“Demand arises naturally from the needs and wants of the individuals in a society, and is not something that someone needs to create.”

I agree. Because it arise from individuals, if we can speak of the total demand as the sum of needs and wants of the whole population, then this aggregate demand will go down if there are less people. For example, people want shoes. If there are less people, less shoes are needed. If the population is declining, then we can expect a continuing decline in the demand for shoes in the future. Who then will decide to invest their capital in a shoe factor – they would loose money!

” The current problems we have now are the result of artificial stimulation, because the intelligentsia and politicians thought they should do something to stimulate demand.”

Absolutely.

“As a population declines in numbers, the demand for specific goods and services will likely change. The mix will probably change considerably. ”

Agreed, and also the total demand for goods and services will in aggregate decline.

“Whoever best supplies those needs in a free society are the ones that will prosper the most. Whether a population is growing or declining in numbers, trade maximizes the net benefits to those involved. People in future advanced societies will still want to spend less time working, and will still want to find easier ways to do things. That makes individuals, and thus, society better off.”

This is key. Following from my shoes example, it can be seen that the declinnig population deters long term investments. However as you say people will likely determine a system of trade and working that somehow works around the fact that investors are likely to lose money (as it is defined today, during an era of historically rising populations) on long term projects. The question is, how is that system likely to differ from our currently undestood notions of capitalism?

“… The most rapid recovery from any crisis comes about when free people are allowed to solve their own problems.”

I agree with this. The thrust of my aricles has been that profound change is coming, but people are kept subservient to a debt-money paradigm based on fractional reserve banking that is going to prevent them optimising for this new change, which could be disasterous.

“The major issues with a declining population in developed societies will likely come about because politicians will think they need to plan for everyone. ”

I’m more worried about bankers in this case, than politicians. I’m afraid that bankers have more control of my life than my politicians do.

“The fact that there is a tremendous buildup of productive capital should only help, if the markets are allowed to adjust and people are allowed to seek their own best interests.”

I have tried to show how capital stock will be reduced by declining populations. To get an idea of how this can happen, google for ‘boomer asset meltdown’, and see what you find.

“I don’t know how developed societies will react in the long run to significant declines in population in the future, nor does anyone else. If we can rely on history at all, however, the more we rely on people who are free to make decisions about their own economic well being, the better off the civilization will be”

We agree on this. However given that we are not, it seems useful to speculate a little on the problems that might arise, and therefore which current constraints on our freedom are likely to be most damagnig in the future.

Sorry I didn’t get back to you right away on this. I was a little pre-occupied.

I think it is an error to think that “someone” has to do “something” to create and sustain demand. Demand arises naturally from the needs and wants of the individuals in a society, and is not something that someone needs to create. The current problems we have now are the result of artificial stimulation, because the intelligentsia and politicians thought they should do something to stimulate demand.

As a population declines in numbers, the demand for specific goods and services will likely change. The mix will probably change considerably. That doesn’t mean that the economy necessarily will fall apart. It means that some of the people employed in certain industries and occupations may need to find other work. All people, however, will still need to eat, will still need clothing, will still need shelter, enjoyment, and so on. Whoever best supplies those needs in a free society are the ones that will prosper the most. Whether a population is growing or declining in numbers, trade maximizes the net benefits to those involved. People in future advanced societies will still want to spend less time working, and will still want to find easier ways to do things. That makes individuals, and thus, society better off.

As you say, it is possible that a society can decline rapidly. Whenever there is rapid change in a society of any kind, it is destabilizing. Any economy can easily adjust to changes when they occur over time. No economy can escape unscathed from rapid and profound change. The crisis arises from people not knowing what they should do in the face of changes that they never had to worry about. The most rapid recovery from any crisis comes about when free people are allowed to solve their own problems.

The major issues with a declining population in developed societies will likely come about because politicians will think they need to plan for everyone. That planning will destroy the market order and will be the cause of economic disaster, as it is in growing societies now.

The fact that there is a tremendous buildup of productive capital should only help, if the markets are allowed to adjust and people are allowed to seek their own best interests. I don’t know how developed societies will react in the long run to significant declines in population in the future, nor does anyone else. If we can rely on history at all, however, the more we rely on people who are free to make decisions about their own economic well being, the better off the civilization will be.

THanks for the feedback so far. Regarding FRB, I agree with your points re the central bank. However FRB has another issue for deciling population, even without a central bank in place.

