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.

Comments

At lower GDP per capita, I'd guess a shrinking or stable population is good because lower fertility leads to a higher GDP per capita
At high GDP per capita, maybe a growing population is better since the GDP per capita cannot grow as fast anyway. Two heads are also better than one for making scientific discoveries.

Lawyers should prefer a growing population, there'd be more young men to commit crimes and crash cars.

Generalizing, to the extent that you work in a business where older people service younger people, a growing population is better and vice versa.

I'll make you a bet that a country after a 100% increase in population will have more entrepreneurs than a country after a 100% decrease. QED. I don't understand the lamb example. Raising 101 lambs will be 1% more expensive than raising 100? That's really inefficient and highly dubious, imho.

As you grow output, you inevitably must rely on lower quality inputs.

The best pastures are always used first. The largest trees are cut down first. The largest elk are hunted first.

Disagree. With scale, new things become possible. The first mines were not the richest or most economical, they were the ones accessible at small scale.

The first cars were not higher quality than later ones, because the investment necessary to make them high quality wasn't warranted by the quantity that could be sold.

Modern production avoids this issue most of the time.

Except for custom production of luxury goods, people prefer consistent quality vs. high-end luxury quality.

Many faux products end up being better than the real thing, too. MDF vs. wood. leather vs. PU leather, etc.

How is MDF better than wood?

Marketing, apparently.

No one ever suggested it would be 1% more expensive, why make stuff up?

But you do need to keep 1 more ewe to get 2 or 3 extra lambs. That marginal cost is relatively high compared to printing another copy of a newspaper, scaling your website, or even scheduling 4 instead of 3 performances of the Trout Quintet.

As far as lawyers. I've always had the prejudice that legal issues scale as a power of population, with the power significantly >1. Have studies been done?

I mean, legal issues involve interactions between (legal) individuals, and that increases as N!

Up to the "event horizon".

There was a small town, so small it had only one lawyer, and he had barely enough business to keep his office open.

Then a second lawyer arrived, and there was business enough for both.

You might think that with fewer lawyers per capita, the remaining lawyers make a higher wage, but it's false. I think that cities need lawyers more, and although there are more lawyers per capita in cities, the need for lawyers there is much greater.

This was my thought too. Even if one considers only legal interactions between two people, that grows as O(N^2). If the number of lawyers grows as O(N), then the amount of legal work per lawyer grows linearly with population N. This might be why big city lawyers make more than small town lawyers.

Interesting question. As always, it depends. The optimum is probably a boom bust cycle which mucks out the garbage regularly. A place that is booming increases the costs of labour, but provides a market for manufacturers who sell into growth.

Which is the hotbed of innovation and entrepreneurship, Calgary or Winnipeg?

Shrinking places usually have dysfunctional and intrusive governance either in response or as cause.

I would look to where people are moving to for raising their families if they have the choice. By definition they are investing in the future, if they can make it they are smarter and more resourceful.

As for Italy, you are now channeling Mark Steyn?

I've never been to continental Africa but I disbelieve Africa has seen less cultural change in the last 30 years than Naples.

+1 but he probably means obvious tourist cultural changes.

There are porbbaly hundreds of entire cultural practices being made extinct by modernity in Africa.

lol, ending Apartheid, deaths of countless strongmen, millions dead in wars, population explosions, democracies emerging after colonialism, no cultural change there.

Not all tourism is cultural. Quite a lot involves seeing the unique nature and natural environments of a place. The destruction of nature in Africa from the ongoing overpopulation explosion is unique in human history and represents the most rapid loss of amazing things to experience that tourists have ever faced.

A growing population means more opportunity for specialization, and higher specialization means high added value, and higher added value means you can make mo money (and be happier). Would you rather be the only lawyer in a small town who has to be able to handle every divorce, estate liquidation, DUI ticket, and real estate closing? You'd likely only be mediocre at each, and you'd be adding value commensurate with your skill level in each area. In a big city, you could hyper-specialize in a narrow focus and become an expert in it, adding a huge amount of value for your clients and being able to charge sky high fees.

In general, larger market size leads to larger opportunities for specialization, which leads to higher productivity and wealth.

