David McWilliams: AI's first victim will be the economy, ushering in the 2030s chaos

Columnist David McWilliams warns that artificial intelligence, despite promises of economic efficiency, could become the first victim of the economy, leading to widespread debt defaults and financial chaos.

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The first victim of AI will be solvency.

McWilliams contends that the core promise of AI and other technological innovations is to increase efficiency by doing more with less. This inherently leads to falling prices and, consequently, falling wages. As AI is poised to replace human workers with robots, the impact on wages could be more severe than ever before, significantly eroding ordinary people's incomes.

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All technological innovations are deflationary because what drives all technology is efficiency. Efficiency is a fancy word for getting more out of less.

He explains that income is the foundation of solvency, and with more debt accumulated globally than ever before, a drastic reduction in income will inevitably lead to mass debt defaults, bankruptcies, and instability in the international financial sector. McWilliams illustrates this with a historical example from 1870 to 1900, a period of rapid technological advancement in rail and steel. During this time, prices and wages fell consistently due to increased productivity, a phenomenon he terms a "supply-side deflationary shock."

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In the case of AI, if the promise is to replace wage-earning humans with robots, the impact on falling wages will be more pronounced than anything we have seen before.

This historical period saw dramatic drops in rail freight rates and steel prices, fueled by massive growth in output, particularly for railroad construction. McWilliams suggests that the current wave of AI innovation could trigger a similar, but potentially more profound, deflationary impact on the global economy.

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Prices don’t fall because demand falls, they fall because we get better at making things cheaper.