The last 12 months have seen the most sustained period of deflation in China since the late 1990s. It’s hard to know how much AI is responsible, but I would guess it is to some extent. It’s driving the reduction in prices in the manufacturing of so many things, EVs especially.
Many people assume unemployment will be AI’s most destructive economic effect. That may be true, but before it causes a problem, there will be a far more immediate one to deal with - deflation.
Deflation is so destructive because it shrinks businesses’ incomes while increasing the size of their debt relative to this income. If there is sustained deflation, then this leads to a spiraling collapse that takes asset prices like the stock market and property values with it. This was the main mechanism that caused most of the damage in the Great Depression.
If AI is on the cusp of giving us lawyers, doctors, and other experts knowledge for practically free, then it follows that there is massive deflation to come. There is already a backlash against AI in some quarters, I would expect it to grow when the deflation problem arrives.
It’s driving the reduction in prices in the manufacturing of so many things, EVs especially.
Really? Do you have a specific example of that? I would have thought that it’s one of those physical work things where either old school robots are already established, or cheap factory workers are still king.
AI causing deflation is an interesting thought. I don’t really feel confident commenting on macroeconomics except for the basics, though.
I don’t have sources for the 2024 deflation in China and AI. (I qualified my initial statement “hard to know”).
Robotics are a proxy for AI in manufacturing.
I suspect AI is about to give us a type of deflation no economist has ever seen or modeled before. What will happen when AI gives us the expert knowledge of doctors, lawyers, technicians, teachers, engineers, etc etc almost for free?
You can’t talk of this scenario in terms of past models, because it’s never happened before, but we can clearly see that it’s just about to happen to us right ahead.
