Organizing Intelligence

Abstract: When will advances in AI lead to economic transformation? We develop a model of how intelligence, the ability to achieve goals, matters for organizations, the key unit of economic production. Agents (human or AI) with multidimensional capabilities sort endogenously into competing firms. A firm's productivity depends on its agents' capabilities; we distinguish competence, which shifts productivity levels, from coordination, which governs how productivity scales with size. Two differences between AI and humans drive transformation: AI expertise is reproducible while humans' are in fixed supply, and AIs may not face the same human limits on coordination. We analyze how equilibrium market structure, productivity, employment, and wages evolve as AI capabilities improve. When AI is more capable than the average human, organizations of complementary humans can nonetheless outperform AI. Increases in AI competence can change the composition of workers within firms and decrease firm size. As AI coordination improves, however, this can break the Coasean ceiling on firm size and the market structure undergoes a phase transition toward large, concentrated AI-heavy firms. Changes in human employment are gradual when AI displaces workers within mixed human-AI firms, or sudden when AI firms outcompete human firms. We decompose wage changes into a technology effect, which changes the value of humans within existing firms, and a reorganization effect as firms adjust size and composition. Reorganization can reverse the technology effect on wages.

• The paper develops a general equilibrium theory of AI where organizational scale and heterogeneity among agents are central, emphasizing the roles of competence and coordination in firm size and market concentration.
• The key theoretical distinction is between competence, which can increase firm productivity, and coordination, which determines how productivity varies with firm size. This distinction leads to predictions about firm size, market concentration, wages, and employment patterns under different AI capability scenarios, without predicting specific AI deployment trajectories.
• The organization of capabilities, demonstrated by the firm's ability to assign complementary workers and AI agents, allows for enhanced productivity and determines wage structures with respect to coordination. This reveals an economically potent mechanism where an organization achieves capabilities superior to any single member.

Analytical perspective

“Organizing Intelligence” develops a general-equilibrium theory of AI in which the economically relevant unit of analysis is not the isolated agent but the organization that combines heterogeneous agents, chooses its scale, and competes for output and labor. The paper’s central distinction is between competence, which raises productivity at a given organizational scale, and coordination, which determines how productivity changes as the organization expands. This distinction generates qualitatively different predictions for firm size, market concentration, wages, and employment (2611.05417).

The framework incorporates three features that standard automation models often abstract from. Human capabilities are heterogeneous and fixed in supply, whereas AI agents can be replicated at a compute rental cost. Human capabilities are multidimensional, so firms can assemble complementary workers whose collective productivity exceeds the standalone productivity of any member. Finally, AI agents may eventually coordinate directly with one another, allowing AI organizations to operate without the human coordination constraints that historically limit firm scale.

The resulting claims are deliberately conditional on the model’s production, demand, and equilibrium assumptions. They are not forecasts of AI deployment. Their contribution is to show that small differences in the direction of capability improvement—task competence versus coordination—can produce sharply different organizational equilibria.

Competence, coordination, and organizational production

Each agent has a multidimensional capability profile

$\mathbf y=(y_1,\ldots,y_n,y_*),$

where the first $n$ coordinates represent productive competence and $y_*$ represents coordination. A firm is represented by a measure over human and machine capabilities. Its output is generated by a production functional $F(\nu)$ that depends both on the composition and on the mass of the firm.

Under the paper’s first-moment representation, output decomposes into a level component and a scale component:

$F(\nu)=L(\nu)S(\nu).$

The level component $L$ depends on mean productive capabilities. The scale component $S$ depends on firm size and mean coordination. This decomposition formalizes the paper’s key economic distinction: competence shifts the productivity curve upward, whereas coordination changes its curvature and tail behavior.

