Authored by George Ford Smith via the Mises Institute,
Artificial intelligence is rapidly becoming one of the most capital-intensive industries in history.Consider:Semiconductor fabrication plantscost tens of billions of dollars. Massive data centers consume extraordinary amounts of electricity,sending power bills soaring. Specialized engineering talent commands premium wages. (Although the median salary for an AI professional is $160K annually, the top 1 percent of AI researchers receive compensation packagesexceeding $1 million).Global supply chainsmust coordinate rare materials, precision manufacturing, and complex infrastructure.
Yet discussions about artificial intelligence almost never address the most important economic variable shaping its development: money.
From an Austrian perspective, the future of artificial intelligence ties directly to the monetary system that finances it. Whether AI produces sustainable prosperity or another boom-bust cycle depends less on algorithms than on interest rates.
As we’ve seen throughout history, interest rates in a fractional-reserve banking system trend ever lower when a new technology gets underway. This generates the illusion of prosperity called a boom, followed inevitably by a bust.
As a reminder of what is meant by a “bust,”keep in mind the figure $16.2 trillion—“The total net worth American households lost between 2007 and 2009 of the Great Recession.”
Artificial intelligence is best understood economically as a higher-order capital good—a tool that enhances the productivity of human performance. Like machinery during the Industrial Revolution or computers in the late twentieth century, AI operates within a time-structured production process involving multiple stages before consumer goods emerge.Here’s how ChatGPT worksas a consumer good, for example, providing an indispensable research tool for millions.
Nobel laureateF.A. Hayek emphasized that production requires coordination of dispersed knowledge across time. Interest rates serve as the critical signal aligning savings with investment. When that signal is distorted, the capital structure becomes misaligned.
Artificial intelligence offers super-advanced intellectual performance, but as a capital good is still subject to interest rate signals. Economically, under our central bank fiat system, distorted interest rates intensifies capital misalignment.
The current AI boom is unfolding after more than a decade of unprecedented monetary expansion. Following the 2008 financial crisis—and again after 2020—the Federal Reserveexpanded its balance sheet dramaticallywhile maintaining near-zero interest rates for extended periods. The Fed has been unwinding since its April 2022 peak, but is still 59 percent above pre-pandemic levels.
Source: ZeroHedge News
