💸 A couple of things about AI that you should know

Hello ladies and gents,

Is it just me or can you also smell the spring around the corner? 💐 it is very lovely outside and I am looking very much forward to spending more time outside.

Also, happy Valentine’s day! I hope somebody made you smile today ❤️

• Let’s continue on this train of discovering economy - AI and how it will change the economy

• Closing the Gap - Grace Beverly

• Book of the month - Capital in the Twenty-First Century by Thomas Piketty - part II

LET’S COVER THE BASICS

How will AI change the economy?

When trying to figure out something new, it is good to first cover the basics. Just like this section is titled. That is why we’ll first list some AI related terms and their short explanations.

• AI - a field of computer science that focuses on building systems to imitate human behavior and demonstrate machine intelligence.

• Generative AI - a form of machine learning whereby AI platforms can generate new output in response to prompts based on the data on which it has been trained.

• LLMs - or large language models are a neural networks trained on large amounts of text to imitate human language. Neural network is a computational model inspired by the structure and function of the human brain.

• Machine learning - is a subset of AI in which a model gains capabilities and improves its perception, knowledge, thinking, or actions after it is trained on or shown many data points. Machine learning algorithms detect patterns and learn how to make predictions and recommendations by processing data and experiences.

• Deep learning - a subset of machine learning that uses large multilayered (artificial) deep neural networks that compute with continuous (real-number) representations, a little like the hierarchically organized neurons in the human brain. It is especially effective at learning from unstructured data such as images, text, and audio.

• Prompts - instructions given to an AI system using natural language rather than computer language.

• Prompt engineering - also known as prompt design, it refers to the process of carefully constructing prompts or inputs for AI models to enhance their performance on specific tasks

We have to thank IMF (International Monetary Fund) for these explanations.

Now that we know a little bit more that we did before, let’s see what this all means for us.

We can all agree that artificial intelligence has come quite far from the times that Gary Kasparov, famous chess player, was beaten by the Deep Blue, an AI that IBM has developed. Since then it has slowly but surely creeped up into our daily lives. It has definitely simplified some otherwise tedious tasks, that we do on a daily basis. ChatGPT, Siri on your iPhone or an AI chatbot on our favorite online shop are all AI driven tools that we use.

But what effect will AI have on the grander scheme of the economy?

Predictions are that it will have a huge impact on productivity, growth, incomes, inflation and more. First off, it's going to boost productivity because it’ll be able to manage our time at work way more efficiently. It will help you get things done faster and better. Either to do repetitive tasks that can be automated or to create some ideas for a certain project. Admit it, you have used ChatGPT for some things that you needed to get done for work 😏

AI is also going to create a whole new virtual workforce. We're talking about "intelligent automation" here. These virtual workers will be able to solve problems and even learn on their own. This will mostly be used in customer service operations and automations in the industries.

The economy as a whole is also going to thrive thanks to the spread of innovation. This means that different industries will be positively impacted, leading to the creation of new revenue streams. So, get ready for a future where AI is driving growth and making our lives easier and more exciting. As long as AI stays under control, we should be good.

Higher incomes cause more spending, which can lead to higher interest rates, if the businesses are not able to produce enough goods and the demand needs to be pulled back. In the past two editions we spoke about the correlation among these so if you missed it, have a look - here and here.

In comparison with other technological revolutions, this one is a bit different. In the past, technology has mostly replaced manual jobs like manufacturing. But now, AI will do many tasks in higher-level professions, affecting intellectual jobs besides the manual ones. Everybody is also saying that people will start loosing jobs because of AI. However, predictions of massive job losses are probably exaggerated. Technological advancements not only get rid of some jobs, but also create new industries, businesses, skills, and careers.

Which parts of businesses will be affected the most? Customer operations, marketing and sales, software engineering, and R&D (research and development). AI has the ability to support interactions with customers, generate creative content for marketing and sales, and draft computer code based on natural-language prompts, among many other tasks.

The countries that are leading the way in AI are USA and China. Both countries are AI hubs, because of the knowledge and wealth that they have to support this technology. However, there is a fear that AI will become too centralized, not only between developed and developing countries, but also in so called super firms, that could widen the gap between businesses. This can all have an even bigger effect on economic inequality, which we are also covering in the book of the month.

