The power and perils of the artificial hand

Nowadays, it’s almost impossible to talk about economics without invoking Adam Smith. We take for granted many of his concepts, such as the division of labour and the invisible hand. Yet, at the time when he was writing, these ideas went against the grain. He wasn’t afraid to push boundaries and question established thinking.

Smith grappled with how to advance wellbeing and prosperity at a time of great change. The Industrial Revolution was ushering in new technologies that would revolutionize the nature of work, create winners and losers, and potentially transform society. But their impact wasn’t yet clear. The Wealth of Nations, for example, was published the same year James Watt unveiled his steam engine.

Today, we find ourselves at a similar inflection point, where a new technology, generative artificial intelligence, could change our lives in spectacular—and possibly existential—ways. It could even redefine what it means to be human.

Given the parallels between Adam Smith’s time and ours, I’d like to propose a thought experiment: if he were alive today, how would Adam Smith have responded to the emergence of this new ‘artificial hand’?

To explore this question, I’d like to start with his most famous work, The Wealth of Nations. A seminal idea in this work is that the wealth of a nation is determined by the living standards of its people, and that those standards can be raised by lifting productivity, that is the amount of output produced per worker.

This idea is especially relevant today because global productivity growth has been slowing for more than a decade, undermining the advancement of living standards.

AI could certainly help reverse this trend. We could foresee a world in which it boosts economic growth and benefits workers. AI could raise productivity by automating certain cognitive tasks while giving rise to new higher-productivity tasks for humans to perform.

With machines taking care of routine and repetitive tasks, humans could spend more time on what makes us unique: being creative innovators and problem solvers.

Early evidence suggests AI could substantially raise productivity. A recent study examined how customer-service agents worked with a conversational assistant that used generative artificial intelligence. The AI assistant monitored customer chats and gave agents suggestions for how to respond. The study found that productivity rose by 14% with the use of this technology.

It’s interesting to note that the greatest productivity impact was on newer and lower-skilled workers. Why? The study suggests that AI can help spread the knowledge of more experienced, productive workers. Imagine how productive a company could be if every employee performed at the level of its best employee!

If such dynamics hold on a broad scale, the benefits could be vast. Goldman Sachs has forecast that AI could increase global output by 7%, or roughly $7 trillion, over a decade. That is more than the combined size of the economies of India and the United Kingdom.

AI could be as disruptive as the Industrial Revolution was in Adam Smith’s time. We will need to carefully balance support for innovation with regulatory oversight

While it is far from certain that such sizeable gains will be realized, it is probably safe to say that when it comes to maximizing efficiency, Adam Smith would be wary of stifling the artificial hand of AI.

Aside from the gains in productivity, AI could shake up the labour market in unprecedented ways. Recently, we have seen the loss of ‘middle-skill’ jobs due to automation, resulting in large clusters of high-paying and low-paying jobs at either pole of labour markets. The literature shows that AI could affect occupations and industries differently than previous waves of automation.

Recent empirical studies suggest AI could reduce job-market polarization, by putting downward pressure on wages of high-paying jobs. Some studies suggest that AI adoption could flatten the hierarchical structures of firms, increasing the number of workers in junior positions and decreasing the number in middle management and senior roles.

The number of jobs affected could be sweeping—some researchers estimate that two-thirds of US occupations could be vulnerable to some form of automation.

So, what will be the net impact on the job market? It is by no means guaranteed that AI will benefit humans, or that the gains of the winners will be sufficient to compensate the losers. It’s quite possible that AI might simply replace human jobs without creating new, more productive work for humans to move into, as the economist Daron Acemoglu has noted.

Thus, despite AI’s potential, we need to consider the broad negative effect it could have on employment—and the social upheaval that could cause. Given that the wellbeing of the individual and the plight of the common worker underpinned much of Adam Smith’s thinking, this would surely have troubled him.

He was interested in developing an economy that worked for everyone—not simply a chosen few. Throughout The Wealth of Nations, he criticized the mercantilist trade system under which England sought to expand its exports at all costs, with too much market power being concentrated in the hands of companies granted trading monopolies.

Today, the market for the components to develop AI tools is highly concentrated. A single company has a dominant position in the market for silicon chips best suited for AI applications, for example. Many AI models require massive computing power and huge amounts of data—the lifeblood through which these models hone their ‘intelligence’.

To be sure, open-source programmers have shown an impressive ability to design their own AIs. But only a handful of large corporations may have the computing and data firepower to develop high-end models in the future.

While Smith would have been impressed by the emergence of such a powerful technology in a globalized economy, he might also have realized that the invisible hand alone may not be enough to ensure broad benefits to society. In fact, in many areas—from finance to manufacturing— the invisible hand hasn’t been enough to ensure broad benefits for quite some time.

Which brings me to a point I’d like to emphasize—we urgently need sound, smart regulations that ensure AI is harnessed for the benefit of society. One of the challenges is the extent to which humans may come to depend on the judgment of AI systems.

