Should entrepreneurs prefer a rising or shrinking population?

Adam Ozimek raises that question.  You might think a growing population is obviously better for business, but it’s actually not so clear:

It’s true bigger places have advantages in terms of being able to offer a greater variety of consumer options and niches. But marginal population growth doesn’t do all that much to change the relative size of a place. A small city growing fast takes a long time to become a mid-sized city, and so forth.

Yes, a growing population means greater demand, but it also means greater supply. So if you are a lawyer, and you care about the relative scarcity of lawyers then it doesn’t really matter if the overall population is growing. It’s really about the population of lawyers relative to the rest of the population, eg customers.

If a growing population brings growing supply and demand in equal proportion, then a business person should be indifferent between growing and shrinking. Given that land prices will be falling in shrinking places, you might even think they have an advantage.

He suggests that competing for new customers may be easier than competing for already-attached customers, and thus entrepreneurs should prefer a growing population.

I say it is fixed costs and minimum scale.  If population is shrinking, the marginal costs of your company typically are rising (the higher cost of competing for already-attached customers can be one example of this).  With a rising population, marginal cost is falling and for sectors with reproducible outputs marginal cost will be zero or near-zero.

Of course these effects will vary across sector.  In New Zealand, a small country, the lamb meat is of high quality.  It is not only the proximity of the source, but this is not an increasing returns to scale sector;  if you wish to sell more lamb meat, you have to raise another sheep.  In contrast, a newspaper fares much better with a larger population, as does a bookstore or movie and television production.

As population shrinks in many countries, reproducible cultural enjoyments are more likely to come from abroad.  The shrinking countries however will offer relatively favorable conditions for innovating domestically with high-quality raw materials, or in other words you have to visit small/shrinking countries to really enjoy what they have to offer.  Like lamb meat in New Zealand.  Lower land prices in shrinking countries will further boost this tendency to focus on quality raw materials production and manipulation.  In other words, Italian food in Italy might stay good for a long time to come.

I’ve already argued that you should visit small countries and territories now, because their special cultures will be overwhelmed and expire more rapidly than is the case for larger units.  This mechanism, outlined above, is another reason for why you really need to be there.  In other words, your trip to Africa can wait, Naples beckons.


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