, October 25, 2021

AI will spark a productivity boom soon, says professor

  •   5 min reads
AI will spark a productivity boom soon, says professor

New research from a professor of economic history suggests that AI will support a boom in economic productivity soon, but we may have to wait a little longer.

What has a good comedian and the economic impact of technology got in common? Answer: timing.

Whilst you get over the fits of laughter, the above joke must surely have induced spare thoughts for time-lags. Technology underpins and economy — the industrial revolution of the 18th, 19th and early 20th Century followed a period of economic boom — but not straight away. It will be like that with AI, suggests
Prof Crafts, Professor of Economic History at the University of Sussex Business School, but the time lags between innovation and economic impact are getting shorter. So we won’t have to wait so long this time.

Here are a couple of thoughts. First, when you look at economic growth per person, it was barely a thing until the 19th Century. According to data from the late Angus Maddison, your average Britain in 1820 was about 50 per cent better off than your average Brit in 1700, who was about 50 per better off than the average Brit in 1500. Between the collapse of the Roman Empire and 1820, UK GDP per capita grew at a trajectory best compared to the pace at which snails move.

From 1820, something remarkable happened— according to Maddison, GDP per capita almost doubled between 1820 and 1870 (despite a major recession during the 1840s) doubled again between 1870 and 1950. Then, between 1950 and 2003, GDP per capita quadrupled.

There is undoubtedly no mystery — the periods of rapid economic growth followed periods of innovation. It is just that there were gaps.

Let’s say the first industrial revolution began around 1760 with the invention of the Spinning Jenny, and let’s agree that the technology change that followed was dramatic — why didn’t economic growth take off dramatically too?

Prof Crafts is an expert in looking at the link between innovations periods and the economy.

Along with Knick Harley, Prof Crafts authored an influential paper that found that economic growth during the first industrial revolution was much lower than previously assumed.

Now he has authored a new study, Artificial intelligence as a general-purpose technology: a historical perspective.

General-purpose technologies and time-lags

Electricity,  steam computers and AI have something in common — they are general-purpose technologies. General technologies don’t make us better off directly. Instead, they create other technologies that make us better off.

This can mean that in the short term, a general-purpose technology could make us worse-off or maybe exacerbate inequality— issues that so vexed the Luddites.

For example, stream power provided the impetus to the first industrial revolution, electricity underpinned much of the technologies of the 20th Century, and computers the economy of the late 20th Century and today.

Yet, the significant impact of electricity in the United States came about 40 years after Thomas Edison first distributed electrical power in New York in 1882, following the widespread redesign of American factories.

Much later, in 1987, Nobel Laureate Robert Solow bemoaned the apparent paradox of slow growth in productivity whilst computers advanced, saying; “You can see the computer age everywhere but in the productivity statistics.” In reality, the computer revolution just needed more time before its impact on the economy became noticeable.

AI is having much the same effect, creating a fourth industrial revolution. But as ever, there will be time lags.

Not sure where the internet fits into this. Presumably, AI and the internet are entangled.

Fifth industrial revolution technologies take a step closer
Three new technology announcements of the last few days concerning brain-computer interfaces, thinking robots based on frog DNA, and quantum computers are so extraordinary that they can’t obviously come under the moniker Fourth Industrial Revolution.

AI as a general technology

“It is a common misconception that the First Industrial Revolution is a template for a general-purpose technology having a major adverse effect on workers’ living standards. The essence of that industrial revolution was not rapid productivity growth in the short run but the ‘invention of a new method of invention’, which increased technological progress in the long run. Since AI is potentially a general-purpose technology that raises the productivity of research and development, it may be the basis for a Fourth Industrial Revolution,” said Prof Crafts.

He added: “It is highly likely that AI will eventually become to be seen as a classic GPT and eventually deliver the much-needed boost to productivity that techno-optimists envisage once its full potential is realised. However, growth accounting estimates for earlier GPTs show that their impact on productivity takes time to develop.”

Quicker this time

However, the Prof had good news for those awaiting a productivity boom.

He explained: “Western societies have been getting better at exploiting new technological opportunities, thanks to superior scientific and technological capabilities, greater expenditure on R&D, and more sophisticated capital markets so that the impacts are felt more quickly. As a result, the impact of ICT was relatively large and unprecedented in its rate of technological progress. We should expect the same with AI. Added to this, machine-learning systems are designed to improve themselves over time and so by nature should advance rapidly.”

Technology Boom Beats Inflation!
Productivity is about to soar, economic growth will surge, but inflation won’t make a hasty return, and why? Technology will create this low inflation economic boom.

Technology jobs and labour shortage

But if Veruca Salt were around today, she would have some choice words to say about AI creating a boost in productivity. She would say, “I want the works, I want the whole works, and I want it now.”

Right now, as the world discovers a labour shortage, something that is likely to worsen as the baby boomers retire, we need a productivity boom urgently.

Prof Crofts said: “If AI fulfils its promise, it will alleviate the current productivity slowdown. Nevertheless, many other things matter for productivity performance as well as the arrival of a new GPT. Optimism over AI is no reason to neglect supply-side policy reforms, for example, to address the trend to weaker competition in the US and other global economies.”

The markets are terrified of technology creating a productivity boom
Stock markets have got it back to front: they have given asset prices, including shares and bonds, huge valuations based on 20th-century logic. The reason lies with a simple piece of logic that has almost perverse implications for stock markets.

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