Carlos E. Perez
Feb 18, 2018 · 12 min read
Photo by Brooke Lark on Unsplash

Today, the global economy is in a perilous situation. Wage growth is stagnant across all industrial economies. Jobs for less skilled workers are in constant decline and this decline is accelerating. Economic inequality continues to increase. Not only is the economy in a perilous situation, but the planet itself is also in dire condition. Mass extinction is now happening and countries are going to be inundated and wiped out of existence. Many coastlines will become uninhabitable with a ton of wealth in beach-front property going up in smoke. Nation states are dissolving into chaos.

The root of the problem is that the old economy has reached the end of the line in terms of its growth. The old economy is driven primarily on resource scarcity (i.e., fossil fuel) and we have maximized its exploitation such that Earth’s ecology is now in jeopardy. There is nothing more to be extracted without real consequences; our civilization’s capabilities are constrained by the laws of physics and our oceans have reached their carbon absorption limit.

In a fossil fuel-based economy, there are intrinsic limits on how we can produce and transport goods while reducing waste. The goods many industries create are actually subsidized by nature. We create revenue from borrowing what we believe to be free from nature like water, air, trees, fish, etc. Unfortunately, our failure to pay for what we take has made our ways unsustainable. We are producing stuff like crazy and in turn accelerating environmental entropy. We create products nature itself can’t decompose and therefore cannot reuse. We are destroying ourselves for short-term gains while mortgaging our children’s futures.

Meanwhile, there is another kind of economy being created that many incumbents are scared to death of. This is an economy based on exponential technologies. Economic revolutions arise when three kinds of technologies converge. That is, when a new source of energy, a new kind of transport and a new kind of communication all converge in concert to become the basis of a new economic platform. The last economic revolution was driven by oil, automobiles, and electrical communication. The new economy emerging is driven by the convergence of renewable energy, self-driving transport, and digital communication.

The nature of this new economy will be very different. We are transitioning from an economics of scarcity to an economics of abundance. This new kind of world, driven by the exponential progress of silicon, is creating massive disruptions in our economies. The biggest media company in the world (i.e. Facebook) has no journalists or content producers. The biggest hospitality company in the world (i.e. AirBNB) has no rooms. The biggest taxi company in the world (i.e. Uber) has no cars. The biggest bank in the world (i.e. cryptocurrencies) has no buildings (or physical safes). All of these are software-driven entities. Software is essentially knowledge and processes that are captured by automation. All of these operate in the virtual world. Artificial Intelligence (AI) is just a more advanced kind of software.

The greatest immediate problem we are about to face is the transition from our current economy into this new economy. Achieving a world of abundance is an ideal goal, but the process of getting there is going to be very painful. This will not happen overnight and may take two generations. We are already seeing the ugly consequences of this transition playing out in real-time. Tribalism and protectionism are becoming resurgent. This is a consequence of having many members of the population unable to participate economically in this transition. When resources become scarce, the idea of sharing gets thrown out the window.

This resentment is also driven by the old economy continuing to become obsolete. It is simply human nature to not comprehend why the world has to change. There are human communities, for example, the Amish people, which have the avoidance of technological progress ingrained in their religion. There is some profound wisdom here. If the goal of technological progress is the improvement of human well-being, then we should not always blindly accept the latest technology; instead, we should select the technologies that are best for our human souls. As you will read later, “The Economics of Abundance” is another kind of philosophy which emphasizes sustainability and fairness.

The fossil fuel economy is estimated to be worth 100 trillion in value. As that economy moves towards extinction, there will be a massive loss of wealth. A majority of the world’s wealth is accumulated in financial instruments tied to this old economy. Today’s yields are negative and will continue to be negative with no end in sight. This wealth has nowhere to go, and that desperation is already being telegraphed with the mind-boggling explosion of wealth in the cryptocurrency space. We are going to see big-time wealth destruction for many and big-time wealth gains for the technically savvy. This is the Revenge of the Nerds sequel.

AI creates an economy of abundance. If we are to truly grasp the consequences of AI, we need to, at a minimum, understand what the economics of abundance is all about. Jeremy Rifkin describes the new economy as the “Third Industrial Revolution.” This is an economy where marginal costs of production (the cost to create an additional product or service) go down to zero. He points out that the millennial generation which grew up in this type of economy have very different sensibilities than previous generations. No longer do they see cars as an enabler of mobility. Access has become more important than ownership. Participation and sharing in networks is power, while isolation is death. Millennials are the ones who will be most severely impacted by this sudden loss of economic wealth. To survive, they are adapting to a new world where the rules of the game are very different. Older generations all too easily dismiss millennials as not being able to comprehend the “rules of the game,” however perhaps it’s just that many can’t see the rules are changing.