The illustrative CES specification makes the mechanism transparent. With two competence dimensions and coordination $y_*$,

$$F(\nu) = L(\nu)\, m(1+m)^{\bar y_*-1} \exp\left(\frac{\phi m}{1+m}\right),$$

where $m$ is firm size. When $n$0, output per worker initially rises with firm size because specialization and division of labor dominate. At larger scale, coordination frictions dominate and average product declines. The preferred firm size is

$n$1

When $n$2, the tail becomes supercritical: average product rises without bound as the firm expands. The knife-edge $n$3 has a finite limiting productivity ceiling, but that ceiling is attained only asymptotically.

Figure 1: Competence raises the level of firm productivity, while coordination determines the preferred scale and the asymptotic behavior of average product.

This formulation embeds a Coasean limit on firm size when coordination is subcritical. The limit is not imposed by an exogenous fixed cost or an arbitrary organizational boundary. It arises because larger firms eventually lose productivity through attention constraints, information loss, and incentive misalignment. The possibility of $n$4 represents a structural break: coordination becomes sufficiently effective that increasing organizational scale no longer generates a productivity penalty.

Mosaic intelligence and the value of human diversity

A central claim is that an organization can be more capable than every individual from whom it is composed. Let $n$5 denote the capability envelope—the convex hull of the capability profiles available to a population or agent set. A firm can choose a point inside this envelope by sorting agents with different strengths.

The paper’s numerical example uses six coders with capabilities $n$6, six writers with $n$7, and two coordinators with weak task skills but high coordination. The harmonic-mean competence aggregator penalizes bottlenecks. Consequently, an isolated coder or writer has competence

$n$8

whereas a balanced coder–writer organization attains mean task skills $n$9 and competence $y_*$0. The team’s competence is therefore almost three times the standalone competence of either specialist.

This result is economically important because it contradicts a simple benchmark-based interpretation of AI capability. An AI system can exceed the average human on isolated tasks while remaining inferior to a human organization that combines complementary specialists. In the example, six coders and six writers organized into two balanced firms generate approximately $y_*$1 units of output, compared with approximately $y_*$2 when the same specialists remain segregated by task and approximately $y_*$3 when all twelve are merged into one oversized firm.

Figure 2: Human specialization, complementary sorting, and coordination jointly determine the baseline equilibrium and the associated wage premia.

The same mechanism gives coordinators a high economic value despite poor standalone task performance. Adding two coordinators raises the preferred team size from approximately six to seven workers and increases total human output to approximately $y_*$4. Coordinators earn approximately $y_*$50.25, while specialists earn about $4.15. The implication is direct: standalone competence rankings need not predict wages. A worker with weak task-test performance can earn a substantial scarcity rent if the worker’s coordination capability raises the productivity of an entire organization.

Equilibrium and the structure of industries

The paper defines an industry as a measure over complete firm activities, allowing both positive-scale firms and atomless firm types. Activity weights may be fractional, which convexifies firm counts while preserving the constraint that each complete firm must fit within the market and available human supplies.

The equilibrium concept combines competitive continuation with replacement stability. Active firms must break even, profitable entry is excluded, labor markets clear, and no alternative industry can make consumers and all human resource owners weakly better off through transfers. This construction is designed to handle economies with both small atomistic firms and large increasing-returns firms, for which conventional competitive equilibrium may fail to exist or may not characterize organizational structure adequately.

The main equilibrium theorem establishes an efficiency and duality result. An equilibrium industry maximizes total surplus,

$y_*$6

where $y_*$7 is the least reservation-resource cost of producing output $y_*$8. Supporting output prices and human wages are shadow values of output and scarce human types. Human wage premia arise only when the corresponding human supply constraint binds.

This result clarifies the role of wages in the model. Wages above reservation levels are not direct social costs; they are transfers reflecting scarcity rents. The resource cost of production depends on reservation wages and compute costs, whereas equilibrium wages distribute the resulting surplus among workers and other protected parties.

Four AI capability regimes

The paper distinguishes four capability regimes using AI competence relative to human capabilities and AI coordination relative to the supercritical scale threshold.

