I present a macroeconomic model of a competitive economy that, counterintuitively, predicts that increases in the productivity of automation technology will decrease economic production. In the model, the decrease in production occurs over an intermediate range of automation productivities, and once automation productivity is high enough that all labor is replaced, production begins to rise.

Most discussions of the economic impacts of AI assume that automation will increase total economic output. Even though wages may decline, the common assumption is that total production will rise. However, in this post I present a model that predicts otherwise. The model follows a standard macroeconomic framework and invokes plausible assumptions. Starting with a simple general equilibrium model of a competitive economy, the model incorporates an automation technology whose productivity increases over time. This model predicts that the increasing productivity of automation causes GDP to decline until all production is automated, at which point GDP begins to rise again and eventually surpasses its pre-automation level. Even a temporary decline in GDP could cause lasting effects: for example, falling tax revenue could destabilize governments, undermining universal basic income (UBI) and AI safety policies.

The mechanism responsible for the drop in GDP is that automation causes wages to fall, and as they fall the amount of labor that workers provide also falls. The drop in labor causes a drop in production that can be greater than the increase in production due to higher productivity automation. To my knowledge, this conceptual argument was first proposed by Artūrs Kaņepājs^[1]. Later, I developed a model showing that AI can decrease GDP in a non-competitive economy^[2]^[3]. It turns out that a drop in GDP can occur even in a competitive economy with frictionless markets, as shown in this post.

The model is defined and solved in the section below, and Figure 1 shows the equilibrium quantities as a function of the productivity of automation technology, denoted $A_{auto}$ . Note that I used the simplest (not the most realistic) choice of parameters to make the figure. The economy's output (left panel, blue curve) drops sharply when $A_{auto}$ surpasses the threshold $R_{0}$ , and falls until labor employed is zero, at which point output begins to rise. At low $A_{auto}$ , returns ...

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