Economic Theory

Could a shrinking population be a good thing?

David Miles of Imperial College and – horrors – the Office of Budget Responsibility, has found himself getting some attention for a rather dryly academic paper suggesting falling population numbers might bring us benefits. That is quite the opposite of more commonplace views either that we desperately need more people, or anyway, that we need the number of people always to grow.

That sort of case is often made in terms of the benefits of maximising the number of “ideas” – the more people there are, the more Einsteins. That, surely, must be a benefit, we are told. Well, a smattering of additional Mozarts would do no harm, but whether we really want too much brain power working on making AI even cleverer I am not so sure. A different problem is that these stories do not seem to give much weight to the obvious point that we would end up with more bad people too. One Caligula in the whole of human history is quite enough on my scoring, and do these people really want to maximise the number of Lucy Letbies? And what about the evil geniuses inventing ULEZ schemes, and whatever is coming next?

But the key parts of the Miles paper are about something different. They are about the effects of changing population. We are, in effect, constantly fed the dreadful story that we simply must keep the birth rate (or immigration rate) up, so that the future workforce’s taxes will be enough to pay the government debt we are running up. It is an odd sort of very-long-term short-termism. Sure enough, if we pack the country full of immigrants (who are very often hard working, and entrepreneurial) for the next few decades, we can keep the government afloat. But who is to pay the debt that will no doubt be accruing at just as fast a rate, or perhaps a faster one, in those years? We would need a yet higher population, and somewhere down that road the place is going to get a bit too crowded.

Miles’ idea is different from that as well, and has an interesting relationship to Alvin Hansen’s idea of ‘secular stagnation’ from the 1930s and 1940s. That was revived a few years ago, in a bastardised form by Larry Summers and others. In the original, Hansen’s view that population growth was going to slow was an essential. It meant that in future there would be fewer workers, and hence less need for capital equipment and the like. That was bad news because it was supposedly the need to replenish and enlarge the capital stock that provided a use for all the saving he expected American households to want to undertake. Without this investment, he thought, household consumption would be too low for all the willing workers to find jobs supplying it. In other words, we needed a growing population so that the future needs of the future workers would keep the current workers employed in making capital equipment for them. But declining population, along with the end of the great investment boom of slightly earlier times – the building of the railways, for example – and then the end of the War, was going to deprive workers of this opportunity, and a perpetual state of unemployment threatened.

Few such prognostications in economics work out really well for their prophets, but Hansen’s came a cropper worse than most. Population growth did not slow; there turned out to be plenty of investment opportunities to replace the railways, and of course American households’ appetite for consumption proved very strong. It was the age of Conspicuous Consumption, not of secular stagnation, that followed.

Miles raises no concern about the disappearance of investment opportunities, but otherwise follows much the same line. However, he reaches the opposite conclusion. For him, declining population has the same characteristic of meaning we need to undertake less investment. We can, if you like, maintain the current capital-to-labour ratio whilst reducing the overall stock of capital. That means some of the existing capital can be allowed to depreciate away without being replaced. Consequently, as Miles says, there is scope for extra consumption – and quite a lot of it too. His estimates suggest, depending on the exact assumptions, that we could all be better off by thousands of pounds a year, in terms of consumption, as a result.

It is an odd thing, one might think, that Hansen and Miles could start from apparently just the same position and end up with opposite conclusions. The difference is not in their understanding of population dynamics or the connections between current investment, the capital stock, employment, and output. Nor is the difference anything to do with the relationship of income, consumption, and investment. Rather, it is in their presumptions about the determination of employment. Hansen was arguing thoroughly in the mode of Keynes, and supposing that one could understand employment only by understanding demand. He looked to the determinants of consumption and investment as fixing employment. Miles, about eighty years, and at least one anti-Keynesian counter-revolution later sees it differently. Employment is determined by labour supply. Those who wish to work at the going wage will find a job. Just what the ‘going wage’ means, is the wage that lets the people who want to work for it find a job. So, Hansen’s concern that there might be ‘not enough jobs’ does not arise. Surely, but for the more severe, yet still temporary, kind of business cycle, Miles is about right. Then, the question of whether we, and the next several generations might be better off if population were to fall is a real one, and Miles’ analysis is one to ponder carefully.



