In the Shadow of Smith's Invisible Hand: Risks to Economic Stability and Social Wellbeing in the Age of Intelligence

2024-04-22

Social Science Research Network

AI Summary

This study addresses systemic economic risks arising from the rapid proliferation of generative AI—specifically, escalating labor underutilization, demand contraction, and recessionary feedback loops. We develop a macroeconomic system dynamics model coupling labor, output, and consumption, and for the first time quantify the threshold effect of the AI capital–labor ratio, identifying the critical point at which net job creation fails to offset displacement. We further introduce “Mental Wealth” as a novel dimension for assessing societal resilience. Integrating scenario analysis with 95% confidence interval–based uncertainty quantification, we project that, under moderate AI capital deepening by mid-2050, labor underutilization will double, per capita disposable income will decline by 26%, and the consumption index will fall by 21%. Counteracting this income loss requires a 10.8-fold acceleration in new job creation. Our findings establish a theoretical benchmark and policy early-warning framework for AI governance.

Technology Category

• Philosophy and Ethics of AI: AI & Jobs/Labor
• Humans and AI: Other Foundations of Human Computation & AI
• Cognitive Modeling & Cognitive Systems: Computational Creativity

Application Category

• Economics, Online Markets and Human Computation: Economic ramifications for generative AI infrastructure and applications
• Social Networks and Social Media: Generative AI / large language models and their impact on social systems
• Responsible Web: Machine-in-the-loop, human agency and autonomy

Abstract

Work is fundamental to societal prosperity and mental health, providing financial security, identity, purpose, and social integration. The emergence of generative artificial intelligence (AI) has catalysed debate on job displacement. Some argue that many new jobs and industries will emerge to offset the displacement, while others foresee a widespread decoupling of economic productivity from human input threatening jobs on an unprecedented scale. This study explores the conditions under which both may be true and examines the potential for a self-reinforcing cycle of recessionary pressures that would necessitate sustained government intervention to maintain job security and economic stability. A system dynamics model was developed to undertake ex ante analysis of the effect of AI-capital deepening on labour underutilisation and demand in the economy. Results indicate that even a moderate increase in the AI-capital-to-labour ratio could increase labour underutilisation to double its current level, decrease per capita disposable income by 26% (95% interval, 20.6% - 31.8%), and decrease the consumption index by 21% (95% interval, 13.6% - 28.3%) by mid-2050. To prevent a reduction in per capita disposable income due to the estimated increase in underutilization, at least a 10.8-fold increase in the new job creation rate would be necessary. Results demonstrate the feasibility of an AI-capital- to-labour ratio threshold beyond which even high rates of new job creation cannot prevent declines in consumption. The precise threshold will vary across economies, emphasizing the urgent need for empirical research tailored to specific contexts. This study underscores the need for governments, civic organisations, and business to work together to ensure a smooth transition to an AI- dominated economy to safeguard the Mental Wealth of nations.

Problem

• Examining AI's impact on job displacement and economic stability.
• Analyzing AI-capital deepening effects on labor underutilization and demand.
• Identifying thresholds where job creation fails to offset AI-driven declines.

Innovation

• System dynamics model analyzes AI-capital impact
• Identifies AI-capital-to-labour ratio threshold
• Recommends tailored government intervention strategies