TECH PRIOR

Across the globe, rates of gross domestic product (GDP) growth have been shrinking. Moreover, this has been true for three decades. Key measures of economic efficiency are trending sharply downward, while labor-force growth across the developed world is largely stagnant. It is even in decline in some countries.

Given this poor outlook, commentators say that a stagnant economy is the “new normal.” On an even more pessimistic note, economist Robert Gordon argues that productivity growth over the next quarter century will continue at the sluggish pace we have experienced since 2004.1 He believes that the past two centuries of “Great Inventions,” such as the steamship and telegraph, are unlikely to be repeated. And this deficit of innovation, combined with unfavorable demographic trends, flagging educational attainment and rising wealth inequality, will slow economic progress.

So, are we experiencing the end of growth and prosperity as we know it? As grim as much of the data undoubtedly is, it misses an important part of the story.

That missing element is how new technologies affect growth in the economy. Traditionally, capital and labor are the “factors of production” that drive growth in the economy (see Figure 5). Growth occurs when the stock of capital or labor increase, or when they are used more efficiently. The growth that comes from innovations and technological change in the economy is captured in total factor productivity (TFP). Economists have always thought of new technologies as driving growth through their ability to enhance TFP.

This made sense for the technologies that we have seen until now. The great technological breakthroughs over the last century— electricity, railways and IT—boosted productivity dramatically but did not create entirely new workforces.

Today, we are witnessing the takeoff of another transformative set of technologies, commonly referred to as artificial intelligence (see “What is artificial intelligence?”). Many see AI as similar to past technological inventions. If we believe this, then we can expect some growth, but nothing transformational. But what if AI has the potential to be not just another driver of TFP, but an entirely new factor of production? How can this be? The key is to see AI as a capital-labor hybrid.

AI can replicate labor activities at much greater scale and speed, and to even perform some tasks beyond the capabilities of humans. Not to mention that in some areas it has the ability to learn faster than humans, if not yet as deeply. For example, by using virtual assistants, 1,000 legal documents can be reviewed in a matter of days instead of taking three people six months to complete.