Here’s an existential fear regarding AI: companies in the economy will invest in AI to such an extent that the result will be massive layoffs of highly-skilled, high-wage technical employees and a severe reduction in demand for routine, repetitive jobs. In addition, new college graduates and less-educated high school graduates will find a job market that isn’t looking for entry-level employees. So, while the unemployment rate rises and then soars, output will grow exponentially as automation improves efficiency. This will lead to a situation where a glut of goods on the market meets consumers with no income.
This is quasi-Marxism—the belief that capitalists will (inter alia) push wages down to a subsistence level while producing goods the workers cannot afford. Crisis will result and we will end up on the road to a worldwide Communist revolution.
Gold in the Ocean
Another, less prevalent, fear exists: the amount of gold in ocean waters far exceeds—by a possible factor of 100—the amount of gold that has been extracted to date. Because of this, for some, gold is not a long-term investment, since once technology exists to efficiently extract the oceans’ gold, its price will plummet to near zero. This fear is presented as if an imminent leap in technology will quickly vacuum the oceans of their gold.
But this requires entrepreneurs to purchase scarce resources today to realize a near-zero return in the future, as the superabundance of gold will drive its price to almost nothing. However, this does not reflect how the entrepreneurial mind operates.
The entrepreneur looks at the current economic landscape and envisions future demand with an eye toward making a profit after costs are considered. That is not to say that all entrepreneurs are successful, or that any given entrepreneur does not make mistakes. It is simply a truism about entrepreneurial motives.
Back to AI
The fear introduced at the beginning of this article requires entrepreneurs to invest in AI to the extent that their investments will result in losses. Again, this is not how the entrepreneurial mind works. Nor is it how individuals employ scarce resources to realize profits.
Existing technology can remove gold from the seas, but that technology is neither practical nor profitable. We can assume that improvements are being both imagined and implemented. But the investments are made in improvements expected to yield a profit. Therefore, the amount invested is tempered by the expected value of the gold to be extracted.
Accordingly, firms will continue to invest in AI, just as they have always invested in both capital and technological improvements. But since no one produces just to produce, any so-called “animal spirits” driving full adoption of AI will also be tempered by the knowledge that goods require a market and consumers willing and able to purchase those goods.
Labor and Capital
There has always been a persistent tension between capital and labor. We see it when a government-mandated minimum wage raises the cost of labor above the cost of technology. This can be seen in fast food restaurants, where kiosk ordering is replacing the employee at the counter. I observed this tension from the other perspective while living in Jamaica as a Peace Corps volunteer in the early 1990s. A day laborer typically made four dollars a day, plus an employer-provided lunch. Given the exorbitant government-imposed import fees, it was cheaper to hire twenty men to build a small house than to invest in machinery.
Notably, both examples are government-driven distortions in the economy. However, that is not a surprise either.
AI investments are capital investments that have created new tensions with labor. Nevertheless, capital investments displace certain jobs even as they raise the relative value of labor. These forces tend to push capital and labor toward a new equilibrium. However, this equilibrium—like all equilibria—is never obtained as new changes in the relationship continually arise.
Conclusion
Yes, AI will lead to some disruptions, large ones in certain sectors of the economy. But the market and society have survived previous technological shocks without the laws of economics being violated. Labor will move to jobs that haven’t even been imagined, and the persistent tension between capital and labor will obviate the possibility of factories producing mountains of goods while would-be consumers remain unemployed and unable to purchase.
There is no need for existential fear: these quasi-Marxist views will be consigned to the dustbin by the laws of human action.
