The Concise Encyclopedia of Economics


by Ronald Demos Lee
About the Author
The world's population doubled between 1950 and 1990, from 2.515 billion people then to 5.292 billion in 1990. Of the 2.777 billion increase, only 13.4 percent was in developed countries, with 86.6 percent in less developed countries (LDCs). The main reasons for this growth were fertility and age distribution in developed countries and both higher life expectancies and high birthrates in less developed countries. Life expectancy in developed countries rose from 65.7 years in 1950 to 1954, to 74.0 years in 1990. For LDCs, life expectancy rose from only 41.0 years in 1950 to 1954, to 62.0 years in 1990. Over that same time the number of births per woman fell from 2.84 to 1.9 in developed countries. In LDCs the rate fell from 6.18 births per woman to 3.9. But birthrates in LDCs are still high enough to contribute substantially to population growth.
Population Aging

Lower birthrates and longer life lead to "population aging" (i.e., more elderly people and fewer children). Population aging is most rapid, and has gone farthest, in the developed world. The median age in developed countries rose from 28.2 in 1950 to 33.8. In LDCs, by contrast, the median age in 1990 was only 21.9. Of course, individual countries vary. The median age in Sweden was 39, whereas in Kenya it was just 14. In Kenya there were only six people age 65 and over per hundred working-age persons (age 15 to 64), while in Sweden there were twenty-eight, or almost five times as many. The United States was typical of developed countries in having a median age of 33.

Population aging matters for many reasons, but first and foremost because of the costs of retirement (pensions and health care). In the developed countries these costs are borne principally by the central government and funded through taxes on the working-age population. In the United States in 1940, there were eleven elderly per hundred working-age people. In 1990 there were twenty. Projections indicate that by the middle of the 21st century, there will be more than forty elderly per hundred working-age people, and under "pessimistic" scenarios there may be fifty. Other things being equal, the tax rate for pensions will be proportional to this ratio. Therefore, unless benefits are cut, the tax rate for pensions and health care will double in forty years, even if costs of health care do not continue to rise. Similar or more striking changes are projected for other developed countries.

Those paying for the current retirees do so with the understanding that they, in turn, will collect from the next generation of workers. Population aging generates intense political pressures to modify this implicit social contract by such devices as delaying the age of retirement or reducing the size of the benefit. The fear of population aging is a strong political force in many developed countries, leading to policies to induce people to have larger families. Such policies include banning abortion and contraception, offering prizes and financial incentives for births, and instituting generous paid-leave policies for women who stay home to care for their babies.

To some degree, however, the increased costs of the elderly are offset by declining public and private costs of raising children, since a lower birthrate is actually the prime cause of population aging. In LDCs, for example, there are fifty-nine children per hundred working-age people, while in developed countries there are only thirty-two.

Only a few years ago, concern with aging seemed ridiculous for LDCs, but with falling fertility and lengthening life, it is now taken seriously indeed. In East Asia the elderly dependency burden—the ratio of population aged sixty-five or more to the population aged twenty to sixty-four—is projected to be higher in 2025 than it now is in Europe. Not only is population aging projected for LDCs, but at the same time economic development and urbanization are weakening the traditional family-based support systems for the elderly.

Fluctuations in Generation Size

Fluctuations in generation size also cause problems. When a small generation pays high taxes to support a large retired one, as will soon happen in the United States, issues of fairness arise. Changes in generation size also affect the labor market. When the small U.S. generation born in the depressed thirties reached the labor market in the fifties, its small size relative to the demand for new workers brought it easy employment, high wages, and rapid advancement. But when the baby-boom generation reached the labor market in the seventies, it experienced relatively high unemployment, low wages, and slow promotion. This picture is complicated by immigration, as well as changing patterns of international trade and education. If the future imitates the past, however, the baby-bust generation entering the labor market in the nineties may again do relatively well.

Population and Development

Although population aging and bulging age distributions are real concerns, many people's greater fear is that global population growth will overwhelm the capacity of economies and of the global ecosystem.

This fear of population growth is not new. Thomas Robert Malthus (see Malthus in Biographies section) and other classical economists believed that as growing population made land increasingly scarce, rising food prices would eventually choke off further economic and population growth, leading to the "stationary state." For classical economists, natural resource constraints, particularly of land, were at the heart of the problem. But the economic importance of land has dwindled in the modern world. The share of the labor force in agriculture has declined from around 80 percent to around 5 percent in many developed countries, while the share of output generated in agriculture has declined even more with industrialization.

Even within agriculture, land has become less important as productivity has been boosted by other inputs, including labor, fertilizer, pesticides, insecticides, new seed varieties, irrigation, mechanical or animal draft power, and education. Contrary to the predictions of the classical economists, real food prices have historically fallen somewhat. In the United States, for example, the price of wheat in 1980 (adjusted for increases in the consumer price index) was about one-third below the price around 1800. Also contrary to the classicals' predictions, from 1950 to 1980 the world's per capita food production increased by about 1 percent per year, for a total increase of about 35 percent. The incidence of famines has diminished, not increased, and modern famines often arise from wars or mistaken policies rather than from population growth. Although hunger and malnutrition are serious problems in many parts of the world, they result more from poverty and uneven income distribution than from deficiencies of agricultural production due to population growth.

So the classical economists' emphasis on land as the critical limiting factor was undermined by the ability of technical progress and capital accumulation to expand output from the industrial revolution until the 1970s. Economists came to view natural resource constraints as unimportant. Instead, investment and capital accumulation, and the creation and transfer of technology, were seen as the keys to economic development.