FRB requires an expansion of the money supply to sustain itself. This can be easily seen since if most all the money supply bears interest, then clearly it must expand to be able to pay back the orginal supply plus the interest. Accordingly, it is not a suitable scheme for shrinking economies/populations – the banks would just keep gonig bust aunless you had a government that colluded with them to just print money to pay their interest – but what’s the point of that.

So we have the following possible combos for the future shrinking world:

central bank+FracRB : won’t work
FracRB only with commodity backed money : won’t work for reasons above
FullRB only: would work, but has issues
Central bank only : would work, but has issues.

The biggest single problem is that as an economy shrinks (and there can be severe demographic shocks than can remove 10,20 or 30% of the population in a single generation – see italy and eastern europe for example), return on capital is negative or so low it doesn’t warrant any risk taking.

This is the big issue for post-growth economics. How to create and sustain demand, for new goods and new investment?

One further note – I heartily agree with you that the asset base would have to adjust to the new realities of a declining population. I believe, however, that it would occur quite naturally over time. At this point, in most developed countries, a sizable number of families already have multiple houses, such as vacation homes, and that is not a problem. As the population declines and the demand for those assets declines, the relative prices will also decline, making it easier to acquire assets that are already in place. That goes for productive manufacturing capacity as well as housing.

The net result will be that it will easier for the typical person to own housing and productive property, increasing the well being of members of the society. There would be no need for any action regarding the asset base, other than the normal market problems of disposing of obsolete, unusable assets over time.

Fractional reserve banking only serves to amplify what the central bank does. The monetary expansion comes from the central bank infusing more reserves into the system. If there were no new reserves entering the system, there would be nothing for the fractional reserve system to multiply. It would have already leveraged the reserves that it had. It couldn’t go further unless the percent reserve requirement was reduced even further, which would be a different issue.

When a fractional reserve bank lends money, it creates new money out of thin air to the extent that it uses other peoples’ money for the loan. Generally speaking, when the individual borrower pays back the loan, the interest is paid from the production of the borrower. When that loan is paid back, the money supply is leveraged the other way, contracting the supply.

With no new reserves in the system to rapidly increase the supply of money and credit, it is easy to imagine the possibility of the system reaching an equilibrium. Interest is paid from borrowers’ production and, so as long as they are productive, the system could be maintained. Money lent out could match the principle being paid back. The incremental production of individuals in the economy over time with a steady money supply would imply gradual price deflation. Deflation causes an increase in the value of the monetary unit, meaning that subsequent loans, payments and interest are disbursed and paid back using fewer monetary units that are incrementally more valuable.

If bank deposits gradually decreased over time because of declining populations, it is also very plausible to picture the system contracting in a orderly way. Every loan the bank makes is to an individual person or entity, and every entity pays the interest from his, her or its own productivity. While it is likely that there would be some banks going out of business as the market declines, there is no reason to expect a collapse of the economy just because interest has to be paid on the credit. In any declining market, the less competitive participants go out of business, leaving room for the more competitive to maintain at the new, lower level. As long as the changes aren’t abrupt, markets can adjust without much trouble.

The real problem with the fractional reserve system is that it magnifies the money creation of the central bank. It causes extreme instability in an economy, resulting in bubble markets and the consequent inevitable collapses.

In my view, when the entire system collapses, it will be the result of the continual expansion of the money supply by central banks and the consequent devaluation of the monetary unit to zero. The current model is Zimbabwe. Fractional reserve banking has a significant effect, but it is not the root cause.

It is a very interesting point about the likelihood of inflation with a fixed money supply and a declining population. It is something to ponder. My first inclination is to believe that the changes in population will be gradual, over many decades, maybe even centuries. I that case, markets, buyers and sellers are given plenty of time to adjust prices and expectations. In that way, it could proceed in a very orderly fashion.

Acute problems with inflation or deflation arise when it is rapid. In that case it causes instability and uncertainty. People lose the ability to accurately predict the outcomes of their actions, and incentives become perverted.

Anyway, an additional factor to consider in your analysis is the greater ease of migration and the trend towards urbanization. While the excess of residential real estate right now has supressed home prices, the trends in information and transportation technology portend that a much larger share of work can be done from home in the future. No longer must people go into an office for most tasks, and no longer must distrubtion be built around rivers or trains. Thus, it seems to me that commercial real estate may be on the verge of a much more significant collapse.