If larger is better than smaller, then increasing is better than decreasing. Additionally, being already in the increasing market is good for you because you have are already there so have more information and first mover advantages.

"In New Zealand, a small country, the lamb meat is of high quality."

I like lamb very much, served many different ways. So, when I visited New Zealand a few years ago, I was eager to get some good lamb. I tried it at 3 or 4 different restaurants, all pretty good places and the lamb was just okay. It wasn't bad, but nothing better than you'd get at many good restaurants in the US, and certainly worse than the lamb that I used to buy right from the farmer at the Union Square Farmer's Market in NYC when I lived there. It was the same for the wine. My impression (informed by talking to a lot of people) was that, 1) lamb is an export commodity there, not a specialty food. It's good, but not great. It's mostly grown in large amounts for export. You can get high-quality stuff, but it's going to be more expensive and not much different form high quality stuff from the US or other places. The same is largely true of the wine. 2) Lots of places are switching to cow for milk (powdered milk mainly, I think) for export, mostly to Asia, so lamb is less common now. 3) Even among better non artisanal high-quality stuff, it's mostly exported, since that's where the money is. Again, same for wine.

So, actually in New Zealand, I'm not sure you should expect higher quality lamb in most cases than in many other areas. What general moral to draw from this for the post I leave to others.

My wife is Taiwanese and she swears that America exports the best cherries to Taiwan and leaves the lesser ones for our own domestic markets.

We do the same with most food (export to Asia, I mean). It doesn't matter, it is the cook, not the food.

In NZ you should eat muttonbird. I've never been offered that anywhere else.

Avoid the whitebait. The wine, in my experience, is excellent, but it's true that it's widely available abroad.

Avoid the whitebait

Agreed - I wished I'd known that, or at least thought better about it - before trying. Not all local favorites are worth having.

What is best for "business" and what is best for entrepreneurs are two different things. As mentioned in comments above, growing population is best for the legal business (due to demand-side network effects), but that doesn't necessarily mean it's best for entrepreneurs. It may be more efficient for existing law firms to hire more lawyers than for new law firms to emerge.

The role of the entrepreneur is to find what Arnold Kling calls new patterns of sustainable specialization and trade, i.e., a new, more economically efficient deployment of natural, human, and capital resources. Thus, the best situation for entrepreneurs is some change that makes the old allocations less efficient. I suppose both growing and shrinking populations could cause changes in the types of businesses that are best suited for that scale. However, it sure seems like in shrinking cities like Detroit, far more businesses close than emerge. On the other hand, maybe shrinking population there is a symptom rather than a cause of an unfavorable business and entrepreneurial environment.

Generally speaking, the municipalities where the most important people live, such as Greenwich, CN, Malibu, CA, or Palo Alto, CA have remarkably stable populations. Similarly, Ivy League colleges very seldom increase the size of their freshmen classes:

http://takimag.com/article/the_fence_around_the_ivory_tower_steve_sailer/print#axzz4NhHAKIu4

Bob Hope used to joke about Cypress Point Golf Club, where he was one of a handful of members along with a several former Secretaries of State: "Cypress Point just had a successful membership drive; they drove out 40 members."

That's true, though note that those "most important people" in Greenwich, Malibu, and Palo Alto are important by virtue of their dominance of the hedge fund, movie, and IT industries, which benefit from the population churn of the stock market, box office, and app downloads. They want localized exclusivity for themselves, and crowding that helps their bottom lines everywhere else.

Krugman said in the 90's that students' knowledge levels were so low, many people who got accepted wouldn't have been in the good, old days. So maybe those freshmen class sizes are all American elite universities can handle while still being elite universities (with the foreign-- particularly Asian-- invasions, I would think the problem had been solved, but who knows)? In Brazil, the most prestigious universities seldom increase the size of their freshmen classes.

Between the 2000 and 2010 Censuses, the population of dumpy Bakersfield, CA grew 40% while the population of immensely wealthy Beverly Hills, CA grew 1%. If you are a Beverly Hills entrepreneur, how is this not the best possible solution?

If you are a Beverly Hills resident and fight to keep the population of Beverly Hills stable, you will be praised by other Beverly Hills residents as an Environmentalist. If you are a resident of Bakersfield and campaign to keep the population of the United States stable, you will be denounced by the residents of Beverly Hills as a Racist and Nativist.

