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Artificial Intelligence And Schumpeter’s Creative Destruction

Artificial Intelligence And Schumpeter’s Creative Destruction

Abhijeet Katte

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If an AI enthusiast had a chance to ask their favourite or most respected intellectual today, the most probable question is:

Will AI take away our jobs?



Will AI destroy the world and/or become our ruler?

And other questions about the future of our societies with respect to AI.

I argue it is great to think and ask this kind of question and they should not be taken as pessimistic thinking. The goal of these questions is not to know the right answer, the goal is to understand different visions of the future, or at least how our experts are thinking about this important question. But before asking or thinking about these important questions let us think about something more basic, the relation between economic growth and innovation. 

Innovation Economics 

Innovation economics is a field that combines many economic theories that deal with the question of how knowledge, entrepreneurship and innovation can lead to economic development. This kind of economic thinking cares less about capital accumulation and thinks more about how open innovation and ideas can drive economic growth and development. 

In the early 20th century, Joseph Schumpeter, an Austrian economist made entrepreneur the centre of innovation cycles and how markets can be disrupted. Adam Smith many many decades ago said how improving productivity is a result of specialisation, more firms and entrepreneurs building specialised machines. He said some of the top reasons for these improvements were mechanisation of machines and the time saved. These improvements applied to both machines and how human minds connect and work together form the bedrock of the study of innovation economics.


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Interestingly, Marx was one of the first economists who incorporated the notion of “first-mover advantage” in his thesis when he wrote, “…far greater cost of operating an establishment based on a new invention as compared to later establishments arising ex suis ossibus. This is so very true that the trail-blazers generally go bankrupt, and only those later buy the buildings, machinery, etc. at a cheaper price, make money out of it.” 

In the context of artificial intelligence, one can see the broader trend of deep learning technology development by big companies such as Google, Facebook as the first movers in the field. But the nature of AI and data collection that comes with data-centred AI applications, Marx’s thesis does not seem applicable. The first movers and innovators seem to make the most impact and create value in the market.

Schumpeter’s Views on Innovation Economics

Schumpeter had placed the emphasis on the entrepreneur as the engine of the capitalist innovation process. He saw entrepreneurs and their new ideas create new “disequilibrium” that are part and parcel of the capitalist system. Whenever a commodity of a homogenous product is traded in the market, the new entrepreneur innovates radically to avoid price competition, hence giving more options for the consumer. 

Schumpeter viewed the role of the entrepreneur as an innovator whose job was to find “new combinations of knowledge” in the following five ways:

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  1. the creation of new products,
  2. the creation of new methods of production,
  3.  the entry into new markets,
  4. the introduction of new materials and sources,
  5. the development of new forms of business organisation.

In this model when an entrepreneur innovates and disrupts old industries and old ways of production. In some time, some innovators come along and copy the innovations of this particular entrepreneur and until there is no new innovation to copy. This means the innovator’s capacity to make pure profits on his own innovation. This ends one wave of what Schumpeter calls “creative destruction.”

Creative Destruction And Artificial Intelligence

Schumpeter in 1942 wrote probably the most important books on economics, titled, “Capitalism, Socialism, and Democracy“, where he introduced the idea of creative destruction. In the book he wrote, “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation-if I may use that biological term-that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

Joseph Schumpeter

There have been many worries expressed by experts and technologists that AI may take away jobs. There have also been proposals to introduce a new universal basic income exclusively to counter the problems caused by AI, though we may need to introduce UBI for other reasons

On the other hand, we can say what is happening in machine learning and AI is Schumpeter’s Creative Description. Let us think through this and see other waves of Creative Destruction:

  1. Automobiles replaced horses in the early part of the 20th century, do we care about where all the horse maintenance jobs went?
  2. Mobile communication systems have widely replaced older telephonic systems, do we now ask about telephone switchboard operator jobs?  
  3. When the web was not invented by Tim Berner-Lee, did anyone think that there might be millions of jobs created around the building, maintaining and running of websites?

Future 

Looking at the future and having a clear picture is hard. Predicting the future is even harder. The most we can do is calibrate our responses and see how we can make ourselves ready for different possibilities of the future. At the heart of Schumpeter’s Creative Destruction is the inherent property of capitalism to destroy old ways of production and introduce new ways. These new ways of production need new skills, new learning techniques and humans that can adapt to an ever-changing world. The response by governments looking to support their public through the next decades should be focussed more on skill development, adaptability training along with direct benefits. 

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