Externalism: an Efficient Economic System Prepared for AI and the Fourth Industrial Revolution

By Xaver Davey

I. Problem Statement

This paper aims to bring attention to an impending economic problem and propose preliminary solutions. What remains uncertain, however, is the size and scale of the incoming predicament. The problem at hand is the vast displacing potential of advanced artificial intelligence (AI), which will dramatically change the economic landscape, possibly hurting a considerable portion of society.

Occasionally, a new technical revelation occurs that completely changes the ground on which all of humanity stands, usually for its betterment as a whole in the long run. Humankind has witnessed these developments time and again with advancements like agriculture, animal domestication, and, more recently, the first industrial revolution. However, as technology grows exponentially (Cassard et al. 76, 2018), these changes are accelerating and happening faster with time. As it turns out, civilization is again beginning to experience one of these massive changes: the fourth industrial revolution. The fourth industrial revolution entails automating technology advancements that, because of its scope, have been described as removing borders between “physical, digital, and biological spheres” (Schwab 1, 2017).

“What is the big deal?” one might ask. Artificial intelligence is a potent tool that has begun performing not merely seemingly mundane tasks like driving cars but also can generate artistic and poetic works (Kurt 25, 2018). Even though machines still require improvement to pass as humans, AI has started to near this frontier unceasingly. Research projects AI to exceed human performance in surprisingly complex tasks within the next decade (Grace et al. 743, 2018). This phenomenon is relevant because it will allow AI to develop the capabilities to perform what was previously thought to be uniquely human, including tasks needed within the workforce. While the issue is highly complex and still theoretical, there are real concerns about how it might impact the US economy. For example, “47 percent of total US employment is in the high-risk category, meaning that associated occupations are potentially automatable” in roughly one to two decades (Frey 41, 2017).

Automating technology at such a scale has the potential to displace substantial numbers of jobs in the workforce in a short period. With economic changes occurring at uncanny proportions, glib and superficial solutions proposed politicians will not cut it. With the fourth industrial revolution changing the technological landscape, getting everyone to code would be unfeasible because firstly, there is no certainty for such a massive volume of demand for software developers, and secondly, not everyone is technologically inclined. If leaders do not configure the socioeconomic system to handle this transition, severe consequences will ensue.

When it comes to finding a way to tackle this problem while maintaining economic flexibility and avoiding an overwhelming degree of change, this paper proposes Externalism. Externalism is a socioeconomic model where both individuals and businesses maintain as many rights and responsibilities for themselves, only encountering an intervention if they have been on the initiating or receiving end of practices that have removed one’s capacity to function independently or self-sustain. Such a model is highly favorable because it minimizes interference in private activity, requires relatively uncomplicated tweaking of current fiscal policy, is tried-and-tested, and is ethically grounded.

II. Background

While technology’s progression has displaced workers in the past, certain forms of displacement would usually not be so harmful since a “productivity effect” occurred (Acemoglu 3, 2018). This productivity effect existed mainly because of the synergetic potential between humans and technology. In other words, the technology existed as a tool that, instead of hurting people in the long run, creates more productive workflows that result in greater output. As an example, one can look at a sewing machine. While it may displace workers who formerly relied solely on hand-sewing methods, it can ultimately increase clothing production by saving time, reducing costs, and potentially establishing the resources for increasing employment. However, this cycle of unemployment and subsequent reemployment logically occurred because automation could not replace humans entirely; each sewing machine still needed a human to use it, or there would be no clothes produced.

There will be widespread disillusionment if we expect the same to happen with the rise of advanced AI. The class of technology is a fundamental game-changer because, by definition, developers designed AI to strongly imitate the valuable traits of humans, including maximum independence and self-management, as opposed to being a static tool where each entity requires constant human attention. In the short term, this technology may create jobs. However, even then, in the long run, when technology continues to grow exponentially, why waste a dollar on a human when it would take a robot a fraction of that to do the same job? The human capital of the majority of the population is not safe.

Nevertheless, one of the biggest hurdles of addressing the problem is the immense uncertainty associated with it. Merely scratching the surface on academia’s take on the topic reveals how uncertain human prospects are for employment. As of the moment, there appear to be three main perspectives relating to AI’s effect on the future economy. However, although enormous challenges are continually confronting humanity, there may still be enough time to address this problem in a manner that is appropriate and informed since “progress in AI may follow a delayed pattern, similar to what happened after the introduction of computers in the 1980s” (Korinek 2, 2018).

Three primary perspectives regarding AI development are the Doomsayer’s Perspective, Optimist’s Perspective, and Unifying Perspectives (Frank et al. 6532, 2019). The Doomsayer’s Perspective is, as its name suggests, highly pessimistic with the assertion that AI will bring mass unemployment, furthering more severe social problems. The Optimist’s Perspective is contrary to this by asserting that while there can be downsides, most participants in the economy will likely benefit in the long run from AI. Finally, Unifying Perspectives are a hybrid of the two (Frank et al. 6532, 2019). However, regardless of where one may stand or how the future will emerge, this paper aims to dissect the problem and gain insight into the issue. While the problem—for many—is incredibly stressful, worrisome, and perplexing, the collective solution must be ultimately rooted in ethics and reasoning.

While it can be challenging to persuade change when clear consequences are not yet visible, it is essential to stay pragmatic and realize addressing the problem before a widespread crisis affords flexibility and avoids potential socioeconomic disaster. Furthermore, it can indirectly solve other ailments of society. Regardless of what final form the economy will take in the wake of advanced artificial intelligence, it is essential to find a solution for the individuals who may face long-term unemployment and make it fair for the companies that will venture into AI. It will be essential to inform them about their responsibilities ahead of time and not in the aftermath of a highly probable social fiasco.

