Some Economic Consequences of a Declining Population Author(s): [John Maynard Keynes] Reviewed work(s): Source: Population and Development

Review, Vol. 4, No. 3 (Sep., 1978), pp. 517-523 Published by: Population Council Stable URL: http://www.jstor.org/stable/1972863 . Accessed: 29/02/2012 20:49
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Some Economic Consequences of a Declining Population

The most domninant force in postwar Western economic thoughtis undoubtedly that of the eminent British economist, John Maynard Keynes. "Keynesian economics," as it has come to be known, has until the past few years guided governmentaleconomic policy in almost every advanced capitalist nation. But Keynesian theoryhas little to say about population change as a strategiceconomic variable-it being assumed in the best tradition classical and neoclassical economics that population growth of is "exogenously"determnined the natural biological procreative inclinations by of human beings. Moreover,steady population growth(along with capital accumulationand technologicalchange) was perceived by Keynes and othersas an essentialingredient an expandingeconomy. for It is interestingbut perhaps not surprising,therefore,to read in Lord Keynes's Galton Lecture delivered beforethe Eugenics Society in 1937 a wvarning against the widespread assumptionthat a stationary declining population or wouild be an unmitigated social and economic good. Within the Keynesian theoreticalframework, declining population would lead to a lower level of a demand, lower aggregate savings, less capital accumulation, and ultieffective matelya higherlevel of unemployment. Thus Keynes warns his audience that the "chainingup of one devil [population growth] may, if we are careless, only serve to loose anotherstillfiercer and more intractable[unemployment]."Needless to say, Keynes's predictions about a declining population proved grossly incorrect (thus confirmling initial statemient his that "we do not know what the futureholds"). Moreover, in the context of contemporary developing nations, the positiverelationshipbetween population and income growthand the negative relationshipbettween population and unemployment increase embodied in the Keynesian theoryappear to be reversed. And yet Keynes's ideas in this 517

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more rapid to speech about the necessity redistributing of incomnes promote ringin the population, a familiar have income growth theface of a declining in development literature the1970s. of Keynes'sGalton Lectureon the economicconsequencesof a declining population published theEugenicsReview29, no. 1 (1937): 13-17 and was in is reproduced below.

speaking, The future neverresembles past-as we well know.But,generally the our imagination our knowledge and are too weak to tell us what particular as holds. Nevertheless, changesto expect.We do not knowwhat the future of livingand moving beings,we are forcedto act. Peace and comfort mind Yet ourselves how little foresee. we must we requiire we shouldhiide that from We to for be guidedby somehypothesis. tend,therefore, substitute theknowlconventions, chief whichis to assume, the of edge whichis unattainable certain will resemble past. This is how the contrary all likelihood, to thatthe future in an we act in practice. Thoughit was, I think, ingredient the complacency reflections human on of the nineteenth that,in theirphilosophical century of contraption the Benthamite behaviour,they accepted an extraordinary of of courses actionwere School,bywhichall possible consequences alternative comparative first expressing their supposed have attached them, a number to to of numberexpressing probability their the advantage, and secondlyanother from courseof actionin question;so thatmultiplying the together following the numbers attachedto all the possibleconsequences a givenactionand of system whatto do. In thiswaya mythical addingtheresults, coulddiscover we of probableknowledge was employed reducethe future the same calcuto to But even lable statusas the present. one has ever acted on thistheory. No I influenced somesuchpseudois by to-day believethatourthought sometimes rationalistic notions. by Now I emphasize the of to-night importance thisconvention whichwe assume future be muchmorelikethepastthanis reasonable-aconvention the to ofbehaviour as it whichnoneofus couild possibly without-because, I think, do our to continues influence mindseven in thosecases wherewe do have good a example reasonto expect definite change.And,perhaps, mostoutstanding the ofa case wherewe in facthave a considerable is powerofseeingintothefuture the prospective thanwe trendof population. We knowmuchmoresecurely that,in factor relating the future to knowalmost any other socialor economic theplace of the steadyand indeedsteeply whichwe rising levelof population short of haveexperienced a great for number decades,we shallbe facedin a very but time witha stationary a declining or level.The rateofdeclineis doubtful, it compared withwhat we have been is virtually certain thatthe change-over, conused to, will be substantial. have thisunusualdegreeof knowledge We in of the becauseofthelongbutdefinite time-lag theeffects vital cerning future is from Nevertheless idea of thefuture the statistics. beingdifferent thepresent and thatwe, most to modesof thought behaviour so repugnant ourconventional several a to Thereare,indeed, resistance acting itin practice. on ofus,offer great