In the forties and fifties economists who studied population had a new concern. They argued that when population grows more rapidly, a greater proportion of current output must be set aside to create capital—housing, tools, machinery, and schools—for new members of the population. All these investments must increase, they noted, at the same time that more children per family tend to reduce domestic savings rates. If the additional investment does not take place, they claimed, then capital will be diluted: new generations will be less well equipped than older ones.

Economists who have used data to simulate the effects of population growth on the capital stock have, however, concluded that "capital dilution" should have relatively small effects: an increase in the population growth rate from 2 percent per year to 3 percent per year, for example, would eventually reduce per capita output by about 7 percent. More important, though, is the problem of providing adequate housing and sanitary infrastructure in the rapidly growing urban areas of Third World countries.

This analysis, with its emphasis on investment and age distribution, was challenged during the sixties and seventies. Empirical studies provided only mixed support for the view that high fertility reduced savings. Second, the role of capital itself in economic growth was questioned. Empirical studies attributed more importance to other factors such as education and technology. For the United States between 1929 and 1969, for example, capital accounted for only 11 percent of the growth in per capita income. Third, two economists, Ester Boserup and Julian Simon, argued forcefully that population growth had many positive economic effects. These included stimulating investment demand, breaking down traditional barriers to the market economy, spurring technological progress, and leading to harder work (the latter because the presence of more dependents in the household raises the marginal utility of income relative to leisure and leads to longer hours of work). They noted also that a larger population can also more easily bear the costs of providing certain kinds of social infrastructure—transportation, communications, water supply, government, research—for which the need increases less than proportionately with population.

By the eighties policymakers were confused. Was population growth good? Was it bad? Did it matter at all? Systematic debate and reassessment in the eighties revealed a surprising degree of agreement among economists. While few economists accepted Julian Simon's view that population growth was actually good for development, the consensus was that population growth mattered less than had been thought. Most economists had failed to appreciate how flexible competitive market economies are. In market economies, when population growth makes resources more scarce, the prices of those resources rise. This leads consumers to reduce their demand for those resources and to find substitutes. The higher prices of resources also give producers an incentive to find new supplies. But more important, technological progress often reduces prices of resources, even in the face of higher demand (see Natural Resources).

As Julian Simon has shown, the real prices of most minerals have been falling historically, not rising. The total costs of natural resources as a share of national output have not been rising. The one exception is petroleum prices, but that is due to OPEC, not to rising population. Before OPEC exerted control on the world oil market in 1973, the real price of oil had been falling. And even now the world price of oil is less than half the level it reached in 1980. (See OPEC.) In 1980 Simon wagered environmentalist Paul Ehrlich that mineral prices would decline in real terms during the following decade. They agreed on five minerals—copper, chrome, nickel, tin, and tungsten. In 1990 Simon won the well-publicized bet and collected his money. Between 1980 and 1990 the inflation-adjusted prices of all five minerals fell, copper by 18 percent, chrome by 40, nickel by 3, tin by 72, and tungsten by 57.

But while economists were concluding that population growth was relatively unimportant, ecologists and environmentalists like Paul Ehrlich and Garrett Hardin were sounding the population alarm. They pointed out that the biosphere provided essential, although uncounted, inputs to economic activity, and warned that its limits and fragility placed bounds on sustainable levels of production. These bounds, they said, had already been surpassed. The global economy, they thought, was profligately consuming ecological capital, rather than living off the "interest" it yielded.

Like Malthus, the ecologists warned about the impending exhaustion of minerals. Although mineral depletion is probably not the real problem, many of the ecologists' most important warnings appear correct and persuasive. The reason is that many renewable resources—air, water, fisheries, land, forest cover, ozone layer, and species—are not privately owned. Instead, they are held in common. Therefore, as Garrett Hardin pointed out (see The Tragedy of the Commons), no person who uses these resources takes account of the damage he or she imposes on others. Individuals and companies, for example, can dump pollution into the air and water without being made to bear the full cost of environmental degradation. The costs are passed on to society as a whole. Consequently, economic incentives encourage overuse. The automatic signaling mechanism of market prices is absent. Therefore, price changes serve neither as an incentive for preservation nor as a signal of increasing scarcity.

Worries about population growth have now come full circle: from the classical concern for limited land, to the emphasis on physical capital, to more recent emphasis on human capital and the ameliorative influence of competitive markets, to beneficial aspects of population growth, and back once again to the natural constraints urged by ecologists. This time, however, the concern is for renewable natural resources, most of which fall outside the market. For some the urgency of population control on ecological grounds is obvious. Others remain skeptical.

As for the more narrowly economic reasons for restraining population growth, decades of research are still inconclusive. For a few countries with very dense populations, like Bangladesh, China, and Egypt, the case is quite clear. For a few others with exceptionally rapid population growth, like Kenya, the case is also clear. But for others the national gains from reducing fertility may be modest.

About the Author

Ronald Demos Lee is a professor of demography and economics at the University of California, Berkeley. He is a past president of the Population Association of America and received the Mindel Shepps Award for outstanding research in mathematical demography and demographic methods. He cochaired the National Academy of Sciences working group on population and economic development that produced a widely cited report in 1986.

Further Reading

Ehrlich, Paul, and Ann Ehrlich. The Population Explosion. 1990.

Kelley, Allen. "Economic Consequences of Population Change in the Third World." Journal of Economic Literature 26 (September 1988), no. 4: 1685-1728.

Menken, Jane, ed. World Population and U.S. Policy: The Choices Ahead. 1986.

National Academy of Sciences. Population Growth and Economic Development: Policy Questions. 1986.

Simon, Julian. The Ultimate Resource. 1981.

World Bank. World Development Report. 1984.

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