Regime	Task competence	Coordination	Main organizational implication
Minimal AGI	At least average human competence, below the best human in some domains	Subcritical	Human mosaic firms remain competitive; AI expands through replication
Supercompetent AI	Above every human in productive domains	Subcritical	Firms become more productive but need not become larger
Supercooperative AI	Not necessarily superhuman in competence	Supercritical	Large markets concentrate into AI-heavy or AI-only firms
ASI	Above humans in competence and coordination	Supercritical	Large-market production concentrates; some human comparative advantage can survive in niches

Figure 3: The capability plane separates competence thresholds from the coordination threshold that changes organizational returns to scale.

In the minimal-AGI regime, AI copies can enter both deep and niche markets, lowering prices and reducing human scarcity rents. However, complementary human teams can remain more productive than AI-only firms. In the numerical example, all fourteen humans remain employed, but specialist wages fall from approximately $y_*$9 to $F(\nu)$0 and coordinator wages from approximately $F(\nu)$1 to $F(\nu)$2.

This is one of the paper’s strongest and most counterintuitive claims: AI can reduce human wages without reducing human employment. Replicable machines expand supply and lower output prices, while human organizations continue to possess a compositional advantage.

Supercompetent AI produces a different reallocation. Raising AI task competence above every human while holding coordination fixed leaves preferred AI firm size near seven copies in the illustrative economy. Output per AI agent rises substantially, but organizational scale does not. Humans sort across markets: specialists remain valuable in complementary human firms serving niche demand, while coordinators work with AI in deep markets. In the reported snapshot, coordinator wages are approximately $F(\nu)$3, compared with specialist wages of approximately $F(\nu)$4.

Figure 4: The four regimes generate distinct combinations of human employment, AI firm structure, wage premia, and market concentration.

The coordination route is more discontinuous. As AI coordination approaches one from below, preferred firm size increases sharply. Once AI becomes supercooperative, a large-market AI firm can exploit increasing returns to scale. The paper proves that, as demand scale $F(\nu)$5 tends to infinity, subcritical AI leads to replication: the largest firm’s output share converges to zero. Supercritical AI leads to concentration: a relaxed Herfindahl-type concentration index converges to one.

The implication is not merely that better coordination raises firm size. Crossing the coordination threshold changes the asymptotic market structure of the economy. A small improvement in coordination can therefore have a larger organizational effect than a much larger improvement in isolated task competence.

Figure 5: Competence increases output per AI agent at a fixed preferred scale, whereas coordination changes the preferred scale and can generate unbounded returns above the threshold.

The concentration result is asymptotic and depends on the supercritical tail assumption, unlimited AI replication, and the absence of sufficiently strong institutional or technological constraints on large firms. The paper explicitly notes that regulation, provider competition, capacity constraints, and contractual rigidities could prevent literal firm singularity in applications.

Firm composition, sorting, and human wages

The paper characterizes human employment through firms’ willingness to substitute human workers for AI copies. For a firm $F(\nu)$6, the bid for a human with capability $F(\nu)$7 is

$F(\nu)$8

where $F(\nu)$9 is the worker’s marginal contribution and $F(\nu)=L(\nu)S(\nu).$0 is the marginal contribution of an additional AI copy. The bid is the compute cost saved by employing the human while holding output fixed.

Under the first-moment representation, bids are affine in capability relative to the AI profile:

$F(\nu)=L(\nu)S(\nu).$1

The coefficients $F(\nu)=L(\nu)S(\nu).$2 differ across firms because firms vary in scale, composition, and the relative value they place on competence and coordination. A worker can therefore earn more than the compute rental cost even when AI is stronger in most productive domains, provided the worker has a sufficiently valuable coordination advantage.

The wage theorem states that an equilibrium wage is bounded below by the highest eligible firm bid, with equality for unemployed workers at the reservation wage or for workers employed in an interior match. Comparative advantage sorts workers into firms whose bid hyperplanes value their capability differences most highly. In capability space, the winning regions form a polyhedral fan centered at the AI capability profile.

