The next economic shift has just begun

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0:49Economics isn't the study of money. It's the study of well-being. As I said, artificial intelligence has massive potential and the likeliest case is that it sends us to levels of prosperity that we can barely imagine right now. Andrew Lee is an economist, Australian MP and author of The Shortest History of Economics. Once you get to the point where it outperforms us, then it will invent things that we don't even imagine. Robots to humans are going to be like humans to pets. It's got a way to go to replace your reading skills, mate. I think you're safe for now. You're all right for now, mate. Don't worry about it.

1:29I genuinely loved your book. So the story behind how this ended up, and I'm not just saying that, I picked your book up in an airport on the way on holiday because, you know, when I go to relax on holiday, I like to read economics books. Who doesn't? Yeah, exactly. Exactly. Well, this is what we do. I read it in two days and I messaged my producer and said, we need to get this guy on because I think it's the best story-based economics book I've ever read in terms of just making things really simple and clear and understandable. It's a talent. You start with a beautiful story around light. So if we look at the amount of time that it used to take to produce the same amount of light that a modern electric light bulb produces in an hour, that was 58 hours, 58 hours of foraging for wood.

2:16And then lamps came along and suddenly that got down to 41 hours. and then we had more advanced lamp technologies so that by the time you got to the 1700s it was down to about five hours to produce an hour's worth of light. But still, five hours work for an hour of light meant that only the very rich in the 1700s could afford to read. And then over recent years we've had electrification and improvements in light technology and now it would take a second or two of work for you to afford an hour of light. And most of us leave lights on when we leave the room without even thinking of it. So there's two kind of big stories out of that, Damien.

3:01One is the improvement in technology and the other is the huge increase in productivity. Going from 58 hours of work for an hour of light to just a couple of seconds of work really is a marker of what modern economics and modern capitalism has brought to many of our lives. Yeah, and on the human level, it means that you don't have to spend all day finding food and finding light. You can think, what else are we going to do? And basically, everything that is around us is born out of removing the necessity of just spending all day looking for logs to burn. It's kind of the renaissance. Everything we have is because we solved quick light.

3:39I think you also said it's 300 ,000 times more efficient to make light now than it was back then, which is just a crazy comparison. It is amazing, isn't it, Tee? 300 ,000-fold increase. And, of course, that means that suddenly our evenings can be so much more productive. You know, you think that for 99 % of human history, when the sun went down, people stopped doing a whole lot of things. And now we've opened up our evenings. And, indeed, I'm speaking to you from Australia in the evening, an opportunity that just wouldn't have been there for the vast majority of human history. So I loved writing Shortest History of Economics because it is the story of the world through the lens of economics and the story of the development of the discipline of economics, how we came to think of the margin, to ignore sunk costs, to engage in cost-benefit analysis, all of those fairly simple tools that make economics such a powerful discipline in our lives.

4:40So I've spent 10 to 15 years living in Manchester and I would recognise the bee on the front cover as the Manchester bee. Why did you choose to put that bee on the front cover? I'm guessing it's not because you love the north-west of England. Well, I do love Manchester and I do love the fact that the Royal Economic Society in the UK has the bee as its logo. And it reflects the fact that economics isn't the study of money, it's the study of wellbeing. And the B symbolises not just industry, but also cooperation. And so much of what we achieve in a modern economy is through cooperation. My friend Justin Wolfe likes to say that economics is no more about money than architecture is about feet and inches.

5:26Money is a yardstick, but the goal we're trying to maximise is happiness or wellbeing or what economists will sometimes call utility. Can we talk about teamwork then in the modern context? Because you speak a lot around tariffs in your book, and you liken them to putting rocks in your own harbor, essentially, when it comes to, you know, what it does to a country. It feels that the tariff regimes that are emerging out of the Trump government seem to be anti-teamwork in a way. The world seems to be going a different way. So what, you know, with, you put beyond the front cover, what do you think about the state of teamwork in the world today?

6:10Well, teamwork involves specialisation. When you're part of a team, you're not trying to do everything. You're recognising that you focus on what you do best and you rely on others to do their job. So if you're on the football field and you're a forward, then there's someone else who's in the backs who's defending the goal. So too in the modern economy, where most of us don't cut our own hair or fix our own cars or make our own clothes. We do what we do best and pay others to do what they do best. And that's true of countries as well. When countries specialise, then prosperity rises. And that notion of specialisation has been one of the key drivers for trade.

