Is the collapse of productivity in the developed world really so close at hand?

Published October 27, 2016 by lagmen
A worker controls a tapping of a blast furnace at Europe's largest steel factory

The developed world may be facing another Malthusian moment. The first came at the end of the 18th century, when Thomas Malthus predicted dire consequences for humanity if population trends continued on their trajectory. But along came something no one predicted: technology that helped humans use resources more efficiently and get more from the land they had.

Our modern Malthusian moment is the opposite problem—a shrinking and aging population might mean less growth and prosperity.

Economic growth comes from three potential sources: You can add more people (labor), you can add more machines (capital), or you can figure out new ways to use labor and capital more productively (innovation/technology).

An aging population means fewer bodies working, which lowers output. There’s not much you can do about it. You can add more machines to make up for fewer people, but that can only get you so far. Giving another computer to a worker who already has one won’t make him more productive.

An aging population depresses growth in other ways. There may be less capital for investment in new machines because retirees consume their wealth instead of saving it. And as baby boomers leave the labor force, they also take their experience and expertise with them. (It’s a common fallacy to think that retirees simply make way for young people to get jobs; in many jobs, the young and old compliment one another.) Maximizing productivity of the labor force requires finding the right ratio of young and old workers.

Another way to increase productivity is to increase education. Not all workers are equally productive; the more educated you are, the more productive (in economic terms) you tend to be. You can try and make individuals more productive by boosting their education levels. But we may be reaching diminishing returns from education now, too.

Economist Robert Gordon of Northwestern University estimates that between America’s aging population and static educational attainment, US growth will be 0.4% lower each year going forward. He and George Mason University’s Tyler Cowen both argue we’ll be lucky if new technology can restore old levels of productivity, let alone make up for an aging work force.

But this supposes, much as Malthus did, that the gains from technology are tapped out—when it may just be too soon to tell what technology today will mean for workers of tomorrow. Economics historian Joel Mokyr, also at Northwestern, notes it took more than 100 years for the invention of the the steam engine (responsible for the industrial revolution) to show up in productivity estimates. Similarly, a small, unnoticed innovation in artificial intelligence today might completely transform elder care tomorrow, or perhaps an innovation in molecular biology and genetics might alter the nature of aging.

And what of the advances to come? Technology might change to compliment a workforce with a different age structure, for instance. Other innovations might help make a smaller workforce more productive.

Depending on your point of view, one two things are true: We are on the verge of new technologies that will transform how we work and live, and maintain the richness and prosperity we are used to, or the aging population will mean the collapse of productivity in the developed world is close at hand.

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