(Just as a heads up, I spoke on this topic at a conference in Amelia island, Florida last June. If you were there, you can skip this post and go back to watching cat videos on YouTube.)
Investors often ask me how best to use demographic projections as they develop their investment strategies. My answer is always the same: very, very carefully.
To see why, let’s look at a recent article that Arthur C. Brooks published in the Times entitled, “Europe’s Decline.” (The article famously began, “Help! I’ve fallen and I can’t get up!”)(1)
Brooks noted that everyone is clamoring for the European Central Bank to launch a massive QE program, and that a lot of people are urging major economic restructuring in Europe to make their economies more competitive. However, he opined that neither would fix Europe’s core problems.
As readers of this blog know, I agree with Brooks. QE in Europe will have exactly the same positive effects it had in the US: none. It will have all the same negative effects.(2) Economic restructuring would be most welcome on the Continent, but it’s political poison and won’t happen.
But I disagree with Brooks about the reasons why Europe “has fallen and can’t get up,” and that disagreement has to do with one of the dangers of using demographic projections. Here’s the key passage in Brooks’ article: “As important as good economic policies are, they will not fix Europe’s core problems, which are demographic, not economic.”
Huh? That’s like saying the world is warming because the polar ice caps are melting. Although we colloquially say that “Europe (or China or Japan) has a demographic problem,” demographics is a description of a state, not a cause of it. In other words, the fact that Europe’s populations are growing very slowly, if at all, is a description of the state of the world in Europe. It doesn’t explain why Europe is growing so slowly, much less what (if anything) might happen to change that slow growth.
More than a decade ago(3) I took a stab at trying to understand the decline of Europe. I won’t go into great length here, but in essence I argued that capitalist societies follow the same logic as the Maslovian hierarchy. In other words, in their early days these societies are incredibly robust, as people work hard, save their money, and rise up in the world.
But capitalism is so powerful that eventually most citizens become quite comfortable. They are no longer interested in working hard and soon forget how to do it. They are no longer interested in taking risks, because they might lose what they have. Eventually, these societies are no longer interested even in defending themselves militarily and they collapse in the face of stronger societies.(4) (That is, they collapse unless the US is around to protect their sorry you-know-whats.)(5)
My point is that there are underlying causes that have led to Europe’s current demographic troubles. Unless we understand those causes, and how they might alter in the future, all we’re doing is making a brain-dead straight-line projection of current trends, a very, very dangerous thing to do.
To show just how dangerous it is to toy with demographic projections, let’s consider a couple of instructive examples, starting with the Grandaddy of all demographic projectors, Thomas Malthus.
In 1798, in his famous (or infamous) paper, “An Essay on the Principle of Population,” Malthus observed that human populations grew geometrically, while food production grew only arithmetically. This, he pointed out, would quickly and inevitably lead to famine, disease and a “Malthusian catastrophe” as human populations collapsed. We would then have to start all over and, ultimately, suffer the same fate.
What Malthus failed to grasp was that increasing demand for food would inspire an extraordinary increase in human productivity that would end up producing food even faster than people could produce people. Indeed, just as Malthus’s famous article was being published, the Industrial Revolution was beginning, an event that is probably the most important occurrence in human history. As human wealth grew, and as food production grew, population growth slowed, instead of increasing, as Malthus had predicted.(6)
In other words, the fellow who invented the idea of making demographic projections proved to be flat out wrong because the world – and especially the human portion of the world – turned out to be a vastly more complex place than he had imagined. And that world hasn’t gotten any simpler since Malthus’s time. In my next post we’ll examine some other catastrophic uses of demographic projections.
(1) 1/7/15, p. A23.
(2) I described the lack of positives and surplus of negatives in, among other places, the series of posts on “Professors, Free Markets & The Fed” back in late 2013. The first post is here: www.gregorydcurtis.com/professors-free-markets-the-fed-part-one/.
(3) Creative Capital, pp. 39-44.
(4) I described such countries as “providential societies,” that is, those that no longer have the stomach for economic, social, cultural or military risk. I borrowed the term “providential” from the poet, Louise Bogan, who used it in her ironic poem, “Women:” “Women have no wilderness in them,/They are provident instead.”
(5) A few years ago I was giving a carfull of French girls – 16, 17 years old – a ride home from school in Lyon. When there was only one girl left, and she therefore had nobody to talk to but me, I asked her what she wanted to do with her life when she graduated. She described an idyllic existence that included a nice house and garden, long vacations in exotic locales, and so on. “What sort of job do you plan to get?” I asked. “Well,” she said, “I don’t want to work more than about twenty hours a week.” Puzzled, I asked, “But then who’s going to pay for this wonderful lifestyle?” She shrugged. “Les riches,” she said.
(6) In Malthus’s day, 80% of the population was engaged in farming. Today, 8/10 of 1% of the American population farms and that tiny group produces far more food than we can eat.
Next up: On Demographics, Part 2
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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.
