The Economics of AI
For Employers

February 15, 2024

The Economics of AI

From shaping industries around data processing to raising ethical dilemmas, AI’s influence promises to be as profound as the foundational technologies of yesteryears.

Introduction

Artificial Intelligence could be a general-purpose technology and redefine economic structures like its predecessors — steam, electricity and the internet [1].

As with these foundational technologies of yesteryears, AI presents a dual dynamic: a “push” from its innate capabilities to reshape industries, ethical landscapes, and global dynamics [2,3,4] and a “pull” from societal needs and economic demands, driving its evolution and integration into various facets of our lives [5,6,7,8,9]. This delicate balance between what AI offers and what the world demands sets the stage for its profound impact.

According to a report by PwC, Artificial Intelligence has the potential to contribute up to $15.7 trillion to the global economy by 2030, offering a significant boost of 14% to global GDP. With industries ranging from healthcare and automotive to finance poised to benefit greatly, the next decade promises a transformative shift driven by AI advancements. [11]
“The World Economic Forum concluded in October 2020 that while AI would likely take away 85 million jobs globally by 2025, it would also generate 97 million new jobs in fields ranging from big data and machine learning to information security and digital marketing.” — Quoted from Ilzetzki, E., & Jain, S. (2023) [12]

Navigating this balance, this article delves deep into the transformative potential of AI, its driving forces, its vast economic opportunities, challenges, and the broader implications it holds for the future.

The Foundation and Implication of AI

Truly fascinating are the waves of industrial transformation that followed each new general-purpose innovation [2]. Transitioning from a brief overview, let’s delve deeper into the foundational aspects of AI and its broader implications.

General-purpose Technology and its Societal Influence

General-purpose technologies are foundational innovations that find applications across many industries rather than confined to a niche sector. They are found everywhere because they can easily fit into different tasks. This often makes things work better and lets us do new things. Initially, these technologies penetrate industries laterally, addressing specific, often disparate needs. Over time, as understanding and accessibility improve, their influence becomes more deeply entrenched in societal frameworks.

The transition of electricity from a novelty to an indispensable utility is a prime example. Initially, it powered simple applications like lighting. But as infrastructure evolved and understanding deepened, it began to run factories, transport systems, and communication networks, becoming the lifeblood of modern civilisation. Similarly, while making lateral inroads into industries like healthcare, finance, and transportation, AI is poised to eventually become an integral part of our daily lives [3].

The Fuel of AI: Data, Attention, and Memory

Unlike traditional machines that execute programmed tasks, AI systems learn, adapt, and evolve. This capability's core lies in vast quantities of labelled data that inform AI algorithms. This data requirement has triggered an unprecedented demand for information, leading to the proliferation of data collection mechanisms across digital platforms.

But more than raw data is needed. For AI to function effectively, it needs ‘attention’ — mechanisms to weigh and prioritise specific data points over others. This allows AI systems to make sense of vast information troves, filtering out noise and focusing on pertinent details. Alongside this, AI’s ‘memory’ plays a pivotal role. Neural networks, inspired by human brains, remember patterns, allowing continuous learning and refinement.

This triad — data, attention, and memory — has significant economic implications. Entire industries have sprouted around data collection, storage, and processing. Moreover, ethical concerns regarding data privacy and ownership have emerged, signalling a need for regulatory frameworks [4].

With a grasp on what powers AI, it’s crucial to comprehend its economic implications.

The Economics of AI

The tension between benefits and requirements will stimulate the economic disruption of AI.

The Benefits and Application

The economic ramifications of AI are multi-dimensional. On one hand, AI can lead to efficiency gains, allowing businesses to offer better products at lower costs. New sectors focused on AI-related services, like data analytics, AI consultancy, and neural network design, are burgeoning.

Yet, on balance, the potential benefits of AI to the economy are immense. By facilitating intelligent automation, enabling novel products, and opening up new markets, AI promises to be a powerful driver of economic growth. Its integration into everyday processes and decision-making systems might very well usher in an era of unprecedented prosperity and efficiency [5].

The Economic Stimulus

AI's formidable growth and capabilities might seem boundless, but in reality, they are shaped and occasionally constrained by a set of existing parameters. These limitations, paradoxically, are fertile grounds for the emergence of innovative economic models.

