Lecture 3 Population, income and resource constraints.

Lecture 3

Population, income and resource constraints.

Resource constraints and long run growth

• The first lecture pointed out that population decline was associated with economic decline and

• that population increase after the 9th century triggered off division of labour and economic growth

• What happens in the very long run if land is in limited supply?

Major issues confronted today

• What determines the long run demographic trends?

• Why has fertility declined in the modern world?

• Why do poor people have more kids than rich?

• Can economies grow for ever with limited resources such as a constant supply of land?

Economists used to say: No Way!

• For Malthus and Ricardo land was the limiting resource.

• For late 19th century economists coal was supposed to bring economic growth to a halt.

• Quite a few today argue that oil shortage will end prosperity and Malthus still has a big fan club.

The Malthus-Ricardo view

• Growth is constrained by limited resources, primarily land

• Population growth positively related to income per capita

• Technological progress is insignificant.• Population growth will depress real wages

in the long run because of diminishing returns and lead to population stagnation.

Malthus was wrong about the future

• Since Malthus died in 1836 world population has increased six-fold from about one billion to about six billion

• Food production has increased about ten times

• Per capita production of food has almost doubled in 200 years

• Let’s see if Malthus was right about the past

Some definitions

• cbr means crude birth rates and is usually measured as births per 1000

• cdr means crude death rates and is measured as deaths per 1000

• The rate of population growth = cbr – cdr

• cbr has an estimated maximum of 50 but it has rarely been observed historically

Malthusian population theory

Vital Rates

Income per headMalthusian EquilibriumCBR-CDR=0Income= Subsistence Constant population

CDR

CBR

The historical record suggests: Constant, above subsistence, income and positive population growth.

Preventive and positive checks

• The upward sloping cbr curve can be explained by the fact that preventive checks increase with falling income and vice versa: late marriages=less children.

• The downward slope of the cdr curve is due to that positive checks – increasing mortality – are triggered off by lower income: poor nutrional status=high risk for diseases.

Population growth with constant land

• Initially land per farmer is high• High income means high cbr and low cdr• As population increases land/farmer ratio

falls• Income per head is falling (diminishing

returns) causing cbr to fall and cdr to increase

• Finally the economy settles at an equilibrium with constant population

Malthus or climate

• The decline in total fertility (TFR) is a response to economic hardship, fall in real wages

• TFR declines because marriage is postponed• The fall in real wage around 1600-50 probably

due to worsening climate rather than Malthusian ‘overpopulation’

• Post 1650 increase in real wages raises TFR

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Figure 3:3. Real farm wages in England and deviations from Northern hemisphere temperature, 1560-1880

• There is long term growth of world (and Europe's) population interrupted by sharp and sudden decline caused by exogenous forces, such as

• political disorder, harvest failures and/or epidemics.

• A slow down in growth in 17th century due to preventive checks.

• Population growth does not tend to decrease real wages.

No historical support for a Malthusian equilibrium

Gentle rise,severe shocks

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Malthus + technological progress = population growth

Population

Time since introduction of technology A and B respectively

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B

A is a low level technology

B is a high level technology

The meaning of land constraint

• There are about 13 billion of hectares of landmass

• With current technology about 7 billion hectares are unfit for agriculture

• The land constraint is then 6 billion hectares

• 5 to 5.5 billion hectares are currently used

But, land is a constraint only at a given level of technology

• The most advanced types of agriculture have up to two crops per unit and year, crop ratio = 2.

• Primitive agriculture - slash and burn – has a crop ratio of 0.05

• The difference between the two is a multiple of 40

• Technological progress is ’land-augmenting’

Substitutes for land

• Scarcity of land triggers off other yield increasing inputs such as

• manure from man and animals, seaweed and in exceptional cases: herring (!!!)

• water (irrigation schemes)

• capital, for example better ploughs and stronger draught animals, horses

• high yield crops

Modern poulation dynamics

• cbr fall with increasing income contrary to Malthus prediction

• cdr have arrived at a low steady state level

• Population growth is low again

• Analyze that!

Long run demographic transition

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Life and death in Tuscany

From high pressure to low pressure demographic regimes

• Pre-industrial economies have high fertility and high mortality. (High pressure)

• Look at the infant mortality!

• Life expectancy is low.

• The transition to the modern low pressure (low fertility and low mortality) comes late and is fast in this village.

Difference between cbr and cdr over time

Time

Cbr-Cdr

The demographic transition

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Life expectancy at birth

Childeren per woman(TFR)

17th-18thold regime 0.1- 0.4 percent growth of population

20th Modern regime0.1- 0.4 percent growth of population

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Transition regime,19th century 1-1.5 percent growth of population

Why fertility falls with increasing income

• Assume that parents get utility (pleasure) from the presence of kids, now and in the future – sometimes hard to believe, but…

• Malthus implicitly believed that utility derived from the number of kids since only income constraints stopped households from having the maximum number

Quality vs. Quantity

• It seems more plausible that the utility is derived from the quality and quantity of kids

• There will be a trade off between quality and quantity of kids and between other goods

• Given the income constraint you cannot have better quality if you do not sacrifice quantity, or the other way around.

Theory becomes ambiguous

• If quality and quantity are a normal goods • then consumption of the both will increase

with increasing income (income effect)• but theory does not tell you about the

income elasticity for quality and quantity being a matter of culture and taste, which can change over time

• Modern households prefer quality over quantity: less but better

Don’t forget the substitution effect!!

• Raising kids is time intensive and if wages increase the opportunity costs of having and educating kids increase.

• The substitution effect, negative on demand for kids, in particular the numbers, might be stronger than the positive income effect.

Why do well educated women have fewer kids?

• The opportunity cost having kids is higher because high education promotes high wages.

• Substitution effect (negative on demand for kids) stronger than postive income effect.

Reflect on this graph! trend growth and growth after a negative population shock. What do

you see?

Summary

• Malthus predicted that population growth would depress real wages and population growth would eventually come to a halt

• However, technological progress seems to keep real wages at a constant or slowly increasing level despite continuing population growth in pre-industrial economies.

• It seems as if population growth can stimulate technological progress and division of labour. More about that next time.