David Miles And The Malthusian Mistake On Living Standards

This is an odd mistake for an economist to make. Because this is a point that has been examined rather a lot over the centuries. It’s at the heart of the difference between a Malthusian economy and a Smithian one and also a Solow one. It’s entirely true that one – but only one – determinant of the living standards of the population is how much capital there is to add to the labour of said population. Which is what is being said here:

Investment is not made for its own sake but to satisfy needs and wants in the future. If a country has a growing population, then for sustainably meeting the needs of all the people investment needs to replace worn-out assets but also to raise the stock of capital assets further in line with growing numbers of people. The higher the population growth, the less your ability to maintain assets per person unless you raise savings, but that means lower consumption. This is a simple and powerful piece of economic reasoning. It is what underlies models of economic growth developed by Robert Solow, the American economist, many years ago and for which he won a Nobel prize.

Well, yes, but that’s rather to miss the residual, which is the important part of that model.

Why do we get such different answers? The fiscal calculations focus on balancing the public budget, something that can be helped by rapid population growth if the young (on balance) pay more taxes than they consume public services and the older are net consumers. If you raise the population fast enough, you keep the ratio of the relatively old to the relatively young down. But what that leaves out of the picture is the extra resources needed to maintain capital assets per person. If the public sector is unable (or unwilling) to do that maintenance, then the fiscal position can improve with fast population growth while the quality of living may decline.

Again, that’s to run with Malthus. As Greg Clark has pointed out the Black Death led to a substantial rise in the living standards – of those still living – of the workers as there was more capital per head. More land, more tools, more housing etc, given that a third of the population had just clog popped.

But, and here’s the trick, that’s a feature of a Malthusian economy, one in which we do not have technological development. As the Solow model shows, by far the greatest determinant of living standards over time – ie, not in any static model – is that residual, that technological advance. The addition of capital to labour explains only some small fraction of the 20th century rise in living standards, it’s the boffins and the applying the boffinry to the world which really did the trick.

So, what’s the effect of a rising population upon that Smithian world? One where it’s the division and specialisation of labour which is paramount? Well, geographic proximity does enable more such division and specialisation. That’s one reason why urban people are more productive than rural. So, more people around the more productive we’d expect each one to be. It’s the same argument as insisting that international trade advances human wealth, just without the sand that economic distance places in that gravity model of such.

We also have the effect of simply more brains solving more problems. That acts more directly upon that residual in the Solow model. More peeps doing more thinking solves more problems and advances productivity again.

It’s entirely fair to point to Malthus and that capital to labour ratio. But entirely unfair, wrong even, to think of that as being the binding constraint. For we do have the division and specialisation of labour, we do have technological advance. And precisely the people we’d expect to be pointing this out are the economics professors.

David Miles is Professor of Economics at Imperial College, London. He was a member of the monetary policy committee at the Bank of England 2009-2015

Which is why this argument, as presented, is so disappointing.