Demographic Change

Capitalism is an unstable system. More specifically, the Anglo-American version is unstable. This is a point that I have made in an earlier post but it is worth repeating again. The currently accepted paradigm assumes infinite growth. This is usually defined as growth in the bottom line which is a measure of the supremacy of the financial system in the recent past that this one measure overshadows any other. Growth in the bottom line can come either by increasing sales or by cutting costs or by a combination of both. Increasing sales in turn can come by either increasing the number of units sold (whatever those units may be) or by increasing the price per unit or again by some combination of both. In practice, it is not always possible to keep on increasing the price per unit so there is usually an element of increasing the number of units sold involved. Increasing the number of units again involves either inducing more and more people to buy the producer's goods and services or inducing the same number of people to keep increasing their purchases or a combination of both. Again, in practice, it is this combination of both that is employed by producers.

From prehistory till the dawn of the industrial age, the global human population was largely static but very slowly increasing if seen from a perspective of several centuries at a time. Periodic crises would knock back the population severely. For example, there is evidence to suggest that an ancient volcanic explosion may have resulted in an abrupt and dramatic decrease in human population although this is not accepted by everyone. In historic times, the black plague caused massive population decrease in Europe and around the world. Collapse of empires such as the decline of the Roman Empire were another reason for population decreases. Population levels would then recover until the next crisis. Despite the crises, there was still a gradual increase in population levels. The industrial age saw a very rapid increase in population. This was caused by improvements in medicine and sanitation which dramatically lowered overall mortality rates as well as maternal mortality rates.

In the past, before improvements in medical care, when mortality rates were high and specially infant mortality rates were high, it made sense for people to have large families. This way, it could be ensured that some children would survive to adulthood. As agricultural productivity increased over time, the population would grow to take advantage of the extra food. This was what led Malthus to make his grim predictions. As mentioned above, the industrial age brought improvements in medicine and sanitation that caused mortality rates to fall. However, birth rates continued to stay high. The result was a population explosion at first in Europe and North America and then in the latter part of the 20th century in most of the rest of the world. It seemed only a matter of time before the worst predictions of Malthus would start playing out.

But then something strange started to happen. For the first time, people gradually started restricting the number of children they had. This trend started first in the developed economies and has now spread to the rest of the world. It happened unevenly and slowly at first. The end of the Second World War actually caused an increase in births - the so called baby boom in the US. Now however, it is firmly established that the birth rates have fallen to below replacement levels in most parts of the world. This is an unprecedented situation. Below replacement birth rate means that over time, the population grows older and starts to decline. Japan is most advanced in this trend with most of Europe following. The US is currently maintaining its birth rate at a replacement level thanks mainly to immigration. The birth rates in developing economies have also mostly fallen to below replacement levels although a high birth rate in the recent past means that there is a large bulge of young people currently working its way through. Over time however, these countries will also experience a graying and then a declining population.

What does this mean for businesses? Earlier I had said that one way to increase the bottom line is to increase the number of units sold and one way of doing this is to sell to larger numbers. How does a declining birth rate affect this calculus? In later posts, I will be exploring this question and some implications of a declining birth rate for businesses and the economy.

Innovation

Innovation is the life source in the world today. For a long time, it has been taken as a given that the world is changing at an increasing rate and the only way for companies and people to cope with this increasing rate of change is innovation. So what exactly is innovation?

Wikipedia defines innovation as "a new way of doing something." Additional definitions of innovation can be found at the Innovation Zen blog. The key take away here is that innovation involves doing something in a new fashion. In every industry or market, there evolves a consensus on doing things. Innovation comes when someone, usually an outsider, discovers a new way of doing these things. Or a discovery or invention renders the product or service obsolete. What is interesting about innovation is that incumbents are usually not the people who innovate. This is in many respects surprising when one considers that the incumbents should be most aware of discoveries or inventions or trends that will affect them. After all, their very survival depends on it.