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important social consequences already predictable as a resultof a rise in population being changed into a decline. But my object this evening is to deal, in particular, with one outstanding economic consequence of this impending to change; if,thatis to say, I can, fora moment,persuade you sufficiently depart fromthe established conventionsof your mind as to accept the idea that the future will differ fromthe past. II An increasing population has a very importantinfluence on the demand for capital. Not only does the demand forcapital-apart fromtechnical changes and an improvedstandard of life-increase more or less in proportionto population. But, business expectationsbeing based much more on present than on prospective demand, an era of increasingpopulation tends to promote optimism,since demand will in general tend to exceed, ratherthan fall shortof,what was hoped for. Moreover a mistake,resultingin a particulartype of capital being in temporary over-supply,is in such conditions rapidly corrected. But in an era of decliningpopulation the opposite is true. Demand tends to be below what was expected, and a state of over-supplyis less easily corrected.Thus a pessimistic atmosphere may ensue; and, althoughat long last pessimismmay tend to correct itselfthroughits effect supply, the first on result to prosperity a change-over of froman increasingto a decliningpopulation may be very disastrous. In assessing the causes of the enormousincrease in capital duringthe nineteenth centuryanid since, too little importance,I think,has been given to the influenceof an increasing population as distinct from other influences.The demand for capital depends, of course, on three factors: on population, on the standardof life,and on capital technique. By capital technique I mean the relative importanceof long processes as an efficient method of procuringwhat is currently described as consumed, the factorI have in mind being conveniently the period of production, which is, roughlyspeaking, a weighted average of the interval which elapses between the work done and the consumption of the product. In otherwords the demand forcapital depends on the number of conand the average period of production. sumers,the average level of consumption, Now it is necessarilythe case that an increase in population increases prothe portionately demand forcapital; and the progressof inventionmay be relied onito raise the standardof life. But the effect inventionon the period of proof duction depends on the type of inventionwhich is characteristic the age. It of may have been true of the nineteenthcenturythat improvements transport, in standardsof housing and public serviceswere of such a characterthat they did tend somewhat to increase the period of consumption.It is well known that highlydurable objects were characteristic the Victoriancivilization.But it is of not equally clear that the same thingis true to-day.Many moderninventions are directed towards findingways of reducing the amount of capital investment necessaryto produce a given result;and partlyas the resultof our experience as to the rapidityof change in tastes and technique, our preferenceis decidedly directedtowardsthose typesof capital goods which are not too durable. I do not believe, therefore, thatwe can relyon current changes of technique being of the

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kind which tend of themselvesto increase materiallythe average period of proof duction.It may even be the case that,apart fromthe effect possible changes in the average period may be tending to diminish.Moreover the rate of interest, may conceivably have, in itself,the an improvingaverage level of consumption the of effect diminishing average period of production.For as we get richer,our consumptiontends to be directed towards those articles of consumption,particularlythe services of other people, which have a relativelyshort average period of production. Now, if the numberof consumersis fallingoffand we cannot rely on any of technical lengthening the period of production,the demand for a significant net increase of capital goods is thrownback into being wholly dependent on an or in improvement the average level of consumption on a fallin therateofinterest. the to I will attemptto give a few veryroughfigures illustrate orderof magnitude of the different factorsinvolved. years from1860 to 1913. I find Let us considerthe period of just over fifty no evidence of any importantchange in the length of the technical period of But production.Statisticsof quantityof real capital present special difficulties. those which we have do not suggest that there have been large changes in the amountof capital employed to produce a unit of output.Two of the most highly capitalized services, those of housing and of agriculture,are old-established. has Agriculture diminishedin relativeimportance.Only if people were to spend of a decidedly increased proportion theirincomes on housing,as to which there is indeed a certainamount of evidence forthe post-warperiod, should I expect years a significant of lengthening the technicalperiod of production.For the fifty was beforethe war, duringwhich the long-periodaverage of the rate of interest fairlyconstant,I feel some confidencethat the period was not lengthened by much more than 10 per cent., if as much. Now duringthe same period the Britishpopulation increased by about 50 and investment was serving per cent.,and the populationwhich Britishindustry And I suppose that the standardof lifemust have risen by a much higherfigure. by somewhere about 60 per cent. Thus the increased demand for capital was attributableto the increasingpopulation and to the risingstandard of primarily life,and only in a minordegree to technical changes of a kind which called for an increasingcapitalizationper unit of consumption.To sum up, the population which are reliable, indicate that about half the increase in capital was figures, required to serve the increasingpopulation. Perhaps the figureswere about as follows,though I would emphasize that these conclusions are very rough and to be regardedonly as broad pointersto what was going on: 1860 Real capital Population Standardof life Period of production 100 100 100 100 1913 270 150 160 110

