AI And The Economy: Business Models Will Change Rapidly

Artificial intelligence will impact pretty much all business activity in the economy. Some functions will be less impacted by the current crop of large language models, such as Chat GPT, Bard and Claude, but even the lightly-affected companies will change some of their operating procedures to take advantage of new capabilities.

Biologists know there are always new species evolving and others going extinct. But sometimes there is an explosion of new species and extinctions. A change in vegetation, for example, changes which animals will thrive, which will die off and which will evolve. Similarly, technological change leads to new businesses springing up and others dying off while the survivors adapt to the new conditions.

“At the dawn of the automobile industry, two thousand firms were operating in the United States. Around 1 percent of them survived…. What is striking about the market system is not how few failures there are, but how ubiquitous failure is even in the most vibrant growth industries.” That description comes from Tim Harford’s excellent book, Adapt: Why Success Always Starts With Failure. I summarized his book in my Forbes review: “… we do not achieve success by using the smartest experts to design the best product, service or system. Instead, success comes from a wide variety of efforts operating in a highly competitive environment. The process weeds out those approaches which do not work, leaving us with the most valuable method of achieving our aim.”

AI may impact all of the critical decisions that business leaders must make, including what products to sell, whether to merge with other companies, make or buy inputs, how much emphasis on innovation. Let’s explore how AI may impact these key strategic questions.

What product to sell is the most basic business question, involving both physical goods as well as services and intellectual property. Leaders always feel the tension between sticking to one’s knitting and applying existing skills to markets that look similar. AI will improve productivity and the ability to learn about other markets. That will probably lead some companies to become more confident about expansion.

But the value of artificial intelligence in some applications depends on the quantity of data available to the models. Maybe the incumbent companies will use their internal data to clobber new competitors.[…]

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