It seems like most of what I read is about the technology’s ability to do (better and faster) tasks currently done by humans and therefore boost productivity. I see less about how AI may change the organisation and workings of markets. But productivity also depends on market functioning — not just on things being done better or faster or more cheaply, but the different things being done fitting together in an efficient way. So today’s column offers some thought about how AI could affect market functioning.
AI is, above all, an information technology: it reduces the cost and friction of acquiring, processing and producing — sometimes very impressively. So we should look to the economics of information to get insights about its effects. If AI leads to significant productivity increases, it’s by making information cheaper. But information economics is a weird field, with strange results. Here are some.
The classic case of a surprising insight from taking information imperfections seriously was George Akerlof’s “market for lemons” — a term for defective used cars, not the yellow fruit. Akerlof’s model showed how imperfect knowledge could prevent mutually beneficial trade. If a used car seller knows whether the car on offer is of high or low quality but the buyer does not, the buyer will only be willing to pay a heavily discounted price (to account for the risk of buying a lemon). But the owner of a good car (a “peach”) will find that price too low, and only owners of lemons will sell. Understanding this, buyers will adjust down their price further. The outcome: only lemons get sold, at a fair price, but the market for high-quality used cars breaks down.