Welcome back to the economics of AI. Our module this week is on economic policy in the age of AI. And getting our economic policies right for this age is perhaps more important than most people realize because political support for our system derives in no small part from the perception that the market economy is uniquely suited to foster innovation, technological progress, and increases in living standards. Our first lesson is on technological progress and welfare. We will start with a general analysis of the relationship between the two, and we will discuss under what conditions technological progress will indeed improve living standards and also what the role is of economic policies in that relationship. The second lesson will be on economic policies for the age of AI. We'll take a deep dive into the policy areas that are especially relevant for AI. One prime area will be policies that look at income distribution. We'll look both at predistribution and redistribution. Predistribution are any policies or changes in institutions that affect the market distribution of income. On the other hand, redistribution occurs after the market distribution is realized, essentially by taxing and transferring the income that the market has generated. We'll also look at a private sector driven scheme to distribute the potential gains from AI, the Windfall Clause. A number of additional important policy areas are competition policy, intellectual property rights, data and information policies, and then a broad set of policies that are oftentimes referred to as technology policy, what used to be called industrial policy. In our third lesson, we will look at taxation in the age of AI. At present, most of our tax revenues come from taxing labor but if the importance of labor will indeed decline in our economies, we'll need to look for alternatives. We'll emphasize that the most promising place to look for are all kinds of rents that have traditionally not been separated out from the returns to capital, but we really should separate them out going forward and tax the rents and the returns on capital that is accumulated separately. And then a fourth lesson will be on steering technological progress. We'll emphasize that our choice of technology in itself affects the distribution of market returns. There is a strong case for steering technology so that it benefits the factors to which we want to allocate more income. For example, making technology more labor using or more unskilled labor using if we want to help labor or unskilled labor. But we'll also observe that we need to consider the non-monetary attributes of jobs if we want to maximize social well-being. A final important point I want to make in this introduction is that good normative economics requires good positive economics. Whatever policy measures you want to analyze, we need a good economic model of the main trade-offs involved. So my advice to economic students who are particularly interested in policy is this, make sure you have the right grounding in both theory and empirics to inform the policy measures that you are advocating. I want to conclude with a quote from Keynes, which is from the last paragraph of the General Theory of Employment, Interest, and Money. Keynes' great treatise in 1936. "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Soon or late, it is ideas, not vested interests, which are dangerous for good or evil." The quote that we have just read is a reminder of several important points. First, it reminds us of the power of human imagination, which ultimately derives from the power of our intelligence. No other animal on our planet could consciously shape the world simply based on their ideas. Keynes observed that the world is ruled by little else than our ideas, and that reminds us how important our own work and our ideas as economists really are. The second point, we have to remind ourselves that we too are subject to this gradual encroachment of ideas of defunct people, meaning ones that aren't even alive anymore including, of course, Keynes. Our thinking is influenced by all these things that we have learned, read, heard from others over our lifetimes. Much of it is implicit memory, and we do not even remember when, where, and from whom we have first heard it. We have grown up in a particular system, capitalism with fewer or more social elements, depending on whether you're listening to me in the US, in Europe, Asia, or elsewhere. And just like fish don't see water, we cannot see those ideas. Sometimes, the most important job of economists or any scientists is to break through the fog, to liberate ourselves from the conventional wisdom, and develop a new paradigm that sees through what the existing paradigm got wrong. One of the main objectives in this course is to develop the contours of such a new paradigm and I hope that you will go beyond what I am teaching here and develop your own.
