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Economist.com-Computers Unleashed Economic Growth Will Artificial Intelligence

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Economist.com-Computers Unleashed Economic Growth Will Artificial Intelligence

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danishraza16
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© © All Rights Reserved
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Computers unleashed economic growth.

Will artificial
intelligence?
economist.com/finance-and-economics/2024/11/21/computers-unleashed-economic-growth-will-artificial-
intelligence

The Economist

Almost two years have passed since OpenAI released GPT-3.5 to great fanfare. Bill Gates,
co-founder of Microsoft, compared the technology’s arrival to his first encounter with the
graphical user interface—a breakthrough that reshaped personal computing—in the
1980s. Others predicted that generative artificial intelligence (ai) would rapidly transform
economies around the world, leaving many millions unemployed. Yet despite the hype
and the worries, ai’s impact has been muted thus far. According to America’s Census
Bureau, only 6% of businesses use AI to produce goods and services. Output and labour-
productivity growth, meanwhile, remain far below the soaring heights of the computer age
in the 1990s.

Why has AI so far failed to live up to its promise? Lessons from the computer age can
shed light on the question. As with AI today, the early years of the computer age were
marked by predictions of economic transformation. In 1965 Herbert Simon, a giant of
computer science, declared that “machines will be capable within 20 years of doing any
work that a man can do.” Two decades after Simon’s prediction, the promised productivity
revolution remained elusive. In 1987 Robert Solow, a Nobel laureate, famously quipped
that “you can see the computer age everywhere but in the productivity statistics.” Only in
the late 1990s did the economic transformation at last materialise, leading Solow to
acknowledge—three decades after the initial exuberance—that computers had begun to
reshape the economy.

Three main factors contributed to the


eventual arrival of a computer-age
productivity boom: companies ramped up investment in information technology, computer
and software prices fell rapidly (see chart), and bosses found new ways to integrate the
tech into their operations. Are these factors in evidence today?

Begin with IT investment. Starting in 1995, firms ramped up spending on computer


hardware, network infrastructure and software. Between 1995 and 2000, their investment
in information-processing equipment and software rose by an average of 20% a year in
real terms. Research by Kevin Stiroh of the Federal Reserve Bank of New York has found
that firms were investing nearly $400bn in such technologies by 1999, accounting for over
30% of all non-residential fixed investment.

By contrast, recent capital expenditure has been underwhelming. Over the past two
years, business investment in information-processing equipment and software has grown
by around 4% a year. AI investment may be more focused on intangible assets, such as
algorithms and data, which are more difficult to measure than physical capital. Payments

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to startups for custom tools may show up as operating expenses in the statistics, for
example. Even so, you would expect at least a rise in software investment. Instead,
spending on both pre-packaged commercial software—such as Microsoft 365—and
custom-built systems, including AI tools tailored to specific workflows, is surprisingly low.
Growth in software investment over the past year was about three times lower than in the
late 1990s in real terms, and remains well below the long-term average.

The second half of the 1990s also witnessed a dramatic fall in the quality-adjusted price
of computer hardware and software. From 1995 to 2000 prices for information-processing
equipment and software dropped by a third, producing cheaper and better computers.
The AI era has yet to see a corresponding decrease in prices: over the past five years,
those for software and information-processing equipment have barely budged. Indeed, in
the most recent quarter, the price index for these goods rose at an annualised rate of 4%.
Even as the underlying technology is becoming cheaper, middlemen who repackage AI
tools are increasingly adding margins and driving up prices.

What about the final ingredient in the economic revolution of the 1990s? For a technology
to provide productivity gains, companies must retool operations and business models to
integrate it. Consider the example of Walmart. In the 1990s the retailer boosted
productivity by embedding a new software system—Retail Link—into its operations,
granting suppliers real-time access to sales and inventory data. AI adoption today
remains largely confined to narrow applications within existing operations, such as a
financial-services firm using an AI app for fraud detection. Most firms do not have the data
infrastructure required to train custom firm-specific models. To unlock AI’s full potential,
more fundamental changes will be required.

Given these constraints, it might be prudent to recall the words of Rudi Dornbusch, an
economist who spent his career at the Massachusetts Institute of Technology: that in
economics things happen slower than you thought they would and then faster than you
thought they could. AI may eventually produce extraordinary productivity growth, but at
present it appears to be some distance from the take-off experienced in the 1990s.

Perhaps a more fitting comparison is to the 1970s—a period when technological promise
mingled with disappointing productivity growth. The memory chip and silicon
microprocessor, which powered the personal computer, were introduced around 1970. Yet
20 years later, less than 10% of the world’s businesses were using computers. As the
world moved into the information age with the arrival of email, mobile phones and the
internet, productivity growth remained stubbornly low. From 1975 to 1994 labour
productivity in America averaged a lacklustre 1.7%. Then things finally got going. The AI
revolution seems to be following a similar path. ■

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