Wealth Flows and Population Aging

Falling birth rates cause population aging. But why do birth rates fall? One explanation rests on reversal in intergenerational wealth flows. Until the mid-1970s, most researchers assumed that small families and low birth rates represented rational behavior while large families and high birth rates were outmoded irrational remnants of a less-enlightened past. It seemed self-evident that children were expensive. Nobel laureate Gary Becker’s Treatise on the Family explicitly suggested that we think of children as consumer durables like cars or refrigerators. Such child-commodities should follow general laws of economics, so people with more money should “consume” more (that is, have more children). The fact that in the real world the rich tend to get richer while the poor get babies contradicts such economic reasoning, and gave much trouble to Becker’s successors. They responded by adding ingenious qualifications to the initial model, including different direct prices of children faced by parents from different levels in society, changing opportunity costs faced by parents, and other complications, but everyone continued to assume that children were expensive net liabilities or costs for their parents.

Australian demographer Jack Caldwell rejected this ethnocentric idea that children are always economic liabilities and asserted that in traditional cultures children actually were economic assets instead. He documented a net wealth flow upward from children to parents in pre-transition societies, logically encouraging many children. But he confirmed that net wealth now flows downward from parents to children in post-transition societies, discouraging large families.

So what exactly causes the flow of wealth to reverse?

Children have not somehow suddenly become expensive, unproductive creatures. What has changed is that their parents have lost control over that productivity. Contemporary market economies have systematically dismantled all legal and customary direct obligations that children once had towards their parents, a dismantling that is still going on in some parts of the world. In this way the productivity of each new generation can be captured instead by other non-family institutions such as joint-stock corporations through the profits their employees produce for them and civil governments through the taxes these new generations pay into their treasuries. If parents still controlled all the wealth produced by their children throughout life, there would be no profits or taxes left over to flow to these new institutional masters of our lives. Wealth has always flowed to some degree from parents down to children, and this flow continues today. What has changed is that the reverse flow of wealth from children up to parents has been diverted by economic and cultural changes, and now flows between the parents’ fingers and into the hands of these new institutional masters of our world. It is in this sense that net wealth flows have reversed, at least at the level of family households where childbearing decisions are made, leading to low birth rates and aging populations.

Carlson

Dr. Woody Carlson is the
Charles B. Nam Professor in Sociology of Population .

The feature image is from YoProWealth.com.

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