Can an increase in productivity cause a decrease in production? Insights from a model economy with AI automation

TL;DR

This paper presents a theoretical model showing that AI-driven automation can increase firm profits while decreasing overall production, challenging the assumption that productivity gains always lead to growth.

Contribution

It introduces a novel economic model demonstrating how AI automation can lead to profit increases at the expense of total output, highlighting potential counterintuitive outcomes.

Findings

Automation can increase profits while reducing total production.

AI-driven capital substitution may have unintended economic effects.

Counterintuitive outcomes arise from basic economic mechanisms.

Abstract

It is widely assumed that increases in economic productivity necessarily lead to economic growth. In this paper, it is shown that this is not always the case. An idealized model of an economy is presented in which a new technology allows capital to be utilized autonomously without labor input. This is motivated by the possibility that advances in artificial intelligence (AI) will give rise to AI agents that act autonomously in the economy. The economic model involves a single profit-maximizing firm which is a monopolist in the product market and a monopsonist in the labor market. The new automation technology causes the firm to replace labor with capital in such a way that its profit increases while total production decreases. The model is not intended to capture the structure of a real economy, but rather to illustrate how basic economic mechanisms can give rise to counterintuitive and undesirable outcomes.