The genuine savings criterion and the value of population

Summary

In any dynamic model of the economy with changing population, the latter should properly be one of the state variables of the system. It enters both in the maximand, at least under total utilitarianism, and into the production function in one way or another. If population growth is exponential and constant returns prevails, then a simple transformation to per capita variables can be used to eliminate one state variable, but this ceases to be true if growth is not exponential, as it obviously is not and cannot be. If the growth of population is exogenous, then introducing it into the system does not affect the optimal policy. However, if one asks whether the system is sustainable, in the sense of at least maintaining total welfare (integral of discounted utilities), then the criterion is that that the value of the rates of change of the state variables is non-negative, so that the shadow price of population becomes relevant. In this paper, we derive explicit formulas in a simple model, showing that the rate of growth of per capita capital is not the correct formula but must have another terms added to it. We also study the question under an alternative criterion of long-run average utilitarianism.

Research support was provided by the William and Flora Hewlett Foundation. An earlier version of this paper was presented at a celebration of Mordecai Kurz’s 66th birthday at Stanford University, 1–3 August 2002.