Figure 6: Firms’ affine bids sort workers according to capability differences relative to the AI profile, with coordination advantages becoming more valuable in larger organizations.

The model therefore predicts that workers need not be classified simply as “complements” or “substitutes” relative to AI. A worker may be weaker than AI in task competence but stronger in coordination and consequently earn a wage premium in AI-intensive firms. In the numerical coordinator example, humans with task capabilities $F(\nu)=L(\nu)S(\nu).$3 and coordination $F(\nu)=L(\nu)S(\nu).$4 work alongside increasingly competent AI with coordination $F(\nu)=L(\nu)S(\nu).$5. At AI competence $F(\nu)=L(\nu)S(\nu).$6, productive humans earn approximately $F(\nu)=L(\nu)S(\nu).$7 and coordinators approximately $F(\nu)=L(\nu)S(\nu).$8. At $F(\nu)=L(\nu)S(\nu).$9, productive humans exit while coordinators remain employed at approximately $L$0, almost entirely in AI-heavy firms.

This mechanism yields a more precise interpretation of managerial or integrative labor. Its value is endogenous to organizational scale. If AI competence allows firms to operate with fewer workers, the marginal value of coordination can fall even when AI does not directly substitute for coordination. Conversely, if AI coordination improves while firms expand, human coordination may initially become more valuable before eventual substitution.

Gradual and sudden displacement

The curvature of the cost-adjusted average-product envelope determines whether humans and AI mix within firms or operate in separate firms. Let $L$1 denote the best average product at human share $L$2.

When $L$3 is strictly concave, mixed firms are favored. As AI improves, the human share changes continuously, as do output, firm size, employment, and wages under the paper’s feasibility and bounded-scale assumptions. Displacement occurs within firms: humans remain employed but their share of organizational inputs declines.

When $L$4 is strictly convex, mixed firms are not optimal. Production separates into human-only and machine-only firms. AI improvement can then cause a discrete switch in which human firms cease to be competitive. Employment can fall discontinuously even when AI capabilities change continuously.

The paper’s numerical examples quantify both cases. Along a competence path with AI task skills increasing from $L$5 to $L$60.96$L$74.58$L$83.30%%%%51$S$52%%%%0.80$S$11.04$S$20.85$$, at which point specialist employment falls from twelve to zero.</p> <p><img src="https://images.emergentmind.com/paper-images/2611-05417/fig-displacement-two-paths.png" alt="Figure 7" title="" class="markdown-image" loading="lazy"></p> <p><p class="figure-caption">Figure 7: Concave composition incentives produce gradual within-firm displacement, whereas convex incentives produce abrupt replacement of human firms.</p></p> <p>The paper’s distinction is analytically useful because it separates two mechanisms that can appear identical in aggregate employment data. A gradual fall in human employment within surviving mixed firms reflects substitution inside organizations. A sudden fall associated with the disappearance of human firms reflects reallocation across organizational forms. The latter can generate sharp wage changes even when the displaced firms represented a small fraction of total output.</p> <h2 class='paper-heading' id='reorganization-and-the-wage-effect'>Reorganization and the wage effect</h2> <p>AI progress affects wages through two conceptually distinct channels. The <strong>technology effect</strong> changes AI capabilities while holding firm size, machine share, and human composition fixed. The <strong>reorganization effect</strong> operates through endogenous changes in those organizational variables.</p> <p>For an interior worker–firm match, the paper decomposes wage changes as</p> <p>$$S$3

The technology term can be negative because greater AI capability reduces the relative capability gap between humans and machines. The reorganization terms can have either sign. Larger firms may raise the value of coordination, while greater machine shares can displace human coordinators and reduce the organization’s average coordination.

