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Artificial Intelligence Could Render Universal Price Level "Meaningless" – UBS
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As debate continues as to what AI means for global economics and investment, the world's largest wealth management house weighs in on the topic.
The rise of artificial intelligence may change how people regard
inflation and, at one level, render the concept of a general
price level “meaningless,” UBS argues in a note about AI and
macroeconomics.
While debate exists on whether generative AI tools such as
ChatGPT count as “intelligence” in a meaningful sense yet (see a
related editorial here),
the ascent of these offerings has grabbed attention around the
world.
In its “TechGPT” edition, UBS along with chief economist Paul
Donovan, said there are potential macroeconomic consequences from
AI that unfold. That includes inflation – a hot
topic in the US and other countries.
“One application of AI may be to more readily identify an
individual’s determination to buy a product, which would allow
the seller to charge the highest possible price that the buyer
will be prepared to pay,” the bank said. “Modern calculations of
inflation assume a universal price – indeed, they exclude prices
generated by schemes that give certain groups a special price
discount. AI may make the idea of a universal price an
increasingly meaningless concept, in our view.”
“In theory, if AI improves efficiency, there should be a
reduction in inflation. Efficiency gains may go into higher
profit margins, but over time, economists would expect some of
those profits to be competed away – and the competition involved
suggests a lower rate of inflation,” UBS continued. “However, AI
should also change relative prices. Thus, the value placed on
certain workers or certain commodities may adjust as AI makes
some things possible that were previously uneconomic. Within the
idea of greater efficiency, there is also the concept of
increased volatility for individual prices. Over time, we think
AI may make the concept of economy-wide inflation
meaningless.”
Statistically, the bank tried to work out how the inflation
numbers pan out depending on specific business sectors.
“Within tech, software and semiconductors (both carrying
operating margins of around 30 per cent) enjoy better pricing
power, whereas hardware and IT services with only low to
mid-teen margins are mostly at risk if AI significantly
changes the way goods and services are priced,” UBS
said.
Along with its peers, UBS its trying to work out not just the
macroeconomic effect of AI but also how it affects the wealth
management value chain. Private banks and wealth managers also
have to confront how such technology changes the jobs of their
staff. The CFA Institute, for example, which is a major
accreditation and professional training organisation, has
decided to
bring AI into its field.
Generative AI
“The current success of many generative AI applications like
ChatGPT, Bard and Midjourney is redefining the way corporates,
consumers and governments approach technology, in our view,” UBS
continued.
“While the full impact on GDP growth is not clear, we believe
software companies with first-mover advantages in AI that can
drive productivity should be clear winners,” it said.
“As more routine tasks are automated, worker productivity should
improve. In this, AI is no different from almost every other
technological innovation over the centuries. As with previous
technological changes, the emphasis should be less about the
technology itself and more about how businesses adapt to
implement the technology. Maximising productivity may require a
rethinking of business models, not just tweaking existing
practices to accommodate AI,” it said.
However, UBS said the growth implications of AI are less clear,
arguing that gross domestic product (GDP), as a measurement of
improving living standards, is a rather “antiquated concept.”
“AI may lead to increased production (which is GDP-positive). It
might also focus on more efficient production – and while
efficiency increases living standards, it does not necessarily
increase GDP. For instance, applying AI appropriately might
result in unchanged output but increased leisure time. That is a
positive for input economic measures of growth, but not output
economic measures of growth like GDP,” it said.
Jobs lost and created
UBS said industries such as IT services which depend the most on
human capital (employee costs are greater than 40 per cent of
sales) are at a risk of disruption from significant
automation.
The bank grappled with worries that AI will erase whole fields of
work and make humans superfluous.
“Ever since the First Industrial Revolution, every technological
change is often seen as reducing employment. Every time the
argument is wrong, in our view. It is certainly true that some
jobs will be lost to AI. It is important to look at the
individual tasks someone performs in their job. The simplistic
rule is `if half your job can be automated, change your job. If
less than half your job can be automated, your job will change’.
Clearly, there will be jobs in the first category that technology
will render obsolete, as has happened in the past. Few offices
today have `typing pools’, for example,” it said. “AI is also
likely to create new jobs that have not previously been thought
of. Roughly 10 per cent of the labour roles that exist at the end
of any decade did not exist at the start of the decade. This
is either because technology creates new opportunities that were
not previously possible, or because it lowers barriers to entry
in existing professions. A parallel example is the increase in
employment in the entertainment industry, as social media and
streaming collapsed the barriers to entry in music and film.”
UBS said such arguments show that labour market flexibility is
crucial – retraining for jobs that are obsolete or accepting
the need to adapt, removing legal and social barriers, etc.