in It follows that a stationary population with the same improvement the standard of life and the same lengtheningof the period of productionwould

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have requiredan increasein the stockof capital of only a littlemore than half of the increase which actually occurred. Moreover,whilst nearlyhalf of the home investment was required by the increase in population,probably a substantially higherproportion the foreign of to investment thatperiod was attributable this of cause. On the otherhand it is possible that the increase in average incomes, the decline in the size of families,and a number of other institutional and social influences may have raised the proportionof the national income which tends to be saved in conditionsof full employment. do not feel confident I about this, since thereare otherfactors, notablythe taxationof the veryrich,which tenidin the opposite direction.But I thinkwe can safelysay-and thisis sufficient my for argument-thatthe proportionof the national income which would be saved to-dayin conditionsof fullemployment lies somewherebetween 8 per cent. and 15 per cent. of the income of each year. What annual percentage increase in the stock of capital would this rate of saving involve? To answer this we have to estimate how many years of our national income the existingstock of capital represents. This is not a figurewhich we know accurately,but it is possible to indicate an order of magnitude. You will probably find when I tell you the answer that it differs good deal fromwhat you expect. The existingnational a stockof capital is equal to about fourtimes a year's national income. That is to say, if our annual income is in the neighbourhoodof ?4,000 millions,our stock of capital is perhaps ?15,000 millions. (I am not here including foreigninvestment,which would raise the figure say, fourand a half times.) It followsthat to, new investment a rate of somewherebetween 8 per cent. and 15 per cent. of a at year'sincomemeans a cumulativeincrement the stockof capital of somewhere in between 2 per cent. and 4 per cent. per annum. Let me recapitulatethe argument.Please take note that I have been making so far two tacit assuinptions-namelythat there is no drastic change in the of distribution wealth or in any other factoraffecting the proportionl income of that is saved; and further, that there is no large change in the rate of interest sufficient modifysubstantially lengthof the average period of production. to the To the removalof these two assumptionswe shall return later. On these assumptions,however, with our existingorganization,and in conditionsof prosperity and full employment, shall have to discover a demand for net additions to we our stockof capital amountingto somewherebetween 2 per cent. and 4 per cent. annually. And this will have to continue year afteryear indefinitely. Let us in what followstake the lower estimate-namely2 per cent.-since if thisis too low the argumentwill be a fortiori. Hithertothe demand for new capital has come fromtwo sources, each of about equal strength: littleless than half of it to meet the demands of a growa ing population; a littlemore than half of it to meet the demands of inventions and improvements which increase output per head and permita higherstandard of life. Now past experienceshows that a greatercumulativeincrement than 1 per cent. per annum in the standard of life has seldom proved practicable. Even if the fertility invention of would permitmore,we cannot easily adjust ourselvesto a greaterrate of change than this involves. There may have been one oi two

