Population is important, but productivity is most important for long-term economic growth.
Throughout most of history before the Industrial Revolution, an economy could only grow about as fast as its population. The Industrial Revolution and the new technologies brought into the production process allowed firms to produce much more than they were ever capable of before. Productivity began to rise for the first time and the era of economic growth was born. Without productivity growth, economic standards of living tend to stagnate.
The world today is aging and population growth is slowing down. Many advanced economies and some major emerging economies like China have very little population growth and will soon experience population declines, if not already. This does have a major impact on overall economic growth, because labor along with capital are the critical inputs to production. As growth in the labor supply slows down, economies can still grow if their productivity grows.
However, productivity growth has also been slowing down in these economies and generally around the world. Without productivity growth and with aging populations, many economies will face very significant challenges that will put pressure on public finances to care for their elderly populations, among others.
This is why it is an imperative for economies to adjust to today’s technologies that are transforming the world as those of the Industrial Revolution had done one to two centuries ago. With digital technologies and artificial intelligence, it is perhaps more possible than ever to sustain long-term economic growth despite population declines. To realize this, however, major changes to our economic system (and economic statistics! quality is increasing in importance over quantity) and our social contract between citizens and their governments is a must and is the defining question of this generation.
“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
-Paul Krugman, The Age of Diminished Expectations (1994)