The Economic Impact of the AI Revolution, Quantified.

Unless you've been living under a rock, you would have heard of the AI revolution and how it is poised to change everything around the world.

But have you thought about just how much is going to change?

A new study by MIT Professor of Economics Daron Acemoglu finds that AI's productivity boost is overestimated.

Explosive Investment in AI

With the AI revolution becoming increasingly significant, investments into AI have increased exponentially in recent years.

According to statistics retrieved from Statista, the global AI market was valued at over 130 billion Euros in 2023 and is expected to grow substantially by 2030, up to nearly 15-fold at 1.9 trillion Euros.

Interestingly, investment in AI is spreading across sectors, moving from manufacturing to services, especially with the latest wave of AI.

Back in 2018, according to the McKinsey report, “manufacturing and risk were the two functions in which the largest shares of respondents reported seeing value from AI use”.

By 2022, “the biggest reported revenue effects are found in marketing and sales, product and service development, and strategy and corporate finance”.

This increase in AI investment is already boosting the output of the sectors most involved, while the higher capital per worker will likely increase future potential growth.

However, the adoption of AI is not immediate and will take place through three main phases:

1. Limited Visibility: This phase is characterized by strong innovation and capital accumulation but with limited visibility on the productivity impact. There is no widespread adoption, and productivity benefits will be partly offset by losses in some sectors.
2. Broader Diffusion: In this phase, the cost of using and investing in new technologies falls, the implementation becomes more widespread, and productivity increases spread across the economy. Divergences may remain, but the benefits are more visible.
3. Normalization: This phase involves diminishing marginal returns to further adoption, and the boost to productivity growth tapers off, most likely returning to a longer-term trend.

Measuring the Economic Boost

So just how much is AI going to boost our productivity, economically speaking?

A new study by MIT Professor of Economics Daron Acemoglu finds that AI will offer no more than a 0.71% increase in economic productivity over the next decade.

Acemoglu joins Market Domination Overtime to discuss how he quantified AI's impact on economic growth and the technology's distributional effects.

"There is a big achievement here ... but when you look at the data, most of the things that humans do these models still cannot do," Acemoglu highlights.

About 4.5% of the tasks American workers complete may be impacted directly by AI, and taken together with the productivity improvements these models can currently deliver, "you end up with productivity of less than 1% of GDP," Acemoglu explains.

The distributional effects of AI are "not huge," the professor notes, adding that society won't see massive job losses in the next 10 years.

That's because occupations impacted by AI are more evenly distributed across geography and economic groups than those jobs "impacted by robots."

Still, Acemoglu states that AI will likely increase the gap between capital and labor, "helping capital owners and managers more than workers."

Is AI Investment Still Worthwhile?

While it may seem like the projected economic boost that AI brings is merely "less than 1% of GDP", does that make all the investments into AI obsolete, or at least not worthwhile?

Hold your horses, because there's more to it.

There are sectors outside of manufacturing and services utilizing AI.

One major beneficiary of AI technology is the finance and crypto world, where AI trading bots that make use of algorithms to help users with their investments are increasingly popular.

These bots allow users to trade even while not actively paying attention.

For instance, Binance and Coinbase, two of the major crypto trading platforms with approximately 128 million and 108 million active users respectively, have these

AI-powered automation trading tools available for use.

Beyond the Hype

While the AI revolution might not deliver the staggering productivity boosts some might expect, its impact across various sectors is undeniable.

The substantial investments in AI are not without merit, as they drive innovation and efficiency improvements in diverse industries.

Despite the relatively modest economic boost, AI's potential to transform specific sectors and provide new opportunities for growth makes it a worthwhile pursuit.

As we continue to integrate AI into our economies, the key will be managing the transition and ensuring that everyone benefits from the use of AI.