Rot Economics with MIT's Daron Acemoglu

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2:57MIT's Derone Assema Glue. Okay, so a term that you've popularized, not necessarily invented, is creative destruction. Do you mind explaining it for the listeners? Oh, yeah. I mean, I definitely did not invent it. And I think many other people deserve much more credit for inventing it and making it work. It's this idea that goes back to Joseph Schumpeter, a famous Austrian economist who spent most of his career, or the most important part of his career at Harvard, who emphasized that in capitalist growth, you will have new firms taking market away and destroying old firms. And as a corollary of that, new technologies taking market share away and driving out old technologies.

3:49And he understood this was a difficult and tumultuous process, but also believed that that was the essence of sort of capitalist growth. so it's one of these things that is a fact of life in a market process but different types of social economic and political reactions to it are natural and how you react to it is going to have various effects both on growth what type of growth and its distributional effects right so something i've written about and spoken about a lot as well is like this idea of the rot economy, which is the kind of growth has overtaken most of the modern markets. And I'd argue, at least in the creative destruction field, tech has stopped really innovating.

4:41It doesn't feel like they're creating things to create new jobs, to create new markets. I'm wondering how you feel about looking at the general tech industry. I am a critic of the tech industry, and I have become so over the last decade or so. And my problem with the tech industry is not its dynamism. I upload that. It's not its risk-taking. I upload that. And it's not the drive towards economic growth, which I think is also generally desirable. But it is the direction of research and technologies that the tech industry has focused on, both because of ideological reasons and because of a particular business model that they developed.

5:33And I think both of those have pushed us towards technologies that I see as socially less desirable, in some cases actually undesirable. And as a result, we're actually getting growth without as much social benefits. And let me try to just make one very simple point, which everybody nods when you say that, but it still is important to put in the conversation. Economic output, as measured by statistical agencies such as gross domestic product, does not have any welfare element in it. Right. So if I find a way of hacking into your computer spending$1 ,000, and you find a way of defending against me spending$2 ,000, that will increase GDP by$3 ,000.

6:25And I think even the most demented person wouldn't say that that's a social improvement. Yeah, I think you made a point like this to Goldman Sachs, where it's about like you could make a trillion dollars if you did deep fakes in a certain manner. Exactly. So, therefore, new products that increase GDP may have socially undesirable consequences. That wasn't part of the original Schumpeter point. And it's not something that I would worry about when I'm talking to people in Mexico who are trying to get the economy going. But it is a very important concern when it comes to new tech. When do you think this shift happened?

7:03You say the last decade. What was it that kind of changed for you? Well, I think it was probably a gradual process, but the tech sector initially was very heavy on hardware with some software elements. Right. And when that started changing and the entire field became software, I think the possibilities for different types of technology to go in very different social directions also multiplied. Right. Right. So money today, NVIDIA being an exception, is not made by hardware. And even in NVIDIA, I think a lot of the innovation is with software. Particularly with CUDA being able to do stuff with GPUs.

7:47Exactly. Yeah. But when you are also doing software, you have ways in which that software becomes an information control tool, a monitoring tool or surveillance tool. It becomes a way of automating work in various different ways. It can become a manipulative tool and it can also create lots of new products, some of them very beneficial, but some of them very addictive and conducive to mental health problems. So I think software sort of expands the capabilities, but together with the capabilities, you also have expanded set of distortionary or manipulative things that you can do. Right. You mentioned the kind of dynamism element of how tech is working in the growth.

8:29I don't know if I agree that tech is in a dynamistic state. It almost feels like it's been spinning its wheels for the last few years. Crypto, metaverse, all of this stuff, it doesn't feel like new things are happening. Well, they are new things. It's just that I think you are saying what I just said in a different way, and it might be that your way is better, they're not super socially valued, but they are new products. So you would say that metaverse or virtual worlds are a new product by any category. It's not just not something that's going to make humanity better. In fact, it might make humanity worse by alienating them more or isolating them more from their social milieu.

9:08You know, and there is another element of what's going on here, which I'll comment on. But again, it doesn't contradict that they are generating new products. a lot of new technologies and new ideas that are being invented in tech are not being implemented. And part of the reason for that is the competitive environment. Google, Facebook, Microsoft, Amazon are all buying up, and Facebook are all buying up a lot of competitors and not even sometimes using their technology. So that's the consolidated structure. So the invention is there, but an invention is not translating into implementation. Now, don't get me wrong, some of that invention may also go in the wrong way.

9:48So a better version of TikTok may not be a great thing either. But there is that consolidated, concentrated market structure that is also changing what gets implemented. The thing I'll push back on is they're making new things, but it feels like the ones I mentioned, crypto, metaverse, and now generative AI. they're not producing actual products at the end. It's not so much that we couldn't live in a virtual world or that digital money wouldn't be useful, but it's more that the actual output from the companies is not translating into meaningful products. Well, again, this is a question of what we are measuring and whether what we're measuring is the right thing and whether it's really welfare relevant.

