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Demographics And Economic Progress

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I’d like to share some thoughts on the connection between demographics and economic progress/change. Before I start I want to clarify that I don’t approve of the way many people seem to treat children, viewing them only as costly “investments”. However, the fact is that there a such people out there and that they influence demographics and economics in very important ways.

You all probably know these facts:

– The median age has been constantly rising since the 19th century in the developed economies around the world

– In the early 19th century Europe, societies consisted of much more children and only very few people in what we today would call “pension age”

– Today, countries like Germany or the US have few children but a large and rising pensioner component

Some economists see a causal relationship between this demographic change and the development of modern economies. They say that the decline in birth rates in the 19th century led to a higher proportion of society in “working age”, and therefore led to a rise in overall savings versus consumption. This facilitated investments and the accumulation of capital, which, of course, is one of the most important sources of long-run economic growth.

I have some problems with this theory. Firstly, what caused birth rates to decline? Secondly, the assumption that declining birth rates led to a higher proportion of employed people is probably wrong. We all know that child labor was very common in Europe and North America during the 19th century. I suppose it was “necessary” because the share of children in the society was so large that it was uneconomical (and unaffordable if they wanted to survive) to forgo on child labor. Coincidentally, child labor was abolished after the population share of children had declined due to lower birth rates and higher life expectancies. So I assume that employment ratios didn’t change much during the last 200 years, which means that demographic change probably cannot explain higher overall savings.

Instead, let’s think about economic reasons why people chose to have fewer children. It is known from Sub-Saharan Africa today (and Europe in the 19th century was very similar to Sub-Saharan Africa today in terms of standards of living) that poor people tend to have more children because they think of them as pension insurance and an investment in future labor force, which will be available to them 10-15 years later. Indeed, children are the best “investment choice” for such poor people. There are no other sensible investment choices in a world full of wars, pandemias, with undeveloped financial markets and unsound money.

This was also true for 19th century Europe. If you expect pandemias, you are better off having more children who could help you with your family business (often farm work), instead of putting money aside for the future. Once the pandemia or the famine was there, labor would be scarce and expensive to buy.

In early 20th century, Europe had changed much from the early 19th century. There was sound money (gold standard), few wars, and almost no pandemia and famines anymore. You didn’t need children as a pension insurance, or as a “labor reserve”, anymore. At the same time, industrialization meant that children had to go to school, if you wanted them to get a good job. So parents started investing into the education of their children. This made children more expensive; another reason to have fewer children.

The World Wars and the financial crises of the early 20th century changed “investment circumstances” again. In 1945, nobody knew for sure what the future would look like. Famines, pandemia, more wars, everything was possible. Pensions were swept away by hyperinflation in most parts of the developed world (even the US experienced high inflation in 1945-50). Children as an insurance became more interesting again. Further, the huge losses in the labor force meant that wages were expected to go up as soon as the peacetime economy was back to full speed again. Considering the Ponzi-scheme-like pay-as-you-go pension systems that were established by then almost everywhere, having children in a time of rising wages looked like a perfect insurance for future pensioners.

However, by the 1960s people realized that there were no famines, pandemia, or more large wars to expect. The farmland population had all but vanished. Having children was more expensive than ever before, with college tuition costs and high youth unemployment rates due to minimum wages. No wonder that birth rates fell to rock bottom.

Nowadays, having children is purely for fun. You don’t have children as a pension insurance. The government coerces other young people to pay for you pension instead. The financial markets were so stable and ever more easily accessible during the last 50 years that it has become much safer (and more profitable) to invest surplus savings into stocks, bonds, etc.

Though, the ongoing financial crisis and the dire straits of our pension schemes could increase the incentives to have children. It has become totally crystal clear that we either have to have more children or increase our savings, if we want to get pensions that last until at least the average life expectancy of 82 years.

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