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As the debate over what AI means for global economics and investing continues, the world’s largest wealth management house weighs in on the topic.
The rise of artificial intelligence could change how people view inflation and, at one level, make the concept of a general price level “meaningless,” UBS argued in a note on AI and macroeconomics.
While there is debate over whether generative AI tools like ChatGPT are meaningfully considered “intelligence” (see related editorial here), the emergence of these offerings has attracted worldwide attention.
In its “TechGPT” issue, UBS with Chief Economist Paul Donovan said there are likely to be macroeconomic effects from AI. That includes inflation – a hot topic in the US and other countries.
“One application of AI can be to identify the decision of an individual to buy a product more quickly, which allows the seller to pay the highest price that the buyer is prepared to pay,” the bank said. “Modern inflation calculations assume a universal price – of course it excludes prices generated by schemes that offer special discounts to certain groups. AI may render the idea of a universal price a meaningless concept in our view.”
“In theory, if AI improves efficiency, inflation should decrease. Efficiency gains could translate into higher profit margins, but over time, economists expect some of those gains to be outcompeted — and the resulting competition will result in lower inflation,” UBS continued. “But AI is also relative.” Prices must change. So AI makes possible things that were previously uneconomic, so the price set for certain workers or certain goods can be adjusted. Within the idea of greater efficiency is also the concept of increasing flexibility for individual prices. Over time, AI will replace the economy-wide concept of inflation. We think it might make sense.
According to statistics, the bank has tried to find out how the inflation numbers come out based on certain business sectors.
“In tech, software and semiconductors (both with operating margins around 30 percent) enjoy better pricing power, but hardware and IT services are mostly at risk with only low-to-mid-teens margins if AI dramatically changes the way goods and services are priced,” he says. UBS said.
Along with its peers, UBS is trying to work out not only the macroeconomic impact of AI, but also how it will affect the wealth management value chain. Private banks and wealth managers must confront how such technology will change the work of their employees. The CFA Institute, for example, a leading accreditation and professional training organization, has decided to bring AI into the field.
Creative AI
“The success of many innovative AI applications such as ChatGPT, Bard and Midjourney are redefining the way corporates, consumers and governments access technology,” continued UBS.
“While the full impact on GDP growth is unclear, we believe that software companies with early advantages in AI that can boost productivity should be the clear winners,” he said.
“Worker productivity should improve as more routine tasks are automated. In this, AI is no different from almost any other technological innovation over the past century. As with previous technological changes, the emphasis is more on the technology itself and how businesses adapt to implement the technology. It should boost productivity.” Doing so may require rethinking business models, not just adapting existing practices to accommodate AI,” he said.
However, UBS argues that the implications of AI growth are less clear, arguing that gross domestic product (GDP) is an “archaic concept” for improving living standards.
“AI can lead to increased productivity (which is positive for GDP). It can also focus on more efficient production – and while efficiency increases living standards, it doesn’t necessarily increase GDP. For example, applying AI correctly can increase productivity, but not leisure time.” This is positive for resource economic growth, not economic growth measures like GDP,” he said.
Jobs are lost and created
According to UBS, industries that rely heavily on human capital, such as IT services (labor costs account for more than 40 percent of sales), are at risk of significant automation disruption.
The bank also grappled with concerns that AI will eliminate entire fields of work and make humans superior.
“Since the first industrial revolution, every technological change has often been seen as a reduction in employment. Whenever the argument is fallacious in our view. It is certainly true that some jobs will be lost to AI. It is important to look at the individual tasks that a person performs in his work. The simple rule is ‘If half of your work is automated, change your job. If less than half of your work is automated, your work will change. Obviously, as seen in the past, in the first category there will be jobs with outdated technology. Few offices today have, for example, ‘typing pools’,” he said. “AI can also create new jobs that were previously unimagined. About 10 percent of the workforce roles that existed at the end of any given decade did not exist at the beginning of the decade. This is because technology creates new opportunities that were not previously available or lowers barriers to entry into existing occupations. Social media and A similar example is the increase in employment in the entertainment industry as streaming has broken down the barriers to entry for music and movies.
UBS says that such arguments show that the dynamics of the labor market is crucial – retraining obsolete jobs or accepting the need to compromise, removing legal and social barriers, etc.
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