Thursday, October 14, 2010

"Demography and Economic Destiny"

Interesting article. This might explain the timing of the economic dynamism of Japan and then China:
Falling birthrates do not instantly damage an economy. Indeed, at first, they often do just the opposite. A first-order effect of a society's producing fewer children is that a rising share of the population occupies the prime productive years of young adulthood. Also, with fewer children around to demand attention, vast reserves of female labor are freed up, and there are more resources available to invest in each remaining child, so that, for example, literacy rates improve. Japan experienced this demographic "sweet spot” in the 1960s and 1970s, and China is experiencing it today. 

Perhaps there is an economic system that can preserve prosperity even in the face of an aging, stagnating population, but it has not yet been devised. It is no coincidence that modern industrial capitalism emerged amid the population explosion of late 18th-century England or that it flourished most in the rapidly growing United States. A young, growing population creates more demand for products and a larger supply of labor. By encouraging people to look for more efficient ways to provide food, energy, and other essentials, it also spurs innovation and entrepreneurism.
There are many possible reasons for this iron law. One, of course, is that aging workers and investors tend to be less flexible and more risk-averse, having more to lose and less time to recover than do their younger counterparts. Both common sense and a vast literature in finance and psychology support the claim that as we travel toward old age, we become more reluctant to take risks with our careers and more set in our ways.
It seems like countering this trend is a high priority. If people are living and working longer, so that 50 is the new 35, then maybe they can learn to be less risk averse at 50!

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