And, guess what, the residents of Beverly Hills control the Microphone? Funny how that works.

For those who don't know, from 2000 onward Beverly Hills (or as my gf pronounces it, bubbly hills) was fully built, and building involved engineering a hillside that was previously considered unbuildable. Bakersfield, not so much. Flat land building.;

Or building upwards or more densely, a possibility that never seems to appeal to Californians when they make this silly "built out" argument. East Asia countries can manage it, so earthquakes are no good excuse either.

Either way you are knocking down something to build something, which I am pretty sure you didn't have to do in 2000 in Bakersfield.

Bad examples. I lived in NZ for 3 years and the lamb has nothing exceptional there. It's a massive export for the country produced at the industrial scale. The lamb produced in the area I'm from (South East of France) is much better (my Kiwi friends (N=3) agree with this).

Well, Africa compared to Naples.... Most large African countries are much more diverse than Italy. There are hundreds of very specific places in Africa that are rapidly changing due to the influence of the outside world (not that it's always a bad thing). I visited Lamu (Kenya), Zanzibar (Tanzania), Saint-Louis (Senegal), Timbuktu (Mali), Marrakech (Morocco) and they seem to be all unique and rapidly changing. Even non historical cities such as Dakar, Lagos, Addis Ababa, or Nairobi are rapidly changing because of rapid urbanization and openness on the outside world. Go there before it's too late. Naples has already passed the point where they realise how unique they are and they're making efforts to preserve it.

But isn't Africa, with its many languages, religions, ethnic groups, made of small unities, too? Well, Africa or Europe, who cares? Brazil will be here forever.

The paradox is involved in whether you are conscious of the particular unit, or just visiting the buffet. You should postpone your trip to Africa, but not your trip to Swaziland.

Thanks.

In our times, declining populations are also aging populations-- I suggest startups in health care for the elderly.

Mad props to Geoff Bilbrough who--in the comment section of Tyler's 2010 post about where to visit--recommended Aleppo.

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.

This lumps established lawyers in with lawyers trying to establish a practice (ie, entrepeneurs). Particularly in law or other professions where turnover is small and the power of incumbency is large, this is a bad assumption.

Let's consider two scenarios in which the work per lawyer is fixed. All new work is up for bidding, and is equally likely to be taken by new or established lawyers.

Scenario 1: the new work consists of natural turnover due to deaths, retirements, population movement, etc. The fraction of new work is n, which is small.
Existing work per capita=W
new work = n*W
fraction of new work that goes to new lawyers: n/(1+n)
fraction of new work going to new lawyers which goes to an individual lawyer: 1/n

So the new work per capita going to new lawyers is W*n/(1+n).

In a growth situation, we replace n with g, the rate of growth, to get W*g/(1+g).

Combine the two to get W*(n+g)/(1+n+g).

In all cases, the new lawyer prefers the high growth scenario, since a higher fraction of the total work is up for bid.

This model agrees with the anecdotal observations of young lawyers that nobody will hire young people in a stagnant economy.

The simplest limiting case: a small town has one major client and one lawyer, who has handled the account for years. When the young lawyer moves to town, he does not get half the work, he gets zero unless he inherits someone's book or attracts new business.

"In other words, your trip to Africa can wait, Naples beckons."

If you wait long enough, Africa will move to Naples.

And you will have lost both.

Yes, something else will arise in its place, maybe something better. But you will not be able to encounter it because you will not have access to its history.

The population of New Zealand is growing steadily.

Similarly, every single one of the 50 states in the U.S. grew in population from 2000 to 2010.

There is a classic joke which is the last word on this question.

Two tailors who are partners are facing hard times, with business collapsing.

Tailor A: Business is terrible. The only thing that can save us is the Messiah!
Tailor B: Our problem is lack of customers. How can the Messiah possibly help us?
Tailor A: When the Messiah comes the dead will rise. And all those people will need new clothes!
Tailor B: That won't help at all. When the dead come to life, all the dead tailors will also be resurrected, and they will compete with us for the new business.
Tailor A: Yes - but they won't know the latest styles!

Comments for this post are closed