How AI will create wealth by destroying jobs – Fat Tail Daily

Today’s Fat Tail Daily begins with a hat tip to the ABC team behind their show Australian Story.

Their latest episode is on the impact Artificial Intelligence is having on the modelling industry and images all over the internet.

Instagram, Facebook, Twitter — you name of it.

You can see, for example, beautiful women, of every shape, everywhere. These days most of them aren’t real.

They’re just images, mashed together by an algorithm from billions of pictures all over the web.

That’s a problem when you’re like Chelsea Bonner and run a modelling agency. Chelsea is raising a warning flag on AI — hence the show.

The major theme is not hard to guess. AI is on the verge of wiping out businesses like hers.

Chelsea is already losing work because her clients can massively cut their costs using AI images instead of a genuine model.

One of those models says, quite rightly, that it’s not just her job under threat.

It’s also the make-up artist, the hair stylist, the set designer and the photographer.

All true. This is the scary part. Maybe they can hang on for a while, but the writing is on the wall for these professions.

Chelsea Bonner can see this a mile off. She wants the government to do something to protect her industry.

It’s the battle of today. Government can protect industry — but only at the cost of the taxpayer and, ultimately, the consumer.

If we can find a cheaper way to produce an image, we should. That’s how economic progress works. Do more for less. That’s how we get richer.

If we get rid of models, hair stylists and photographers but still have an image, then we gain whatever those people go on to do instead. We progress by freeing up labour to do something additional…and, ideally, more productive!

This is just a small example of how AI is going to upend one industry. There will be countless more.

Consider the firm that needs an image of a model for their advertising. They save a fortune.

That will show up in higher profits…or more money they can reinvest in their business.

If they are listed on the share market, this will be reflected in a higher share price, all else being equal. The market will sniff out the lower costs and better margins.

Here’s the crux of the thing…

In classical economics, hairs stylists, models and lighting experts are not considered productive labour. They provide a service and no more.

There are no more goods that can be exchanged — wealth — in the world after a slim (or not), young (or old) woman (or man) poses in a beautiful location.

I enjoy looking at a beautiful picture as much as the next person. But a classical economist would say that’s merely a satisfaction, and not wealth.

I’m not just picking on the modelling industry.

Here’s Adam Smith writing on unproductive labour — in a classical sense — in the 18th century…

‘In the same class must be ranked some both of the gravest and most important, and some of the most frivolous professions: churchmen, lawyers, physicians, men-of-letters of all kinds: players, buffoons, musicians, opera singers, opera dancers, etc…

‘Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production.’

You’ll see Adam Smith mentions men of letters there. That’s an old term for what I’m doing now. See…I’m not just picking on the modelling industry!

In other words, these roles have value — people will pay for them after all — but aren’t very productive in an economic sense.

In fact, Adam Smith would be knocked over that we gave actors any importance at all today, let alone Hollywood pay cheques. They certainly had no importance in his day. They might be heading that way again.

We got a taste of all this as the Covid lockdowns rolled over the world.

Actors, casino dealers and football coaches discovered that, without a stage or a gaming table or a football field and a paying audience, their services weren’t required.

It didn’t really matter, either.

We discovered that we didn’t need football matches or theatre or a game of blackjack to get by. We did gardening and baking instead.

But we certainly needed petrol and semiconductors and toilet rolls and face masks and testing kits. More wealth, in other words, created from productive labour, alongside different satisfactions.

Covid, then, revealed how many of us have jobs Adam Smith would call unproductive labour.

AI is going to do the same thing. We’re going to discover that if a firm can use AI to do it cheaper, faster and better, their business will do so because it makes them more profitable — productive — by doing so.

But for every job displaced, another one will be created elsewhere.

Human needs and wants are infinite so the demand for labour will still be there, just in different way.

Blacksmithing isn’t a job anymore. We found a better way to produce wrought goods. That’s ok. It’s ok, too, if an AI creates the image you see on a billboard.

What matters is not so much what jobs we have — but how much wealth we can produce with a given amount of labour.

AI should make labour more productive…and that’s a very good thing!

Granted, if you run a modelling agency or are a man of letters, and enjoy your work, you’re not going to like being disrupted.

Adam Smith would say something like, ‘Bad luck, chum!’

The history of the industrial revolution is ongoing innovation to make labour and capital more productive.

There’s a reason most of us don’t spend our days producing food like we did for most of human history. Productivity sent the general level of wealth skyrocketing.

AI should do the same thing. It’s no good trying to save models and fashion designers. Let’s find the best thing they can do instead!

Another idea is to find companies that can harness AI to become more productive…and therefore more profitable.

Think of the above.

You wouldn’t invest in a modelling agency. But what about the firm that benefits from cheaper advertising…or better data…or better sales?

I’ve got 5 ideas for you here right now.

Best,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

Callum Newman is a real student of the markets. He’s been studying, writing about, and investing for more than 15 years. Between 2014 and 2016, he was mentored by the preeminent economist and author Phillip J Anderson. In 2015, he created The Newman Show Podcast, tapping into his network of contacts, including investing legend Jim Rogers, plus best-selling authors Jim Rickards, George Friedman, and Richard Maybury. He also launched Money Morning Trader, the popular service profiling the hottest stocks on the ASX each trading day.

Today, he helms the ultra-fast-paced stock trading service Small-Cap Systems and small-cap advisory Australian Small-Cap Investigator.