The Transformative Impact of AI for Economic Growth and Wages
Recent accelerations in the pace of AI development have renewed interest in AI’s transformative potential. Generative AI has the potential to significantly impact economic growth and wages.
A just released working paper from the National Bureau of Economic Research (NBER), Economic Growth Under Transformative AI [1], explores just how revolutionary AI could be for economic growth and wages. It is one of the first papers to rigorously evaluate a large number of economic avenues by which AI could affect growth and wages.
Notably, of the 25 economic pathways considered, 21 lead to growth or wage increases, of which 10 pathways produce growth or wage explosions, or both. [2]
This article summarizes key takeaways and provides insight into how the next wave of AI beneficiaries – such as companies investing heavily in AI automation – will increase their profitability and growth.
How Will AI Transform The Economy?
AI capabilities are improving at predicted scaling laws that suggest an impact at least as great as the Industrial Revolution.
Industrialized countries have seen relatively stable growth in output per capita and stable labor share from the dawn of the industrial revolution (1820) to the present day. But AI may be transformative, in the sense that it may break one or both of these stylized facts.
AI can increase output production by letting capital ‘self-replicate’. This can happen for example via increases in capital’s substitutability for labor or automation. AI can also let capital speed growth even further by ‘self-improving’. This can happen as AI increases knowledge production. The economic literature suggests that sufficiently advanced AI is likely to deliver both self-replicating and self-improving effects.
This could mean that advances in AI could be as transformative, or even more so, than the Industrial Revolution. The economic patterns of growth during the Industrial Age and until now may no longer hold in the future.
Currently, progress in AI is driven by what are called ‘foundation models’. Foundation models are immense neural networks that are trained on large amounts of data. These networks are then fine-tuned to perform an increasingly broad range of activities. During the training process, these models develop their own internal models which form the basis on which they can then generate outputs across a wide range of domains.
The complexity of cutting-edge deep learning and foundation models has roughly quadrupled each year for the past decade. Recently it has reached levels that are comparable to human brains. Economists note that the capabilities of these models seem to be improving according to reasonably predictable scaling laws, meaning they should continue to advance at a rapid rate.
What Is The Impact Of Artificial Intelligence On The Market?
Artificial Intelligence could produce explosive economic growth.
Future models are likely to be capable of performing an even broader range of tasks and may eventually reach the level of Artificial General Intelligence (AGI). AGI is the ability of AI systems to perform all cognitive tasks at least as well as a skilled person, and in the process, unlike any other technologies yet developed, such models could automate the process of research and development.
If AI capabilities cross certain thresholds, such as that of general intelligence, it is conceivable that a change in growth regimes as substantial as the Industrial Revolution would occur. Economic growth would then proceed more quickly than growth today.
If we assume the level of AI capital-augmenting technology is doubled (that is, the cost of capital is assumed to halve) every two years, in a conservative approximation to Moore’s Law, the model growth rate is 45% per year. Compare this with the relatively familiar output growth rate of 4.3% per year since the Industrial Revolution.
How Is Artificial Intelligence Affecting The Labor Market?
AI Systems transform the growth engine of research.
There are three broad categories of AI systems: symbolic reasoning, robotics, and deep learning. Symbolic reasoning systems have so far had few applications. Robotics — or capital that can substitute for human labor in various ways, instead of complementing it — has had many applications in the last thirty years. The most dramatic possibilities, however, may come from deep learning systems that can automate processes of technological development.
Most transformatively, if AI tools help researchers search through the ever-growing “haystacks” of possible idea-combinations for valuable “needles”, they could permanently increase growth rates.
This is exactly the kind of activity to which AI systems are best suited. In fact, they are already being profitably used to identify promising combinations of chemicals in pharmaceutical development, for example. If this turns out to hold across industries, the result is what economists refer to as a “growth explosion”, similar to what happened at the transition from pre-Industrial Revolution to Industrial Revolution.
AI could increase the level of investment in technological development.
Another way AI could have a significant impact is by changing the levels of investment in technological development. At least in some circumstances this can change the growth rate, or it can determine the type of a growth explosion. A growth explosion could take place by accelerating the Schumpeterian process of “creative destruction”.
Of course, the effects of AI are most impactful when it allows capital to better substitute for labor in both goods production and technology production.
Can AI Really Help To Boost Economic Growth?
This has happened before.
Significant changes to the growth regime experienced by our economies are possible across a range of economic models, including permanent shifts in growth rates and mechanisms that involve ever-increasing growth rates.
In summary, there is no shortage of mechanisms through which advances in automation could have transformative growth consequences once we allow ourselves to look for them. Taking the Industrial Revolution as an example, there is also historical precedent for significant changes in growth regimes.
At Markin Asset Management we’re investing in the next wave of AI beneficiaries, the large- and mid-cap US companies most likely to profit from effectively leveraging AI technologies in their businesses to grow faster and more profitably.
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Sources:
[1] National Bureau of Economic Research (NBER). Economic Growth Under Transformative AI. https://www.nber.org/system/files/working_papers/w31815/w31815.pdf
[2] The authors also explore the potential impact on labor share, but we focus on the growth and wages impact in this article for brevity.