Last week I posed the following question from my Ph.D. Micro midterm:

Suppose artificial intelligence researchers produce and patent a perfect substitute for human labor at zero MC. Use general equilibrium theory to predict the overall economic effects on human welfare before AND after the Artificial Intelligence software patent expires.

As promised, here’s my answer:



While

the patent lasts, the patent-holder will produce a monopoly quantity of

AIs. As a result, the effective labor

supply increases, and wages for human beings fall – but not to 0 because the patent-holder keeps P>MC. The overall effect on human welfare, however,

is still positive! Since the AIs produce

more stuff, and only humans get to consume, GDP per human goes up. How is this possible if wages fall? Simple: Earnings for NON-labor assets (land,

capital, patents, etc.) must go up.

Humans who only own labor are

worse off, but anyone who owns a home, stocks, etc. experiences offsetting

gains.

When

the patent expires, this effect becomes even more extreme. With 0 fixed costs, wages fall to MC=0, but

total output – and GDP per human – skyrockets.

Human owners of land, capital, and other non-labor assets capture 100%

of all output. Humans who only have

labor to sell, however, will starve without charity or tax-funded redistribution.