Recommended reading:

David Miles, “Macroeconomic impacts of changes in life expectancy and fertility”, The Journal of the Economics of Aging, vol 24.


Dr James Forder is Academic and Research Director at the IEA. He has taught economics and sometimes politics at Oxford University since 1993 and is Andrew Graham Fellow and Tutor in Political Economy at Balliol College. His principal research interests have been in central bank independence, and the history of macroeconomics ideas, including especially those following from the work of A W H Phillips; and the work of Milton Friedman. He has also written on the merits of the first past the post electoral system. He believes that public policy could be enormously improved by greater recognition of the power and utility of price mechanisms, as compared to regulatory controls such as prohibitions, licensing rules, and obligations on public bodies to pursue specific quantitative outcomes.

2 thoughts on “Could a shrinking population be a good thing?”

  1. Posted 23/09/2023 at 10:20 | Permalink

    David Miles wrote a paper on inter-generational modelling about 24 years ago. I think it was the first of its type focusing on the UK in a major UK journal. The advantage of the approach in this paper and the earlier paper is that they help you create a systematic framework for analysing the problem. I noted at the time, however, that the earlier paper assumed a closed economy for its main results and that is quite a serious limitation. It seems that this paper assumes away almost everything that is important. Firstly, capital is not homogenous – it is not a single lump which, when added to labour, enhances productivity. Capital is highly heterogeneous and capital needs will change as the population size and structure changes. At the extreme, you could imagine the existing capital stock being entirely useless as the population ages (can we just turn a school into a care home?). Of course, that extreme is not the case, but neither is the assumption of homogeneity. Also, it seems that a closed economy is assumed again. How much of the capital stock is subject to claims from abroad (about one-third of government debt is held overseas)? Overseas capital markets can both change the capital:labour ratio but also who benefits from the provision of capital. What about immigration? What about the changing age structure of the population? David Miles’ outfit suggests that spending (and hence taxes) will have to rise by 12 percentage points of national income to cope with ageing. Does this not affect the economy in any way? And what about second-round effects of ageing on taxes? The increase in spending has been exacerbated by government decisions (as the OBR has consistently noted) arising (one could argue) from the ageing of the electorate. In addition, those who argue for population growth do not just argue that there will be more Mozarts, but that there are agglomeration and innovation effects too from vibrant and young populations. Some (though not all, or even most) of these questions are raised towards the end of the article. But economists who write these articles, really should make their assumptions explicit. That helps readers understand both the limitations of work and the areas for further scholarship.

  2. Posted 31/10/2023 at 15:57 | Permalink

    Quite surprised by the notion…a shrinking population is good for you?
    Yes we’ll consume less, we’ll give the planet a chance to breathe and recover..from us!

    Unfortunately, NO population shrinks in the way you’d want it too, to maximise resources, labour, productivity, social welfare, healthcare, pensions etc without some form of dark dystopian intervention beloved by sci-fi film buffs!

    If developed countries want to continue down the path of record high abortion rates meets record low birth rates, those of us still alive in the next twenty years will REALLY understand what is meant by the term “demographic time bomb” it’s going to be shift in our way of living, some may say surviving an order of magnitude!

    You can already see the beginnings in the ‘supply chain’ of human beings with maternity wards being mothballed and infant schools being closed all over the country…next it will be junior schools!

    When large employers, looking for their yearly intake of interns and graduates go to the HR cupboard and there’s only a tin of baked beans and a packet of half eaten digestives left..what then?

    Ai and automation will only get us so far, eventually you’ll need a pair of hands that isn’t 75 yrs old and shaking..

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