Is AI a circular money machine? 3 reasons not to worry.
Concerns have recently emerged about the financial structure underpinning the artificial intelligence boom, with some analysts describing it as a "circular money machine". This refers to the complex web of investments and partnerships between major AI players, where the same capital appears to be circulating between companies rather than generating new economic activity. While these concerns are valid, there are several reasons why this may not be as alarming as it seems.
1. Not fraudulent round-tripping
One primary worry is that these "circular deals" artificially inflate companies' revenue, potentially misleading investors and leading to overvalued stocks. Some observers draw parallels to the dot-com era, where companies allegedly sold to each other to create an illusion of growth. However, experts like Noah Smith and Tyler Cowen argue that these AI deals are not fraudulent. The financial transactions are real, the AI hardware exists, and the contracts are public. This transparency distinguishes them from the deceptive practices of the late 1990s.
2. Diversifying dependencies
It's been suggested that these deals increase systemic risk by making AI companies' success interdependent. If one major player falters, it could trigger a domino effect throughout the entire network. While this is a valid point, the existing circular deals might actually help AI companies diversify their dependencies. For instance, if Nvidia, a leading AI chipmaker, becomes overly reliant on a few major customers like Amazon, Microsoft, and Google, building demand from companies like OpenAI could mitigate that risk.
3. Innovation and Real-World Value
Despite concerns about financial structures, AI is driving significant innovation and delivering real-world value. AI has the potential to boost productivity, improve healthcare, and increase access to education. AI is being implemented across various sectors, including finance, medicine and environmental management. AI can also generate complex forecasts that are important for issues such as flood management, storm responses, and reducing global carbon emissions. Although some argue that AI's potential is overhyped and that it currently serves more as a cost-cutting tool than a source of innovation, others believe that it is upending even the most forward-looking economic models and that its full effects are not yet grasped.
It is important to acknowledge the potential downsides and challenges associated with AI, including its environmental impact, potential for job displacement, and ethical considerations. The environmental impact of AI includes substantial electricity consumption for training and usage, and the related carbon footprint and water usage. The manufacturing of AI hardware requires the extraction of raw materials, which can lead to habitat destruction, water pollution, and significant energy consumption. AI may also lead to job displacement, particularly for entry-level workers whose jobs can be performed by generative AI tools.
While the financial structures surrounding the AI boom warrant scrutiny, the concerns about a "circular money machine" should be tempered by the recognition of genuine innovation, potential diversification benefits, and ongoing efforts to address the challenges. By remaining vigilant and addressing the ethical, economic, and environmental implications of AI, we can harness its transformative power for the benefit of society.
