Sustainability

In standard economic theories, economy will grow indefinitely over time. In standard finance theories, stock market are assumed to increase indefinitely over time. There is no sustainability problem in standard economic and finance theories. But what is the reality?

Stock market performance Stock market performance is generally regarded as a leading index. What are the performances of the stock markets around the world? Nikkei 225 –1989, near 40,000 –More than twenty years later, less than 1/3 of the peak value

Stock market performance (Continued) Is Japan alone? Peaks of most stock markets in the world were reached in 2008 or much earlier. The levels of most stock markets today are lower than the levels at 2000, which was more than ten years ago.

Stock market performance and resource allocation Most of our retirement funds are invested in stock markets. The expected performance of the stock market has significance impact on our future life.

Sustainability has become a major concern in our economic and financial decision making How sustainable is our society? What signs we should look at on sustainability?

Factors determining sustainability Abundance of natural resources Living standard Irrelevance of natural resources in a technology society? Case of Japan?

Children as the future of our society We often say children are the future of our society. How about the fertility rates in Canada? About 1.6.

Detailed consequences School enrolments keep declining in most school districts. In Prince George, we already experience two waves of school closure in the last ten years. University enrolment Future work forces Health care costs

More detailed analysis Fixed cost and sustainability High school have higher fixed cost than elementary school. When a community cannot support a high school, young families start to move away. Eventually, the community cannot support an elementary school. More families move away. The community eventually disappear. Example, Hixon, which is between Prince George and Quesnel.

Why most economists are not concerned Economists mostly use GDP as the measure of health of the society. GDP is still growing in most wealthy countries

The problems of Using GDP as the main measure The decline of fertility rate free up labor forces over the short term. More women join labor market. This generate short term economic growth. But over long term, labor supply will decline. Since it takes about 25 years from birth to work, it is only after 30 years the negative impacts of low fertility rates will show up in economic activities.

This suggests that fertility rate, which is the return on human investment, is a much more fundamental parameter and is a leading indicator over GDP growth rate.

Examples If fertility is used as a measure of social health in Japan, you can recognize its eventual decline in early 70s. However, even today, economists are still arguing about how past policy mistakes wreck Japanese economy and how a good policy can revive Japanese economy.

Europe If fertility is used as a measure of social health in Europe, you would be much less ambitious about expansive social engineering such as the creation of Euro zone. Instead various countries will prepare for maintaining and simplifying their social structures. The attempts by European countries and others to save Euro will further drag down Europe and the world indefinitely, until the final collapse of the Euro and Euro zone.

Questions Is the current world becoming more integrated or less integrated? Are there more or less countries today than half century ago?

China If fertility is used as a measure of social health in China today, policy makers would attempt to slow down instead of speed up economic growth, to avoid future economic collapse. Policy makers would have scraped the one child policy long ago.

Can one child policy be stopped when the population size becomes “optimal”, whatever that term means? In such a society, population structure, with mostly seniors and few young people, is hardly optimal. Furthermore, policies will be more influenced by the needs of seniors than by the needs of young families in reproductive ages. This will continue to depress fertility over long term, as observed in countries that experience demographic transitions earlier.

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Canada and BC If fertility is used as a measure of social health in Canada today, we would need to seriously rethink about our policies and social structures. We might stop burdening ourselves with things like carbon tax. We might start to reduce our health care cost instead of increasing it.

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Science and Technology Science and technology for high fixed cost systems. How further development of science and technology shape demography in wealthy countries?

Historically, the sharp decline of fertility is always the harbinger of decline of highly developed civilizations. However, there is a time lag between the decline of fertility and the decline of economic output. The initial decline of fertility reduces the ratio of dependents over workers, which actually speed up economic growth.

From Darwin, A most important obstacle in civilized countries to an increase in the number of men of a superior class has been strongly urged by Mr. Greg and Mr. Galton, namely, the fact that the very poor and reckless, who are often degraded by vice, almost invariably marry early, whilst the careful and frugal, who are generally otherwise virtuous, marry late in life, so that they may be able to support themselves and their children in comfort. Those who marry early produce with a given period not only a greater number of generations, but, as shewn by Dr. Duncan, they produce many more children. The children, moreover, that are born by mothers during the prime of life are heavier and larger, and therefore probably more vigorous, than those born at other periods.

