The impact that groundbreaking technological advances like artificial intelligence will have on the functioning of our economies and labor markets has been a hot topic for a long time. But Jerry Kaplan’s recent book Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence has impressed upon me the true size of the socioeconomic stakes.
One relatively well-known example of the digital revolution’s impact on the workings of markets is the ability to earn huge returns in high-speed trading by being a microsecond “ahead” of everyone else. Another is the capacity for price discrimination by new electronic market makers like Uber, which thus appropriate every penny of the old “consumer surplus” of microeconomic theory. Soon a new kind of enhanced Uber could emerge, integrating car, bus, ship, airplane travel, and hotel rooms into one super-app. In fact, some car manufacturers are now working on exactly that.
A key question is why good old competition does not whittle away these profits rapidly. The answer often lies in the business model. Companies borrow a lot to start up, accumulate large fixed costs, and offer such low prices at first that they lose money. This enables them to expand their businesses virtually competition-free until they have established what is essentially a monopoly. At that point, they can hike prices and engage in price discrimination relatively freely.
As Kaplan points out, that is precisely what Amazon has done. It first achieved massive scale, enabling it to store unordered products at diffuse locations and thereby reduce transport costs. Now it can offer fast and free delivery, which smaller companies cannot beat. Add to that complex algorithms that set prices in a way that maximizes profits, and the company’s dominance seems relatively secure.
As this approach facilitates the rise of global super-firms, it creates serious problems for labor markets and societies, because it destroys mid-level jobs based on old skills faster than comparable jobs based on new skills can be created. Equally serious, it contributes to shocking levels of income inequality, with a few households not only enjoying massive wealth, but also wielding considerable political influence. If income becomes too concentrated too quickly, desired investment will tend to fall short of available savings, creating a Keynesian macroeconomic imbalance. (Contrary to popular belief, what matters is not the actual amount of income flowing toward top earners, but the changes in that income.)
As it stands, the impact of these technological disruptions remains relatively small in the advanced countries. But it could affect some 20% of GDP and 40% of jobs by 2030. That is a huge shift, happening at an unprecedented speed.