AI and Jobs, again

I like to think of the Guardian's Adam Dorr as a well-rounded fellow. But an economist he is not. Although I taught economics at UC Berkeley for ten years, neither am I. But, as a historian, I do know that this refrain is an old one. Technology is coming for your job: the telephone, the automobile, the cell phone, the computer, digital movies. The list is extensive.

First, what does Dorr get right? Yes. There is already a massive shift underway in the labor market. Just as when rail replaced horses and cars replaced rail, workers were forced to abandon old jobs and take up new ones. And, yes. AI is different. AI can do what we do, including the creative stuff, faster, better, for much less money.

But, among the very first things economics students learn — kind of Day One — is the circular economy. Here is Paul Krugman and Robin Wells' illustration of the circular economy. Now. Take out household income. This, normally, is how consumer goods are purchased and, well, consumed. Take all of that away.

No income. No consumption. No consumption. No production for consumption. No production. No investment. The entire economy — AI or not — collapses.

So where is the error? The error is in thinking that people work in order to consume what is produced. The causal relationship, however, is much more complex. People work because investors believe their work increases the value of their investment. It increases the value of their investment if and only if the marginal value of the labor they invest in is greater than the cost of producing . . . whatever. This means that a drop in consumption (as distinguished from employment) will lead to investors pulling their capital and investing it someplace else. ("As distinguished from employment" because an individual who enjoys a surplus of value might give an individual who is lacking in value the means to consume.)

Periodically even investors forget this important lesson. They come to believe that they enjoy wealth because they are geniuses, they are creative, they are producing value. They might be all of these things. But without consumers, they are simply brilliant, creative, and productive idiots. (See Great Depression.)

Is the future rocky? Absolutely. Is AI coming for your job? Maybe. But, hey, enjoy your free time. Is AI going to eliminate your ability to consume? No. Because if it does, no one will invest in it. Let that sink in. If AI takes away our capacity to consume, then no one will invest in it.

So, yes, railway travel eliminated a whole host of jobs: shit shovelers, shoers, creators of leather straps and steel bits. But, it did not suppress consumption. (See the circular chart above.)

Thanks for your time.