Category: Web/Tech

The Solow model has its uses, but it fails when it comes to major changes stemming from AI.  Consider instead an economy with (at least) two factors of production:

1. Intelligence.  Yes, formal smarts.  Playing chess, proving math theorems, and doing well on evals.  Don’t forget humans can do those things too, though AIs are now a huge boost here.

2. Polanyi knowledge.  Michael Polanyi, that is.  This refers to knowledge of time and place, inarticulable knowledge, custom and habit, and many other particularities that you can read about in Hayek and Polanyi and in many other social scientists, anthropologists too.

Humans specialize in this.  The AIs can aid in its production, but at least so far there is no way you can “bring an AI into your office and have it figure out how that office works.”  At least not in the human rather than the purely mechanistic sense.

In the model, intelligence and Polanyi knowledge combine to produce output.

Substitutability is fairly limited.  For instance, if you have problems of norms in your office, a mere dose of AI-drenched technocratic knowledge does not usually solve those problems.  Sometimes it even can make those problems worse, by empowering rent-seekers further.

Intelligence and Polanyi knowledge are not quite Leontief complements, but they are mostly complements.

Now recently the U.S. economy has experienced a huge positive shock to its Intelligence, with more to come.

The core prediction is that this increases marginal returns, employment, and real wages in the Polanyi knowledge sector.  All of a sudden, the inputs into that sector are relatively scarce, compared to the now-larger quantity of Intelligence.

There will also be some transitional unemployment in the Intelligence sector, at least once Centaur models fade.  But so far Centaur models are holding, for instance mathematicians did the prompting to do the new math work.  Nonetheless some of these Centaur employments will fade, just as they have in chess.

Note that the Polanyi sector cannot be boosted very quickly or with direct and simple efficacy.  It is messy by its nature, to cite a term from Luis Garicano.  So the wage and employment gains there are slow in coming.  But they keep on coming for a long period of time.  There are further AI/Intelligence advances on tap, plus absorbing the advances to date, and exploiting them, takes a long time.

In this model, if someone or something could “commandeer” the Intelligence sector, their power over society would be much more limited than it might appear at first.  The world does not change that much at first, because the necessary complements are lacking.

The Solow model usually does fine by ignoring these features of the world, in part because it is rare for the Intelligence sector to take such a rapid swing upwards.  So the ratios and complementarities across these two sectors usually are fairly constant in the short run, though not in 2026 or in the next years to come.

I recall talking through this model, and debating it with people, when I was seventeen years old.  The impetus for that was the Soviet preoccupation with cybernetics, central planning, and possible supercomputers.  We were all wondering what kinds of economic improvements that might lead to, or whether it could make central planning successful (no, basically, but that involves some yet further arguments).

Of course this very simple model can be improved upon in many ways, but it is a start.

This very simple model so far is matching up to the data, namely that we have shocking AI and tech advances, the job market is doing fine, markets do not see high risk, and economic growth is robust, not exploding, but likely will rise in the future.  These predictions change somewhat as the Polanyi sector, slowly, catches up to and incorporates the Intelligence explosion.

In the meantime, this is the best basic framework for understanding our current situation.