AI and GE: Answers
Last week I posed the following question from my Ph.D. Micro midterm:
Suppose artificial intelligence researchers produce and patent a
perfect substitute for human labor at zero MC.
Use general equilibrium theory to predict the overall economic effects
on human welfare before AND after the Artificial Intelligence software
As promised, here’s my answer:
the patent lasts, the patent-holder will produce a monopoly quantity of
AIs. As a result, the effective labor
supply increases, and wages for human beings fall – but not to 0 because the patent-holder keeps P>MC. The overall effect on human welfare, however,
is still positive! Since the AIs produce
more stuff, and only humans get to consume, GDP per human goes up. How is this possible if wages fall? Simple: Earnings for NON-labor assets (land,
capital, patents, etc.) must go up.
Humans who only own labor are
worse off, but anyone who owns a home, stocks, etc. experiences offsetting
the patent expires, this effect becomes even more extreme. With 0 fixed costs, wages fall to MC=0, but
total output – and GDP per human – skyrockets.
Human owners of land, capital, and other non-labor assets capture 100%
of all output. Humans who only have
labor to sell, however, will starve without charity or tax-funded redistribution.