A three-portion investigation into value, work, AI, and what it means for our times

1. Tim Harford Teaches us Income Effects and Substitution Effects1. Tim Harford Teaches us Income Effects and Substitution Effects

The AI age gives us a new spin on this.

In a recent FT “Undercover Economist” column titled “What if AI just makes us work harder?”, Harford explored the levels of impact that general productivity-improving AI might have on our work… labor-enhancing vs labor-replacing technology always did a little bit of both. My guy Levine in a recent newsletter: (#1430189)

The big question in artificial intelligence economics is: If you are a company that sells some sort of knowledge-work service, will AI make you more efficient, or will it make you worthless?

• Income effect: causes changes in spending behavior when consumer incomes shift.
• Substitution effect influences purchase choices due to price differences.

From a general worker – say writer, programmer, creative blah-blah, content creator or whatever – you’re presented with these two opposite-working forces:
The income effect of labor-enhancing AI tech suggest that they’d work less… the same thing they could accomplish in ten hours previously now only takes them two. Their customers or bosses or audience won’t be the wiser for it, and so they’ll laugh with that labor-enhanced tech gain all the way to the bank the beach. Harford again:

These tech workers felt that generative AI was making them dramatically more productive and capable — but they were also trying to do more, voluntarily working longer hours, and hurtling towards burnout.

The substitution effect, instead, makes them work more hours. Leisure is now, relatively speaking, more expensive so they’ll ration it a bit… all that extra dough just sitting there, and imagine how much better off you could be by working a bit more!

Round 2: all that extra production a) shoves the price/value of the output downwards, b) makes the audience ration on quantity, and improved quality, instead of price. When hyperproductive Danny of What Bitcoin Did releases 30 shows a week instead of 3, or hyperproductive Den of Stacker News posts 30 ~econ posts a day instead of 3, their devoted audience listen to or read at best a couple more but most go to complete waste.

Once everybody catches up with the new AI-productivity boost, all the podcasters and Den imitators and movie makers and sing-and-song writers pour out newly created work. The outlets or music venues or radio shows that used to publish/play them notice the avalanche of new output --- and restrict access, either via literally gatekeeping (most of) their work, or by dramatically dropping what their creators are paid.

Because I, or Danny, infer that this is the necessary future of our output, we may just double-down on using AI now such that we can get as much goodies while the going is, um, good. So we spam the output. We hire like crazy. We overbuild myopically.

Harford gives us that “immortal Douglas Adams joke about working conditions: the hours are good, but ‘most of the actual minutes are pretty lousy’”. Instead:

What the researchers found was the opposite of Adams’ morose Vogon guard: the minutes are amazing but the hours are terrible.

I don’t mean to suggest that AI is useless or trivial, but there is a long history of time-saving digital technologies that at best make us more productive yet overwhelmed — and at worst, just make us feel overwhelmed.

2. Jevons Paradox for the 21st Century: AI doesn’t reduce work, it intensifies it2. Jevons Paradox for the 21st Century: AI doesn’t reduce work, it intensifies it

Job-searching is, sort of, up. Dara Khosrowshahi says he wants more engineers when the old ones can do more. Google et al overbuilding (#1446786). Harvard Business School just concluded that AI doesn't replace work but intensifies it:

This same ethnographic study that Harford invoked, researchers looked at a company with some 200 employees. Interviews, tracked communications etc showed that AI boosted (short-term) productivity but led to workload creep, strains, and unsustainable working pace. What looks like high productivity... isn't productive. (Perhaps my Beckert dude had a accidental point?? #1434507)

Jevon's Paradox is that efficiency gains from (past) improvements result not in slower but faster resource use -- because we expand usage so much. Typical example: coal.

In 1865, the English economist William Stanley Jevons observed that technological improvements that increased the efficiency of coal use led to the increased consumption of coal in a wide range of industries. He argued that, contrary to common intuition, technological progress could not be relied upon to reduce fuel consumption

When the output of your employees increase suddenly, you use them for more things. That is, they don't lose their jobs to AI -- you’re just expanding the number of things they do. By economic necessity, then, we know the added value of that extra stuff will be less valuable and so somebody’s earnings/wages/revenue will drop, at least on the relevant margins.

3. My prior SN musings on infinite generation (e.g., music) and books, and what that means for the economic pricing of such things3. My prior SN musings on infinite generation (e.g., music) and books, and what that means for the economic pricing of such things

Here: #798342 , #796401
(and, you know, what Phil says… <3 #1424616)

When infinite generation is a click away but consumption is a deviously tricky task in between the daily chores and the mental obesity (#1383936) --- stemming from information overload from radio, random human news-media-obsessed/propaganda boxes, and your very accessible screens --- the economics of content (music, books, code, research) approaches zero stunningly fast.

In that domain, human attention and human value has to become judges of what’s important instead of primarily creators of it. #1425743 That could be a way out, I'm not sure.

Scarcity pricing does its ruthless thing to us, producers, when nothing you create is scarce…Scarcity pricing does its ruthless thing to us, producers, when nothing you create is scarce…

Or whatever. We can always just check out, work less, and gamble on crypto instead #1437333