AI Economics

Concept

Creative destruction

Creative destruction is a growth process in which successive innovations replace existing ways of producing and temporarily reward the innovators who displace them.

Explanation

The creative and destructive sides are one process. The prospect of a temporary innovation rent encourages research, but a successful invention also erodes the value of older products and the investments built around them.

The process is not automatically socially optimal. Market power can reward useful innovation, yet incumbents may block entry and new innovators can impose losses on existing firms and workers that they do not bear. Very rapid obsolescence can even reduce today's incentive to invest if an invention is expected to be displaced almost immediately.

For AI, creative destruction directs attention beyond aggregate productivity. The same advance can create consumer value and new firms while eliminating tasks, occupations, and existing software rents; institutions determine how quickly resources move and how the gains and losses are distributed.

Examples

  • Online travel booking

    Booking platforms gave consumers direct access to reservations and created new digital businesses while sharply reducing demand for traditional travel agencies.

  • AI-generated software

    Cheaper software creation may enable new products while reducing the value of existing code, licenses, and firms whose advantage came from producing routine software expensively.

Sources