Archive | March 2016

Gwangi`s thoughts on how AI will affect AS and AD

 (My comments are in italics).

Gwangi Kim (class of 2017) has found a very interesting video about artificial intelligence (AI).


Gwangi considers that our brains are nothing more than a very complicated machine. As AI develops, he argues that society’s rosy, yet blinded and romantic view of human creativity will soon be revealed as invalid.  He admits that creative jobs will be difficult to replace by AI  (while other office jobs, will definitely be replaceable) but it will eventually happen. Moreover, the proportion of jobs that use creativity in society is very small relative to other types in the workforce.

Therefore, Gwangi concludes that there will be excess supply in the long term. (This could also be phrased as excess aggregate supply  (AS) -a concept which 11th graders have not yet encountered – or excess capacity). Aggregate demand  (AD) in more economically developed countries (MEDCs) will not be enough to meet aggregate supply (which is exponentially increasing due to advanced technologies such as AI)  due to the substitution of labor by capital or by the cheaper labor force in other countries.

However, a possible and the only solution would be if an international government were to impose a tax on production and use the tax revenue to provide a basic income guarantee for everyone. Consumption would rise and this would lessen the excess supply problem, though probably not solve it.

Gwangi`s analysis is based on the fact that AI doesn`t demand goods as labour does. Humans and AI are similar in the fact that they both act according to basic instructions: DNA and the algorithm. However, the `goal` of DNA is the survival and reproduction of human beings; therefore, humans consume goods so that they can satisfy their biological demands. While the `goal` of the algorithm is to achieve the best performance in the task given; therefore, AI doesn`t demand any of the goods produced.

If Gwangi is right, this has serious implications for the future structure of economies and even, perhaps, for your own futures in the work-force. I have attempted to rebuff the gloomy predictions by suggesting that in the economically less developed countries (ELDCs) there are still many needs that have not yet been met. Demand will arise from these consumers so long as they can obtain the funds necessary (either from income generated by work or from redistribution, perhaps through the international tax suggested by Gwangi). I would also like to see “job-sharing” schemes arise, where two people share one job and each work for half the time. But I am not confident that such developments would avert the problem.

Joseph Stiglitz’s advice for Japan

Joseph Stiglitz, a professor at Columbia University was in Japan last week. He won the Nobel prize a few years ago for his work on asymmetric information (do you remember that that is one of the causes of market failure?).  He has also been a chief economist of the World Bank and criticised its policies towards developing countries arguing that their focus on free markets harmed development in many cases.

Joseph Stiglitz, left, on March 16 attends an economic seminar in Tokyo with the governor of the Bank of Japan.

While in Japan, Stiglitz stated that Abe’s government should postpone the planned increase in the consumption tax (sales tax). Abe considers the increase to a 10% rate is necessary to reduce the large budget deficit. But Stiglitz argues that Japan now needs an expansionary fiscal policy because global demand is so weak and therefore Japan cannot rely on exports to increase aggregate demand (AD).

Stiglitz noted that Japan’s monetary policy had stimulated the economy, but that such a policy has limited effects.

If Japan’s government wants to raise more revenue, it should do it in ways that do not contract AD. He suggests “A better tax would be a carbon tax,”  as it “encourages demand because firms have to spend money to retrofit for global warming.” (Remember that a carbon tax is placed on the quantity of a firm’s emissions. Therefore it is incentivised to reduce its emissions.)

In stressing the need for an expansionary fiscal policy (demand-side approach), Stiglitz would seem to be on the Keynesian side of macroeconomic theories. It is also interesting that he mentioned the balanced-budget multiplier. “If you raise taxes and you increase spending, you design the taxes right and you design spending right, you can increase demand by a multiple, GDP by a multiple”, he said in an interview.

P.S.  Another Nobel laureate, Paul Krugman, gave similar advice this week, arguing that the sales tax increase should be postponed and fiscal spending boosted because the economy is still not strong enough to escape deflation.