warning about not ignoring people's behaviour. While modelling the behaviour of people at the individual and aggregate levels yields many insights, the complexity of the human psyche and resultant behaviour highlights the heterogeneity across people in families, groups, and countries. We need to better understand economics and finance in conjunction with psychology, philosophy, and politics, as Akerlof and Shiller emphasise.
Trends at both the micro and macro levels testify to the impact of changing behaviour that results in observable changing core demographic characteristics such as increased life expectancy, lower population increases and growth, lower fertility rates (children born per woman), increased ratios of old to young people, and lower ratios of working-age people in the total population. These in turn also influence behaviour in terms of productivity of workers, movements of people from rural to urban areas, movements across countries (migration), and access to education, technology, and capital. Focus on age alone misses out on the fact that similar-aged people across different areas and countries exhibit different behaviour, as human behaviour is endogenous: it is different within different systems and institutional setups.
How we live, how we consume, and how we work have changed dramatically over the last few decades, with rapid acceleration due to the adoption of technology, changed awareness and knowledge, and adapting to changing work and home environments. These behavioural trends are nicely documented by Mark Penn11 in MicroTrends (2000) as well as in MicroTrends Squared (2018). Microtrends reflect the changing behaviour of people at the micro level, which over time gets incorporated into aggregate changes displaying growing levels of heterogeneity. This is akin to a focus in the academic macroeconomics literature on micro-foundations of macroeconomics to reconcile or explain certain major macro puzzles.
The changing trends of globalisation over the last few decades, followed by a recent slowdown in the pace of globalisation, even called deglobalisation, are affected by changes in people's movement, trade, and government policies. I believe and argue that globalisation is a multifaceted phenomenon with a slowdown in some features such as global trade but rampant acceleration in the flow of information, IT, and capital. This is another example of the narrow interpretation of globalisation related to the movement of goods and services as well as the movement of people across national boundaries.
A correlation exists between the recent slowdown of real GDP growth in advanced countries and the acceptance of immigrants into their labour force and/or citizen population. There are many countries that rely on pools of immigrant labour—some skilled and some unskilled—to meet their workforce requirements. Even within the same region, neighbouring countries have differing immigration policies and immigrant worker shares. Population change decomposes into natural population change (deaths minus births) and net immigration (immigration less emigration). Demographics affects and is affected by both internal and external migration policies. Internal migration from villages to towns to cities reflects the growing trend of urbanisation within countries. Urbanisation growth has been much more rapid in many of the emerging market countries, leading to a larger number of megacities in the developing world such as Sao Paolo, Rio de Janeiro, Shanghai, Mexico City, Lagos, Mumbai, Delhi, Beijing, Kolkata, Dhaka, and Lahore. We shall discuss urbanisation, immigration, and globalisation in later sections of the book.
The later chapters as outlined in the preface, present data on the ongoing demographic changes, including a historical look back. The focus then is on the implications of those demographic changes on macroeconomic variables such as labour productivity, GDP growth, GDP per capita, inflation, interest rates, and public debt. Further discussion revolves around the effects of demographic changes on asset prices and asset allocation. Individual preferences toward risk and expected return influence the prices of assets. The rise of behavioural finance as a research area helps provide alternate explanations for many observed financial events and data.
A very important applied area of demographics is pensions and insurance. Increased life expectancy has resulted in uncertainties associated with living longer, given limited resources. Individuals want insurance for longer lives and also want to plan better over their lifetimes, which involves decisions on how much to save and which assets to invest those savings in. Pension funds and insurance companies invest in assets that help defray their liabilities. Strategic asset allocation and asset liability management are growing areas of emphasis for institutions that help manage liability risk for individuals. Later chapters of this book also focus on the importance of health from an individual and aggregate perspective, underscoring the importance of healthy life expectancy for society. Demographic changes have effects on inequality across generations, gender, age groups, regions, and countries. We discuss implications for inequality, human development, human capital, sustainability and public governance in later chapters, too.
People influence social change and social policies. Their behaviour is conditioned by the environment that they live in and their past experiences. The environment is determined by the interaction of various systems (health, education, labour, social welfare, legal, political, etc.) and the institutional framework. Policies have a role to play, and the role of government thereby influences the environment within which consumers and workers reside. The potentially negative implications of ageing populations have been characterised by the popular rhetoric of “the demographics time bomb”, posing a threat to ageing developed countries, and several experts, including Peter Peterson, have warned of this12,13.
In my first research foray into the area of demographics, “The Demographic Manifesto”14, we advocated radical policy measures as part of a policy agenda for ageing countries to adopt in order to mitigate the demographic time bomb. In later policy research, I emphasised the need for coordinated and holistic policy across individuals, companies, governments, and international policy institutions to solve this complex issue of ageing, as it has manifold direct and indirect implications.
Changes in consumers and workers pertain to their changing preferences and behaviour as the environment around them changes. Endogenous changes in behaviour reflect the psychology of individuals, which differs across people irrespective of age, gender, or race; it is conditioned on a complex of experiences, environment, and background. Drucker highlights the role of the knowledge worker in a modern, evolving society and the role of information. The role of heterogeneity and diversity in decision-making in response to the changing opportunity set is reflected in the resultant outcomes and outputs.
The focus of demographics is people; and as people “live longer and live differently” than ever before, for the first time in humanity, four to five generations of a family co-exist with hardly one or one-and-a-half generations working to support them. The pressures of supporting multiple generations of members are apparent not just to families but also to governments. Many experts have characterised this ongoing phenomenon as a generational storm15 or source of potential generational conflict, with the smaller, younger population group having to support a growing old-aged group. The basic question facing societies and countries as they age is one related to finances to support the ageing, as articulated very provocatively and directly by Peter Heller (2003), highlighting the urgency of planning16 for such a future. Unprecedented demographic changes are heralding challenges and opportunities for society, industry, and governments on the path toward ensuring a profitable, sustainable, and equitable future for the population, which includes all consumers and workers. Therefore, demographics has international, intertemporal, and intergenerational effects across countries and the world.
In the next chapter of this book, I present data on core demographics, looking back and placing the current period in a historical context. I then use the data on population projections from the United Nations (UN), one of the best
