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null What Are the Two Forces that Will Shape Our World?

What Are the Two Forces that Will Shape Our World?
20 Sep 2022
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Plato stated that "only the dead have seen the end of wars". In a challenging way, the great Greek philosopher was drawing our attention towards the long term. We often discuss about the short term, and at certain moments in classical Greece it was perceived that "the end of wars" had occurred (for example, after the victory of the Greek polis over the Persians in 480 BC, or after the victory of Sparta over Athens in the Peloponnesian Wars in 404). However, Plato knew that in the long run there would always be wars, and therefore only the dead could claim to have seen their end.

If we apply this Platonic logic to the world we live in, we can extract some very juicy insights that will help us analyse and understand structural, rather than contextual issues. In my opinion, there are two main forces that will define our world. First, demography. If population growth keeps its downward trend, the world may reach a peak of close to 10 billion people in a few decades, and for the first time since the history of mankind (some 200,000 years) we will be fewer without war or pandemic. At the national level, changes may be even more dramatic. The United Nations recently published a paper analysing the future evolution of China's working population (currently hovering around 1 billion). In a low fertility scenario (as the current one), this population could shrink by two-thirds to around 250 million. In fact, already in 2023, India will be more populated than China. Working population will shrink not only in China, but also in Europe and Japan.

The economic and social consequences of demographic decline are enormous. If the health of an economy is determined by a multiple of hours worked and productivity per hours worked, the former will be heavily dented by population decline. If the UN predictions come true, and productivity remained at a constant rate, the Chinese economy could shrink by two-thirds by the end of the century. In turn, the worsening of dependency ratios (number of people retired compared with workers) will put pressure on public accounts, which are increasingly oriented towards pensions and healthcare, breaking down intergenerational solidarity, and thus Burke's notion that "society is a contract between generations". In addition, global warming will force large swaths of population to move, either across their own country, which could exacerbate the overpopulation of many cities, or across borders. In the latter case, the borders exposed to the greatest difference in GDP per capita will be the most threatened. Europe comes out on top. In addition, ageing populations tend to innovate less, something that could have an impact on productivity, which will be discussed below. Another consequence of ageing is that, as fewer younger people enter the workforce than older people retire, the bargaining power of the employee vs. the employer will increase, bringing about greater structural inflationary pressures, as well as a possible reduction in corporate margins, trends that will generally explain a lower level of inequality. It is also interesting to reflect on how much real estate will be worth in areas suffering from depopulation. Finally, an ageing population will be less inclined to fight wars, a platonic positive consequence amidst so many threats.

The second force is productivity. If, as we have seen, GDP is the multiple between hours worked and productivity per hour worked, the evolution of this last factor will be key, not only to understanding economic growth, but also our future prosperity. Since their earliest history, human beings have lived with a very limited per capita income, a consequence of the Malthusian model, whereby improvements in production led to a larger population, so that per capita income remained unchanged. Only a massive and rapid concentration of innovation could significantly boost productivity and as such, living standards. This is exactly what happened with the industrial revolution at the end of the 18th century, a process that has allowed us to increase our per capita income a hundredfold in about two hundred years (also generating negative externalities, such as global warming).

Growing productivity from low levels is easier than from high levels, and since the mid-1970s productivity growth in Western countries has been lacklustre (despite many invention efforts). Productivity growth in emerging countries is also slowing down. However, in my view, we may experience positive surprises here if massive innovations of the last decades combined with soaring digital transformation brought about by the covid crisis improve the output per hour worked ratio. If this is eventually so, it could offset demographic decline and the inflationary strain of rising wages, resulting in an acceleration in our living standards. We will be less and lonelier, but with higher per capita income. Whether it is for the better is still to be seen.

I end this editorial with what according to Plato is a quote by Socrates, addressing the jury as he faced his death sentence: “The hour of departure has arrived, and we go our separate ways, I to die, and you to live. Which of these two is better only God knows.”


Published in Actualidad Económica

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