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The Demographics of Saving and Growth


Tags Money and BanksCapital and Interest TheoryMonetary Theory

08/20/2003Christopher Mayer

A common economic view predicts that the aging societies of the West portend lower economic growth in the future because these older populations are likely to save more (and consume less) than younger populations. Increased savings, then, is viewed as unfriendly for growth. Higher levels of consumption, conversely, are viewed more favorably.

Also implicit in the framing of this argument is the idea that higher growth is automatically better than slower growth or no growth. It is one of those assertions that quietly pass without scrutiny, and yet it reveals a preconceived notion that impedes clear thinking on the issue.

What follows is a peek under the rocks of these unquestioned assumptions in the hopes that the modest effort sheds some light on the nature of savings and growth.

Savings and growth

Begin with the obvious intuitive understanding of savings as deferred consumption. An individual can invest only what he has saved (or borrowed, in which case someone else must do the saving). Savings, then, is essentially the same as investment. What is saved, or invested, becomes a key ingredient in the creation of capital.

Capital gets batted around quite a bit perhaps because it is an abstract concept, or perhaps because it carries, in some circles, a trace of a negative connotation. It just so happens, that those people generally most interested in helping "the poor" don't want to hear about capital. They seem to be more interested in aid programs and theories of exploitation. This is unfortunate, because really capital is as innocuous as it is essential.

Capital can be described using a number of metaphors. William Graham Sumner was one of those writers who understood that the creation of capital was the chief source of all of man's material progress, for his advancement beyond the status of a primitive cave dweller. He likened capital to a lever, which helps man lift weights beyond what could be done with his bare hands. Capital gives a like advantage in economic matters. Sumner also used the example of a snowball, to illustrate how the advantages of capital accumulate over time. "Its first accumulation is slow" he wrote, "but as it proceeds the accumulation becomes rapid…and the element of self-denial declines." Sumner thought this was incontrovertibly true, because if it were not, there would rapidly come a point at which further self-denial, or saving, would not pay.

Discoveries and improvements require less additional capital when you have more to work with. It is easier to get computer technology to a certain level today than it would be to achieve that same level when computers were still in their infancy and the computing power of today's common desktop filled a whole room. That it takes fewer resources is intuitively obvious, and that is Sumner's point.

Capital is what is used to build houses, bridges, roads, schools, and churches. It is used to manufacture automobiles, boats, airplanes, washing machines, and television sets. It is essential in food production, in creating new medical breakthroughs and is critical in any research. Without capital we would all be living like simple hunters and gatherers.

So, capital is critical to growth, and savings are essential to the creation of capital. Why, then, would savings, the backbone of all material progress, be thought to hinder growth?

These critics must think that all of what we have just arrived spontaneously and that it is not going away. A society that chooses to no longer accumulate capital is like one that freezes time and slowly creeps backwards as things start to fall apart, like Cuba or the state of the former Soviet Union.

Savings, ironically, is the only viable way to grow. It is the only way to create investment and capital and to further along the improvements in the standard of living that are generally associated with growth.

Murray Rothbard in his grand treatise Man Economy & State dealt with the errors economists make in this department. He concluded that "investment in capital goods means nothing except as a necessary way station to increased consumption" [italics are his]. Therefore, critics of savers as being unfriendly to growth have it exactly wrong because the savers are the ones that provide for future growth or increased consumption.

Growth and the alternatives

Another unquestioned assumption by anti-savers is that growth, and more of it, is automatically the goal of everyone. However, consumers are constantly balancing their wants and needs to consume now against their wants and needs to consume in the future, and allocate their resources accordingly. Rothbard's analysis in Man, Economy & State is characteristically lucid and raises all the important points.

For example, how much growth is the right amount of growth? Is it 5% or 10%, or 3.63%? Who decides and why? The beauty of the free market is that each individual decides for himself how much to save and how much to consume. The collective net result of all these individual decisions determines how much capital a society generates and impacts the future growth of the economy. There is no need to worry about. No policy decisions are needed, no interest rates need to be manipulated and no tax incentives are required. Growth is a derivative product arrived at naturally.

Therefore, any attempt to manipulate growth is an attempt to do something that the consumers themselves have not chosen to do. Economies are created and maintained as a means for individuals to satisfy wants and needs, they are not designed to satisfy the arbitrary preferences of economists or politicians.

Even so, the very idea of growth itself is highly abstract and nebulous. It defies easy definition and measurement. Growth of what? Again, in a free market, there is no concern as the actions of consumers dictate where and when growth will take place.

The real problems of aging populations

The economic problems that arise from aging demographics are problems that arise as an outgrowth of the welfare state. They are political problems.

To the extent that governments around the world have promised to pay some form of social security and/or provide medical benefits for its aging populace, to that extent there is going to be a problem with a larger aging population. Because, for obvious reasons, such plans can only "succeed" when there is a sufficient number of worker bees underneath. All of these schemes depend on a younger workforce to draw sustenance from, like a mosquito depends on warm bodies.

The younger generations will tolerate only so much. There is a point at which the plucking of feathers creates a reaction in the goose. Again, this is a political problem. Political problems demand political solutions and in this case it means pushing back the time that beneficiaries are eligible or reducing benefits altogether. This is no easy task either, since government has created a class of dependents or at least a class that expects something. These people can vote and hence you can see how these awful programs, which should never have been put in place to begin with, are going to be terribly difficult to extricate ourselves from.


Aging populations' tendency to save more, then, is not the problem that it has been assumed to be. Rather, the real problems stemming from aging demographics arise from the nature of a welfare state and the unrealistic pyramid scheme it represents. Economic stagnation due to increased burdens borne by society via the welfare state is quite a different matter from the benign voluntary savings of aging populations.


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