The Future of Work and Capital: Analyzing AGI in a CES Production Model (2502.07044v1)

Abstract: The integration of AGI into economic production represents a transformative shift with profound implications for labor markets, income distribution, and technological growth. This study extends the Constant Elasticity of Substitution (CES) production function to incorporate AGI-driven labor and capital alongside traditional inputs, providing a comprehensive framework for analyzing AGI's economic impact. Four key models emerge from this framework. First, we examine the substitution and complementarity between AGI labor and human labor, identifying conditions under which AGI augments or displaces human workers. Second, we analyze how AGI capital accumulation influences wage structures and income distribution, highlighting potential disruptions to labor-based earnings. Third, we explore long-run equilibrium dynamics, demonstrating how an economy dominated by AGI capital may lead to the collapse of human wages and necessitate redistributive mechanisms. Finally, we assess the impact of AGI on total factor productivity, showing that technological growth depends on whether AGI serves as a complement to or a substitute for human labor. Our findings underscore the urgent need for policy interventions to ensure economic stability and equitable wealth distribution in an AGI-driven economy. Without appropriate regulatory measures, rising inequality and weakened aggregate demand could lead to economic stagnation despite technological advancements. Moreover this research suggests a renegoation of the Social Contract.

• The paper extends the classic CES production function to integrate AGI as both labor and capital, revealing substitution and complementarity dynamics.
• It quantifies significant shifts in wage structures and income distribution, underscoring the need for interventions like progressive taxation or universal basic income.
• The study highlights long-run equilibrium challenges and productivity changes, calling for policy measures to ensure sustainable economic stability.

Analyzing AGI in Economic Production: Insights from a CES Model

The paper "The Future of Work and Capital: Analyzing AGI in a CES Production Model" by Pascal Stiefenhofer presents a theoretical exploration of the integration of AGI into economic frameworks. This work is significant as it extends the Constant Elasticity of Substitution (CES) production function to encompass AGI-driven labor and capital. Through this extension, it provides a nuanced framework to analyze the economic impacts of AGI.

The paper delineates four primary models to investigate the repercussions of AGI on economic dynamics:

1. Substitution and Complementarity: The paper investigates the conditions under which AGI labor may substitute or complement human labor. Through the augmented CES production function, it evaluates the elasticity of substitution, denoted by $\sigma$. If AGI acts as a perfect substitute ($\sigma \to \infty$), the model predicts significant displacement of human workers. Conversely, when AGI and human labor are complements ($0 < \sigma < 1$), AGI enhances human productivity.
2. Wage Structures and Income Distribution: The redefined CES model indicates significant shifts in wage dynamics, especially in scenarios where AGI supplants human labor. Such displacement potentially leads to a collapse in human wages, emphasizing the need for alternative income distribution mechanisms such as progressive taxation on AGI-driven output or universal basic income.
3. Long-run Equilibrium Dynamics: The paper examines the equilibrium state in AGI-dominated economies. As AGI-related capital ($K_{AGI}$) accumulates, the marginal productivity and hence the wages of human labor diminish. The framework suggests an impending need for redistributive mechanisms and policy interventions to maintain economic balance and aggregate demand.
4. Total Factor Productivity and Technological Growth: The impact of AGI on economic productivity, measured by Total Factor Productivity (TFP), is discussed. The framework postulates that sustained economic growth is contingent upon whether AGI complements human labor. In contrast, if AGI substitutes human labor extensively, the resultant weakened demand could culminate in economic stagnation.

The paper points to foundational shifts necessary to adapt to AGI-driven disruption, signifying the limitations of existing economic models when faced with AGI's dual role as both labor and capital. The proposed model underscores vital interventions such as universal basic income, progressive taxation on AGI capital, and perhaps public or cooperative ownership of AGI resources to ensure equitable redistribution and sustained socio-economic stability.

In conclusion, this paper is pivotal for researchers and policymakers as it provides a theoretical understanding of potential economic scenarios with AGI advancements. As AGI technology progresses, its economic implications outlined in this work highlight the necessity for informed policy-making to navigate the complexities of labor market transformations and maintain equitable growth trajectories in an AGI-integrated economy. Future research avenues may include empirical validation of the model’s hypotheses and exploration of diverse policy frameworks to manage the societal impacts of AGI.