The Coming AI Economic Revolution
Can Artificial Intelligence Reverse the Productivity Slowdown?
In June 2023, a study of the economic potential of generative artificial intelligence estimated that the technology could add more than $4 trillion dollars annually to the global economy. This would be on top of the $11 trillion that nongenerative AI and other forms of automation could contribute. These are enormous numbers: by comparison, the entire German economy—the world’s fourth largest—is worth about $4 trillion. According to the study, produced by the McKinsey Global Institute, this astonishing impact will come largely from gains in productivity.
At least in the near term, such exuberant projections will likely outstrip reality. Numerous technological, process-related, and organizational hurdles, as well as industry dynamics, stand in the way of an JAMES MANYIKA is Senior Vice President and President of Research, Technology, and Society at Google-Alphabet, a Distinguished Fellow at Stanford University’s Human-Centered Artificial Intelligence Institute, and Chairman Emeritus at McKinsey Global Institute. MICHAEL SPENCE, winner of the 2001 Nobel Prize in Economics, is a Senior Fellow at the Hoover Institution at Stanford University.
AI-driven global economy. But just because the transformation may not be immediate does not mean the eventual effect will be small.
By the beginning of the next decade, the shift to AI could become a leading driver of global prosperity. The prospective gains to the world economy derive from the rapid advances in AI—now further expanded by generative AI, or AI that can create new content, and its potential applications in just about every aspect of human and economic activity. If these innovations can be harnessed, AI could reverse the long-term declines in productivity growth that many advanced economies now face.
This economic revolution will not happen on its own. Much recent debate has focused on the dangers that AI poses and the need for international regulations to prevent catastrophic harm. As important, however, will be the introduction of positive policies that foster AI’s most productive uses.These policies must promote technologies that augment human capabilities rather than simply replace them; encourage AI’s widest possible implementation, both within and across different sectors, especially in areas that tend to have lower productivity; and ensure that firms and sectors undergo necessary process and organizational changes and innovations to effectively capitalize on AI’s potential.To unleash the full force of an AI-powered economy, then, will require not only a new policy framework but also a new mindset toward artificial intelligence. Ultimately, AI technologies must be embraced as tools that can enhance, rather than undermine, human potential and ingenuity.
THE GREAT SLOWDOWN
The accelerating progress of AI comes at a pivotal moment in the global economy. For three decades, the massive growth of productive capacity in China and other emerging economies kept inflation in check, allowing central banks to lower interest rates to zero and inject very large amounts of liquidity into their financial systems. Those years are over. In many developed countries, growth is slowing and remains weak, in part as a result of the protracted battle with inflation that central banks are now fighting. And productivity growth has been ebbing since around 2005, with the falloff especially pronounced in the decade leading up to the COVID-19 pandemic. Labor productivity growth in the United States, which ran at 1.73 percent in the decade before the financial crisis, dropped by more than two-thirds to 0.53 percent, in the decade before the pandemic. Large service sectors—the areas of the economy that fall outside of manufacturing and trade that now account for almost