A simple model of AI-aided economic growth

The Solow model is a useful tool for understanding economic growth, but it falls short when it comes to major shifts caused by artificial intelligence (AI). Instead of relying solely on intelligence and Polanyi knowledge as factors of production, consider an economy with two key elements: formal smarts (intelligence) and inarticulable knowledge (Polanyi knowledge). Humans excel at Polanyi knowledge, which encompasses time and place, custom, habit, and other particularities that AI cannot replicate.

Intelligence and Polanyi knowledge work together to generate output, yet the substitutability between them is limited. Problems related to office norms cannot be solved by merely introducing AI into the mix; in fact, they might worsen due to empowering rent-seekers. Intelligence and Polanyi knowledge are mostly complements, not quite Leontief complements.

Recent years have witnessed a significant surge in intelligence, with more on the horizon. This increase leads to higher marginal returns, more employment, and higher real wages in the Polanyi knowledge sector. However, inputs into this sector become relatively scarce compared to the growing quantity of intelligence. Initially, there may be transitional unemployment in the intelligence sector as mathematicians adjust to new AI-assisted work styles.

The Polanyi sector cannot be rapidly boosted with direct and simple measures due to its inherent messiness. Wages and employment gains in this sector will come slowly but steadily over time. As AI advances continue, the integration of these advances into the economy will be a lengthy process.

While a powerful entity could theoretically "commandeer" the intelligence sector, their influence on society would be more limited initially due to the lack of necessary complements. The Solow model often overlooks these aspects because it is uncommon for the intelligence sector to experience such a rapid surge. The complementary ratios and relationships between these two sectors tend to remain relatively constant in the short run, even as we move into the future.

This simple model, developed during my high school years, has been tested against data and appears to hold up well. The recent AI and technology advances have led to a robust job market, stable markets with low perceived risk, and robust economic growth. As the Polanyi sector gradually incorporates the intelligence explosion, this framework will continue to provide a useful foundation for understanding our current economic situation.