20, September 2023
Can AI speed up Canada’s economy?
There has been a lot of talk about Canada’s poor economic growth and productivity. The OECD puts Canada at the bottom of the G20 in growth for the next few decades. Will adoption of artificial intelligence speed up growth?
Adoption of new technologies.
When a new technology comes along its diffusion through the economy typically follows an “S “shaped curve (Ref 1). At first, early adopters use the new technology, then others see how well it performs and copy the early adopters and the technology becomes mainstream, later on late adopters start using the technology, finally the market is saturated and growth ceases. Eventually the technology is replaced by something else.
An “S” curve is the stylized version. However, the real world follows the “S” curve fairly closely in many cases. The graphic below (Ref 2) shows examples from the adoption of US infrastructure:
However, to use generative AI effectively needs a significant amount of technical expertise and it’s worth noting that 27% of businesses in Canada don’t even have a web site, so adoption of AI for these businesses will likely be very slow. There is evidence that Canadian firms are very slow at adopting AI (Ref 3). The timescale is also worth noting. It took about 100 years from the first railway until the market was saturated, so widespread adoption of AI could take longer than we think, although not that long.
Thee view from the World Economic Forum.
The WEF included generative AI in its Top 10 Emerging Technologies of 2023. They list numerous fields where it can find use. They note that while it is still currently focused on producing text, computer programming, images and sound, the technology could be applied to a range of purposes, including drug design, architecture and engineering. Other applications include use in the food industry and the design of everyday objects. In scientific research it could improve experimental design and create new theories. They say it can increase job satisfaction and self-efficacy. (Ref 4.)
Artificial Intelligence is a General-Purpose Technology.
A strong case can be made that AI is a General-Purpose Technology (GPT). A GPT is a technology, such as the steam engine, the electric motor, semiconductor and computer that becomes pervasive throughout the economy and becomes a major driver of economic growth. They typically evolve through a process of trial and error as users learn how to use them, and they also often involve significant industry re-structuring. (Ref 5.)
AI is showing signs of becoming an investment bubble. For instance:
- Nvidia, the dominant manufacturer of AI chips, is now valued at over $1 trillion US and recently had a price/earnings ratio of a very high 105.
- It is almost impossible to pick up a magazine or newspaper without finding an article on AI.
- Pundits are predicting the impact of AI ranging all the way from the end of humanity to a much brighter future.
- It is likely impossible to find any large company that is not evaluating the impact of AI on its business.
Is this a bad thing? William Janeway, an economist, argued that bubbles are a necessary condition for the innovation economy. The reason is that you need a speculative bubble to allow the channeling of massive resources into unproven technologies, which enable transformative changes to the economy. These resources aim to solve two problems: (1) figuring out how to make it work in a way that is economically useful and (2) figuring out the business models that allow firms to make money using it. (Ref 6.)
The impact of AI on the economy could take longer than you might expect. Remember the Solow paradox – the saying by Nobel prize winner Robert Solow in the early days of computers in 1987 that “the computer age was everywhere except in the productivity statistics”. Edison invented the light bulb in the 1870s and began selling electricity in 1881 yet it took until the 1930s for 70% of houses in the US to be electrified.
The impact on Canada.
Most of the applications being proposed for AI at the moment involve cost cutting. That is why the writers and actors in Hollywood are on strike. So, at some point these will show up in the productivity statistics. However, bearing in mind the Solow paradox this may take some time.
Longer term, if AI, as a GPT, behaves true to form it will drive significant growth in the Canadian economy in areas we can’t currently predict. However, if past form is any guide this will take decades. Of course, other countries are also adopting AI, so a lot will depend on how effectively Canadian companies use AI, and AI won’t change Canada’s international rankings.
- Diffusion of Innovations, Everett Rogers, The Free Press, 1995
- Technology and Global Change, Arnold Grubler, Cambridge University Press, 1998, page 51 and 62.
- “Innovation in Real Places” by Dan Breznitz, Oxford University Press, 2021, page 49.