Thus the reckless, degraded, and often vicious members of society, tend to increase at a quicker rate than the provident and generally virtuous members. Or as Mr. Greg puts the case: “The careless, squalid, unaspiring Irishman multiplies like rabbits: the frugal, foreseeing, self-respecting, ambitious Scot, stern in his morality, spiritual in his faith, sagacious and disciplined in his intelligence, passed his best years in struggle and in celibacy, marries late, and leaves few behind him.

Given a land originally peopled by a thousand Saxons and a thousand Celts --- and in a dozen generations five-sixths of the population would be Celts, but five-sixths of the property, of the power, of the intellect, would belong to the one- sixth of Saxons that remained. In the eternal ‘struggle for existence,’ it would be the inferior and less favoured race that had prevailed --- and prevailed by virtue not of its good qualities but of its faults.”

Today's world Rich country. –Low discounting, long education, late marriage, low marriage rate, low fertility. Poor country –High discounting, short education, early marriage, high marriage rate, high fertility.

Inside a rich country such as Canada More educated: Low fertility Less educated: High fertility

advantages of high discount rate We normally notice many disadvantages of high discounting, such as poverty. But there are advantages: –Enjoy now, –More children

Disadvantage of low discount rate Low discount rate is often associated with farsightedness. However, we often are not as farsighted as the low discount rate demand. We get university education for the expected future payoff. However, many of us are not highly motivated to work hard. We delay our marriage and having children. We have few children in the end.

An Example Suppose our life span is 60 years old. For the first 20 years, we depend on our parents for our living. For the next 40 years, we live on our own and possibly provide for the next generation. Assume our current living standard consumes 8 unit of resources per year. During our working age, we obtain 15 unit of resource per year, for 40 years.

An Example (Continued) Calculate the amount of net resource, which is defined as the amount of resource we obtain during working age minus the amount of resource we consume during working age. This is the amount of resource available for next generation. Calculate the number of children we can support. Will population grow or decline in this society?

Consumption in first 20 years 8*20=160 unit of resource Resource extraction in 40 years of adult life 15*40 = 600 unit of resource Consumption in adult life 8*40 = 320 unit of resource

Net resource 600 – 320 = 280 unit of resource Number of children can be supported 280/160 = 7/4 > 1 Population grows.

Continued from the last question. Assume all other conditions remain same. But the living standard is increased to 10 unit of resource per year. Recalculate and determine how many children each person can support. Will population grow or decline in this society?

Consumption in first 20 years 10*20=200 unit of resource Resource extraction in 40 years of adult life 15*40 = 600 unit of resource Consumption in adult life 10*40 = 400 unit of resource

Net resource 600 – 400 = 200 unit of resource Number of children can be supported 200/200 = 1 Population stable.

Continued from the last question. Assume all other conditions remain same. But the amount of resource one can obtain in working age declines to 14 unit of resource per year. Recalculate and determine how many children each person can support. Will population grow or decline in this society?

Consumption in first 20 years 10*20=200 unit of resource Resource extraction in 40 years of adult life 14*40 = 560 unit of resource Consumption in adult life 10*40 = 400 unit of resource

Net resource 560 – 400 = 160 unit of resource Number of children can be supported 160/200 = 0.8< 1 Fertility rate is 0.8*2 = 1.6. Population declines.

Choice or necessity The decline of fertility is often interpreted as the choice of modern people. We would like to discuss how we use choices in general. When we drive, we have a choice to drive on the right side or left side of the road. But of course most of us choose to drive on the right side of the road. Otherwise, we will die soon.

We have a choice to show up at the final exam or not to show up at the final exam. But if we do not show up, we will fail the course. In general, we rationalize our necessity as our own choice. This makes us feel much better.

Let’s get back to fertility. It is very expensive to raise children in modern society. We often need to send our children to hockey, soccer, ski, piano and many activities. They are very time consuming and costly. At the same time, modern careers require long term investment. If we have children early, it reduces our time to socialize with our colleagues and makes our schedule less flexible. We are less able to travel or perform field works for extended periods.

Raising children is a long term commitment. However, modern families are not very stable. It is often difficult for women to decide to have children because they often face the prospect of raising children alone. So low fertility is really a necessity of modern society, but presented as a choice to make it less tragic.