Demographics Unravelled. Amlan Roy
Читать онлайн книгу.
of goods and services is a dominant component of national and global economic activity. A large segment of people in the population possess another characteristic: that of a worker contributing labour toward the production of goods and services, which in aggregate also leads to GDP. Thus, people are the core of any economy, and their salient features are those as consumers and workers—a far more important economic classification than that based on age or numbers of young or numbers of old. This paradigm encompasses the fact that consumer and worker behaviours are more relevant than their mere numbers or their age.
One of the world's greatest management gurus, Peter F. Drucker, had the following to say on the subject “Demographics is the single most important factor that nobody pays attention to, and when they do pay attention, they miss the point”1,2. This important insight by Drucker resonates with the broader interpretation of demographics that I have adopted and have been popularising for the last couple of decades in my reports, speeches, and discussions.
My first criticism was that conventional approaches to demographics by historians, market commentators, and popular writers were narrowly based on “age and numbers”. There was another popular misconception of demographics (related to the former narrow view) that it was “predictable”. This was based on counting people of certain age: say, if the number of 35-year-olds in a country in 2000 was X million people, then it could be said that the number of 45-year-olds in 2010 would be close to X million adjusted for certain mortality factors. The likelihood that most 35-year-olds would live to be 45-year-olds is close to 1 in most countries of the world. This notion of forward extrapolating the number of people of a given age few years ahead with near certainty or predictability3 to evaluate their demands is incomplete. However, being Druckerian in spirit, I believe that this popular conception also misses the point by focusing on numbers of people and how many of them are expected to live T-periods ahead in the future (10, 15, 20, etc.). The more important point is not just counting the mere numbers of 45-year-olds 10 years later but rather how different they are as consumers and also as workers than the current 45-year-olds. It is therefore the behaviour of consumers and workers 10 years later that is more unpredictable, interesting, and relevant from an economic and business perspective.
The behaviour of consumers depends on preferences towards consuming today vs. saving for later, also called the discount factor by economists (related to the degree of impatience that an individual consumer displays), and the preference towards risk, called the degree of risk aversion. Dynamic models of consumption and asset pricing in the microeconomics as well as macroeconomics literature build on these two preference parameters. Consumption by people as individuals and in the aggregate also depends on the universe of goods and services they could potentially consume. Consumers in the 1980s didn't have access to the same smartphones (iPhones, Samsung, etc.), web and internet services, and online ordering as consumers of the 2000s or consumers in 2010 and 2020. Technological advances and product innovations have dramatically altered the consumption opportunity set available to individual consumers across all countries in the world, not just in the advanced, rich countries. Globalisation has extended access and availability to consumers in the poorest countries, too4.
Both the consumer opportunity set and the preferences of consumers have changed as the world has globalised, information and education have increased awareness, and companies have innovated over time. The affordability of technological and consumer products has undergone radical changes on many fronts, which would have been hard to forecast 10 or 20 years ago even by visionaries, futurists, or pioneering innovators.
People (consumers and workers) were at the core of modern economics, as elaborated by Adam Smith's The Wealth of Nations (1776) and The Theory of Moral Sentiments. People's behaviour was also central in John Maynard Keynes' The General Theory of Employment, Interest and Money (1936). Keynes coined the term animal spirits to capture the emotions, impulses, and tendencies that influence human behaviour and used it to explain investor decisions of buying and selling assets during times of uncertainty and stress. Psychology and deviations from perfect rationality have also been highlighted by Daniel Kahnemann and Amos Tversky5, who highlighted cognitive biases in decision-making, and Richard Thaler6,7, who highlighted deviations from rationality in economics and the importance of behavioural economics. One of the pioneers of decision-making in organisations as well as artificial intelligence was Herbert Simon, who took an interdisciplinary approach to organisational decision-making and developed the concepts of bounded rationality and satisficing. My perspective fundamentally includes the behaviour of consumers and workers as a reflection of their characteristics.
I have another criticism of the conventional popular perception of demographics being long-term in its effects. Consumers and workers make direct contributions to the economic output of a country, a region, or the world, as mentioned earlier. Additionally, they influence inflation through effects on both the demand and supply sides. The wages consumer demands and labour costs of workers have short-term as well as medium-term and long-term effects on inflation and profitability. A flagship study by Deutsche Bank's Jim Reid8 on long-term inflation over centuries found that demographics was one of the most important factors influencing inflation. My direct negation of this populism that demographics is long-term only stems from the fact that consumers and workers are not just long-term in terms of their economic behaviour but also immediate-term, short-term, and medium-term.
To summarise, I assert that demographics is not about age or population numbers only, nor is it only long-term in its effects, nor is it largely predictable, as it is hard to predict worker and consumer psychology in the future in the face of changing consumer opportunity sets—many of which have not even been visualised—like the current versions of the iPhone, web-based education, and online ordering
My perspective of demographics extends to a conclusion that I have been stressing over the last two decades that demographics affects the income statement and balance sheet of every household, every company, every industry, and every country. This is because consumers and workers are the core of revenues and costs of every producing unit, be it at the household level or company level or industry level or national level. Demographics has accounting implications on enterprise profitability if one views labour as contributing to the costs and consumers as contributing to the revenues.
By taking a broader view of demographics, I reveal and unravel the rich and deep influences of demographics on macroeconomics, investments, and policy. I paraphrase Drucker to urge readers of this book “not to miss the point when they pay attention to demographics”. A better understanding of demographics is essential to facilitate their entry into a Braver (and Better) New World9. I strongly believe that a proper understanding of demographics will facilitate a better understanding of the dynamics of the real economy (Main Street) and the financial markets (Wall Street), as well as the divergences that have become very apparent during the 2020-COVID era.
1.2 Effects and Implications of Demographics
The focus in understanding demographics should be on understanding the effects of people behaviour at the micro (individual basis) as well as at the macro (the aggregate) level. These encompass individual interactions and dynamics within families, groups, and societies, which are a reflection of their characteristics. The failure of modern macroeconomics in warning about the global financial crisis (GFC) was highlighted by George Akerlof and Robert Shiller in Animal Spirits (2010)