The psychology of scarcity is very different from the psychology of abundance. Scarcity encourages hoarding; in contrast, abundance encourages sharing. Hoarding chokes innovation; sharing facilitates innovation. Most of the world comes from scarcity, and the psychology of abundance manifests itself in wealthier communities.

The economics of abundance is also very different from a world defined by scarcity. In fact, one can make the generalization that economics in a world defined by scarcity does not exist when there is no scarcity. How does civilization even function in a world without scarcity?

Wolfgang Hoeschele has studied extensively the ‘Economics of Abundance’. His writings gave us a glimpse of how a world with advanced AI will be organized. In “Seven Key Elements of an Economy of Abundance” he explores how the world will operate differently. His definition of the Economic of Abundance is as follows:

An economy of abundance seeks to dismantle or reform these scarcity-generating institutions in such a way as to affirm our freedom to live life as art (self-expression to others), social equity (so that everyone can live life as art), and sustainability (so that all life can thrive into the future). Among other things, this implies a much greater role for various forms of shared property, individual and community-level self-reliance, and participatory decision-making.”

Hoeschele’s exploration involves the context where there is a means of decentralized production. Zero marginal costs, zero distribution and decentralized production are sources of abundance. However, abundance also creates relative scarcity. This scarcity is analogous to the problem of information overload. For example media (i.e., video, music, literature etc.) in a world of abundance would have a scarcity of attention. Similarly, although zero marginal cost creates abundance, it will consequently lead to relative scarcity created elsewhere. This scarcity typically manifests itself in our cognitive limitations of handling a barrage of new information created by abundance.

This is the reason why AI is a critical component in the equation. You can have millions of vehicles, but it creates a scarcity in the availability of roads (and therefore unbearable traffic). With AI, you can have more efficient use of vehicles and achieve a higher density of vehicles per road. In addition, you would have fewer vehicles because the cars will not be sitting in garages all day waiting for a driver.

Just to be clear, the “economics of abundance” refers to a mode of operating production that minimizes waste and encourages decentralization. One way to reduce waste is to become very intelligent about recycling goods. Sharing goods is a form of recycling. However, to share physical goods, one has to be in close proximity to be efficient. Decentralized systems are more efficient than centralized systems in the sense that you can get a closer match between actual needs and resources. However, with more advanced manufacturing and farming (examples: 3D printing and hydroponics), one can circumvent the energy expenditure to ship fresh goods across vast distances.

Why is decentralization extremely important? This is because people need to feel that they are in control of their own lives. It is what allows people to work on what they love and what they are good at while remaining self-sufficient. They see their contributions improve the lives of the people around them: life, liberty and the pursuit of happiness (not property).

In the following paragraphs, I will highlight some of the effects of AI in driving the economics of abundance.

Natural Resource and Land Commons

Governments provide exclusive access for corporations to exploit environmental resources in exchange for compensation. Today this assessment uses a very primitive and crude way of valuing said resources. This problem is further exacerbated through corrupt practices were the people responsible for the stewardship of a resource are paid off. AI can be made available to track resource consumption and compensation for use. Transactions can also be made available in a public ledger and enforced at the time of consumption to mitigate against corruption.

Cooperative Business

There needs to have an equal sharing of profits between the coordinators and the providers of goods and services. Each party has its own costs and are required to be appropriately compensated. Today’s corporation is extremely unbalanced. Those who are responsible for coordination are compensated grossly more than those who provide the actual goods and services. AI can provide superior coordination and planning capabilities so that value moves toward the edges and at the point of contact with the consumer.

Energy for Everyone

Renewable energy such as solar power is democratizing the generation of energy. AI will allow the more efficient distribution of excess energy where it can be used more effectively.

Finance as Servant, not Master

Blockchain in combination with advanced AI will lower the cost of financial instruments that are necessary for business. The financial industry (finance, insurance, and real estate) accounts for 20% of the US economy. This is a massive percentage which doesn’t produce any goods or services. AI can reduce the cost of managing financial instruments which should reduce the cost of running businesses across the board.

One major reason for the high inequality in this world is due to the inability of many to have access to capital. At a certain monetary amount, it isn’t worth the bank’s effort to service impoverished clients. However, AI allows services to scale with zero marginal cost. This lowers the cost for access and thus allowing larger participation into the economy.

