The Economic Metamorphosis
AGI's Divergent Paths in Capitalist and Communist Systems
Following the release of the Chinese AI model Deepseek (R1), I started to think more about our different approaches in the West and East. The approach difference became even clearer recently when Deepseek promised to publicly make the model's code available, doubling down the open-source approach.
As artificial general intelligence emerges on the horizon of human achievement, two distinct economic philosophies chart dramatically different courses through these transformative waters. The United States and China, like two great experiments in human organization, offer contrasting visions of how societies might integrate this revolutionary technology into their economic and social fabric.
The Capitalist Crucible
In the United States, AGI's evolution follows the familiar patterns of market-driven innovation, yet with unprecedented intensity and scope. Recent research from the BIS Working Papers reveals that AGI could boost productivity growth by 1.5 percentage points annually over the next decade, where my personal forecast is dramatically higher. This transformation, however, carries within it both promise and peril. The productivity gains appear concentrated among high-income knowledge workers, threatening to deepen the existing fissures in American society.
The market-driven approach has generated remarkable innovations through companies like Google and OpenAI, with projections suggesting a potential 15% productivity boost over ten years, potentially unlocking $4.5 trillion in annual GDP. Yet this same dynamic creates a paradox: the very forces driving innovation may also accelerate economic stratification, as the benefits of AGI accrue disproportionately to those already commanding the heights of the digital economy.
The State-Guided Path
China presents a markedly different vision for AGI integration. With a planned investment of $13.7 billion in AI development, the state acts as both architect and coordinator of technological advancement. While being perceived as slower in generating breakthrough innovations, this approach offers the possibility of a more deliberate and equitable distribution of AGI's benefits throughout society.
The Chinese model emphasizes strategic sector development and coordinated implementation across industries, particularly in manufacturing and infrastructure. This systematic approach may sacrifice some of the dynamism seen in market-driven systems but probably offers greater stability and more uniform social benefits. The state's ability to direct resources and coordinate across sectors could help mitigate the disruptive effects that market forces might amplify in more capitalist systems.
Convergence and Divergence
Both systems face distinct challenges that reflect their fundamental organizational principles. The rapid, market-driven adoption of AGI technologies in the United States threatens to accelerate economic polarization, requiring new forms of social support to maintain stability. The American system excels at generating breakthrough innovations but struggles to distribute their benefits equitably. For example, we can think of the unequal distribution of the fruits of the economic recovery following the 2007-8 financial crises. A system putting shareholder profit at its centre can easily ignore the suffering of millions removed from their bread and butter, with the pleasing excuse of always favouring talent and hard work. The accuracy of such claims is likely the subject of another, more controversial post.
While potentially more effective at ensuring broad-based benefits, China's state-directed approach may sacrifice some of the creative destruction that drives technological advancement in market systems. The challenge lies in maintaining technological competitiveness while adhering to centralized planning principles that can sometimes stifle bottom-up innovation. However, Deepseek is the black swan event for the AI community, crashing produces against the state-controlled approach and effectiveness of US export controls against Chinese AI companies.
The evidence suggests that success in the AGI era may require synthesizing elements where both sides can learn from each other. The US model's capacity for rapid innovation and the Chinese system's ability to coordinate large-scale implementation each offer valuable lessons, especially regarding the efficient use of existing resources.
Considering its unique and ambiguous nature, neither system can claim a definitive advantage in managing AGI's economic impacts.
The key to success may lie in finding the right balance between market dynamics and social stability, between technological advancement and equitable distribution of benefits. The data suggests that both systems will need to evolve, possibly adopting elements from each other's approaches to create more resilient and equitable economic frameworks capable of harnessing AGI's potential while mitigating its economic and social damages.
As this technological revolution unfolds, the contrasting approaches of these two economic systems offer valuable insights into the challenges and opportunities ahead. The ultimate success of either approach may depend less on ideological purity than on the ability to adapt and incorporate beneficial elements from both traditions while maintaining social cohesion and economic vitality.
Imagine a world where artificial intelligence and robotics have achieved such sophistication that they can perform virtually all human labour - from complex surgical procedures to creative tasks like architectural design, from manufacturing to agricultural production. In this scenario, human labour becomes obsolete across both blue-collar and white-collar sectors.
This situation will create a wealth concentration even Alexander the Great could not imagine in his wildest dreams. The owners of AI systems and automated production facilities capture nearly all economic value, while the vast majority of people lose their primary means of income. The traditional relationship between labour and capital fundamentally breaks down, as returns on capital completely dominate returns on labour.
A universal basic income (UBI) funded by the state emerges as an apparent solution to this crisis. However, this creates several interconnected problems:
The Funding Dilemma: If we assume the state funds UBI through taxation of automated production, we encounter a circular problem. For example, if a company produces 100 units and faces 60% taxation*, the state can redistribute 60 units worth of value to society. However, this leaves two critical questions:
Consumption Gap: Who will consume the remaining 40 units? The population receiving UBI might only have purchasing power equivalent to the redistributed 60 units.
Production Incentive: What motivates private ventures to maintain production if they can only retain 40% of output in a market where consumers have limited purchasing power?
*Here, I am proposing a taxation based on the output level, unlike the current taxation models calculated through profits.
The Ownership Question: This scenario raises fundamental questions about the ownership of automated means of production:
Private Ownership Model: If private entities retain ownership, they face a paradoxical situation where their potential customer base lacks purchasing power. This creates a deflationary spiral where reduced consumption leads to reduced production, reduced tax revenue for UBI, and reduced consumption.
State Ownership Model: If the state assumes ownership of automated production, it eliminates the private profit motive but faces challenges such as determining the optimal production levels without market signals or allocating resources across different sectors.
The traditional circular flow of economic activity breaks down in this scenario. In a regular economy, people earn wages through labour, which they use to consume products, which generates revenue for companies, which pays for more labour. The system loses its self-sustaining nature when labour is removed from this equation.
Potential Solutions
Several approaches might address these contradictions:
Distributing ownership of automated production systems across society through a sovereign wealth fund or universal basic capital.
Maintaining some sectors where human labour remains valuable creates a hybrid economy.
Developing an entirely new economic system that doesn't rely on traditional market mechanisms.
The endpoint of automation forces us to confront fundamental questions about our economic systems. Neither pure capitalism nor traditional socialism appears adequate to handle this scenario. The solution may require reimagining basic economic relationships and developing new frameworks that can:
Fairly distribute the benefits of automated production. "What is fair and what are the weights for distribution?" are likely topics for future posts due to their importance and detailed philosophical nature.
Provide meaningful ways for humans to contribute to society.
Ensure sustainable consumption patterns. Although this may not be a constraint in future, technological advancements can lead to a future with almost perfect levels of recycling for earth's resources.
This scenario suggests that as we approach higher levels of automation, we need to begin developing new economic models that can handle these challenges. The transition period will be crucial, requiring careful management to avoid social disruption while new systems are developed and implemented.
The future may require a hybrid system that preserves some elements of market economics while incorporating new mechanisms for wealth distribution and social organization. The challenge lies in designing this system before automation reaches critical levels.