensions, social security, and other forms of “nest egg” where anonymity replaces familial relationships. We all need that new generation of the working-aged, with income exceeding immediate needs, to create a market for the financial instruments and real estate we expect to liquidate (at a profit) in order to have retirement funds to live on in comfort.
Absent population growth, would it still be possible to support each generation of retirees? Japan has begun conducting just such an experiment, albeit involuntarily. There, the population has been flat for years and is now declining, in part due to virtually zero immigration. But declining fertility and lengthening life spans are the hallmark of affluence, and it would seem that the Japanese economy is doing quite nicely, that even retirees are getting by. Japan is a healthy society with low unemployment, high labor force participation, historically low inflation, and high GDP per capita, and apparently coping very well. But the Japanese government borrows heavily to prop up demand, and the central bank has long engaged in aggressive quantitative easing to forestall deflation. Today, public debt is now more than two and a half times the size of GDP. So, while the economy seems healthy, there is clearly a deep-seated weakness, forcing authorities to resort to extreme measures to maintain productive investment and prevent financial instability that might cause the economy to implode and society to fracture.
When first introduced, these measures were probably intended as a stopgap, and while they do not seem to be sustainable, capitalism as we know it—with fractional reserve banking, the decoupling of saving and investment, etc., etc.—has always been in need of government intervention. The history of capitalism itself is largely a history of learning how to keep it from spiraling into disaster. And we are still learning. Capitalism is too much like a nuclear chain reaction, rather than some sort of stable clockwork mechanism. Without effective moderators and corrective forces, it is apt to either blow up or run down and go cold. Bank runs, financial panics, deflationary effects related to the paradox of thrift—all are lessons in the underlying instabilities of the way we organize productive activity.
So, it is necessary to ask whether a reduction in population growth, much less a reversal, would trigger similar instabilities, or even lead to disaster—because it is apparent (to most of us) that capitalism is fundamental to supporting our population at any level of affluence. And billions of people can not be expected to simply relinquish affluence once attained, nor forgo affluence within reach.
Reasonable people might disagree over what the name capitalism “really” means, but here we will use the word in its most useful sense, to denote a market-based economy with the means to accumulate, concentrate, and control capital so it is deployed for innovation and production.
Obviously, this does not simply mean freely-operating markets. The activity of trading among individual producers of goods and services is not capitalism (no matter how unregulated), and it does not necessarily lead to capitalism. “Capitalism” without capital (beyond the seed for next year’s crop) is an oxymoron.
The preeminent means by which modern capitalism deploys capital is the corporation, and in particular the publicly-held corporation, which is so deeply embedded in society that it is difficult to imagine life without it, outside science fiction. The public markets for corporate securities, in particular shares of common stock, are a driving force in ways we seldom think about.
Take the fact that the most important (and usually only) source of returns to an investor in stock shares is the next investor, who buys with the same anticipation of finding another optimistic investor in the future, and so on. If this sounds like a pyramid scheme, well, that’s really what it is. And everyone profits, so long as the firm grows and achieves business metrics that raise expectations, which in turn lift the share price.
In other words, the very first investors, who supplied the capital to start the firm or finance a new phase, are generally long gone, having taken their return as early as possible. They exited at the best point in time for them, all things considered (time value of money, future prospects of the firm, etc.). Yet the firm is not done delivering returns. Each new “investor” charges the firm with a mandate to create still more share value, which normally means more growth. On the other hand, these “investors” do not in fact put any additional capital into the firm. In a very real sense, they freeload on the original investment: They expect a payout without contributing anything toward it.
Of course, there are public companies whose return takes the form of dividends, which are paid out of profits and don’t actually require business growth. But these are in a minority. And in any case, a two or three percent dividend is generally not enough to retire on, much less build a retirement nest egg. Which is not to say that retail mutual funds, for example, will always do better, but we expect them to. Much better.
When nearly all domestic business is conducted by publicly-traded companies, the combined growth of all is limited to the growth of GDP, which is essentially determined by the growth in labor productivity added to the growth in population. (If one firm grows instead at the expense of another, say by taking away market share, then the return to its investors comes at the price of the destruction of capital owned by others. The overall limiting factor remains the growth of GDP.)
As long as sufficient growth is attainable, this arrangement provides incentives that drive the needed investment and innovation. But if the expected returns from productive enterprise fail to satisfy, then investors will turn elsewhere for yield, with consequences that are not always very constructive: national capital flight, asset bubbles, pump-and-dump schemes, deliberately destructive shorting, leveraged buyouts that saddle firms with unsustainable debt, etc., etc.
Consider again the case of Japan. In the decade before the recent pandemic, GDP growth in Japan hovered around 1.5%, while in countries like the US and UK the growth was more like 2.5%. During the same period, US population growth was around 1%, while in Japan there was no growth. These numbers make sense, but they didn’t come about as a matter of course. In order to avoid a deflationary spiral—in order to maintain business investment that would otherwise undoubtedly leave the country—the Japanese authorities were forced to resort to much greater and more expensive stimulus programs than those in the US or UK (before the pandemic), precisely because long-term population decline limits domestic economic growth to unattractive levels. The authorities feared a deflationary spiral in which declining investment and shriveling demand feed on one another, leaving society far poorer.
Because of international trade and capital flows, the global picture is obviously much more complicated than the simple illustrations presented here, and perhaps over time our form of capitalism might well adjust itself to a new set of expectations. For example, we might manage (globally speaking) a 1% annual productivity increase coupled with a 1% annual population decline, leaving economic activity essentially flat overall in dollar terms, but with generally improving lifestyles. Still, it is difficult to imagine how the world would get there, i.e. achieve such far-reaching financial reorganization while continually maintaining the confidence necessary for investment, and needed to ensure economic demand throughout the transition. Fear leads to frugality, and rising frugality is destructive of economic activity and prospects.
The foundations of our world were laid down during the Industrial Revolution, and since then the framework has only changed to a limited degree. Even with the arrival of the welfare state, it remains largely intact. And we are beginning to see, breaking out here and there, the dangers of chronically anemic economic growth, the consequences of which we fear with good reason. It seems far-fetched that we could accommodate a reversal of population growth as well.
So, population reduction as a lever for addressing what are likely to be existential threats is in all likelihood beyond our capacity. But continued rising affluence is far from assured. Smart money is already betting on rising environmental volatility, so to speak, disasters and tangible threats of disaster, which in turn may dampen demand and cause big capital, which is inherently conservative to begin with, to become even more cautious. Together, these could become the ingredients of a long-term economic contraction, operating to fulfill their own worst expectations of each other.
At his inauguration during the dark days of the Great Depression, Franklin Roosevelt said to the nation that “the only thing we have to fear is . . . fear itself”. He was right. Yet it is one thing to overcome fear in the midst of widespread unemployment and business failure. It will be quite another in an age of increasingly frequent disasters (if that is what lies ahead). And, as mundane as economic activity might seem, it will be crucial to meeting these challenges. The corrosive effects of fear on the organization of that activity will set the stage for ever greater involvement of governments, but the capacity of democratic governments to act effectively, without making matters worse, should not be taken for granted. Technology is not magic. Neither is Democracy.
