The deflationary nature of technology

Technology, including artificial intelligence (AI), must be deflationary to have a macroeconomic impact. It can reduce costs and prices and boost real incomes and demand, thereby creating new jobs and offsetting automation-driven losses.

Predictions of technological unemployment have repeatedly proven false, as macroeconomic job creation in new sectors offsets microeconomic disruptions. AI is likely to increase productivity and wealth, with new jobs emerging; the focus should be on managing sector-specific disruptions, not fearing labour market dystopia.

In 1983, Wassily Leontief, a Nobel Prize-winning economist, concluded that human labour would go the way of the horse after the automobile arrived – “first diminished and then eliminated.” Today, a new wave of doomsaying has emerged surrounding “technological unemployment” as AI, with its promise of business innovation, has marched to the forefront of economic debate.

As we argue in Shocks, Crises, and False Alarms, predictions of technology-driven job destruction have a long history and correspondingly, a long record of failure. Angst about worker obsolescence ebbs and flows with each new generation of technology.

Will AI buck the trend?

If we scrutinize AI’s promise along each step of the well-trodden path from new technology to new employment, it seems unlikely that AI will end a history of labour market rejuvenation and adjustment.

• Cost reduction: AI is likely to succeed at replacing labour, particularly in services where digital technologies have struggled to do so in the past.
• Falling prices: Unless labour-saving technology can be monopolized, it will continue to drive cost competition and deflation.
• New demand: Real income gains often drive demand for goods and services that were barely known when a new technological wave began.
• New employment: AI’s labour-enhancing properties are as credible as its labour-eliminating ones.

The impact of AI will be seen, experienced, and reported primarily through a microeconomic lens that magnifies the disruptions and gyrations that will come. That should not be conflated with the macroeconomic promise that AI holds. Mass technological unemployment remains an ahistorical and unlikely proposition.

A far more likely outcome is a gradual increase in productivity and wealth, punctuated by the microeconomic pain of any economic transformation. The world will not be without work but it will work differently.