Longevity Drives Economic Growth

Economic growth is fetishized in modern society, an idol and a yardstick. This shouldn't be surprising given the benefits that accompany the wealth of a society, amply demonstrated within the span of a lifetime for many countries in Asia and Africa, as entire populations moved rapidly from a state of agrarian poverty to build far wealthier industrial societies. It is argued here that rising life expectancy is a principal driver of economic growth, not just a benefit of increased wealth, and given this we should expect to see interesting times ahead of us.

It is arguably the case that the Industrial Revolution happened where it did and when it did in part due to a few generations of small but steady increases in life expectancy. This drove a slowly compounded increase in wealth and technology, which in turn fed back into further increases in life expectancy, and over time this small difference between England and the rest of Europe grew large enough to be the economic basis for a suddenly rapid expansion in technology and prosperity. Progress is the consequence of investment, and investment requires wealth. The growth curve is exponential, a bootstrapped grind from nothing that accelerates and feeds on itself as progress produces wealth that drives progress.

But why does longevity improve economic growth? Firstly because people who expect to be around for longer have more of an incentive to invest in improving the state of their property over the long term, and that happens to coincide with what should be going on if the goal is to create greater wealth for all. Short term thinking is the great destroyer of prosperity. Secondly age-related disease and disability imposes huge costs, both direct and opportunity costs: the sick must be cared for, and the productive work they could have carried out now goes undone. When people die, their knowledge and their contributions are lost. The cost of this lost human capital is staggering, should you actually sit down to run the numbers.

Increased life expectancy in past centuries was largely a matter of raising the average age at death through better nutrition and control of infectious disease, as well as other improvements in the provision of medicine, such as greater availability of any sort of worthwhile medical services. This was a matter of reducing mortality rates in childhood and early adulthood more than anything else. The future will be quite the opposite, and indeed even today the causes of the upward trend in life expectancy are quite different from those of the 17th and 18th centuries. We will live to see large gains in life expectancy arriving in later life, produced by addressing the causes of aging so as to create rejuvenation and extended vigor.

The effects on economic growth should still be just as profound over time. If stewardship of property is greatly improved by life expectancy at birth growing from 40 to 80, and the costs of aging and disease reduced, then the economic outlook improve again when the expectancy for health life span pushes towards 200 and beyond. I say beyond because if anyone alive today makes it that far, then so much technological progress will have occurred that the state of biotechnology should enable indefinite health by that time. There is no upper limit on human life span given sufficiently capable therapies to repair the causes of aging, and we are now moving into an era in which researchers are just starting to look at doing this, as opposed to patching over the consequences and hoping for the best.

The Longevity Dividend from an Aging Population

Indeed, a central issue with America's aging population - driven by longer lives, lower birth rates and the graying of 78 million baby boomers - is the question of how to manage a society with as many old as young. This is fundamentally a question of economics. The question for all of us is how to square 21st century aging populations with misaligned 20th century policies. Investing giant BlackRock recently addressed this challenge in a white paper and related panel discussion in New York. BlackRock, which manages $4.77 trillion in assets and serves 89% of the largest U.S. retirement plans, brings a compelling set of new ideas to the table.

The most remarkable thing about the new BlackRock report, "Unlocking the Longevity Dividend: How Longer Lives Are Changing Retirement, Investing and the Economy," is that it's not another woe-is-us lamentation on how demographics are going to doom America and the world. Instead, the report argues that if we get things right, longevity and population aging can be a lever of growth for individuals, families, businesses and nations - essentially, everyone on the planet.

BlackRock gets it right by focusing on the fundamentals of human capital: "Longer lives have created a vast pool of experience, capability and wealth that can become a driver for 21st century economic growth. Indeed, the transformative power of the generation now entering retirement should come as no surprise: Baby Boomers, born in the two decades following World War II, have reinvented every phase of life they have entered, often by design and sometimes through sheer force of numbers and economic clout."

Comments

Increased life expectancy in past centuries was largely a matter of raising the average age at death through better nutrition and control of infectious disease, as well as other improvements in the provision of medicine, such as greater availability of any sort of worthwhile medical services. This was a matter of reducing mortality rates in childhood and early adulthood more than anything else.

I went back and read the 2001 paper you linked to in 2009, and apparently in the period preceding the industrial revolution adult longevity increased but from birth did not. The former would need to be the case for increased incentive for saving to be a cause of economic growth. A fun paper, thanks 6 years later for noting it.

I looked for something more recent on the topic and found https://perso.uclouvain.be/david.delacroix/pdf/mit-ddlc.pdf dated a couple weeks ago, which models both the incentive effect of increased longevity and also a contact time effect: longer life means not just more time to accumulate knowledge, but for masters to teach apprentices and other ways to communicate knowledge.

Posted by: Mike Linksvayer at June 27th, 2015 12:43 AM

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