Liveable Cities

Smart AI driven mobility will lead to a change in how cities are designed. Cities will be designed to maximize people’s interactions and would less prioritize the movement of people. The value of cities has always been in the richness and the diversity of interactions. Cities are the primary driver of innovation in our current knowledge-based economies. Smarter cities are going to be influenced more by the need to enhance collaboration rather than the need to transport people.

London has 20,000 ghost homes despite the high cost of rent and the growing number of homeless,, people. Clearly, there is a problem here where homes are used only to store wealth instead of sheltering people. AI-driven by the objective of higher occupancy can put an end to this kind of hoarding behavior.

Liberated Learning

Access to learning will be greatly democratized with the availability of scalable AI teaching systems. One’s perceived value to a business will be based less on credentials acquired by virtue of attending an exclusive educational institution, but rather on a real-time assessment of one’s true skills. This more transparent assessment of skill sets may lower one’s own premium on the market as one can’t leverage asymmetric information.

The need to seek credentialed education in colleges and universities has led to crushing debt on the millennial generation. These educational debts guarantee a kind of indebted servitude, which is basically a new kind of slavery. The primary reason to pay for exorbitant tuition is to access exclusivity and not necessarily for education. Excellent formal education can be found in many sources online at affordable costs. However, there are many professions that create artificial barriers to entry by demanding expensive access for any aspiring member. The problem is not the cost of education, but rather we deliberately make the cost for credential expensive to discourage competition. Formal education is no different today than the NYC Taxi medallions which were such a great investment prior to Uber and Lyft.

Truly Caring for Health

AI leads to greater access to affordable healthcare., AI already provides lower cost and accessible diagnosis. (This won’t roll out in the U.S. because the medical cartel will do what it can to hang on to its monopoly). Healthcare will be more holistic and sophisticated. Instead of providing care only in times of emergencies, lifelong care is provided on a continuous basis to ensure the maintenance of a healthy lifestyle. The emphasis would be in reducing the likelihood of falling ill over the current paradigm of addressing the problem only when the patient is already ill. Healthcare driven by AI will be preventive and proactive rather than how it is today — reactive, irreversible and expensive. With AI, you will have the democratization of healthcare diagnosis allowing health issues to be identified much earlier and therefore remedied at much lower costs.

You may be wondering right now: What does AI do that makes it so valuable? To answer this, you have to understand what makes anything valuable. A service or a good is always valuable from the perspective of a Job to Be Done (JTBD). What AI is good at (and getting better at) is identifying a person’s unique context and subsequently deliver the best goods or service that enables a person to get their job done. Context + Resource = Value.

In summary, the notion of monetary compensation will make little sense in a far future AI-driven world. However, it is unlikely in the near term that we can arrive at this new world without the pain of weaning ourselves out of the previous economy of scarcity. There will be a period where few people will own the majority of ‘wealth’ in the world. And just as we see it today, a world where 4 billion people earn less than $2 a day, we will see even more people without means to support themselves as we make the unavoidable transition.

AI will break capitalism, and this should be obvious to anyone. Capitalism only works where there exists a reasonable level of equality. That’s because Capitalism requires both capital and labor. When you don’t have labor (as AI replaces it), then there will be nobody to consume the goods produced. Capitalism also requires scarcity. Otherwise, the price of goods goes to zero. In a world with all but the few own AI, there is an absence of buying power in the population who have no jobs.

Our civilization needs to make the conscious effort to address the disruptions that are about to occur. The great challenge of our time is to manage this transition. If we currently cling to this mindset of “business as usual,” (that our economies will continue to function as they always have), then we are setting ourselves up to be blind-sided for the coming disruption. Ignorance of what is about to happen will lead to a lot of suffering for those who continue (sometimes without a choice) to cling to the past. We should not, as an example, insist that our younger generation falls into indebtedness when the rules of the past may not be applicable in the future. The debt of older generations have accumulated to live a life of comfort should not be passed on to their descendants to pay. Artificial Intelligence is both the destroyer and the creator of wealth.

How do you survive the transition? That should be obvious, place your talents and investments in anything that has to do with Artificial Intelligence.

Further Reading

http://www.flassbeck-economics.com/how-inequality-is-evolving-and-why/

http://rsif.royalsocietypublishing.org/content/15/139/20170946

http://slatestarcodex.com/2018/02/19/technological-unemployment-much-more-than-you-wanted-to-know/

http://www.chiangmaicitylife.com/citylife-articles/talking-solutions-post-capitalist-future/

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Carlos E. Perez

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Author of Artificial Intuition and the Deep Learning Playbook — linkedin.com/in/ceperez

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