"Workers supply labor, hold no assets, and consume their wage." Ouch. There was a time in the US when most capital was the assets backing workers' pensions.

We've seen speculative over-growth with a good legacy at least three times in the last three decades. First was the dot-com boom. Overpromotion made it necessary for every business to have a web site. That wasn't pre-ordained. The Web could have maxed out as a distribution system for catalogs, data sheets, academic papers, and similar business to business info. Overpromotion created the business to consumer web, which turned out to be useful.

The second overbuild was long-haul fiber optics. Look up Global Crossing. So much fiber was put into the ground and water that intercontinental spam is not a problem. That didn't have to happen. If traffic was billed, it wouldn't have happened. It turned out to be useful, but was not pre-ordained from the economics.

A third overbuild was the solar panel industry, especially in China. So much money was thrown at solar panel manufacturing that the price became very, very low. Solar deployment accelerated and started to take over, after decades of panels costing too much. Now China has a solar panel glut. They're dealing with it intelligently - minimum efficiency standards are coming into effect, and pollution controls on panel manufacturing are being tightened.

    If enough capital has been installed before learning removes the wedge, the economy lands in the high-capital state,

I’m gonna need an honest caveat on the load-bearing assumption here.

I won't pretend to fully understand the paper, but I did try to read it.

A few notes:

1. This assumes that there is notable ROI on 'AI labor'. That is still up for debate.

2. This assumes that the interests are currently falling, unless I misread the paper.

3. This affirms that we are in an over valuated, speculative bubble which will inevitably correct; but it needs to "correct" at the exact right time defined by multiple factors.

First, "correction" can be an euphemism for a disastrous financial crisis. It could take years and years for most people to see the end of the tunnel. I don't know if the end justify the means.

Do we really need to engineer a financial crisis to build more energy facilities? And will they be built the 'right way', using renewable energy for example? What if we invested half of those trillions directly in socially impactful measures, instead of having the money flow through a speculative bubble first?

Finally, I am not an economist, but I wonder how accurate a mathematical model is to the real world - i.e. what happens to the model when Donald keep changing the opening hours of the Hormuz?

It does feel a bit like trying to read tea leaves to me. This reminds me of Hari Seldon's psychohistory:

> In Foundation (1951), famed mathematician and psychologist Hari Seldon has developed the science of psychohistory, which uses sophisticated mathematics and statistical analysis to predict future trends on a galactic scale. He has predicted the unavoidable and relatively imminent fall of the Galactic Empire, and intends to establish the Foundation, "a repository of crucial, civilization-preserving knowledge" that will enable society to revive itself more quickly and efficiently [...] [1]

---

[1](https://en.wikipedia.org/wiki/Foundation_universe#Psychohist...)

Seems like this is basically the same theory as what happened in the late 90s internet boom. Lots of speculative investment, over build out of core technology like fiber networks, then a crash, and an eventual recovery where that additional capacity was eventually put to use. Similar thing happened with railroads and the airline industry to some extent (pretty sure airlines as a whole had net negative investment returns until recently).

No word about taxes and the paper describes workers as being “protected on the downside.” while the model has removed the downside risk that workers actually face. I could write a long essay with all the issues this "paper' has.

Truly dismal science of an Economics professor at MIT.

So, some of the capital invested due to the AI boom may be for stuff like buildings, energy infrastructure, and other long-lasting stuff. I am reminded of all of the spending done in the runup to the Y2K, when I saw factories able to get all kinds of upgrades to equipment done, outside of the normal budgetary restraints, simply because the vendors were smart enough to say "not fixable, you'll have to buy the new model". It could happen.

However, GPUs and memory chips are some of the fastest-depreciating capital investments one can make. Overinvesting in this generation's GPU model will either be wasted (because the chips are worthless in a few years) or result in a lot of underinvestment in future years (because instead of replacing those GPUs with newer models you keep using them, unwilling to admit you bought several times as much as you should have).

If we have reached the point in the cycle where the boom's proponents are trying to argue that even if it was all a mistake, maybe it's ok, then one suspects were might be late in the boom part of the cycle.

This has strong signs of LLM writing, potentially Claude.

I have a hypothesis that the bubble in and of itself would not be so problematic if the United States was not in a war with Iran.

I am looking to test if there are several second order effects of rising oil prices and supply chain issues that can exacerbate financial contagion from an AI bubble (assuming we are in one) and, to the best of my understanding, it depends on what kind of mechanisms fail to contain the fall out.

I don't think it is reasonable to assume doom, but I would imagine there needs to be considerations from a much broader perspective as to discuss the possibility of 'a larger capital stock, higher wages, and a lower interest rate' that is paper is asserting.

I could be wrong (I am still trying to assess my hypothesis), but I am skeptical that the increased value/productivity from AI can overcome a rising cost of living if the war is sustained.

The book Boom argues something similar

https://press.stripe.com/boom

This reads like a propaganda piece aimed at mathematically inclined knowledge workers to try to stave off risk perception as their economic and political power is undermined by the US shift towards kakistocracy.

"workers operate with a larger conventional capital stock and wages rise even as the worker share falls."

Liberal Democratic capitalism splits power into two primary buckets: political and economic.

Marx provided the critique of consolidated economic power. The Soviet union proved the dangers of consolidated political power and Hayek made the mechanism explicit.