The paper therefore rejects a monotonic interpretation of AI progress and wages. A worker’s wage can rise temporarily as organizations expand and then fall once AI coordination makes the worker redundant. In one calibration, human coordinator wages initially rise as firms become larger, then decline as AI coordination crosses the relevant threshold.

This result has a direct empirical implication within the model: observed wage changes cannot be interpreted solely as the marginal productivity effect of better technology. Employer composition, firm scale, and the identity of surviving firms must also be observed.

Relation to task-based automation models

The framework nests the conventional task model as a special case. If the production functional has constant returns to scale, then the tail exponent is $S$4, firm boundaries become organizationally indeterminate, and the aggregate allocation reproduces the standard task-assignment equilibrium. The paper proves equivalence of output and task assignments, with wage equivalence except at a finite set of nondifferentiable least-cost points.

The extension adds organizational scale and coordination to the task model. In the augmented technology, the bid for a human combines task productivity with a coordination contribution:

$S$5

The coefficient $S$6 increases with the output of the firm and with the logarithm of firm size. Human coordination advantages therefore matter more in larger firms. Under constant returns, $S$7 and the conventional task model is recovered.

The resulting human-exit condition contains both relative task productivity and a coordination term:

$S$8

Even if AI dominates humans in every task, humans can remain employed when their coordination advantage is sufficiently valuable at the relevant organizational scale. This is a precise version of the paper’s broader claim that superhuman task competence does not imply immediate human economic irrelevance.

Limitations and open questions

The paper is a theoretical framework with calibrated examples, not an empirical estimate of AI capabilities or organizational production. Its strongest conclusions depend on assumptions that are consequential.

First, coordination is represented by a scalar capability that affects the scale component of production. This is a reduced-form treatment of communication, common ground, incentive alignment, verification, and managerial attention. The model does not derive $S$9 from an explicit hierarchy, communication network, contract structure, or alignment process. Whether AI coordination is stable across tasks, organizational environments, and time horizons remains open.

Second, AI copies are perfectly replicable at a common rental cost and share a single capability profile. This abstracts from heterogeneous models, inference bottlenecks, hardware constraints, model-specific failure modes, and endogenous compute prices. The supercritical concentration result is especially sensitive to the assumption that sufficiently large AI organizations can realize increasing returns without facing capacity or governance constraints.

Third, the equilibrium uses divisible activity weights and permits fractional masses of complete firms. This is analytically useful and exact for atomistic firms, but large indivisible firms may generate different industry costs and may not admit the same supporting prices. The paper explicitly interprets the convexified economy as an approximation rather than an exact model of discrete firm counts.

Fourth, several numerical paths are illustrative rather than globally certified. Some figures rely on finite menus, selected entry checks, or large-market limits. The paper states that these calculations do not establish equilibrium along every finite-market path, uniqueness at employment thresholds, or convergence of finite markets to the displayed deep-market allocations.

Finally, the empirical evidence discussed in the paper does not yet identify the model’s central primitives. Current measures of multi-agent scaling may not equal the asymptotic tail exponent $y_*$0, and firm size measured only by human employment omits rented compute. The paper leaves open whether observed AI systems are below the coordination threshold in economically relevant production environments and whether the same AI capability profile produces different coordination exponents across tasks.

Conclusion

The paper’s main contribution is to place organizational formation, firm scale, and worker sorting at the center of AI economics. Competence and coordination generate distinct comparative statics: competence can increase output while shrinking firms, whereas coordination can expand firms and, above a threshold, transform replication into market concentration. Human employment depends not only on whether AI is individually more capable, but also on mosaic intelligence, comparative advantage, firm composition, and the curvature of the human–AI productivity envelope.

The resulting predictions are structurally non-monotonic. AI can reduce wages without reducing employment, raise the value of human coordinators before displacing them, and generate either gradual or discontinuous labor-market adjustment. The specific empirical question left by the framework is whether economically relevant AI systems exhibit subcritical or supercritical coordination when evaluated inside organizations rather than on isolated tasks (2611.05417).