I like that this post lays out the dilemma in principles A (marginal value dominates) and B (marginal cost dominates). One quibble is that the effects are on the supply and demand curves, not on the quantities supplied and demanded, i.e., it’s not about the slopes of the curves but the location of the new equilibrium as the curves shift left or right. It’s not about which part “equilibrates” faster (with what?) but about the relative strength of the shifts.
If AGI shifts the demand for AI labor to the right, under constant supply, we’d expect a price increase and more AI labor created and consumed. If AGI shifts the supply for AI labor to the right, under constant demand, we’d expect a price decrease and more AI labor created and consumed. Both of these things would happen, so there is a wide range of possible price changes (even no change in price) consistent with more AI labor created and consumed, but what happens to the price depends on which shift is “stronger.”
Still, with the quantity of AGI labor created and consumed increasing, you might wonder about how the experience curve impacts it—that’s just more right-shift in the supply curve, so maybe we don’t have to wonder after all. What about the effect on substitutes like human labor? Well, if the economy has a set number of jobs, you’d expect a lot of human labor displaced, but if the economy can find other useful work for those people, they will do those other jobs, which might be lower-paying (no more coding tasks for you—enjoy 7⁄11), reducing the average price of human labor, or might be higher-paying (no more coding tasks for you—enjoy this support role for AGI that because of its importance requires, increasing the average price of human labor.
Can those niches exist? Yes, the supply and demand curves are curves of heterogeneous values and production functions. And markets are imperfect. Won’t those niches eventually disappear? Well, rinse and repeat. See ATMs and bank tellers, also see building luxury housing supply and the effects on rents throughout the housing supply.
I don’t think it’s only talking past each other—it’s a genuine ton of uncertainty.
I just added a few words to the effect that Principle (A) is a claim about how the demand curve will shift, and Principle (B) is a claim about how the supply curve will shift. Thanks.
Update: Also added a little bulleted list about supply and demand curves racing each other rightwards. Hopefully that will make it more clear what I’m saying. Thanks again.
It’s not about which part “equilibrates” faster (with what?) but about the relative strength of the shifts.
If demand for socks quadruples overnight for some exogenous reason, then there will be some period of time when socks are more expensive. Days, weeks, months, I don’t know. But there’s a lead time on building new sock factories (or hiring more workers, or retooling production lines, or whatever it is). In the longer term, presumably socks would wind up at a similar price as today—there’s plenty of cotton. The supply curve can shift, but can’t shift instantaneously.
So that’s what I mean by “equilibration”—The demand curve shifts, and then we’re “out of equilibrium”, in the sense that there’s a highly-profitable opportunity (to manufacture more socks), but nobody is exploiting that opportunity yet (because it takes a few weeks or months). Eventually people do build the factories, and now the supply curve has shifted to its new stable home, and the price of socks is its normal inexpensive price as usual.
Hmm, I wonder if you’re assuming that “equilibration” = “price moving to match immediate supply and demand”, whereas I’m using the term “equilibration” more broadly (“some process reaching equilibrium”). I’m open-minded to rewording things. I do want this post to use conventional economics language as much as possible, and I’m rusty. :)
Anyway, I disagree that it’s “about the relative strength of the shifts”. It’s not a “shift”, because the system has no equilibrium. If the AGI supply curve were stuck at C1, then over time, the AGI demand curve would settle to C2. Separately, if the AGI demand curve were stuck at C2, then over time, the AGI supply curve would settle to C3, which is to the right of C1. See what I mean? The two curves just race each other outwards, forever, until the surface of Earth is plastered with solar cells and factories etc. So, to figure out the current price, it matters which curve can shift faster in response to current conditions.
(Note: have edited the post to make this part clearer.)
Well, if the economy has a set number of jobs, you’d expect a lot of human labor displaced, but if the economy can find other useful work for those people, they will do those other jobs
I think that, in this quote, you’re being the person on the left side of my silly diagram :) You’re assuming that the economy will produce new jobs faster than the factories will produce new chips and robots to fill those jobs. New jobs don’t appear instantaneously, right? …But new chips also don’t appear instantaneously. Which one is less instantaneous? You need to make an argument. That’s my point. :)
Thanks, you had mentioned the short- vs. long-run before, but after this discussion it is more foregrounded and the “racing” explanation makes sense. :) Though I appreciated the references to marginal value and marginal cost.
You’re assuming that the economy will produce new jobs faster than the factories will produce new chips and robots to fill those jobs.
Well, the assumptions are primarily that the supply and demand for AI labor will vary across markets and secondarily that labor can flow across markets. This is an important layer separate from just seeing who (S or D) wins the race. If there is only one homogenous market, then the price trajectory for AI labor (produced through the racing dynamics) tells you all you’ll need to know about the price trajectory for its human substitute. So the question is just which is faster.
But if there are heterogenous markets, “which is faster” is informative only for that market and the price of human labor as a substitute in that market. The price trajectory for AI labor in other markets might be subject to different “which is faster” racing dynamics. Then, because of composition effects, the trajectory for the average price of AI labor that is performed may diverge from the trajectory for the average price of human labor that is performed.
This is true even if you assume the economy has no vacancies and will not produce new jobs (i.e., labor cannot flow across markets). For example, average hourly earnings spiked during COVID because the work that was being performed was high-cost/value labor, an increase seemingly entirely due to composition [BLS]. Although I am alleging that predicting the price trajectory remains difficult even if you take a stance on the racing dynamics because you need to know what the alternative human jobs are, in that world where jobs are simply destroyed, the total value accruing to human laborers certainly goes down. This is why I think the labor flows could be considered a secondary assumption for the left-side depending on how much you think that side would be arguing—they are not dispositive of what the price changes will be (the focus of the post was on price), but they definitely will affect whether human labor commands the same total value.
