The Vanishing Demand: How AI is Reshaping the Global Economy
A troubling trend is emerging in the global economy: a “vanishing demand.” The traditional capitalist cycle of production, distribution, and consumption is fracturing. While artificial intelligence (AI) and other advanced technologies are generating immense wealth, that value isn’t flowing to people in the form of wages. Instead, it’s accumulating with the capital owners who control these technologies – a dangerous economic stagnation is beginning to take hold.
The Productivity Paradox: Growth Without Gains
Recent data confirms this unsettling pattern. In the second quarter of 2024, U.S. nonfarm labor productivity surged 3.3% annually, more than double the 10-year pre-pandemic average of 1.5%. This boost is directly attributable to the adoption of generative AI, robotics, and other IT advancements. However, the labor share of income, measured by the Labor Share of Income Index (base year 2017), remained at 97.703 – still below the baseline of 100.
Meanwhile, corporate profits are soaring. U.S. corporate profits (domestic industries) reached $3.4582 trillion in the second quarter of 2024, representing 11% of GDP, up from 9.0% in 2019. This widening gap between productivity and worker compensation is at the heart of the problem.
The Optimists vs. The Realists: Will AI Lift All Boats?
Technological optimists argue that AI will expand the economic “pie” and ultimately benefit everyone through a “trickle-down effect.” Jensen Huang, CEO of Nvidia, famously compared AI to electricity – a universal technology that will drive productivity and lower prices, boosting consumer purchasing power. However, critics contend that the way this wealth is distributed is the critical issue.
The core of the problem lies in differing marginal propensities to consume (MPC). Workers, with a higher MPC, tend to spend 70-80% of any income increase, injecting money into local economies. Capital owners, with a lower MPC, are more likely to save or reinvest in asset markets, keeping money locked away from the real economy.
The Rise of AI-Fueled Inequality
AI is effectively shifting income from workers to capital. A recent International Monetary Fund (IMF) report on “AI Adoption and Inequality” found that while AI adoption could improve wage inequality (measured by the Gini coefficient) by 1.73 percentage points in productivity-enhancing scenarios, it would worsen wealth inequality by 7.18 percentage points. This means the gap between those who own capital and those who don’t is widening.
Some economists draw parallels to the pre-Great Depression era of the 1920s, when advancements like electric motors and conveyor belts boosted productivity, but wages failed to keep pace, leading to overproduction and a collapse in demand.
Excessive Automation: A Self-Inflicted Wound?
Daron Acemoglu, an MIT economist, argues that we are caught in a trap of “excessive automation.” He warns that current AI investments are focused on replacing human labor to cut costs, rather than augmenting worker productivity and raising wages. This short-term gain for corporations could ultimately erode the middle class and undermine long-term demand.
The trend is clear: capital expenditure is flowing into servers, power infrastructure, and robotics, not into job creation. The International Federation of Robotics (IFR) reports that global industrial robot installations exceeded 542,000 units in 2023 – a fourth consecutive year above 500,000. Factories are becoming increasingly automated, requiring fewer workers.
The Looming Demand Cliff: 2026 and Beyond
Experts believe the most significant challenges lie ahead, not in 2025, but after 2026. This is when the initial “honeymoon period” of AI investment will end, and the full impact of job displacement will be felt. The World Trade Organization (WTO) recently lowered its 2025 global merchandise trade volume growth forecast to 0.5%, a quarter of the 2.4% predicted for 2024. The WTO warns that the boost from AI-related hardware trade will fade, and global consumption will likely slow.
This echoes a classic pattern of overinvestment followed by a downturn. Companies borrowed heavily to invest in AI infrastructure in 2024-2025, driving GDP growth. But if AI fails to deliver expected returns or consumer spending weakens, this investment could turn into a massive liability.
South Korea: A Case Study in Automation
South Korea offers a stark example of this trend. It’s consistently ranked as the most automated manufacturing nation globally, with 1,012 robots per 10,000 workers – six times the global average. While this automation has boosted manufacturing competitiveness, it has also contributed to job losses, particularly in mid-skill occupations. According to the Korean Development Institute (KDI), manufacturing employment insurance subscribers fell by 14,000 in October 2024 compared to the previous year.
Navigating the New Economic Landscape
The challenge isn’t to halt technological progress, but to manage its consequences. Policies that promote worker retraining, invest in education, and explore alternative income models (like universal basic income) will be crucial. Furthermore, incentivizing companies to focus on AI applications that augment human capabilities, rather than simply replacing workers, is essential.
Pro Tip: Stay informed about the evolving AI landscape. Follow industry publications, research reports, and expert commentary to understand the potential impacts on your career and investments.
FAQ: The Vanishing Demand
- What is the “vanishing demand”? It refers to a slowdown in consumer spending due to wealth concentrating in the hands of capital owners rather than being distributed to workers.
- Is AI inherently bad for the economy? Not necessarily. AI has the potential to boost productivity and create new opportunities, but its benefits must be shared more equitably.
- What can be done to address this issue? Policies focused on worker retraining, education, and alternative income models are crucial.
- Will this lead to a recession? It’s a significant risk. A prolonged decline in demand could trigger an economic downturn.
Did you know? The labor share of income in the U.S. has been declining for decades, even before the recent surge in AI adoption. This suggests that broader structural factors, such as globalization and declining unionization, are also at play.
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Kim Ju-wan, Staff Reporter, Hankook Ilbo
