Why AI Won't Cause Unemployment

"In retrospect, I wish I had known more about the hazards and difficulties of [running] a business." -- George McGovern

Fears about new technology replacing human labor and causing overall unemployment have raged across industrialized societies for hundreds of years, despite a nearly continual rise in both jobs and wages in capitalist economies. The jobs apocalypse is always right around the corner; just ask the Luddites.

We had two such anti-technology jobs moral panics in the last 20 years — “outsourcing” enabled by the Internet in the 2000’s, and “robots” in the 2010’s. The result was the best national and global economy in human history in pre-COVID 2019, with the most jobs at the highest wages ever.

Now we’re heading into the third such panic of the new century with AI, coupled with a continuous drumbeat of demand for Communist-inspired Universal Basic Income. “This time is different; AI is different,” they say, but is it?

Normally I would make the standard arguments against technologically-driven unemployment — see good summaries by Henry Hazlitt (chapter 7) and Frédéric Bastiat (his metaphor directly relevant to AI). And I will come back and make those arguments soon. But I don’t even think the standand arguments are needed, since another problem will block the progress of AI across most of the economy first.

Which is: AI is already illegal for most of the economy, and will be for virtually all of the economy.

How do I know that? Because technology is already illegal in most of the economy, and that is becoming steadily more true over time.

How do I know that? Because:

This chart shows price changes, adjusted for inflation, across a dozen major sectors of the economy.

As you can see, we actually live in two different economies.

The lines in blue are the sectors where technological innovation is allowed to push down prices while increasing quality. The lines in red are the sectors where technological innovation is not permitted to push down prices; in fact, the prices of education, health care, and housing as well as anything provided or controlled by the government are going to the moon, even as those sectors are technologically stagnant.

We are heading into a world where a flat screen TV that covers your entire wall costs $100, and a four year college degree costs $1 million, and nobody has anything even resembling a proposal on how to systemically fix this.

Why? The sectors in red are heavily regulated and controlled and bottlenecked by the government and by those industries themselves. Those industries are monopolies, oligopolies, and cartels, with extensive formal government regulation as well as regulatory capture, price fixing, Soviet style price setting, occupational licensing, and every other barrier to improvement and change you can possibly imagine. Technological innovation in those sectors is virtually forbidden now.

Whereas the sectors in blue are less regulated, technology whips through them, pushing down prices and raising quality every year.

Note the emotional loading of the interplay of production and consumption here. What do we get mad about? With our consumer hat on, we get mad about price increases — the red sectors. With our producer hat on, we get mad about technological disruption — the blue sectors. Well, pick one; as this chart shows, you can’t have your cake and eat it too.

Now think about what happens over time. The prices of regulated, non-technological products rise; the prices of less regulated, technologically-powered products fall. Which eats the economy? The regulated sectors continuously grow as a percentage of GDP; the less regulated sectors shrink. At the limit, 99% of the economy will be the regulated, non-technological sectors, which is precisely where we are headed.

Therefore AI cannot cause overall unemployment to rise, even if the Luddite arguments are right this time. AI is simply already illegal across most of the economy, soon to be virtually all of the economy.