III. Analysis

It is imperative to define the parameters of action. One must assert principles and standards that are inviolable when proposing a potential solution. Moreover, this paper asserts several ethical postulations before specifying the solution for this predicament. They are as follows:

  1. Every person has fundamental rights and responsibilities. Without one, the other is meaningless. These rights include dignity and means of survival. The individual’s burden is to provide these rights for themself, to the fullest extent that their capacity allows.
  2. Every person has the freedom to partake in all social or economic practices as long as all parties consent. There should only be legal intervention if these practices impact a third party’s capacity to secure their rights for themselves.
  3. While at times difficult to identify, it is possible to establish when one party has externally impacted a third party through socioeconomic behavior. This postulation rests on Calebresian understanding of economic externalities (Dahlman 142, 1979).
  4. While survival and basic dignity are fundamental rights, to flourish and thrive beyond necessities is at the individual’s discretion. No external person, firm, or state is responsible here as no such external force can guarantee internally-acted self-actualization.
  5. While radical change is sometimes necessary, there is an inherent practical advantage to gradual adjustment.

At its core, the proposed solution of implementing the economic system of Externalism roots itself in these principles. When any socioeconomic policies are drafted, especially in the wake of an industrial revolution that threatens to change the very functional landscape society rests upon, it is vital to keep these postulations in mind to minimize ethical inconsistencies. As leaders propose other specific solutions, these postulations should remain as the foundation.

Understanding economic externalities, including government intervention through subsidization or taxation, is not associated with these postulations since these postulations are compiled novelly for this paper. However, in its essence, Externalism proposes a system with postulations that complement traditionally economic externality theory, which implies the favourability of competition in free markets due to their efficiency (Franzini 56, 2006). In that spirit, if an entity impacts a third party, a tax or subsidy should be imposed out of simultaneous fairness and economic efficiency.

IV. Proposed Solution

While the impending crisis is complicated and multidimensional—therefore likely having multiple solutions—the path of Externalism is a potential optimum choice. While the paper will momentarily explain in greater detail what particular goals and policies the government should implement to prevent a collapse of society, it will focus on the general guiding principles.

As previously stated, the idea of taxation or subsidization based on a third party’s impacts is not at all new. What is novel and not yet legally applied is a concept that those who have been made incapable of sustaining themselves by an action of a third party through that party’s economic decision of rendering their skills obsolete need to be supported by those who engendered this situation, and secondly, that AI effects count as an externality. Suppose an economic situation develops where a part of the workforce has no job prospects because of AI’s utilization and cannot obtain employment. In that case, the government should impose taxes on creating and using AI, which locomotes to fund the survival/re-training of those displaced.

It is vital to reiterate that an ideal government does not impose AI taxes on an emotional sense of equity. If AI causes harm to a third party, these taxes provide financial means for the vulnerable but surprisingly and simultaneously increase economic efficiency. For example, it is standard practice to tax tobacco sales to fund the offset of third-party damage implicated by this transaction to optimize the economy. The paper argues for treating displacing AI similarly. The idea of fairness and efficiency are not mutually exclusive in dealing with externalities (Heath 24, 2019).

A few essential investments are also necessary to facilitate an Externalist framework. The first one is to continue incentivizing work involving financial analysts and surveyors. Because the consequences of the imminent transition relate mainly to injury against society’s members, the economic landscape must be continually analyzed to implement more specific policy actions.

Another essential investment is increased funding to courts carrying judicial appeals. Because the problem of solving externalities by tax or subsidies will often operate on individual cases, the courts will most likely be the best location for suites to determine whether third-party harm or help has occurred. If the problem manifests itself on an enormous scale, having a robust court system will be critical to making sure those who need cases heard have their right to a quick and speedy legal resolution guaranteed. This funding would not be another Washington blackhole that vanishes money out of existence. Instead, these expenditures would be infrastructural and would return the financial investment in the aggregate economy.

Finally, updating the computational infrastructure of the government is both long overdue and essential. Information is power. To address the problem, the government must have quick and easy access to details surrounding its citizens’ dynamics through information technology. 

V. Conclusion

In summary, while uncertain, there is a significant potential for workforce-related economic collapse to occur soon that, ultimately, the continuous progress of artificial intelligence’s automotive nature fuels. As a result, the situation demands policy action capable of addressing the situation. Externalism is a model built from the ground up on ethical and practical postulations. As a result, regardless of the scale of the displacements caused by the upcoming fourth industrial revolution, the system could work. While this paper’s scope covers a general overview of a system much needed for this modern context, legislators can create more specific target policies with reduced difficulty if consistent principles—as offered by this paper—are utilized with third-party thinking at the forefront of these decisions.

Without a doubt, implementing Externalism into law will not necessarily be easy. Individuals with financial means have often avoided efficient outcomes, choosing selfish gain and creating negative externalities (Beckman et al. 365, 2002); within all humanity’s strides for progress, implementation challenges are always present. However, there is still hope. What makes Externalism a feasible option is because it is rooted in well-understood theory and is minimally deviant from our current economy. One of the only critical requirements for Externalistic legislation is a democratic culture. Because of the excellent efficiency and utility associated with addressing externalities, as long people have autonomy over themselves in a democratic environment, policies like these may come naturally.


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