That said, it is also possible for another scenario to emerge: Commerical real estate is converted to residential real estate (we’ve already seen this with many downtown lofts). Some of the billions of people around the world without adequate shelter move into the US, where this new residential space moderates rental prices (as we’ve already seen). Meanwhile, the cost of education drops as specialization continues to obviate the need/value of a broad liberal education in favor of specialized technical education, much of it on the job. The cost to have children, and their life expectancies trend such that population continues to grow in spite of reducing birth rates. The US swells to the 600 million currently predicted- but perhaps much sooner.

It would seem, then, that the value of a mud hut in Zambia may be much more likely to drop than perhaps real estate in the US- as a function of hourly wage (real purchasing power). But this makes lots of sense, doesn’t it? Someone no longer has to spend all their time building and maintaining their hut as modern tools make it much easier to outsource.

As I’ve stated before, the key question is this- are we going to run out of natural resources? It’s clear land will not be the issue. Solar looks increasingly capable of eliminating the constraint on energy. Perhaps iron ore? Carbon polymers and other biomaterials (that could be synthesized from corn) might have something to say about that.

I’m increasingly convinced that it’s reticence to embrace change that keeps our economy from doing what it’s capable of doing- namely, providing prosperity for all. Getting past this would certainly require a new view, and execution, of the system of the world.

Glad to hear that I have surprised you!

Regarding money supply issues, if one has a fractional reserve banking system, then the money supply must increase over time, otherwise the system will go bust.

In the case of an economy which is shrinking in terms of people, goods and services, then a fixed money supply would result in persistent inflation of pretty much all prices. Whether this is bad or not is open to question. Imagine a fixed, gold back currency in such a situation. Would it be acceptable or desirable for the government to sell its gold abroad in order to reduce the money supply to prevent inflation?

There are also many issues with property rights in shrinking populations. In general long lived assets like housing and personal transport are going to lose value as the population shrinks but the asset base does not. Similar to the money supply, it might make sense to deliberately reduce the asset base as the population shrinks (for example by destroying unwanted housing in underpopulated areas and starting to return built up areas to nature). I shall touch on these and other similar issues in future articles.

I agree with you on GDP. Crucial to making the transition to shrinknig populations is to derive a more useful measure than GDP, or even GDP-per-capita.

I think this is going in a significantly different direction than I originally anticipated. I look forward to your next installment. I am not quite sure where it is leading, but it is interesting. I think you are quite right when it comes to population. Overpopulation is not a problem, nor was it ever a problem. Well being in a society has to do with productivity of individuals, no matter how many people there are.

One important issue that seems to have an important effect on the overall assessment of the problem is the idea that growth in any economy must be accompanied by growth in the money supply. In all cases, growth comes only from accumulation of capital from prior production. Any quantity of money will work for any level of economic activity. The world economy could develop on an extremely small quantity of “money.” As productivity increases, the value of the fixed quantity of money would increase. Ever smaller denominations of ever increasing value could be used to purchase an increasing quantity of goods.

What matters in money is not the thing which is called a dollar or a pound or a kroner. The only thing that matters is the stuff that that currency can buy, goods and services. Money serves as a means through which people can take advantage of the benefits of division of labor and comparative advantage. If it only takes 1/1000th of a dollar to buy a tomato, that does not, in itself, mean that anyone is better or worse off than if that tomato costs 1 dollar. What matters what everything costs in relation to other goods and services.

The problem with the current state of affairs is that systematic inflation transfers the value of production from the producers of goods to the producers of currency. That is an important source of the distorted incentives in any modern society.

I contend that the problems we face are not due to monetary economies, per se. Any economy beyond barter must necessarily have some form of money. The problems are due rather to government monetary regimes that confiscate the property of citizens directly or confiscate it indirectly by inflating away the value of the money, using that value for the benefit of the political and financial elite.

The idea of GDP per person is very important, but it is important now, even if usually ignored. The very idea of GDP needs to be drastically reworked if it is to have any relevance, whether it is in the present economy or the future one that you envision. The current statistics are quite meaningless from the standpoint of true productivity and wealth of individuals within a society.

By the way, the United States dollar was not backed by gold for anything but international transactions between nations, since the 1930’s. 1971 marked the “closing of the gold window”, the euphemism for repudiation of the oligations of the United States governennt to foreign governments. US government had already repudiated its obligations to mere citizens nearly 40 years before that.