6:48It was the great Cambridge economist Joan Robinson, who many thought would be the first woman to win the Nobel Prize in economics, who talked about putting rocks in your harbours as being what countries do when they impose tariffs. The biggest losers out of tariffs are your own country's consumers themselves. And that's why even if a trading partner chooses to put rocks in their harbours, it doesn't make sense to retaliate by putting rocks in your harbour. So you think the right response is to basically not respond then and not to, you know, we had that escalation, didn't we, between China and America where it got pretty hairy, where every day they were just slapping on these new tariffs and it was kind of like they were playing chicken.

7:28You think the right thing to do is go, okay, well, if you're going to do that, we're just not going to because we don't want to inflict self-harm essentially. Precisely. If another country says it's going to hurt its own citizens, why would you respond by hurting your citizens? The main losers out of tariffs are a country's own people and governments should be looking after their people first and foremost. So the reductions in tariffs that we've seen around the world in the post-war decades have brought huge prosperity, allowing countries to specialise. So Switzerland does high-end pharmaceuticals.

8:07There's a great wine trade out of places like Spain and Portugal and Italy. We have Australia specialising in mining and various forms of advanced manufacturing. And, of course, Britain does very well in financial services. So sticking to your knitting, focusing on what you do best, has raised living standards, created jobs, and allowed people to live lives in much greater prosperity than if every country tried to do everything ourselves. That'd be a bit like trying to make your own clothes, grow your own food, make your own smartphone. Maybe you could do half of that, but you'd be way less prosperous and probably less happy as a result.

8:47I'm going to say that Australia has some pretty good wine as well. I like a Sauvignon Blanc from your region of the world. So the – oh, is that New Zealand? Sorry, I probably just offended you deeply there. Yeah, yeah, yeah. No, no, we'll do the full range. And I remember Jacob's Creek for a while was the top-selling wine in London, so we've done pretty well at various price points. Yeah, yeah, yeah, yeah, yeah. And what's – is it the Jammy Roo or whatever? My mate loved a bottle of that on a – it was the post-lash. He'd be like, let's get a – it's like a dessert bottle of wine, in the jammy red roux or whatever with the kangaroo on the front.

9:21Okay, sorry. Yeah, I just offended a whole nation there. So let's move on, shall we? We're going to get some tariffs now as a result of this. You won't be surprised to know that when those wines are selling in Australia, they don't typically have as many kangaroos and koalas on the label. So we're probably tailoring it for the market. Or do they have like British teabags on them or something like this? Bit of a crumpet on the front. Yeah. So you say that the tariffs lead to prosperity. but when I was reading your book, it made me think that there was protectionism within imperial nations in the past.

9:52And it feels like they kind of brought the drawbridge up a bit. There was protectionist regimes around some of the great powers that we saw emerge, wasn't there? Yeah, there certainly was, Damien. And partly that was because those countries didn't have income taxes and didn't have consumption taxes. Tariffs are a really easy tax to impose. You just wait until a ship comes into the harbour and you say, well, if you want to unload your stuff, then you'll need to pay us 10, 20, 30, 40, 50 % of the value. But as countries have gotten more sophisticated, we've realised that income taxes, company taxes and consumption taxes can all be efficiently levied.

10:28And it's much better to raise revenue through those sources than through tariffs. Now, we started there talking about the productivity gains and the the story of light would make you think that it was this kind of like linear growth in productivity t have you got that stat about japan that you could read out yeah let me pull it up because you're so good at reading i'm i'm the reading expert on this podcast um in japan the average real income was two dollars eighty cents a day in in the year one thousand in the year i was literally like in 1000 in the year 1000 the average real income was$2.80 and in 1700 it was$2.90 so in 700 years it went up by 10 cents so it doesn't feel like much productivity gain in that period do you find that the productivity gains are really lumpy and that we can have I mean in that case multiple generations that would have seen no increase in their living standards relative to their grandfathers, their great, great, great grandfathers potentially.

11:33Yeah, I mean, that's the story of human existence to a large extent. We saw an agricultural revolution that allowed population to increase, but really didn't boost living standards per person all that much. It used to be the case that through the dark ages, artisans would carve their prices on the wall, knowing that they wouldn't change much from one generation to the next. And then you see this transformation in the late 1700s in a little island off the coast of Europe, where suddenly there is an explosion of gadgets, of innovation and technology that becomes the Industrial Revolution and transforms the world.

12:13As the Industrial Revolution flows out from Britain to the rest of the world, suddenly people come to expect increases in living standards. And now it's just taken for granted that each generation will live better than the one that preceded it, and that the average living standard will double every generation or two. That's normal now, but would have been remarkable for the vast majority of our prehistoric ancestors. Do you think that's still going on till today? Because you wrote in the book that in the 1940s, how much you could earn, I think nine out of 10 people would earn more than their parents.

