The Hayekian case for wage flexibility in an AI economy

Artificial intelligence is a shock to labour supply. The emerging policy response wants a small number of large adjustments (e.g. social insurance, regulation, macro policy). A feature of this is that the information requirements are small, e.g. a few high-quality expert reports and plans. But AI applications and labor are both highly heterogeneous, and dynamically so. Those reports and plans will arrive parochial and dated and be useless to everyone except consultants, politicians and journalists. In practice, economic adaptation will require a large number of small adjustments, requiring a flow of information reflecting specific conditions and local trade-offs.

Hayek (1945, 1948, 1968) long-ago explained that this is the role of prices and the role of competition is to generate those prices. If the global economy is to adapt to the massive AI shock it needs competition and flexible prices in labour markets to discover where human labour retains and loses value in an AI economy and to communicate that information simply and widely. The rigid wage structures of industrial modernity prevent this price discovery and therefore prevent fast effective economic adaptation to this unprecedented looming shock.

About the speaker

Jason Potts is Professor of Economics at Alfiasal University in Riyadh, Saudi Arabia and a research affiliate at Sloan School at MIT, an editor of the Journal of Institutional Economics, and also a proud member of the Mont Pelerin Society.

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