If you live in the United States today, and you accidentally knock a hole in your wall, it’s probably cheaper to buy a flatscreen TV and stick it in front of the hole, compared to hiring a handyman to fix your drywall. (Source: Marc Andreessen.) This seems insane; why?
Well, weird things happen to economies when you have huge bursts of productivity that are concentrated in one industry. Obviously, it’s great for that industry, because when the cost of something falls while its quality rises, we usually find a way to consume way more of that thing - creating a huge number of new jobs and new opportunities in this newly productive area.
But there’s an interesting spillover effect. The more jobs and opportunities created by the productivity boom, the more wages increase in other industries, who at the end of the day all have to compete in the same labor market. If you can make $30 an hour as a digital freelance marketer (a job that did not exist a generation ago), then you won’t accept less than that from working in food service. And if you can make $150 an hour installing HVAC for data centers, you’re not going to accept less from doing home AC service.
This is a funny juxtaposition. Each of these phenomena have a name: there’s Jevons Paradox, which means, “We’ll spend more on what gets more productive”, and there’s the Baumol Effect, which means, “We’ll spend more on what doesn’t get more productive.” And both of them are top of mind right now, as we watch in awe at what is happening with AI Capex spend.
As today’s AI supercycle plays out, just like in productivity surges of past decades, we’re likely going to see something really interesting happen:
Some goods and services, where AI has relatively more impact and we’re able to consume 10x more of them along some dimension, will become orders of magnitude cheaper.
Other goods and services, where AI has relatively less impact, will become more expensive - and we’ll consume more of them anyway.
And, even weirder, we may see this effect happen within a single job:
Some parts of the job, automated by AI, will see 10x throughput at 10x the quality, while
Other parts of the job - the part that must be done by the human - will be the reason you’re getting paid, command a wildly high wage, and be the target of regulatory protection.
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