10:33But if I create a metaverse and you're willing to pay a million dollars for it, that will increase GDP by a million dollars. So that's a new service. So a lot of things we consume today are services. It's not something produced like a t-shirt or a car. They are based on digital services. Now, of course, to produce those digital services, we're actually using real resources such as energy. But what I actually buy from you maybe or what you buy from me may be just a digital service. Now, some digital services are extremely useful and some of them are useless. some of them may be bad for you. Right.

11:10I think my point is more, they're not making particularly useful services. They're doing well monetizing the things they've had for years, but it kind of reminds me of something you wrote in 2019, where you were talking about automation and effect on growth. But also, we may have run out of ideas for generating new high productivity labor-intensive tasks. Do you think we're approaching that point? Thank you for raising that, Ed. So I think that is a very, very important part of my thinking. I would say that the tech sector is not producing sufficient new tasks for workers to use their skills and to expand their capabilities.

11:49And firms perhaps are not demanding and implementing enough of them. But it is not, according to me, because we're running out of possibilities. It's just that we haven't focused on those. And that's where the ideology reference earlier on that I made comes in. You know, I think the software industry would have done somewhat more productive things if it did not become too focused on replacing humans, having machines as humans overlords, which today has, of course, reached its apex with the craze on AGI.

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14:46Free shipping and 365-day returns. Quince.com slash better. But here's the thing. I get that that might be what they're pushing toward, but generative AI isn't even automation at this point. A lot of what you've written about AI is correctly, like the effects of if we automate these tasks, but it feels like they aren't even successful automating anything. Absolutely. 100%. Thank you for saying that. My take is that generative AI is actually an informational tool. Right. So you should use generative AI as a way of generating, filtering, summarizing, finding, checking information. That's actually what it's good at.

15:32If you try to use it for other purposes, sometimes you can get away with it, but it won't be very good at that. So you can try to automate a lot of warehouse tasks today by using the current crop of robots. People don't do that because they are not good at it. If you did it, costs would go up. People would lose their jobs. Delays would pile up. But you can do it. It's the same thing with generative AI. Even though it's not an automation tool, automation wouldn't be its best use, especially given the current unreliability. Even though there is something else that we could do better with it, I think many people are going to use it for automation because that's the why.

16:11That's what companies are being told. If you talk to business leaders today, everybody's asking them, financial journalists, their shareholders, and their friends, where are you with the AI investment? So that's the hype. And then people are going to rush in to use AI, to implement AI, even when they don't know what to do with it. And automation will often appeal to them because it's like the easiest thing to do. It's the thing that they may have experienced from other technologies. And it's the thing that some people are telling them that that's what they should do. There are companies, integrators, websites devoted to automation AI, even though it wouldn't be very good at it.

16:47I mean, again, it could automate some tasks. You could have more of your customer service done without people. Right. Even then, that feels like a stretch of what automation means. Because sure, the customer service example, and I think you may have raised this point as well. How does it get better? How do you measure better in the case of customer service? But even then, it's automation only in so much as you can trust it. And it feels like these core issues of hallucination almost kill the concept of automation with generative AI. 100%. So here's a good use case for automation of customer service, which is you call your bank and you enter some password and they tell you your balance.

17:29That's perfect. You don't need a person there to tell you the balance. Right. because the current technologies can faithfully take those numbers and communicate them to you after the right security steps. Yeah, and it's not a generative answer because it's a number in a database. It's not a generative answer. So now put generative AI in there, you're probably going to get lots of incorrect answers. Yes. But some companies might still do it. Which is, it just feels like a crazy time that you have companies shoving this through, almost like the, very much like a post-Jack Welch situation. Yeah, exactly the Jack Welch mindset.

18:08Do you think a part of the problem is that the people running these companies aren't really technologists? I don't know. Look, I think this is another branch of my work, but US businesses are often led by people who have been trained into thinking that their only priority should be increasing short-term shareholder value. Right. And a very effective way of doing that is cut labor costs. But A, that's not the right social objective. Even maximizing long-term shareholder value is not the right objective.

18:47But even more fundamentally, cutting short-run labor costs may be an illusion and be associated with longer-term problems. So if you have a company where your workers are skilled, talented, they are very useful for liaising with customers, creating new services, products, innovation, you can in the short run cut your labor costs, but it would destroy you in the long run. I think many more companies are in this bucket than American business leaders realize. And it's funny you mention that. I've heard a lot from Google people in particular. I get emails from Google people all the time because I did an episode about a particular guy.

