Malthus on his head

Capitalism in an age of scarcity

Thomas Malthus thought population growth would impoverish humanity. He couldn't have been more wrong. The last two centuries have witnessed the most rapid population growth in human history, and also the most spectacular rise in living standards around the world. Malthus grossly underestimated the capacity of humans to become more productive. And their productivity increased the more humans there were. More people meant more new ideas, more demand for those ideas, and more rewards for those who met the demand.

What happens when population declines? We're about to find out—that is, in the next century or so. Some countries are already experiencing population decline, but given the interconnections among national economies, the true test won't come until the human population as a whole declines. It still might not decline; demography is an uncertain art. Yet assuming it does decline, will economies still grow? Will they level off? Will they decline?

Convinced capitalists might say markets will figure things out as they have in the past, and growth will continue. Maybe so, but the evidence is scanty. Modern capitalism has existed only during the period of population boom. Its whole dynamic rests on the availability of more—more producers, more consumers, more resources. The competition that drives capitalism is directed toward growth—growth of revenues, growth of market share, growth of profits. The high valuation of successful companies reflects their current performance but especially their growth prospects.

Is there a steady-state version of capitalism, one that doesn't require growth? Economics is often defined as the study of scarcity. But here scarcity is meant comparatively: people want more than they have. In fact modern economic theory, like modern capitalism, evolved in an era of abundance. Will the laws of economics as we know them continue to work in an age of absolute scarcity, when the factors of production are fewer and rarer?

Which raises another confounding circumstance. The modern age of growth has been an age of exploitation of the earth's resources. Fossil fuels, to cite an obvious instance, drove the industrial revolution. But they are becoming harder to find, and their negative externalities are becoming harder to ignore. Maybe the rapid growth of the last two centuries depended on cheap resources up front and a willingness and ability to pass costs on to future generations. If the payment window shrinks, does the growth model have to be revised?

One response might be that whether economies are expanding or contracting, capitalism—at least the part asserting that markets provide the optimal mechanism for making decisions about allocating resources— is still the way to go. Perhaps, but capitalism doesn't operate in a vacuum. It's always situated in politics. To give an example: Americans have tolerated greater economic inequality than people in many other countries largely because the consistent growth of the American economy as a whole meant everyone got richer even if some got richer faster than others. Will Americans be so tolerant if overall growth stalls—and they retain the democratic ability to rewrite the economic rules?

History suggests not. During the two world wars Americans looked not to markets but to government to deal with shortages. They could have let prices determine who got what, but most judged the laissez faire approach undemocratic and inequitable. Instead they accepted government rationing.

Rationing for the duration of a war is one thing. Will Americans accept rationing that has no prospect of ending? Wouldn't that be socialism?

Pretty much. But what's the alternative? As the American population declines, people with certain needed skills will become scarcer. Will Americans let surgeons set their fees at whatever the market will bear? They currently do—more than in other countries, at any rate. How long will this continue?

Historically rich folks could escape polluted cities by heading to their country houses, leaving the poor to choke on the smog. But in the 1960s and 1970s Americans said enough was enough and approved government regulations on emissions. Critics called it socialism; Americans shrugged at the label, happy for the breath of fresh air.

There are two principles societies balance in defining how individuals live in groups. The first is: Each alone. The second is: All together. When the economic pie is growing, the individualistic ethos is appealing in that it lets us think our good fortune is our own doing. When the pie shrinks, the communitarian approach offers comfort that it's not our fault and we won't be abandoned to starve.

Expect more communitarianism in the future.