Case after case in industry after industry has shown companies being caught flat footed and in many cases going out of existence. Delving into the (relatively) remote past, coach makers failed to see the arrival of the automobile as a threat and an entire industry was extinguished to be replaced by another. More recently, in computers, mainframe manufacturers almost went under under the onslaught of the personal computer. In both cases, new players on the scene pulled the rug from under the feet of the incumbents. For a more recent example, take the music industry. When the Internet came along, there arose the question of what to do with the medium. The music industry viewed the new medium as a threat to its lucrative sales of CDs. Also, in the beginning, no one was sure exactly how to make use of this new medium. Then Napster came along and showed how music could be efficiently distributed to large numbers simultaneously. The industry's response? Sue Napster out of existence. However, by then the cat was out of the bag and for the next 15 years, the music industry struggled with the rise of online music. Even now, it is only reluctantly coming round to viewing the Internet as a new medium. Only now is it reluctantly acknowledging that the old business model is dead and a new one has to be found.

So now the question is why are incumbents so blind? Why does innovation typically not come from them? Part of the reason is that incumbents, being so close to the action, fail to see the wood for the trees. Also, when a new innovation comes along, it often is not seen as a potential threat because of (usually) teething problems. A third reason is that over time, large corporations have ceased to be well springs of research and innovation. Instead they have tended to become rent seekers. So for a variety of reasons, well established companies cease to be innovative and thus lose their edge and often their very existence.

Needs & Wants

What are the basic motivators that drives a person. Anyone who has worked in a transnational corporation has come across Maslow's Hierarchy. If we think in these terms, then what are the basic motivators for a person. I believe that the very basic motivating factors driving a person are just two: food & security. These are primal needs. Without them no one can survive for very long. Food is a need. Without it there is no survival. What kind of food to eat is a want. Similarly security is a need. What kind of security is a want. If we go up the hierarchy of needs/wants a little, there is the need for sex. This group of three: food, security & sex are basic needs. I have not put sex as a primal need. The reason for that is that sex is not necessary for the survival of the individual unlike food & security. However it is a strong motivating factor - so strong that it has to be categorized as a basic need. This troika is also expressed colloquially as wine, women & song: the three standing respectively for food, sex & security. While the first two are logical juxtapositions, the third one may seem odd. What has song and security got to do with each other? The answer is simple. An insecure person - insecure in the sense of not having enough to eat and having no shelter would never dream of indulging in song or rather the larger category of entertainment. A recreational activity like this requires a minimum level of security in order to carry out.

We have identified two level of needs. Primary needs: food & shelter and basic needs: food, sex & shelter. These needs are expressed in many different ways. The ways in which they are expressed are called wants. The ways in which these basic needs are expressed have resulted in some of the oldest economic activities. Let us go up the needs/wants hierarchy a little more. Once the primary needs (& hopefully the basic needs) are met, a person starts thinking about meeting the higher level of needs. What are these higher level needs?

Humans are material, social and spiritual creatures. The basic needs are essential material needs. But there are other needs that need to be met if a person is not to be a one-dimensional being. Being social creatures, humans have an inherent need to develop emotional attachments. These bonds are primarily towards family; then acquaintances (including friends), then clan and/or religious community members and finally all others. It has been shown that these emotional attachments are literally necessary for a long & healthy life. No man is an island unto himself - atleast not for long. The need for emotional attachment is expressed in different ways. Along with the need for emotional attachment is the need to communicate. These two needs - the need for emotional attachment and the need to communicate are fundamental needs.

So now the needs hierarchy is becoming clearer. First there are the primary needs: food and security. Without them, survival is not possible. Then there is the basic need: sex. Food, security and sex are extremely powerful driving factors.Then there are the fundamental needs: emotional attachment and the need to communicate. Fundamental needs have to be met at some level and different people have different levels at which they satisfy these needs. Going up the needs/wants hierarchy further, we enter the realm of higher needs. These are spiritual in nature. They nourish the nebulous entity known as the human spirit. At the root of these needs lies the need to learn/explore. Learning and exploration are in may respects two sides of the same coin. Learning anything inherently has strong aspects of exploration while exploration inherently strongly involves aspect of learning. Learning/exploration can be either internal or external or both. If it is internal, then it can lead to the highest level of Maslow's hierarchy - self actualization. So there we have it. A complete hierarchy of needs (or atleast as complete as I can think of). To recap: Primary

• Food
• Security

Basic

• Sex

Fundamental

• Emotional attachment
• Communicate

Spiritual

• Learning
• Exploration

Wants are essentially an expression of these needs. All economic activities are ultimately designed to meet one or more of these needs.