12:50But I think in the 1980s, when we were born, I think it's 50%. Yeah, only half people can expect to earn more than their parents. So is there what's causing this change in our earning potential? Yeah, it's partly inequality and it's partly a decline in the growth rate. But certainly that lack of advancement from one generation to the next compared to the end of World War II is pretty stark. That slowdown has been quite substantial in some countries. Others have continued to increase prosperity over time. And it really does turn on how well you manage to boost the skills of your population and capture the gains of technology.

13:33Right now, if we're able to harness artificial intelligence as a growth engine, it's got the potential to do for living standards what the steam engine and electrification and these other past general purpose technologies achieved. So it's an exciting moment as we look at how artificial intelligence could again boost living standards and get that productivity motor going, which has been spluttering a bit in many advanced countries. Your book terrified the crap out of me at the end because it says that AI might be like the last human invention and that the AI will just, the robots are going to be amazing and And they're going to be like we are.

14:15Robots to humans are going to be like humans to pets. It's got a way to go to replace your reading skills, mate. I think you're safe for now. You're all right for now, mate. Don't worry about it. So, yeah, do you think it will be the last human adventure AI? Like it's all going to be doomsday for us? Because that's kind of how you ended the book. Yeah, I do. I do, T. I mean, once you get to the point where we have artificial general intelligence, where it outperforms us, then it will invent things that we don't even imagine. and the question is how we ensure that that superintelligence is aligned with human capability.

14:47When they survey researchers working on artificial intelligence and say, once it exceeds human capacity, what's the chance you think that the world ends? Those researchers give numbers around 5%. Now, I don't know about you guys, but I wouldn't get on a plane that had a 5 % chance of crashing. I wouldn't open my front door if I thought there was a 5 % chance that an asteroid would fall on my head that day. So that's a risk which is big and which we need to reduce. For many technologies, we've built the safety standards around them as they've developed. For this one, we probably want to build the guardrails before we build the highway.

15:26As I said, artificial intelligence has massive potential and the likeliest case is that it sends us to levels of prosperity that we can barely imagine right now. But we've got to get that chance of catastrophe down from 5 % to zero in order to really benefit from the technology. Last time we recorded, Tamein, you were having some real dramas with your accountant. So how's that been going, mate? They're sacked. So drama sorted. They're a big corporate firm. They didn't really reply to my emails very quickly, like took a week or two at times. And they charged me way too much. I mean, I've got pretty simple taxes.

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18:26And I think back to like the nuclear bomb and the hydron collider and the scientists around those were like, we don't really know what's going to happen when we let this thing off. So yeah, I mean, you would roll the dice, right? You take a 50-50 bet. But there's the fear of like, you know, Terminator, let's call it that. But a fear that I think is, I want to put to you because you are a politician as much as you are an economist, is how do you as a policymaker ensure that the productivity gains are given to the people and not just hoovered up in share price or for, you know, the owners of the businesses, say like Google, Meta, how does it make sure it just doesn't go to Mark Zuckerberg?

19:12Yeah, so Damien's partly about having good competition laws around it, making sure that we don't have a single monopoly engine. You know, you look at the internet search market in the late 1990s, there's a dozen internet search engines out there. Now, we've basically just got one. and AI engines have some of the characters of search. Data matters a lot. There's only a certain amount of expertise. People tend to flock to the best algorithm. So having good competition laws around it will matter. And then ensuring that people have the training in order to be able to use AI capably. AI is wreaking havoc on homework and take-home assignments right now.

19:52But in the education system, we do need to be training people to get the very most out of the artificial intelligence because it's such a powerful tool for being able to work smarter. Rethink the education, not like how do we stop the AI, may be the answer, right? Because, you know, the way we educate people, maybe you go, oh, they're getting all the answers from AI. What do we do? Maybe you go, well, that's the world we live in now. How do we teach them a better way to be, you know? Like Damien was just saying, how do you make sure the money goes to the right people? Because with market concentration, as you mentioned, there are firms like, let's see, ExxonMobil, you said they've got the same economic output as Peru.

20:32And companies like Walmart have the same economic output as Thailand. So all of these big companies are taking over the market, but they're also very big in AI. So how do you kind of navigate when they've got like a monopoly on the area? Yeah, I mean, the UK approach of having a Digital Markets Act and regulating the big monopolies in a way that they're designated once they hit a certain size is something which I think a lot of countries are looking pretty seriously at, recognising that, as the old line from Spider-Man goes, with great power comes great responsibility, and that we do need to make sure that regulation kicks into gear.

