Productivity, GDP per capita, and babies
By Abigail Zhu
web posted November 24, 2025
"We are not having enough babies! The economy is heading towards a cliff!" You see it everywhere in 2025. Suddenly, everyone from Elon Musk to your worried uncle seems to think that falling birth rates are an economic death sentence. The logic of this stems from the fact that people believe fewer people means a smaller labor force and fewer consumers, resulting in a decrease in both aggregate demand and aggregate supply. After all, over the last 75 years, global birth rates have plummeted from an average of 5 births per woman in 1950 to 2.2 births per woman in 2024, which is a drastic decline that is well below the replacement level. In response, governments have been lowering the price of in vitro fertilization (IVF) drugs and giving childcare subsidies. But do fewer babies really mean bad for the economy? The influential Austrian economist Joseph Schumpeter (1883-1950) said no in the chapter "The Vanishing of Investment Opportunity" in his book Capitalism, Socialism, and Democracy.
Similar to the economists today, many economists in Schumpeter's time explained that a decrease in birth rates would restrict the expansion of demand, leading to a decrease in the rate of increase in output, and thus, investments. But as Schumpeter argued, there is a fine line between human wants, the unlimited desire for goods and services,and effective demands, the sum of the goods and services that consumers are willing and able to buy at a certain income level, price level, or employment. As he noted, "Want and effective demand are not the same thing…the income elements set free by the falling birth rate may be diverted to other channels…". In other words, a shrinking population does not mean a proportional shrinkage of demand, but rather leads to a structural change in demand. For example, the money couples saved from having two instead of five children could be diverted toward other sectors that usually have higher margins. Instead of being spent on diapers, that income flows into luxury, fitness memberships, and nicer restaurants. A 2024 MarketWatch Guides study found that 56% of the child-free, dual-income couples poured a massive part of their spending into traveling and saving, 43% of them spent on pets, and 41% spent on shopping, etc. So, while the baby product aisle might suffer, there is, in fact, a huge boost to the other sectors. With fewer babies, the capitals don't just vanish, but are reallocated to the other areas, which generate many new investment opportunities.
Another false conception of what a decreasing population would lead to is the decrease in total output. In other words, this implies that the number of workers directly correlates to the amount of output. As Schumpeter has pointed out, however, the size of the workforce is not what mainly contributes to the total output, but the productivity and technology. Even with decreasing birth rates, Schumpeter identified that increasing employment, prolongation of work life, increasing participation of women in the workforce, and most importantly, technological innovations could sustain long-term economic growth. The "stream of labor-saving devices" he described are the physical capital we have today: robotic manufacturing, facilities, automation, and artificial intelligence. These physical capitals ensured that even with fewer workers, they could produce the same as, or perhaps even more than, what they produced with more workers. In other words, they make each worker vastly more productive. One worker with a tractor can produce more than a hundred workers with hoes. Aside from existing technologies, capitalism's profit-driven approaches will always drive investment toward new ones, especially when technological progress is not subjected to the law of diminishing returns. A smaller, more technologically augmented workforce can therefore sustain, and even grow, total economic output.
What ultimately determines economic growth is the growth in GDP per capita, the standard of living, or economic productivity. And since the GDP per capita is calculated by dividing the total GDP by total population, the population is tied in pretty closely with the GDP per capita growth. The long and short of it is, when the increase in GDP per capita is higher than the decrease in birth rates, then there will not be any negative impacts on the economic growth. Meanwhile, declining birth rates will hurt economic growth had it were higher than the increase in GDP per capita. Schumpeter has, in fact, considered this factor. He argued that the declining birth rates would not reduce the economy to a heap of dust because of shifting demands and technological advancements. As mentioned earlier, both the "stream of labor-saving devices" and "the income elements…may be diverted to other channels" can accelerate GDP per capita growth. When workers become scarce, the supply curve shifts to the left, leading to higher wages. This creates a massive profit incentive for businesses to invent or deploy technology (robots, AI, software) that makes each remaining worker more productive. Meanwhile, spending on high-value services (luxury travel, advanced healthcare, etc) usually leads to more value-added amounts in the GDP, boosting the average GDP produced per person. It can thus be proven that Schumpeter's arguments did actually take into consideration the relationship between population and GDP per capita, and they still applied fittingly to the economy of 2025.
So, do we have enough babies? Probably not. But if Schumpeter is right, then the real question is whether or not we have high productivity and GDP per capita to compensate for the lack of them. 
This Abigail Zhu's first contribution to Enter Stage Right. (c) 2025 Abigail Zhu