I like that this post lays out the dilemma in principles A (marginal value dominates) and B (marginal cost dominates). One quibble is that the effects are on the supply and demand curves, not on the quantities supplied and demanded, i.e., it’s not about the slopes of the curves but the location of the new equilibrium as the curves shift left or right. It’s not about which part “equilibrates” faster (with what?) but about the relative strength of the shifts.
If AGI shifts the demand for AI labor to the right, under constant supply, we’d expect a price increase and more AI labor created and consumed. If AGI shifts the supply for AI labor to the right, under constant demand, we’d expect a price decrease and more AI labor created and consumed. Both of these things would happen, so there is a wide range of possible price changes (even no change in price) consistent with more AI labor created and consumed, but what happens to the price depends on which shift is “stronger.”
Still, with the quantity of AGI labor created and consumed increasing, you might wonder about how the experience curve impacts it—that’s just more right-shift in the supply curve, so maybe we don’t have to wonder after all. What about the effect on substitutes like human labor? Well, if the economy has a set number of jobs, you’d expect a lot of human labor displaced, but if the economy can find other useful work for those people, they will do those other jobs, which might be lower-paying (no more coding tasks for you—enjoy 7⁄11), reducing the average price of human labor, or might be higher-paying (no more coding tasks for you—enjoy this support role for AGI that because of its importance requires, increasing the average price of human labor.
Can those niches exist? Yes, the supply and demand curves are curves of heterogeneous values and production functions. And markets are imperfect. Won’t those niches eventually disappear? Well, rinse and repeat. See ATMs and bank tellers, also see building luxury housing supply and the effects on rents throughout the housing supply.
I don’t think it’s only talking past each other—it’s a genuine ton of uncertainty.
I just added a few words to the effect that Principle (A) is a claim about how the demand curve will shift, and Principle (B) is a claim about how the supply curve will shift. Thanks.
Update: Also added a little bulleted list about supply and demand curves racing each other rightwards. Hopefully that will make it more clear what I’m saying. Thanks again.
If demand for socks quadruples overnight for some exogenous reason, then there will be some period of time when socks are more expensive. Days, weeks, months, I don’t know. But there’s a lead time on building new sock factories (or hiring more workers, or retooling production lines, or whatever it is). In the longer term, presumably socks would wind up at a similar price as today—there’s plenty of cotton. The supply curve can shift, but can’t shift instantaneously.
So that’s what I mean by “equilibration”—The demand curve shifts, and then we’re “out of equilibrium”, in the sense that there’s a highly-profitable opportunity (to manufacture more socks), but nobody is exploiting that opportunity yet (because it takes a few weeks or months). Eventually people do build the factories, and now the supply curve has shifted to its new stable home, and the price of socks is its normal inexpensive price as usual.
Hmm, I wonder if you’re assuming that “equilibration” = “price moving to match immediate supply and demand”, whereas I’m using the term “equilibration” more broadly (“some process reaching equilibrium”). I’m open-minded to rewording things. I do want this post to use conventional economics language as much as possible, and I’m rusty. :)
Anyway, I disagree that it’s “about the relative strength of the shifts”. It’s not a “shift”, because the system has no equilibrium. If the AGI supply curve were stuck at C1, then over time, the AGI demand curve would settle to C2. Separately, if the AGI demand curve were stuck at C2, then over time, the AGI supply curve would settle to C3, which is to the right of C1. See what I mean? The two curves just race each other outwards, forever, until the surface of Earth is plastered with solar cells and factories etc. So, to figure out the current price, it matters which curve can shift faster in response to current conditions.
(Note: have edited the post to make this part clearer.)
I think that, in this quote, you’re being the person on the left side of my silly diagram :) You’re assuming that the economy will produce new jobs faster than the factories will produce new chips and robots to fill those jobs. New jobs don’t appear instantaneously, right? …But new chips also don’t appear instantaneously. Which one is less instantaneous? You need to make an argument. That’s my point. :)
Thanks, you had mentioned the short- vs. long-run before, but after this discussion it is more foregrounded and the “racing” explanation makes sense. :) Though I appreciated the references to marginal value and marginal cost.
Well, the assumptions are primarily that the supply and demand for AI labor will vary across markets and secondarily that labor can flow across markets. This is an important layer separate from just seeing who (S or D) wins the race. If there is only one homogenous market, then the price trajectory for AI labor (produced through the racing dynamics) tells you all you’ll need to know about the price trajectory for its human substitute. So the question is just which is faster.
But if there are heterogenous markets, “which is faster” is informative only for that market and the price of human labor as a substitute in that market. The price trajectory for AI labor in other markets might be subject to different “which is faster” racing dynamics. Then, because of composition effects, the trajectory for the average price of AI labor that is performed may diverge from the trajectory for the average price of human labor that is performed.
This is true even if you assume the economy has no vacancies and will not produce new jobs (i.e., labor cannot flow across markets). For example, average hourly earnings spiked during COVID because the work that was being performed was high-cost/value labor, an increase seemingly entirely due to composition [BLS]. Although I am alleging that predicting the price trajectory remains difficult even if you take a stance on the racing dynamics because you need to know what the alternative human jobs are, in that world where jobs are simply destroyed, the total value accruing to human laborers certainly goes down. This is why I think the labor flows could be considered a secondary assumption for the left-side depending on how much you think that side would be arguing—they are not dispositive of what the price changes will be (the focus of the post was on price), but they definitely will affect whether human labor commands the same total value.