19:24and it's funny they all talk about the kind of brain drain of layoffs that you don't realize it's not just the output you're losing it's the person who knew how the stuff worked and where the stuff was and who built the stuff and why the stuff is good or that and it almost feels like american capitalism is dramatically disconnected from labor in general yeah absolutely so look i I mean, I think there is a tremendous amount of tacit knowledge that workers have, which often gets unrecognized. And even bosses sometimes don't recognize that. So both French and British trade unions in the history experimented with these types of strikes where workers just follow the rules.

20:10Right. They do exactly what the rulebook says their responsibilities are. and it turns out to be quite disastrous for the company because most of what actually workers do is much more adaptive than just following the rule right like kind of outsourcing risk almost yeah it's just like you know the rule book says you know operate the machinery but you know when to actually operate the machinery not yeah just operate the machinery if i hear this sound yeah exactly yeah so that's the kind of tacit knowledge that people acquire via training where I experienced by their social network, talking to friends.

20:46And if we don't value that, we'll lose that. And it's going to be very difficult to replace it with what machines or information technologies do. Do you think we're in a bubble right now? Define a bubble. Actually, let me reframe the question. Do you think generative AI is a trillion dollar industry? Do you actually think it is the next type of growth market? Let me answer that question slightly indirectly. Sounds good. I believe that generative AI has the capacity to add a trillion dollar or more over time if we use it correctly. Because as an information technology, it has great capabilities.

21:26We live in an age in which useful information is scarce. All sorts of junk you don't want is on the internet. But when you actually need to solve a problem, get better at what you're doing, get more background information, those things are very difficult to find. And generative AI could be a tool for providing that sort of information to all sorts of decision makers and workers, blue-collar workers, office workers, and so on. But that's not the direction we're going, in which case I don't think it's going to add trillions of dollars of true value. But that also doesn't mean that generative AI companies are going to go bust because they're going to be able to monetize this in other ways.

22:10So if generative AI enables you to take over the search market from Google, that's a huge amount of money. It may take over the search market from Google without providing much better service to consumers, but it might still be hugely profitable. If generative AI companies convince businesses to invest in generative AI, that's going to be very profitable for them, but not so good for the businesses that misimplement it. Right. So the thing is, and I understand why you're making these assumptions, but what if it doesn't get cheaper? Because right now, the thing I've been on about with generative AI is on top of not being super useful, it's so unprofitable.

22:50And every report seems to be suggesting it isn't making people money. What if it stays where it is? Because in the last 18 months, GPT-40 is not significantly different. What if they've stalled? What if this is all we've got? My guess is that it will get somewhat cheaper because right now it's very costly to even answer queries. And with more GPU capacity, it will get somewhat cheaper. With better designs, it will get somewhat cheaper. but I do not believe that there is a scaling law in there. So many people in the industry believe in this mysterious scaling law, which is that you double the GPU capacity or compute capacity, you double the data, and you get twice the performance.

23:36Just an aberration of Moore's law by people who don't necessarily understand it. Yeah. But first of all, what does it mean to say double the data? Right. We're going to throw more Reddit at it. So even if there was such a scaling law, you would require high quality data, which we're not producing. It's run out. We're not paying for it. Yeah.

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25:42New customer offer first three months only. Then full price plan options available. Taxes and fees extra. See mintmobile.com. There's something just very nihilistic about the whole thing as it stands. There's not really much of a social output. It's helping automate away jobs predominantly held by contractors, which is already a problem unto itself. But also, it doesn't seem to be making the money. I don't think I've ever seen anything like this in tech. And I'm just wondering, indeed, maybe this is the question. what happens if this is not it but also heck doesn't have a next step do you think one of these big companies could die do you think that there is actually an existential risk if generative ai and all this falls apart no i don't think so i think none of these companies you know are just committed to generative ai they have other businesses that are making money and even nvidia can make still a lot of money with the gpus let me rephrase it then so right now all of these tech companies, they do very well in their multiples in the markets because they have a relatively low cost of goods.

26:46Their actual costs are pretty great, but they're predicated on this ongoing growth. They must always grow. But what happens if they don't have a new growth thing? Because they haven't for a while. And what if they turn on generative AI? This feels like this could be an economic panic unto itself. Yeah, it could be. There could be some drops in valuation. The general pattern we have seen with many other products and technologies is that it looks a little bit like an S-curve. Right. You have an acceleration and then you plateau. And that's when new products are invented, new investors move on to other things.

27:26And that hasn't happened with tech. You know, Microsoft is living its fourth life or whatever since MS-DOS, partly because they have acquired new businesses, some competitors, some competing technologies. And sometimes some tech companies have invested in the wrong things. I mean, cryptocurrency was more crazy than AI. There, I really didn't see the use case. The question I keep, and I've asked a lot of people this, is just what happens if there's nothing, though? Because growth is slowing. There is a pattern of slowing growth within these companies, and there isn't a new thing that they can pick up and acquire.