The Shrinking Half-Life of Economic Paradigms: Anticipating the AI Revolution

Economic paradigms shape human society, and their transitions have always created profound changes. Think about the difference in how we live now, vs a pastoralist in 2000BC. A close examination of our history reveals a fascinating pattern: the duration of each era is decreasing logarithmically. In other terms, the rate of change is accelerating exponentially. Take a look a this timeline that shows the history of economic systems (the timeline is exponential so we can fit it all on one graph)

This acceleration isn't just an academic observation; nor is it tech bro utopian talk. If the pattern continues, then it will have real consequences for how we live our lives in the next 10-20 years. And understanding this pattern early could have implications for the plan you make in the coming few years as we approach the next change. For most of human history, individuals lived and died within the same economic paradigm. Now, if you were born in the last 70 years, you might witness multiple shifts in your lifetime.

The nature of economic shifts

Each economic paradigm shift is driven by a technological breakthrough that fundamentally alters what's possible. These breakthroughs create a kind of "economic magic" – new ways of creating value that were previously unimaginable.

Consider the shift from hunting and gathering to agriculture. Suddenly, humans could control their food supply, plan for the future, and build permanent settlements. This wasn't just an improvement; it was a complete reimagining of human existence.

In the same way that people don't debate whether we should go back to feudalism, it is unlikely that people in the future will look back at our current system with nostalgia.

From Feudalism to Capitalism: A Case study

The shift from feudalism to capitalism offers a compelling case study in economic paradigm shifts. Under feudalism, wealth was concentrated in the hands of nobility who engaged primarily in rent-seeking behavior. Serfs worked the land but received only a fraction of their labor's value, with limited opportunity for economic mobility.

Capitalism emerged as a revolutionary alternative. It introduced two key concepts:

Private property rights and capital accumulation: Individuals could now collaborate to build enterprises that created value beyond what could be directly derived from land-based necessities. Over time, governments began to recognize these entities and grant them rights, providing the stability necessary for assets to become capitalized.

This ability for people to create wealth in a positive-sum manner made innovation a viable strategy, which in turn fueled scientific discoveries and technological advancements.

This transition wasn't just about new rules; it fundamentally changed how value was created and distributed in society.

Hernando de Soto's "The Mystery of Capital" provides crucial insights into this shift. De Soto argues that the true power of capitalism lies not just in free markets, but in legal frameworks that transform assets into capital. In feudal systems, most assets were "dead capital" – unable to generate additional value. Capitalism introduced formal property systems that allowed assets to become productive capital.

For example, a house in a capitalist system isn't just shelter; it's collateral for loans, an address for billing, or a location for a home business. This "economic potential energy" of assets, unlocked by legal frameworks, fueled unprecedented economic growth.

Understanding this transition helps us appreciate the profound nature of economic paradigm shifts. As we stand on the cusp of the AI revolution, we might ask: What assets will gain new "economic potential energy"? How might our legal and economic frameworks evolve to unlock this potential?

The digital revolution:

This era introduced three game-changing concepts:

A. Software and the zero marginal cost of distribution

For the first time in history, we could create products with virtually no cost to replicate and distribute. A piece of software, once written, can be sold millions of times without additional production costs. This defies traditional economic models and creates the potential for unprecedented scale and profit margins.

B. The ability to create "capital" directly from labor

In the digital age, a single programmer can create a billion-dollar company from their laptop. This direct transformation of cognitive labor into capital assets is revolutionary. It democratizes wealth creation in a way never before possible, allowing individuals to compete with established institutions.

C. Refutation of Marx's labor theory of value

Marx argued that the bourgeoisie exploited the proletariat by extracting surplus value from their labor. The digital economy turns this on its head. When a developer creates a valuable app, they're not being exploited – they're capturing the full value of their cognitive output. This challenges our traditional understanding of labor, capital, and value.

The Digital Revolution, however, is just a transitional phase. It's paving the way for something even more profound: the AI Revolution. As we stand at this juncture, we must ask ourselves: If software eating the world was revolutionary, what happens when AI starts thinking for us? The economic paradigm shifts we've seen so far may pale in comparison to what's coming next.

The AI Revolution: The Next Paradigm shift

As we enter 2025, we stand on the brink of another economic paradigm shift: the AI Revolution. This transition promises to be as profound as previous shifts, but with a pace and scale that may be difficult to fully comprehend.

A. AI as a multiplier of human cognitive labor

AI has the potential to dramatically amplify human cognitive capabilities. Much like how industrial machinery multiplied physical labor, AI could enhance our mental work by orders of magnitude. This isn't just about automation; it's about augmentation. AI tools could increase the output of human labor by 20-100x, enabling individuals to accomplish tasks that would have previously required entire teams.

B. Potential for a "post-scarcity" economy

The efficiency gains from AI could lead to a state of abundance in many sectors. From our current perspective, this might appear as a "post-scarcity" economy. However, it's crucial to note that scarcity is relative; new forms of scarcity may emerge as others disappear. Nonetheless, AI could significantly reduce the human labor required for many current economic activities, potentially freeing people from the necessity of work for survival.

C. Implications for work, society, and human development

As AI takes over more cognitive tasks and value generation becomes increasingly effortless, we may reach a period where individuals no longer need to work to survive. This unprecedented situation could create evolutionary incentives that our species has never encountered before, potentially leading society into uncharted territory.

Furthermore, companies might leverage AI to enhance algorithms, creating a more potent form of "digital opium" - content so engaging and personalized that it becomes difficult to disengage from.

Beyond these social risks, there's also the potential for global conflicts. If one nation or entity gains exclusive access to a significantly advanced AI before others, it could dramatically alter the balance of global power, potentially leading to geopolitical instability.

Skepticism and concern

While the potential of the AI Revolution is immense, it's crucial to approach it with both optimism and realism. The utopian visions of AI solving all our problems must be tempered with an understanding of potential downsides:

Evolutionary mismatch: As work becomes optional for survival, we may face incentives that human evolution hasn't prepared us for, leading to unforeseen societal challenges.

Enhanced digital addiction: AI could supercharge addictive algorithms, creating digital experiences so compelling they're nearly impossible to resist.

Geopolitical instability: The first entity to develop advanced AI could gain unprecedented global power, potentially destabilizing international relations.

Navigating these challenges will require unprecedented adaptability from individuals, institutions, and societies.

Conclusion

The logarithmic decay in the duration of economic paradigms suggests we're on the cusp of another major shift. If the pattern holds, the AI Revolution could reshape our economy more rapidly and profoundly than previous transitions.

This shift promises significant increases in productivity and wealth creation, potentially at a scale that dwarfs previous economic transformations. However, it also presents unique challenges, from the risk of cognitive decline in a world where critical thinking becomes less necessary, to the potential for more addictive digital experiences, and the geopolitical implications of AI-driven power imbalances.

While it's tempting to view these changes through a utopian or dystopian lens, reality will likely be more nuanced. Our task is to engage with these emerging technologies critically and pragmatically, steering their development and implementation in beneficial directions.