Is prosperity a Ponzi scheme?

When is enough enough?

For the first few hundred thousand years of the existence of Homo sapiens, the growth rates of the human population and the human economy were almost negligible. The species spread slowly into new territory, adding numbers by this method. But the means of production — hunting and gathering — improved little. The average standard of living was stagnant.

The first big jump occurred with the agricultural revolution of ten thousand years ago. Farming produced more calories per person than hunting and gathering, enabling populations to grow. The average standard of living may not have increased much or at all, for the storable nature of grains allowed the amassing of surpluses which were captured by elites.Yet the human economy as a whole grew along with the growing population.

Subsequent growth was slow, depending on improvements in agricultural techniques. In certain places trade fostered specialization that enhanced productivity. But again the gains were mostly captured by elites. Average living standards rose only marginally.

The next big jump came with the industrial revolution of the eighteenth and nineteenth centuries. Power derived from fossil fuels greatly exceeded the muscle power that had driven economies until then. Trade within countries and across borders expanded, encouraging further specialization. Populations grew and so did economies. Per capita growth was less but appreciable.

Slightly lagging the industrial revolution was a financial revolution that allowed entrepreneurs to tap the resources not merely of nonentrepreneurs but of future generations. On behalf of the entrepreneurs, the financiers sold shares of firms, on the prospect of future earnings, and they negotiated loans, to be repaid with those future earnings.

This gave a forward tilt to the industrial economies. The investment facilitated economic growth, which supported population growth. The population growth fueled further economic growth, which allowed the redeeming of the obligations to the future.

Governments joined the process, building infrastructure and a safety net for workers with money partly drawn from tax revenues but often from the sale of government bonds.

The formula appeared magical. The industrial countries grew in wealth and population as no countries ever had before. They seemed to have found the secret to perpetual growth.

There was just one problem. For all of previous history, population growth had tracked economic growth, with the latter limiting the former. But in the twenty-first century, population growth independently stalled and in many rich countries reversed.

As it did, the forward lean to the model of growth began to appear unsustainable. Countries had borrowed against the future on the premise that there would be more workers with each new generation. A decline in population would falsify the premise and cause the growth model to topple over.

This raised the possibility that the growth model had always been less than it seemed. To be sure, there had been inventions and innovations that made people more productive. Economic progress was not entirely fictitious.

But a model that was based on a continuously growing supply of workers looked suspiciously like a Ponzi scheme — a scam named for Charles Ponzi that pays current investors with contributions from new investors rather than from returns on the underlying investment. Ponzi schemes look great until the pool of new investors dries up.

The effect was most noticeable in government programs that supported workers in their retirement. The first such programs were established in Germany in the nineteenth century. America’s version, called Social Security, originated in the 1930s. Initially the contributors to these programs — that is, active workers — outnumbered retirees by many to one. Over time this ratio diminished. In the United States in 1940 there were 42 workers per retiree. Today there are three workers for retiree. By 2050 there will be two workers per retiree.

Under these circumstances, the existing pension model will soon become unsustainable.

It's not just pensions. A large and growing population of workers kept the whole economy afloat. The workers doubled as consumers who required a constantly growing supply of goods and services. The flywheel of production and consumption kept spinning as long as there were new inputs of supply and demand.

The flywheel is slowing and might soon reverse its direction. As automatic as expansion has seemed during the last two centuries, contraction might become irresistible.

Are we doomed to be to become gray and poor?

Not necessarily. Young men and women could decide to have more children. The old model could revive. Governments in several countries have undertaken campaigns to encourage births.

Or a new economic model could be devised. An economy designed for steady-state equilibrium might emerge. Humans don't grow their whole lives. They grow rapidly in childhood and youth, but in maturity they maintain the same height, for example, for several decades. The existing economic model has equated prosperity with growth. More was always seen as better. The new model might settle for sufficiency, for enough being enough.

This will sound radical to some. But there's precedent for it. It was the model during nearly all of human history. The model of the last three centuries is the radical one.