The biggest issue in 20 years will be population collapse. So we're looking at the Chinese running out of people. Within ten years. The population collapse in developed countries is precipitous. A demographic earthquake is going to destroy our economies. Fewer workers, fewer ideas, higher taxes to fund more pensioners, slower growth. By now, you've probably heard all the doom and gloom arguments, perhaps even on this very channel. But what if we wait? What if I was wrong? What if the historical evidence actually tells us that collapsing birthrates, paradoxically, are good for the economy? Because they force companies to innovate?

Before we can find out, let's quickly review the standard story the global economy faces demographic doom. All right. As I see it, there are essentially two parts to this story about why a rapidly aging society is bad news for the economy. The first is simple. Far fewer workers will have to support a lot of pensioners. The economy GDP is simply a measure of all goods and services produced. If you rapidly reduce the number of people who make stuff versus those that are retired, and of course you should expect economic growth to slow down rapidly. Yes. Slow down. Because the thing is, economic growth is not just hours worked. It's also how productively these hours are used. So far, even a rapidly aging economy like Japan has been able to grow by getting more productive. However, sadly, the second part of the doom and gloom story predicts that as fewer babies are born, workers will be less productive because there will be less innovation for two reasons. Reason number one young workers are uniquely innovative. Fewer babies today mean fewer entrepreneurs and inventors tomorrow. After all, beyond the fact that older workers tend to start fewer high growth startups, aging workforces create massive bottlenecks. That is when senior employees hold onto key positions for longer and longer. They prevent younger talent from acquiring the management and business skills needed to succeed. Therefore, economists like doctor Fatih Garan argue that roughly half of the decline in U.S. startup activity since the 1980s can be explained purely by fewer young Americans entering the workforce. Second, when a population is growing rapidly, there is a big prize for those who innovate. Competing with established giants requires immense upfront investments. If the population is growing, so does your future customer base, making it worth the risk to build new products. But in a country facing demographic decline, where the pool of potential business clients shrinks year after year, the price for innovation might simply not be big enough anymore to justify spending so many years on researching and trying potential new products. So in summary, the standard narrative is twofold. One. Fewer babies means fewer workers, means less supply of goods and services simple to fewer young people. And a falling population means less innovation. And together, these two trends spell certain doom for the economy.

But that is just a theory. And a theory must always answer to evidence. And according to some Moghalu and his coauthors, the evidence does not support this story at all. Yes, aging will reduce the number of workers, but rather than becoming less innovative, they believe a reduced workforce will make economies more innovative, not less. And crucially, this positive effect will be stronger than the negative effect of having fewer workers, at least. This happened clearly when people least expected it during a time of war or war, and its unexpected blessings. It's 1809 and Britain is at war with France for control of the world. The Royal Navy soon runs short of sailors, so every captain suddenly has to find his own crew however he can, looking for volunteers, taking men of passing merchant ships and, crucially, recruiting many unexperienced farmers and workers off the coast. In this case, the Navy recruited mostly farm men from coastal regions. Of course close to the deep waters where the biggest warships could anchor. Therefore, these regions last prime working age males to fight the French, and this caused, of course, labor shortages and as a consequence, those that stayed behind could, in theory ask a higher wage. As economists Joachim von and his colleagues show, that is exactly what happened. The higher the recruitment in an area, the higher the wage. Agricultural servants on annual contracts and day laborers got. Okay, that makes sense. This turned out to be a crucial factor behind the mechanization of British farms, a shift that many point out as the peak starter for the Industrial Revolution in Britain. Already back in the 1780s. Andrew Maxwell had built the first threshing machine, but it was expensive and somewhat unreliable. So for two decades it had only made sense in northern England, where wages were already fairly high. In southern England, it was cheaper to hire a man to do the work instead. However, as labor became more expensive due to war, recruitment machines essentially became cheaper compared to labor. So machines, of course, ended up showing up exactly in places that had an higher number of men recruited to fight in the war against France. Hence, for these regions, paradoxically, losing young workers was the opposite of a catastrophe. Instead, it became an incentive to innovate simply because labor was getting too expensive. And this is what the standard doom story misses. More pessimistic economists like Professor Charles Goodhart do stress that fewer workers will likely cause wages to rise, causing inflation. That's a bad thing, but they typically do not stress so much that this could be a major boost to innovation, because higher wages force firms to innovate, which ultimately makes remaining workers more productive, causing the economy to grow.