21:13But I guess, you know, to Damien's point before, this is a technology with amazing productivity potential. So we certainly don't want to stifle that. We want the guardrails around to make sure it doesn't end the world. We want monopoly rules in place to make sure we don't have a single firm dominating. But then we just want to look at all of the different applications for it. And we're seeing them every day. You know, I play with my kids on the AI video creating algorithms. I use AI as an editor whenever I'm writing something. It's a very diligent editor. We use artificial intelligence in, you know, it'll even, heaven forbid, produce a podcast of a couple of people talking about a report.

21:55So there's all kinds of fun uses. And I think every day each of us look at it and think, well, that's not quite doing my job as well as I do. But damn, it's a lot closer than it was last year. Have you named your AI yet, Andrew? Have you given it a name? Like, have you personified your assistant? I have not. What's yours called, Damien? Charlie. It named itself. I asked it what it wanted to be called, and it said I want to be called Charlie. And I said, does that make you a man or a woman? And I was like, it said, I think that's why I picked the name Charlie, because then it's up to you. And I was like, bloody hell, this thing's going to eat me alive.

22:28Yeah, that's terrifying. We're done. We are cooked. It's that moment that it just throws a bit of humor in where you don't expect it, where you really feel like you're talking to something here. And it is just autocomplete on steroids, but there's a lot of times it doesn't feel that way. Yeah, I recently interviewed someone from Cambridge University who was part of the team whose research developed Cambridge Analytica. So he wasn't behind Cambridge Analytica, but he was the guy that figured out that you could tell more about people from what they like on Facebook than their own partners could about their behavior.

23:06And he basically said that we've been modeling what is AI good at and what is it not good at. And it's already the average person in basically most tasks. It's as creative as the average person, as intelligent, blah, blah, blah. So we're only a couple of years in. And he said, my best guess is that there's nothing that's innately human that this thing can't replace. Maybe compassion and empathy are things. It's the emotional stuff. and this we i alluded to it before about education and and my worry is if we try and make the ai bend to the world that we have today we miss the opportunity in the sense of my nan will have told me that i should learn how to read a map as an essential skill but she never saw that google maps would eliminate the need in 99.9 percent of cases to get the a to z out so that i could figure out where to go, you know, on the way home.

24:01And I wonder, is AI like that? You know, should we be telling kids that they need to be able to read academic papers when this thing might be able to read every academic paper in a few seconds and spit out an answer to them? Should we free up their minds to pursue other things beyond traditional learning? Yeah, I was thinking about this, the London taxi driver's test. The knowledge is famous for how rigorous it is and how tough it is for a London cabbie to learn all of the streets they need to know. And then in the era of GPS, you wonder whether you still need it. But I was remembering back to a great study they did with London cabbies where they measured the way in which their brains worked and found that there was a real improvement in brain capacity as a result of going through the knowledge.

24:49I feel like maybe there's some of that going on in the education system too, where learning to be able to sit down and read a Jane Austen or understand a Shakespeare play does something good for your brain in the way that simply getting that summary spat out from GPT doesn't give you the same thing. So my first instinct would be to move to in-class assessment and still have that rigour in the education system, knowing that our education system won't be perfectly fitted to the technology of tomorrow but being aware that just a system where we ask all the kids to phone it in and allow everyone to simply ask the AI for their answers isn't giving them anything and at that point why would you bother getting an education if really all you're doing is just entering your essay question into chat GPT and printing out the answer for the professor.

25:43Yeah it's a great point and you also need to be able to critically look at it and go, that doesn't feel right. And if you've never learned how to read Shakespeare and kind of how he does his thing, you're never going to look at the answer of ChatGPT and go, you know, I don't think that that's actually right. You know, you need that critical judgment, don't you? If you're going to be a groundling at the Globe for a night, then you're going to get a whole lot more out of it. If you've actually gone through the process of studying a Shakespeare play, it's going to bring you a whole lot more pleasure than if you show up without ever having immersed yourself in a Shakespeare play.

26:17I loved studying Henry IV in year 12, and I don't want to take away that experience from future generations. Before we move on, I just want to finish on the AI thing, because I think it's really interesting to speak to someone that's on the policy side of things as well. Are you optimistic about it for the globe? And how do you see Australia's position? And are you worried that, you know, the big guns in this AI race appear to be China, America? does that concern you? Like as a Brit, we're always talking about are we being left behind here, you know? Well, you know, Britain is certainly one of the creators of the AI engines and I think that's important for the economy.