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decadesin thiscountry during past hundred the yearswhenimprovement has proceeded therateof 1 percent.perannum. at But generally speaking rate the of improvement seemsto have been somewhat than1 per cent.per annum less cumulative. I am heredistinguishing, willsee, between you thoseinventions whichenable a unitof capitalto yielda unitof product withtheaid of less labourthan before, and thosewhichlead to a changein the amountof capitalemployed morethanin proportion theresulting to output. am assuming I thatthefolrmer classof improvements proceedin thefuture in the recent will as past,and am readyto takeas myassumption theywillproceedin thenearfuture to that up thebeststandard haveeverexperienced anyprevious we in decade; and I calculate thatinventions falling underthishead are notlikely absorbmuchmore to thanhalfofoursavings, assuming conditions fullemployment a stationary of and population. in thesecondcategory But someinventions someway and some cut theother, it is not clear-assuming constant of interest-that net and a rate the result invention of changesdemandforcapitalper unitof outputone way or theother. It follows, therefore, to ensureequilibrium that conditions prosperity of overa period years willbe essential, of it either we alterourinstitutions that and thedistribution wealthin a way whichcausesa smaller of of proportion income to be saved,or thatwe reducetherateofinterest to sufficientlymakeprofitable in very which largechanges technique in thedirection consumption or involve of a muchlarger of capitalin proportion output. of course, wouldbe as use to Or, we wisest, couldpursue to bothpolicies a certain extent. III What relation theseviewsbear to the older Malthusian do theory thatmore capitalresources head (chiefly per in envisaged the olderwriters the shape by ofLand) must ofimmense be benefit thestandard life, to of and thatthegrowth of population was disastrous humanstandards retarding increase? It to this by mayseemat first sight thatI am contesting old theory am arguing, on this and thecontrary, a phaseof declining that will more population makeit immensely difficult before maintain than to prosperity. In a sensethisis a trueinterpretationwhatI am saying. ifthere of But are anyold Malthusians herepresent them supposethatI am rejecting let not their essential argument. Unquestionably stationary a populationdoes facilitate a rising standard life;but on one condition of only-namely thatthe increasein resources in consumption, the case may be, whichthe stationariness or as of population makespossible, does actually takeplace. For we have now learned thatwe have another devil at our elbow at least as fierce the Malthusianas namelythe devil of unemployment escapingthrough breakdown effecthe of tivedemand.Perhapswe could call thisdevil too a Malthusian devil,since it was Malthushimself who first told us about him. For just as the young Malthuswas disturbed the factsof population he saw themroundhim as by and sought rationalize to thatproblem, the older Malthuswas no less disso turbed thefactsof unemployment he saw themroundhimand soughtby as

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far less successfullyso far as his influenceon the rest of the world was concerned-to rationalize that problem too. Now when Malthusian devil P. is chained up, Malthusian devil U. is liable to break loose. When devil P. of Population is chained up, we are freeof one menace; but we are more exposed to the other devil U. of Unemployed Resources than we were before. With a stationarypopulation we shall, I argue, be absolutely dependent and civil peace on policies of increasingconforthe maintenanceof prosperity of sumptionby a more equal distribution incomes and of forcingdown the rate of interestso as to make profitablea substantial change in the length of the period of production.If we do not, of set and determinedpurpose, pursue these policies, then without question we shall be cheated of the benefitswhich we fromthe perhaps stand to gain by the chaining up of one devil, and shall suffer more intolerabledepredations of the other. Yet there will be many social and political forces to oppose the necessary change. It is probable that we cannot make the changes wisely unless we make them gradually. We must foresee what is before us and move to meet it half-way. If capitalist society rejects a more equal distributionof incomes and the forces of banking and finance succeed in maintainingthe rate of interestsomewhere near the figurewhich ruled on the average during the nineteenthcentury(which was, by the way, a little lower than the rate of interest of which rules to-day), then a chronictendencytowards the under-employment resourcesmust in the end sap and destroythat formof society. But if, on the otherhand, persuaded and guided by the spiritof the age and such enlightenment as there is, it permits-as I believe it may-a gradual evolution in our attitude towards accumulation, so that it shall be appropriate to the circumstances of a stationaryor declining population, we shall be able, perhaps, to get the best of both worlds-to maintain the libertiesand independence of our euthanasia as the presentsystem,whilst its more signal faults gradually suffer diminishingimportanceof capital accumulation and the rewards attaching to properpositionin the social scheme. it fallintotheir A too rapidly declining population would obviously involve many severe problems,and there are strongreasons lyingoutside the scope of this evening's discussion why in that event, or in the threatof that event, measures ought to be taken to prevent it. But a stationaryor slowly declining population may, if and wisdom, enable us to raise the standard we exercisethe necessarystrength of life to what it should be, whilst retaining those parts of our traditional scheme of life which we value the more now that we see what happens to those who lose them. In the finalsummingup, therefore, do not depart fromthe old Malthusian I conclusion.I onlywish to warn you that the chainingup of the one devil may, if and more intractable. we are careless,only serve to loose anotherstillfiercer