Artificial Intelligence and the economy

Abstract

This paper examines the economic implications of recent advances in artificial intelligence (AI), focusing on the mechanisms through which AI affects firms, markets and macroeconomic outcomes. Building on the view that modern AI primarily reduces the cost of prediction and pattern recognition, the paper analyses how lower prediction costs reshape organisational decisions within firms, including task allocation, business processes, human resource management, strategic decision-making and innovation activities. It then considers how these firm-level transformations influence market structure, highlighting the emergence of a vertically organised AI stack – from semiconductors and cloud infrastructure to foundation models and applications – and the economic forces that may lead to concentration and new forms of market power. The analysis subsequently examines the material and systemic foundations of AI, including semiconductors, energy systems, data centres and critical minerals, and discusses how these inputs interact with geopolitical competition and industrial policy. The paper also reviews the uncertain macroeconomic consequences of AI, assessing its potential effects on productivity, employment and income distribution, while emphasizing the importance of organisational complements, adoption patterns and institutional frameworks in shaping aggregate outcomes. Finally, it explores governance challenges, outlining the roles of competition policy, corporate accountability, industrial strategy and labour market institutions in shaping how AI-driven transformations affect economic efficiency, resilience and equity. The paper concludes by identifying key areas where further empirical research and policy experimentation are needed to better understand and manage the economic transition associated with AI.