IN 1937, John Maynard Keynes gave a lecture on "Some Economic Consequences of a Declining Population". Many at the time felt the world was overpopulated and fewer people could only be a good thing, a view that Keynes himself shared. But the purpose of his lecture was to issue a warning: Declining populations come with nasty economic side effects.
Keynes, it turned out, was worrying a couple of generations too soon. Births jumped in the postwar baby boom. Today, though, his warning reads like a prophecy. Population is already falling in countries such as Japan, and a future global decline is more plausible than ever before. As in the 1930s, many welcome the prospect - largely for environmental reasons - but the economic downside may be more severe than even Keynes anticipated.
Future populations will reflect a truly remarkable fall in global fertility. In rich countries, fertility rates have hovered below replacement levels of 2.1 children per woman for decades, but they are now below that threshold in middle-income countries across the world, from Iran to Thailand to Brazil. In South Korea, the fertility rate dipped to just 0.98 last year, and even in the US it hit an all-time low of 1.73 births per woman.
Given parental desire to invest in each child, a fertility surge in rich countries is improbable. According to the latest World Population Prospects from the UN, 27 countries have fewer people now than in 2010, and it expects 55 nations - including China - to experience declines between now and 2050. In the 21st century, falling populations will become normal.
Some of the economic consequences are obvious: Fewer people make less stuff, so a declining population means slower economic growth or even falls in output. But fewer people also consume less stuff: What matters for living standards is output per person, and the crucial question is whether declining population can affect it. There are at least theoretical reasons to think the answer is yes.
Keynes' main concern was weak demand for investment in a world where companies expect a falling population of customers. That, he feared, would lead to deficient demand and thus high unemployment. Demography was closely linked to Alvin Hansen's original 1930s theory of "secular stagnation" - a situation of entrenched low growth and interest rates - which has been revived in recent years.
The solution Keynes proposed was strikingly similar to modern debates: "With a stationary population we shall, I argue, be absolutely dependent for the maintenance of prosperity and civil peace on policies of increasing consumption by a more equal distribution of incomes and of forcing down the rate of interest." The latter has certainly come to pass.
For Keynes, the risk from a falling population was unemployment - he did not see any reason why it should affect living standards or the advance of new technology. Modern economics, which tries to explain the pace of scientific discovery, is less sanguine.
In a new paper, provocatively titled The End of Economic Growth?, Stanford University economics professor Charles Jones models what might happen in a world of declining population. Rather than per capita growth chugging along, even as overall output declines, Prof Jones argues that living standards would stagnate as the population gradually vanishes.
He assumes that economic growth ultimately comes from new ideas, and the discovery of new ideas depends on the number of people researching them. If population began to decline at the global level, it would mean ever fewer people devoted to research and thus ever slower progress, at a time when new technologies already seem to have become harder to find.
Mr Jones' work suggests that falling population could cause slower growth in living standards. But there is an even more alarming possibility: a vicious cycle in which low fertility in one generation causes low fertility in the next, leading to a downward spiral in population. That is the scenario that demographer Wolfgang Lutz and colleagues call the "Low-Fertility Trap Hypothesis".
They propose a set of mechanisms whereby low fertility can pass itself from generation to generation. In particular, they suggest that willingness to marry and have children depends partly on whether a couple can meet their material aspirations. But low fertility goes hand-in-hand with ageing populations and a rising tax burden to pay for pensions and health care. In places with low housing supply, falling interest rates also lead to high house prices, putting even more pressure on the finances of the young.
There is reason to suspect that these mechanisms are already at work in suppressing fertility. In Japan, for example, almost all recent income growth for people of working age has been soaked up by tax rises and social insurance premiums.
Keynes concluded: "I only wish to warn you that the chaining up of the one devil (of population growth) may, if we are careless, only serve to loose another still fiercer and more intractable." It is time to take that warning to heart. FT