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The Return of Malthus?

Last month China announced that, after 35 years, it was ending its one-child policy which restricted couples to one child. While the prohibition was rigorously enforced on the masses, for those with party connections there was always a way around the policy. The fortunate few studying abroad, for example, could return with their foreign-born brood when their studies were completed.

The policy was driven by fears that China was stuck in a poverty trap: that unbridled population growth prevented the accumulation of savings needed to invest in the capital necessary to raise income. As Deng Xiaoping, the Chinese leader who imposed the policy in the late 1970s, put it the policy was needed to ensure that “the fruits of economic growth are not devoured by population growth.”

This is straight out of Robert Malthus–the 18th century English clergyman, turned economist, who pessimistically concluded that society faced a natural constraint: population increases geometrically, while food production increases arithmetically. As a result, man’s proclivity for reproduction would eventually exhaust any improvement in agricultural productivity, so that mankind’s fate (or, rather, the fate of the labouring classes) is one of disease, malnutrition and early death.

No wonder Carlyle dubbed economics “the dismal science.”

Looking at the long span of historical data he confronted, Malthus’ pessimistic perspective is understandable. There was, after all, very little improvement in caloric intake or other measures of well being from the Stone Age to the industrial revolution of the late 18th century apart for a fortunate few who ascended to the tip of society’s pyramid. Indeed, Gregory Clark argues in “A Farewell to Alms” that workers of the early industrial revolution actually had a worse standard of living than their pre-history hunter-gather counterparts foraging on the African Savannah.

Malthus was singularly unlucky, however, in that he was writing on the cusp of a truly revolutionary change in living standards. Economists might say he missed a “structural break.” What Malthus’ failed to anticipate was the remarkable increase In agricultural productivity unleashed by the nascent science of chemistry, which would lead to fertilizers, as well as botany and plant science, which together greatly expanded agricultural yields. At the same time, while it wasn’t apparent to him or, subsequently, Marx, the fruits of the incredible increase in productivity that the industrial revolution unleashed were eventually shared with workers–albeit not without a fight.

A funny thing happened on the way to a higher labour share of national income. As workers’ incomes increased and became more stable, behavior changed. Fecundity decreased. Individuals began having fewer children; a trend that accelerated in the advanced economies with the invention and introduction of the birth control pill in the 1960s. Fertility rates in some countries are now so low that population growth is stagnant. Instead of rearing children, workers accumulate possessions.

It’s a material world.

Today Malthus is dismissed as an economist. Yet, in some respects, a new threat puts Malthus on his head. The worry of some is that with labour force growth flat, output growth is dependent on technological change. Technology has, of course, been the driving force of productivity and income gains. But, if, as some prominent economists foresee, we are in a period of slow technological change we could see output stagnating and advanced economies becoming stationary states.

The stationary state scenario is not necessarily a problem. And, indeed, it might reflect a better balance between material accumulation and fundamental resource constraints, such as the earth’s capacity to absorb CO2 emissions. (Past measured growth, it might be argued, was overstated since the negative externalities associated with the carbon-based economy of the past 200 years were not factored in the national income accounting.)

But what does the scenario imply for global economic prospects?

In the first instance, there is the concern that higher savings of the aging population of advanced economies implies less consumption and the secular stagnation hypothesis advanced by Larry Summers: chronic demand deficiencies that are only relieved temporarily by asset price bubbles.

In the second instance, there would be a change in global demand patterns. Advanced economies with aging populations cannot be relied upon as the consumer of first and last resort, as arguably was the case prior to the global financial crisis. This implies that the emerging markets that had benefited from large current account imbalances, reflecting underlying savings-investment imbalances, will have to develop domestic sources of demand–the rebalancing of growth to which the Chinese authorities say they are aiming.

When viewed in these terms, Beijing’s policies over the past couple of decades seem prescient. Capital accumulation is needed to achieve a level of income consistent with strong domestic demand. But to get that capital required higher savings. The one-child policy, combined with an exchange rate policy that promotes current account surpluses, generated those savings.

As the well-worn saying goes: the challenge for the Chinese masses was to “get rich before they got old.” The recent relaxation of the one child policy may be an indication that, having achieved a level of GDP per capita sufficiently high to sustain convergence to high-income levels and people voluntarily choosing “quality” over quantity of children, the authorities are confident they have succeeded. Time will tell.

A subsequent post will consider the impact of an inverted Malthus on the global financial architecture and the institutions of international cooperation that have helped support global growth and development over the past 70 years.

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