The "election tampering" BS is their attempt to try to undermine plutocratic political power. This looks like an attempt to justify the insane concentration of economic power that clearly goes against Hayek's description of free markets as a mechanism to discover preferences. Whose preferences?

If worker share is falling, workers are losing their share of the economic voting mechanism. Whether or not the emerging capital ownership class chooses to keep rents and subscriptions affordable to the new working subclass if and when they accomplish this power grab is immaterial, no matter how much math they try to wrap the propaganda in.

Tl;dr is:

A temporary overvaluation can build enough real capital that the economy lands in a permanently higher-capital equilibrium, even after the inflated valuations correct. The future for AI companies may look rather iffy, but the whole economy may not be as screwed as some fear.

> What if we invested half of those trillions directly in socially impactful measures

There’s no real “we” in this case. The money is coming from private coffers, people looking for ROI on their hard-earned money. The money isn’t coming from a central planning process.

You're right but nobody wants to hear that the entire field of economics is a religion and pseudoscience to justify the immense and appalling mismanagement of society for the benefit of the few. It's anything but logical, however much the field abuses scientific and mathematical methods, because its main purpose is not to further understanding and knowledge, but to justify the existing power structure, its oppressive ideology and hidden motives, to keep the public from revolting entirely against it. What kind of economic science even makes sense in a plutocracy and oligarchy, where the rules are just made up by whoever has the reins of the system? There is no logic but greed and power, all else is intellectual theater, either in service of power or attempts at mythologizing its dynamics after the fact. The sooner we accept the reality, we can move on to productive discussion about the necessary next steps for collective action and reform.

This is a well thought out macro-finance paper. The space of multiple equilibria models is understudied because it is hard to solve computationally (or rather, it is hard to say that you have actually found all of the equilibria computationally unless you get really creative with the model).

high quality post

The author starts out with a quote from Keynes about the speculation/growth from 1925-1929, is the permanently high-capital equilibrium supposed to happen 10 years after the crash or after we win the world war that follows..?

Surely that outcome requires that the capital retains its value/usefulness. One advantage of crypto and AI is that they can utilise massively parallel computational resources (and don't have tight latency requirements, like gaming) in an age where we've hit the physical limits of sequential computation.

If the "higher capital" that results from an AI boom consists of massively parallel computational resources that currently can only be fully utilised by AI and crypto, and if those things turn out to be a bust, the "higher capital" only has value if we find something else to do with it.

Maybe we will...

Doesn't that only apply if the capital is reusable? If we end up with a bunch of data centre GPUs after an AI bubble collapse, there's no guarantee those GPUs will find productive use for other things.

It's like the tulip bubble of the 17th century [1]. Having a bunch of money tied up in useless tulip bulbs didn't do anything productive after the collapse.

[1] https://en.wikipedia.org/wiki/Tulip_mania

> the economy lands in a permanently higher-capital equilibrium

Good for the economy, what about the value of the labor that it's currently screwing over?

I don't give a single damn if "the economy" grows if it means my skills become worthless and I become basically unemployable anywhere near my previous earning ability

Edit: even if the value of "the economy" does strongly in the future, is the value of "my labor" ever going to recover?

If no, then fuck it. Why should I care?

The reality will be something more like this-

https://en.wikipedia.org/wiki/Minsky_moment

the guy wrote a paper on what a VC is, amazing

"In a K-shaped recovery, different parts of the economy move in opposite directions at the same time following a recession or downturn. One segment—the upper arm of the K—experiences an increase in wealth due to rising asset values or incomes. The lower arm faces increasing financial strain due to declining purchasing power along with stagnating or decreasing wages." (source: Britannica)

So you have it exactly backwards: the K-shaped economy refers to the continued rise of asset valuations as workers real wages decrease.

But I'm not going to keep arguing with you since you seem to be afflicted by "Math brain" (defined here by the belief in homo-economicus where humans can be accurately modelled as a selfish calculator - and please don't correct me on the calculator metaphor, I'm being hyperbolic).

Let's take what we do know from AI and cognitive science seriously: if we accept that humans are some sort of biological prediction machine, that doesn't give us a completely predictive model. There's a sort of "measurement problem" when it comes to self-prediction: while the goal of environmental prediction is clearly accuracy, the goal of self-prediction cannot be accuracy since self-prediction is inherently accurate by virtue of the actualisation of self-predictions. What then discriminates within the self-predictive model between multiple actualizable self-predictions?

If Math-brained believers in homo-economicus are to be believed, then human behaviour is completely determined by what basically amounts to greed. Certainly that's what generally selects for those who occupy positions of power and prestige in our society, and thus based on current political norms has turned into a somewhat self-fulfilling prophecy.

In this since Nietzsche was right: "God is dead." He was killed by enlightenment thinking and replaced with rational self-interested agents governed by predictable macro-economic models... which keep being wrong, because humans are not universally greedy and behaviour, politics, and psychology actually matter a great deal. (Nor is the new god of "rational" selfishly motivated acquisition, expansion, and power-seeking really that new of an invention - he is sometimes called "Moloch", and is in fact perhaps the oldest God, and humans keep discovering he's a pretty shitty God to worship; I have no doubt that he will prove equally destructive and unkind to us if we insist on continuing to and/or reverting to worshipping him dressed up in "rational" mathematical economic language).