Demographic Nightmares 2

George Magnus writes,

``capitalism rewards scarcity, and as labour supply fades relative to the availability of capital, returns will shift towards the former...

Huh?

If capitalism rewards scarcity then why at all risk precious capital to invest in order to produce?

What could Mr. Magnus be smoking?

Capitalism is an economic or resource distribution system which operates on the platform of property rights, voluntary exchange, and the profit and loss system in a world of scarcity. And the reason capitalism exist is to satisfy the unease or the pain of consumers from scarcity, hence the incentive to invest to produce.

I am reminded that once we argue using false premises then the conclusion would obviously wrong.

Mr. Magnus is apparently anxious about the world’s demographic trends echoing Pimco’s Bill Gross [see William Gross’ Demographic Nightmare]

His concern is that a smaller labor force would result to reduced corporate earnings and a lower economic growth. Hence, he recommends numerous “policy levers” or interventions to solve these predicaments.

Yet how valid is this?

True, the global rate of population growth has been falling as shown above, but it is still mostly positive (ex- Japan).

However, what is not seen is that the crucial reason why the rate growth has been falling is due to the relatively high nominal levels of world population which has already reached 6.697 billion (!), in 2008, according to the World Bank.

Another important variable in the present global demographic trends is that while population growth rate has slowed in developed economies, the bulk of the growth now comes from emerging markets.

Chart from Oppenheimer Funds

The implication is that this puts to risk the cumbersome welfare system of developed economies, aside from crimping “aggregate demand” (we dealt with this earlier).

Although I would be agreeable to one of Mr. Magnus’ suggestion that changes be made in the welfare system, I’d take a more radical approach.

Since it is to my opinion that welfare systems signify as unsustainable political PONZI programs that had been designed to buy votes of the population and to keep people dependent on politicians, welfare systems should be phased out or trimmed to the essentials.

The reduction or elimination of which would entail diminished financial burdens for the future generations, which should allow our children more room to deploy resources to their interest or pleasure, thereby reduce the barriers to investments.

This should also instill the culture of savings and personal responsibility and importantly advance the cause of personal liberty—where lesser redistribution translates to more efficiency of resource allocation and freedom of choice.

And there is another possible solution which could compliment this: ease immigration barriers to allow for free movement of people or enhance social mobility.

So globalization shouldn’t be limited to trade and finance, but also to migration flows, which at present constitutes only an estimated 3.1% of the global population, according to the International Organization For Migration (IOM).

These two structural reforms will greatly ease the concerns over reduced economic and corporate earnings growth, thus, needing less government activist (boom-bust) policies which would only worsen whatever demographic nightmare envisaged by interventionists.