They rely on existing data, and hence may replicate the embedded bias in that data. Some models have shown a tendency to confidently defend false information—a phenomenon known as AI ‘hallucination’. If we cede control to AI in areas such as medicine and critical infrastructure, the risks could be severe and even existential.

When it comes to AI, we need more than new rules: we need to recognize that this might be an entirely new game. And that will require an entirely new approach to public policy.

New legislation proposed by the EU is an encouraging start. The EU’s Artificial Intelligence Act classifies AI by risk levels. The highest-risk systems would be banned. This would include government systems that rank people based on social compliance, known as ‘social scoring’. The next-highest risk level would be tightly regulated, with requirements for transparency and human oversight.

Beyond regulating AI systems directly, we must be prepared to address the broader effects of AI on our economies and societies. Given the threat of widespread job losses, it is critical for governments to develop nimble social safety nets to help those whose jobs are displaced, and to reinvigorate labour market policies to help workers remain in the labour market. Taxation policies should also be carefully assessed to ensure tax systems don’t favour indiscriminate substitution of labour.

Making the right adjustments to the education system will be crucial. We need to prepare the next generation of workers to operate these new technologies and provide current employees with ongoing training opportunities.

Demand for STEM specialists will likely grow. However, the value of a liberal arts education—which teaches students to think about ‘big questions’ facing humanity and do so by drawing on many disciplines—may also increase.

Clearly, we need international coordination on regulation, because AI operates across borders. It is therefore encouraging to see that the G7 has formed a working group to study AI. In the end, we’ll need a truly global set of rules. Considering how fast the technology is moving, time is of the essence.

All that said, to truly consider the implications of AI from Adam Smith’s perspective, we need to go back to his first major work, The Theory of Moral Sentiments.

Smith explored what enables us to behave morally. In his view, it’s our ability to experience ‘sympathy’: we can imagine each other’s joy and pain, and as a result, we temper our ‘passions’ and learn to be civil toward others. It’s what allows us to build and sustain a rules-based society.

But what happens when you add artificial intelligence into the mix? Of course, AI has been part of our lives for years—it completes our sentences when we’re typing on our phones and recommends what video we should watch next.

What’s remarkable about the latest wave of generative AI technology is its ability to comb vast amounts of knowledge and distil it into a convincing set of messages. AI doesn’t just think and learn fast—it now speaks like us, too.

It’s unclear whether AI will evolve to the point where it could be called truly sentient. But if it can already replicate human speech, it may be difficult to know the difference. The glue that binds the concept of society conceived by Smith—sympathetic human beings interacting in the spirit of compromise—begins to disintegrate.

This has deeply disturbed scholars such as Yuval Harari. Through its mastery of language, Harari argues, AI could form close relationships with people, using ‘fake intimacy’ to influence our opinions and worldviews.

That has the potential to destabilize societies. It may even undermine our basic understanding of human civilization, given that our cultural norms, from religion to nationhood, are based on accepted social narratives.

It’s telling that even the pioneers of AI technology are wary of the existential risks it poses. Just last week, more than 350 AI industry leaders signed a statement calling for global priority to be placed on mitigating the risk of ‘extinction’ from AI. In doing so, they put the risk on par with pandemics and nuclear wars.

So much of Adam Smith’s work is based on the idea of information being effectively transmitted through society. Markets send signals through prices to producers and consumers. Human beings pick up emotional cues from each other, enabling them to civilize their behaviour. But AI can significantly damage the integrity of that information and the fundamental benefits that it confers to society.

Smith would no doubt be troubled by the possibility of ‘hallucinating’ software spreading fake news and deepening divides in society. Thus, there’s a good chance he would have supported rules that protect consumer privacy, and limit misinformation in the age of AI.

I’d like to stress that this debate is ongoing, and I don’t claim to have all the answers. I’ve pointed out a few of the issues surrounding AI, and how we can use Adam Smith’s thinking and philosophy as a guide to help us navigate the path ahead.

AI could be as disruptive as the Industrial Revolution was in Adam Smith’s time. We will need to carefully balance support for innovation with regulatory oversight.

Because of AI’s unique ability to mimic human thinking, we will need to develop a unique set of rules and policies to make sure it benefits society. And those rules will need to be global. The advent of AI shows that multilateral cooperation is more important than ever. 

It’s a challenge that will require us to break out of our own echo chambers and consider the broad interest of humanity. Adam Smith is best remembered for his contribution to economics, but his body of knowledge was much broader. He was a student of the law, history, rhetoric, languages, and mathematics. In the same spirit, harnessing AI for the good of humanity will require an interdisciplinary approach.

Writing on the cusp of the Industrial Revolution, Smith could hardly have foreseen the world we live in today, some 300 years after his birth. Now, we may once again be on the brink of technological transformations we can’t foresee.

For better or worse, humans aren’t known for walking away from the next stage of scientific and technological progress. Usually, we simply muddle through. This time, as we confront the power and perils of the artificial hand, we need to summon every ounce of our empathy and ingenuity—the very things that make human intelligence so special.

This article is based on a speech to commemorate 300th anniversary of Adam Smith’s birth, University of Glasgow, June 5, 2023.