Revisiting the Economics of Population

Posted on Posted in 2012-2013

Before the great brouhaha over the FOI Bill and the Anti-Cybercrime Law, the Reproductive Health Bill was the talk of the town. Indeed, months ago, the debate over the proposed law was so intense that the public seemed deeply polarized between the pro-life and pro-choice camps.

After the tension has subsided, and the public has discovered new issues to tackle with, OIKONOMOS finds it imperative to look back and reflect about the RH Bill – with its divergence of perspectives, the frameworks and narratives that has influenced each side, and the economic theories that are embedded in the arguments – with the goal of improving the way discourse is done in the country.

In this article, the author explores the contributions of the economic field to the discourse of population management.

By Noel P. de Guzman, PhD*

Population occupies a strange role in economic theory. If real life was likened to a movie, population is often seen as neither hero nor villain, but something in between. Furthermore, if there are some actors who are typecast into certain roles, the same seems to be case for population. Within economics itself, the issues of population and population growth are often discussed only in certain fields like development economics and macroeconomics. In this short essay, I would like to revisit some of the interesting insights some economists have made about the role of population in economics.

Let me start with a more recent excursion into this controversial topic. In his 2008 book, Common Wealth: Economics for a Crowded Planet, the famous economist from Columbia University, Jeffrey D. Sachs, gives an empirical presentation about the state of the world population today. Sachs divides economists into three camps: population optimists, population pessimists, and those that are in between (acknowledging that he belongs to the third group). According to Sachs, optimists accord a positive role to population based on the argument that a greater number of people also ensures that there will also be a greater number of geniuses born that can help sustain technological advance. The argument is further strengthened by the economic insight that scientific knowledge gives rise to unlimited positive externalities. On the other side of the fence, pessimists who carry the Malthusian legacy, point to the limited natural resource base and the ferocious impact of population momentum. Pessimists are also skeptical about the promise of unlimited technological change and questions whether the “right” kinds of technical change are the ones being brought forth. Those in the middle, like Sachs, believe that population does have direct negative impacts such as poverty and environmental degradation but see solutions through voluntary fertility choice. This is where economic theory based on individual rationality can play a major role, to which we now turn.

The starting point is the phenomenon of “demographic transition.” As many students of development economics know, the theory of demographic transition postulates that the initial condition of many countries is one of high mortality coupled with high fertility. At some point in the transition, mortality rates fall drastically due to advances in medicine. However, this drop in the mortality rate is not accompanied by a similar drop in the fertility rate since medical advance also lessens infant mortality rates. The result is a booming population. It is only when the drop in the mortality rate is accompanied by a drop in fertility that the population reaches a stable level. Hence, economists like Sachs and many others believe that pressure on the natural resource base can be eased only if the demographic transition can be hastened to achieve low fertility rates sooner. This is where voluntary choice comes in.

The full force of microeconomic theory can be utilized to examine the issue of voluntary fertility choice. Borrowing from McKenzie and Tullock (1981), we re-visit a simple model of child production. (See figure below.) Parents are assumed to be rational in the sense that their demand for children can be likened to the demand for any other (durable) good like a house or a car. Like the latter goods, children can be viewed as providing a stream of benefits to the parents. In some instances, children can also be treated as investment goods as they are foreseen to financially support their parents during old age. The demand for children is downward-sloping, assuming that children are normal goods. To account for unplanned births, there is a positive amount of children, C0, from which the rational demand for children begins. McKenzie and Tullock assume that the marginal cost of child production (mc) is constant and is simply given by a horizontal line. The equilibrium fertility choice, C*, is given by the intersection of the demand curve and the marginal cost curve. Using this simple model, one can see that fertility will be high if the demand curve shifts to the right or if the marginal cost curve shifts downward. Hence, standard microeconomic theory can provide answers as to why the fertility rates in most developing countries may remain high, especially if children are considered as investments for social security.

The equilibrium fertility choice conclusion only works if we are willing to assume that there are no market failures or externalities. However, this might not be the case in most less developed countries. In the 1993 book An Inquiry into Well-being and Destitution, the renowned economist Partha Dasgupta, provides some insights as to how there might be excessive population due to certain types of externalities. One type of externality is the failure of the parents to internalize the full cost of child production, including the social cost. (This is recognized by McKenzie and Tullock as well.) For example, it is not only the parents who bear the full cost of raising a child especially if the child is foreseen to consume certain public goods like public education and public health services. What is seldom realized is that population booms impose greater tax burdens on the rest of society in order to finance the greater demand for public goods. These do not yet include some of the social problems normally attributed to increasing numbers of impoverished citizens such as crime and illegal settlers. (In fact, there might also be an incentive to under-invest in the quality of the child because parents do not necessarily bear the full cost of inferior quality.) If parents do not factor in these social costs, their perceived marginal cost curve is lower than the true marginal cost curve, resulting in excessive population levels.

A second type of externality mentioned by Dasgupta is a kind of coordination failure. Sets of parents can be locked into a game against each other such that if all of them voluntarily choose low fertility, their payoffs will be maximized. But if they cannot coordinate on this low fertility equilibrium, they both end up in the high fertility equilibrium where payoffs are substantially lower. The failure to coordinate can be attributed to various non-economic reasons such as cultural forces and tradition. Coordination failures are one thing, but it is also possible to extend this insight by adding the possibility of class conflict and strategic interests of competing actors in society.

References:
1. Dasgupta, Partha (1993) An Inquiry into Well-being and Destitution, Oxford: Clarendon Press
2. McKenzie, Richard B. and Gordon Tullock (1981) The New World of Economics: Explorations into the Human Experience, 3rd edition, Homewood, Illinois: Richard D. Irwin, Inc.
3. Sachs, Jeffrey D. (2008) Common Wealth: Economics for a Crowded Planet, New York: Penguin Books

*Noel P. de Guzman is an associate professor and former chairperson of the Economics Department of the School of Social Sciences, Ateneo de Manila University.


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