Powers and perils of AI
Adam Smith’s thinking and philosophy can help humans navigate the troubled waters of artificial intelligence

Nowadays, it’s almost impossible to talk about economics without invoking Adam Smith. Smith grappled with how to advance well-being and prosperity at a time of great change. The Industrial Revolution was ushering in new technologies that would revolutionise the nature of work, create winners and losers, and potentially transform society.
Today, we find ourselves at a similar inflection point, where a new technology, generative artificial intelligence (AI), could change our lives in spectacular—and possibly existential—ways. Given the parallels between Adam Smith’s time and ours, I would like to propose a thought experiment: If he were alive today, how would Adam Smith have responded to the emergence of this new “artificial hand”?
Beyond the invisible hand
To explore this question, I would like to start with his most famous work, The Wealth of Nations. A seminal idea in this work is that the wealth of a nation is determined by the living standards of its people, and that those standards can be raised by lifting productivity. This idea is especially relevant today because global productivity growth has been slowing for more than a decade. AI could certainly help reverse this trend. AI could raise productivity by automating certain cognitive tasks while giving rise to new higher-productivity tasks for humans to perform.
Goldman Sachs has forecast that AI could increase global output by 7 per cent, or roughly USD 7 trillion, over a decade. While it is far from certain that such sizeable gains will be realised, it is probably safe to say that when it comes to maximising efficiency, Adam Smith would be wary of stifling the artificial hand of AI.
Aside from the gains in productivity, AI could shake up the labour market in unprecedented ways. Recently, we have seen the loss of “middle-skill” jobs due to automation, resulting in large clusters of high-paying and low-paying jobs at either pole of labour markets. The literature shows that AI could affect occupations and industries differently than previous waves of automation. Recent empirical studies suggest AI could reduce job-market polarisation, by putting downward pressure on wages of high-paying jobs. Some studies suggest that AI adoption could flatten the hierarchical structures of firms.
So, what will be the net impact on the job market? It is by no means guaranteed that AI will benefit humans, or that the gains of the winners will be sufficient to compensate the losers. It is quite possible that AI might simply replace human jobs without creating new, more productive work for humans to move into, as the economist Daron Acemoglu has noted.
Thus, despite AI’s potential, we need to consider the broad negative effect it could have on employment—and the social upheaval that could cause. Given that the well-being of the individual and the plight of the common worker underpinned much of Adam Smith’s thinking, this would surely have troubled him.
Today, the market for the components to develop AI tools is highly concentrated. A single company has a dominant position in the market for silicon chips best suited for AI applications, for example. Many AI models require massive computing power and huge amounts of data—the lifeblood through which these models hone their “intelligence”.
While Smith would have been impressed by the emergence of such a powerful technology in a globalised economy, he might also have realised that the invisible hand alone may not be enough to ensure broad benefits to society.
New approach to regulation
Which brings me to a point I would like to emphasise—we urgently need sound, smart regulations that ensure AI is harnessed for the benefit of society. One of the challenges is the extent to which humans may come to depend on the judgement of AI systems. They rely on existing data, and hence may replicate the embedded bias in that data. Some models have shown a tendency to confidently defend false information—a phenomenon known as AI “hallucination”. When it comes to AI, we need more than new rules: we need to recognise that this might be an entirely new game. And that will require an entirely new approach to public policy.
New legislation proposed by the EU is an encouraging start. The EU’s Artificial Intelligence Act classifies AI by risk levels. The highest-risk systems would be banned. This would include government systems that rank people based on social compliance, known as “social scoring.”
Beyond regulating AI systems directly, we must be prepared to address the broader effects of AI on our economies and societies. Given the threat of widespread job losses, it is critical for governments to develop nimble social safety nets to help those whose jobs are displaced.
Making the right adjustments to the education system will be crucial. We need to prepare the next generation of workers to operate these new technologies and provide current employees with ongoing training opportunities.
Clearly, we need international coordination on regulation, because AI operates across borders.
Redefining human
All that said, to truly consider the implications of AI from Adam Smith’s perspective, we need to go back to his first major work, The Theory of Moral Sentiments. Smith explored what enables us to behave morally. In his view, it is our ability to experience “sympathy”: we can imagine each other’s joy and pain, and as a result, we temper our “passions” and learn to be civil towards others. It’s what allows us to build and sustain a rules-based society. But what happens when you add artificial intelligence into the mix?
What is remarkable about the latest wave of generative AI technology is its ability to comb vast amounts of knowledge and distill it into a convincing set of messages. It is unclear whether AI will evolve to the point where it could be called truly sentient. But if it can already replicate human speech, it may be difficult to know the difference. The glue that binds the concept of society conceived by Smith—sympathetic human beings interacting in the spirit of compromise—begins to disintegrate.
This has deeply disturbed scholars such as Yuval Harari. Through its mastery of language, Harari argues, AI could form close relationships with people, using “fake intimacy” to influence our opinions and worldviews.
It's telling that even the pioneers of AI technology are wary of the existential risks it poses. Just last week (last week of May 2023), more than 350 AI industry leaders signed a statement calling for global priority to be placed on mitigating the risk of “extinction” from AI.
So much of Adam Smith’s work is based on the idea of information being effectively transmitted through society. But AI can significantly damage the integrity of that information and the fundamental benefits that it confers to society.
Smith would no doubt be troubled by the possibility of “hallucinating” software spreading fake news and deepening divides in society. Thus, there is a good chance he would have supported rules that protect consumer privacy, and limit misinformation in the age of AI.
To conclude, I would like to stress that this debate is ongoing, and I do not claim to have all the answers. I have pointed out a few of the issues surrounding AI, and how we can use Adam Smith’s thinking and philosophy as a guide to help us navigate the path ahead.
AI could be as disruptive as the Industrial Revolution was in Adam Smith’s time. We will need to carefully balance support for innovation with regulatory oversight. Because of AI’s unique ability to mimic human thinking, we will need to develop a unique set of rules and policies to make sure it benefits society. And those rules will need to be global.
It is a challenge that will require us to break out of our own echo chambers and consider the broad interest of humanity. Harnessing AI for the good of humanity will require an interdisciplinary approach.
Writing on the cusp of the Industrial Revolution, Smith could hardly have foreseen the world we live in today, some 300 years after his birth. Now, we may once again be on the brink of technological transformations we cannot foresee. For better or worse, humans are not known for walking away from the next stage of scientific and technological progress. Usually, we simply muddle through. This time, as we confront the power and perils of the artificial hand, we need to summon every ounce of our empathy and ingenuity—the very things that make human intelligence so special. DTE
The writer is the First Deputy Managing Director, International Monetary Fund or IMF. Views expressed are personal