I have just read a very interesting piece in the Economist about a book by Thomas Piketty, Capital in the 21st Century. This book looks at the links between demography, growth and inequality.  Essentially, demographic growth feeds into economic growth, along with productivity growth. To increase economic growth, one must either increase the number of workers or the output that each worker is producing.  According to Piketty, the world’s economic growth since the birth of Christ has been roughly equally due to an increasing population and increasing productivity.  Thus, in the century ending in the year 2012, the world economy grew at roughly 3% a year. Population growth was 1.4% and per capita output grew at 1.6%.  

Now however we are facing a century of slowing population growth. As the Economist argues:

“Projections from the UN indicate that global growth will average 0.7% a year between 2012 and 2050, and then slow to 0.2% between 2050 and 2100. By the second half of the current century, the only area to show a population rise will be Africa. Asia’s population will be falling, along with that of Europe where a decline is expected for the first half of the century as well.”

This means that economic growth will slow along with this slowing population growth. To assume that productivity growth will rise to pick up the slack in the years ahead is, according to the Economist, “an act of the purest optimism”.  It quotes Piketty:

“ ‘there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5% over a lengthy period of time’

By the “world technological frontier”, he simply means advanced nations. Countries can grow per capita output faster when they are catching up with the others, like China. But when they have caught up, they slow.”

This means that the years of relatively high economic growth that those living now have grown up with, particularly in the 1950 and 1960s, will not be repeated. It was a golden age it seems. Piketty argues that both logic and history show that dreams of economic growth of 3-4% a year in the future will be “illusory”.

Of course, many argue that this is not a bad thing; we can’t continue to rely of economic growth and should get used to a world where growth is much more anaemic.  However, according to Pikett, rapid growth reduces economic inequality, whereas economic stagnation increases inequality. He argues:

“in a society where output per capita grows tenfold every generation, it is better to count on what one can earn and save from one’s own labour; the income of previous generations is so small compared with current income that the wealth accumulated by one’s parents and grandparents doesn’t amount to much.

Conversely, a stagnant, or worse, decreasing population increases the influence of capital accumulated in previous generations. The same is true of economic stagnation.”

During the twentieth century there was a rapid reduction in economic inequality, also known as the “Great Compression”.  Pickett argues that this was due to world wars, high taxes, high inflation which destroyed private wealth.  Compare that to the nineteenth century when, by contrast, the Economist states that “many upper class people lived quite comfortably off the income from government bonds”.

Therefore, according to Pickett:

“in a quasi-stagnant society, wealth accumulated in the past will inevitably acquire disproportionate importance. The return to a structurally high capital/income ratio in the twenty-first century, close to the levels observed in the eighteenth century, can therefore be explained by a the return to a slow-growth regime. Decreased growth – especially demographic growth – is thus responsible for capital’s comeback.”

Does this mean that we may be heading toward a century of low demographic growth, low economic growth, widening inequalities? Pickett would say yes we are.  The Economist is not sanguine about the future if that is the case:

“But if economic power has gone back to the rich, we may be sliding back into plutocracy, where government is controlled by the rich; look at the expense of US political campaigns or Larry Bartels’s work on the correlation between congressional votes and the views of their better-off constituents. Silvio Berlusconi’s long career in Italy indicates the way that economic wealth can translate into power in a more direct fashion. We may indeed being going back even further than the 19th century to the Roman republic where rich men bought their way into the Senate and placated the populace with bread and circuses – junk food and reality TV, perhaps?”

And that’s just with population slowdown on a global scale. What will happen to those countries where population will (and is already in some cases) decline absolutely for a sustained period in peacetime? We are entering unchartered territory in those cases, we simply do not know what happens to countries and civilisations which decide to not replace themselves for any long stretch of time…

Marcus Roberts is a Senior Researcher at the Maxim Institute in Auckland, New Zealand, and was co-editor of the former MercatorNet blog, Demography is Destiny. Marcus has a background in the law, both...