• The Invisible Hand

The Economics of Population Growth

Does population growth help or hinder an economy and historically what have been its effects?

Tokyo, Japan. The largest city in the world by population.

Classical Population Theory

Historically, population has featured much more in economics debates. In the 19th century population was increasing by over 10% a year. Thomas Malthus was one of the first economists to directly address this issue. He was the ultimate pessimist and doomsayer. He believed that rapid population growth was unsustainable and instead ‘positive checks’ would reduce the size of the population. This included things like disease and starvation. This was because he assumed food supplies grew arithmetically while population grew exponentially. Therefore, eventually there would be insufficient resources to support the current population.

Classical writers such as Malthus were initially not wrong with their analysis of population growth, however, they were wrong about food production. It is easier to say that population growth makes people worse off as it spreads fixed resources across more people. However, this does not account for productivity improvements. To be fair to Malthus, there was little major productivity improvements in history since the invention of wheel. Yet, unfortunately for his academic reputation, productivity shot up with a string of revolutionary inventions in the 1760s such as the spinning Jenny. There was also a significant reorganisation of land use and rights which led to output improving dramatically. For most of the 19th century, England was an active exporter of food supplies rather than a country suffering from a dearth. This has been the case since with major innovations such as fertilisers and mechanised agriculture.

Hundreds of years ago, there was a consensus among classical writers that the birth rate was determined by the demand for labour. An increased demand for labour would increase the birth rate as it would be more profitable to have a child as wages were higher. Indeed, this was largely true as during the industrial revolution population grew at the same time as rising wages. However, while it was true a hundred years ago, it is much least potent economic notion in modern times. It is much easier to sustain a child and therefore wages play a less significant role. People do not consider the demand for labour when they are having a child today. There is no subsistence work today so a child earning enough money to survive is not a significant concern.

Modern Population Theory

The modern situation of population is far different from the menacing prognostications of Malthus. Population growth in the UK is only 0.6% and it will probably start declining in a few years. Of course we have better healthcare and sanitation today, so the death rate has declined, but this has been met also with a decline in the birth rate. Economists like to seem rather callous and refer to children as goods. Like any other goods parents make decisions when they have children about the utility they will receive. In our modern age, children are not required for labour and they have become much more expensive to support. Furthermore, it is assumed many parents make decisions based on their expected number of children. Today it is assumed all children survive, however, two hundred years ago this was by no means certain. Therefore, parents would have to have more children to achieve their expected rate as they needed to account for child mortality. People today could achieve the same expected rate by having far fewer births.

The Historical Case

Population is much more minor issue in UK economics today, but to understand it properly we must look back to when it was. Studying the UK population many hundreds of years ago can still help economists today understand population problems in the developing world today. UK population has gone through three main stages in its history. First, the pre-demographic revolution during which both death rate and birth were high and fairly sporadic. Second, the death rate began to fall due to improvements in medical knowledge and public health although the birth rate remained high. Third, as incomes rose and societies industries it became more expensive to afford large families. Population growth in England was faster than any other Western European country between 1700 and 1871, but why?

Contrary to popular belief two-thirds of the population increase came from an increase in the birth rate and only a third from a falling death rate. International migration was minimal so plays a minimal role in this equation. Interestingly, the age specific marital fertility rates were largely stable so most of the change came from a fall in the average age of marriage. Pre-industrial England actually had a fairly high marriage age and since marriage was required for child birth this restricted fertility. For many families marriage represented the moment where they must set up a financially dependent household and fend for them selves. Few people, therefore, could afford an early marriage. However, trends shifted over time. Increased urbanisation meant it was much easier to set up a household as buying a farm could be much more expensive. However, agricultural living also came more financially manageable as tenant farming became much more common in which landlords would look after their labourers.

Some growth did come from a fall in mortality as higher wages and improved food production extended life expectancy. However, at the same time the mortality rate in industrial areas remained significantly higher than rural regions. Medical historians find little evidence of any medical improvements become widespread in this time. Inoculations were also introduced in England in the 1720s.

Significance of Population Growth

Minimal population growth has little impact on our economy today, but it could have profound economic effects in industrial economies. Higher population growth increases the ‘dependency ratio’ as there are more young people who need to be supported by working age adults. This constrains savings which then has a knock-on effect on the availability of capital. There could also be a negative shock on wages as the supply of labour has increased. This could have widespread impacts in an industrial economy. According to Ernst Engel falling wages mean more money is spent on necessities rather than industrial goods, hence the rate of industrialisation is slowed.

However, population growth seems to have always been beneficial especially if it is accompanied by economic growth. Besides the effect on wages, a greater population makes it much easier to develop economies of scale and implement division of labour. The development of the English transport system has only been possible due to the population growth, which provides a justification for its construction. Overall, it appears demographic growth is necessary for economic growth, but not sufficient as productivity growth is also needed to ensure this growth can be supported.

For modern developing countries approaching the same stage in their economic cycle as England two hundred years ago, there are many lessons to be learnt. First, population growth can be a force of good if it is accompanied by an increase in demand in an economy and can open up productivity opportunities. Second, the case of population growth in England shows that it can be sustainable, but also demonstrates the importance of customs (eg marriage) and income on population decisions.

I hope you have enjoyed this concise introduction to population theory and overview of the English case. Please subscribe at the top of this page for updates of future articles. To support this blog and receive exclusive economics articles become an elite member here https://www.economics-exchange.com/plans-pricing.


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