But this happened more than 200 years ago, and it's just a single case study. Of course, as a moghalu and his coauthors present way more evidence in the paper specifically on how the past 70 years of falling birth rates affected economies. To answer this question, Asim Moghalu and his coauthors compared 70 years of birth rate and GDP data across more than a hundred countries. So a lot of data. Very impressive. As you can see here, their findings are clear. Lower birth rates in 1950 correlate with higher GDP growth. But of course, this in itself does not prove the innovation story. Therefore, the researchers dug deeper. After tracking millions of battered records worldwide, they found a striking pattern. As you can see here in these graphs, the higher the birth rate in 1950, the fewer patents were filed. So by implication, countries with fewer birth rates actually innovate more. Which again contradicts the standard story. And crucially, these inventions did not just sit on shelves collecting dust in patent offices. They transformed real world economies. Reading our graph again, we see that countries with more births in 1950s went on to export significantly fewer high tech products in the decades that followed. In other words, low birth countries exported more high tech products. They were more innovative. This provides an additional layer to the economic miracles of both dependent China. Both nations started out exporting cheap, simple goods to Western markets and quickly moved up the ladder into advanced, sophisticated industries like robotics, electronics and high tech manufacturing. As their birth rate collapsed. Of course, while many factors drove this transition from industrial policy to global trade demand, the things that we often discuss on the channel the urgent need to replace a shrinking younger generation of workers was potentially an underrated factor. So history so far contradicts actually the main doom and gloom narrative of demographic decline. Fewer workers do not automatically mean less innovation, on the contrary. Countries facing labor scarcity have often adapted technology to compensate for missing heads, making the average worker significantly more productive in the process.

Does this mean that the standard pessimistic story is entirely wrong, and that falling fertility rates will simply make us all richer? Sadly, no. Because this time may actually be different. After all, the present does not have to be like the past. And in this case, I think there are two main weaknesses in the new positive story presented by Professor Acemoglu and his coauthors. First, fertility rates in the 1950s were very different to our current rates that are ultra low. In 1950, the country with the lowest fertility rate on Earth was Austria, and it was still at 2.0. That's very close to the replacement level needed to hold the population steady. Today, South Korea is at 0.8. If you hold that for a generation, the next generation will be 38% smaller than last. And this isn't just a projection. It's already happening. Korea was delivering around 650,000 babies a year at the start of the 1990s, but last year it was closer to 230,000. Those 1980s and 1990s babies are the engineers designing chips at Samsung right now. But the classrooms behind them are two thirds empty. Sure, some of those remaining students will still grow up to become brilliant engineers and creative inventors. But it's hard to believe that such a massive collapse in the talent pool, something we have not seen before, will not lead to less innovation overall. That's the scary math of ultra low fertility. It gets worse over time, driving population decline faster than anything we've seen in human history. We simply did not have this dynamic back in 1950, when virtually every country on earth was sitting well above the replacement level. Now, the second weakness in a similar story is that he just looks at falling birth rates. Yes, that is a trend that has been happening for a long time. However, what I'm worried about is actually the ratio of pensioners compared to active workers. More specifically, what I'm worried about is the changing dependency ratio. That is, those who do not work, that depend on those who work. You see, while you may say how strange that falling birth rates coincided with an economic miracle, I would instead look at the dependency ratio of both kids and old people in the 1950s, all the way up to the 20 tens. The dependency ratio was actually falling fast in China and Korea, but now it's starting to rise. That is a very different trend. Some demographic researchers call the times of falling dependency ratios a positive demographic dividend for a reason. Having two young kids myself, I can definitely tell you that I became far less willing to take massive entrepreneurial risks since I became a dad. So the fact that falling birth rates, a period of demographic dividend coincided with a productivity boom does not surprise me at all. But now, with more elderly people to take care of, the world is heading into a period of reverse demographic dividend today, which is fundamentally different than the period a small group studied in his paper. So, in conclusion, where I and other economists wrong about warning for the economic consequences, the doom story of more and more pensioners with fewer workers to depend on. Perhaps, but I was not fully convinced by this paper. I think that the simple fact that so many people stop working while the remaining workers have to pay for their pensions presents a huge, never before seen risk to the global economy. But the paper we discuss today did make me more hopeful that rather than gray economies becoming less innovative, rising workers shortages could actually force them to become more innovative. Just like what happened in southern England during the war with France, which I surely would have expected would have been negative for the economy, the way I see it. Each of these three effects can be true at the same time. The question that really matters is which effects will be stronger. Sadly, historical economic research cannot yet answer that question because a new wave and falling population levels. That is simply something that we have never seen before. But that's my take. What do you think? Will the negative effects of falling workers to pensioners and eventually falling population levels be stronger than the potential effect of increased innovation after labor costs are pushed higher, because companies will have to innovate so much faster.