Why is now such a good time for AI and it’s growth?

Everything we do these days becomes a data point. More data is created in a single hour today, than in an entire year two decades ago. Just think about how many hours a day, you spend on your phone doing something or looking things up. All that is data, that can be used for improvement and development of AI.

When we discussed investing trends of 2023 AI was the first trend that we mentioned. It has shaped the stock market last year and the trend is continuing in 2024 as well. Just look at some of the AI stocks and their growth in 2023:

• Nvidia - they design chips used for AI - 214% growth

• Microsoft - is financing OpenAI that has ChatGPT - 50% growth

• Alphabet (Google parent company) - 54% growth

For reference - stock market’s average yearly growth is between 6-8%, so when you look at above numbers you can clearly see, that this is a technology that will definitely change the world.

And what does ChatGPT say about AI’s impact on the economy?

GLOSSARY

We covered enough glossary above, so we are skipping this section today.

CLOSING THE GAP

Grace Beverly

Former fitness influencer, turned serial entrepreneur.

I found Grace on Instagram last year and what intrigued me about her is the charisma, honesty and desire for work. However, she is not a workaholic. She is a self-proclaimed “lazy workaholic”. She simply loves her work and I can very much relate to that.

At a young age of 26, she has three different businesses (TALA, Shreddy and Productivity Method) and is an investor in many others. I actually bought her business planner this year and I love it. She also has a podcast called Working Hard, Hardly Working, where she talks with other entrepreneurs and shares the lessons she learned while building a business. Oh, she also wrote a book with that same title. So I think it’s very clear what she likes to do - work.

BOOK OF THE MONTH

Capital in the Twenty-First Century

by Thomas Piketty

What is the definition of capital in this book?

Capital is defined as the sum of all nonhuman assets that can be owned and exchanged on some markets. This includes all forms of real estate property, stocks, commodities, factories, infrastructure, patents and so on. We are not taking about human capital.

Last week we said that the main forces of inequality, that we are experiencing these days, are the lack of knowledge and investment in training and skills. That is understandable if we compare developed countries with the developing ones. However, even in the developed countries things are not so good for all social groups. In fact, the inequalities may be even worse.

Reasons are the following.

Top earners can quickly separate themselves from the rest by a wide margin. The other issue lies in the accumulation and concentration of wealth in the hands of the 1%, especially if the economic growth is weak and the return on capital is high. Return on capital is business profits, dividends, rents collected from owning multiple real estates etc. This issue is the more prevalent one, especially in slowly growing economies, because it takes only a small amount of new “savings” to increase the existing accumulated wealth of certain individuals. This is how the inequalities rise over time.

This can all be put in a very short form:

Historical data shows that the rate of return on capital significantly exceeds the growth rate of the economy. This puts people that inherited wealth, into a huge advantage vs. the people getting their income from labor. Their wealth grows much faster than the economy, because as we know r > g. Which is a good argument that investing your money into assets that can potentially give you return in the future is a must.

If we talk about the inequality and the distribution of wealth, there is one basic question that we need to answer.

The ever problematic question of capital/income ratio. This is an issue that has been at the very core of many historical events such as revolutions and wars. Which brings us to the first fundamental law of capitalism.

α = r x β

r = rate of return on capital
α = capital’s share in national income
β = capital/income ratio

It is a very simple way of showing the relationship between three most important concepts for analyzing capitalist system as a whole, on a country level or even for a company. To simplify - example of r is the average yearly return/growth of stocks. R can also be rents that we collect on monthly basis for an apartment that we own or the profit we make in a company.

And what is the second fundamental law of capitalism?

We’ll dive into that next week!

SOME NEWS

• If you want to know more about AI, I highly recommend subscribing to Neuron. It’s a cat friendly AI newsletter.

• Let’s admit it, working with people is hard. This might help you.

• Completely unrelated but because sharing is caring ❤️. I found this audio that promotes alpha waves in your brain, the waves that give you that flow of productivity and it is amazing. Thank me later.