  1. Platform Economics and Network Effects (NFX): The value of AI doesn’t grow linearly but exponentially with increased user interaction and data input. As AI systems become more interconnected, the benefits of these network effects multiply. Companies that harness these NFX earlier can gain significant competitive advantages, potentially creating monopolistic or oligopolistic scenarios challenging traditional market dynamics [6].
  2. Hardware Limitations: The rapid advancements in AI demand a corresponding evolution in hardware. The current silicon-based architectures may soon hit their efficiency ceiling, driving demand for novel hardware solutions. This pushes industries to invest in and innovate around new materials, designs, and manufacturing processes, opening avenues for economic diversification [7].
  3. Computational Models: While robust, the traditional computing models might not be optimal for the future needs of AI. Searching for more efficient, adaptive, and scalable computational models can spur innovation, reshaping sectors from research and development to commercial applications [8].
  4. New Paradigms of Computing: Quantum computing is a beacon on the horizon of computational evolution. Its potential to process vast amounts of information simultaneously promises to accelerate AI capabilities manifold. As we inch closer to making quantum computers commercially viable, we might see a seismic shift in industries, from cryptography to drug discovery, all propelled by the fusion of AI and quantum mechanics [9].

The Ethics

However, there are challenges, too. As AI systems become more competent, they threaten to displace traditional jobs, leading to workforce displacement and requiring societal adjustments. Additionally, AI’s decision-making ability autonomously prompts questions about accountability, bias, and fairness [10].

Beyond the economic and ethical dimensions, AI’s influence on a global scale is undeniable. Here’s how.

The Global Effects

The widespread adoption and integration of AI promise transformation on an economic scale and a global societal scale. A new geopolitical dynamic is shaping as nations increasingly incorporate AI into their infrastructure, from public services to national defence. Emerging economies might leapfrog developmental stages through AI, while developed countries may witness shifts in job markets and urbanisation patterns. International collaborations and conflicts might take new dimensions, driven by the race for AI supremacy. Moreover, the globalisation of AI means that ethical, safety, and regulatory concerns transcend borders, prompting the need for global governance and cooperative frameworks.

Conclusion

As we stand on the precipice of what promises to be a transformative era driven by Artificial Intelligence, it’s essential to appreciate the depth and breadth of its impact. Not only does AI offer a potential economic windfall, but it also challenges us to confront and navigate the ethical considerations inherent in its application. The journey ahead is filled with promise and challenges alike.

The global ramifications of AI transcend traditional boundaries. As nations increasingly invest in AI, we witness a tectonic shift in geopolitics, economic paradigms, and societal structures. And while there’s much excitement about the boundless opportunities AI presents, it’s equally important to tread with caution and foresight. As with disruptive technology, the key will be to strike a balance — leveraging AI’s potential to spur growth and innovation while ensuring its ethical and responsible application.

We are at the dawn of a new technological era and a pivotal moment in human history. Embracing AI’s potential while vigilantly addressing its challenges will dictate how this chapter unfolds. As we hurtle into this brave new world, our collective responsibility is to ensure that AI, as a general-purpose technology, serves as a force for good, enhancing lives and economies.

[1] Bostrom, N. (2014). Superintelligence: Paths, dangers, strategies. OUP Oxford.

[2] Goldfarb, B. (2011). Economic Transformations: General Purpose Technologies and Long-Term Economic Growth. By Richard G. Lipsey, Kenneth I. Carlaw, and Clifford T. Bekar. Oxford: Oxford University Press, 2005. The Journal of Economic History, 71(3), 820–823.

[3] Brynjolfsson, E., & McAfee, A. (2014). The second machine age: Work, progress, and prosperity in a time of brilliant technologies. WW Norton & Company.

[4] Dignum, V. (2019). Responsible artificial intelligence: how to develop and use AI in a responsible way (Vol. 2156). Cham: Springer.

[5] Arntz, M., Gregory, T., & Zierahn, U. (2016). The risk of automation for jobs in OECD countries: A comparative analysis.

[6] Parker, G., Van Alstyne, M., & Choudary, S. (2016). How Networked Markets Are Transforming the Economy-and How to Make Them Work for You.

[7] Sze, V., Chen, Y. H., Yang, T. J., & Emer, J. S. (2017). Efficient processing of deep neural networks: A tutorial and survey. Proceedings of the IEEE, 105(12), 2295–2329.

[8] Goodfellow, I., Bengio, Y., & Courville, A. (2016). Deep learning. MIT press.

[9] Aaronson, S. (2013). Quantum computing since Democritus. Cambridge University Press.

[10] Carter, A. (2018). Cathy O’Neil (2016) Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy, New York, St. Martin’s Press and Virginia Eubanks (2018) Automating Inequality: How High-Tech Tools Profile, Police, and Punish the Poor, New York, Broadway Books.

[11] PwC (2017). “Sizing the prize: What’s the real value of AI for your business and how can you capitalise?”

[12] Ilzetzki, E., & Jain, S. (2023). The impact of artificial intelligence on growth and employment. Retrieved from https://cepr.org/voxeu/columns/impact-artificial-intelligence-growth-and-employment#:~:text=The%20World%20Economic%20Forum%20concluded,Lawrence%20et%20al.

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