Harnessing AI: Balancing Efficiency And Value In The Global Economy

Artificial Intelligence (AI) is not just a technological marvel; it's a revolution that is reshaping the very fabric of industries worldwide. Imagine a world where machines learn from data, adapt to new information, and make decisions that once required human intuition - without a single person at the wheel. This is not the distant future—it's happening right now, driving unprecedented changes in both the global economy and our daily lives. According to some reports, AI could potentially add $13 trillion to the global economy by 2030, boosting global GDP by about 1.2 per cent annually. 

As AI continues to advance at breakneck speed, it promises to revolutionize everything from healthcare to finance, enhancing productivity and slashing costs. However, amidst this technological euphoria, the real challenge is to harness AI's potential responsibly. Striking a delicate balance between its transformative capabilities and the tangible value it brings is essential to ensure that this wave of innovation fosters sustainable and inclusive economic growth.

The Tightrope Balance. Cutting Cost vs. Adding Value 
In the short run, companies face a delicate balance: leveraging AI to reduce costs without sacrificing the quality of their products or services. The temptation to use AI primarily for cost-cutting can be strong, especially in competitive markets. However, this approach can be shortsighted. AI's true potential lies in its ability to add value—by enhancing customer experiences, improving decision-making processes, and enabling innovation.
A historical perspective on technology adoption can provide valuable insights into AI's impact. The Jevons Paradox, which suggests that increasing the efficiency of resource use leads to a greater overall consumption of that resource, is particularly relevant. For instance, when cars become more fuel-efficient, people tend to drive more because the marginal cost of driving decreases. Similarly, as AI makes certain business processes more efficient, it could lead to an increased overall use of those processes. This paradox highlights the importance of considering AI's broader economic implications beyond mere cost savings.

AI is more likely to act as a force multiplier rather than an outright replacement of human labor, at least initially. This means that instead of displacing workers, AI can enhance their productivity and the value of their labor. For example, a single worker equipped with AI tools can accomplish tasks that previously required a team. This increased productivity should, in theory, lead to higher wages at equilibrium, as the value of individual labor rises.

However, in practice, this will only be achieved with the rise of skillsets of the average worker taking AI into account. As AI automates routine tasks, job roles will evolve, necessitating new skill sets. Workers will need to develop expertise in areas where human judgment and creativity are irreplaceable. Companies must invest in upskilling and reskilling their workforce to adapt to these changes. This transition period will be crucial in determining whether AI leads to widespread job displacement or the creation of new, more fulfilling job opportunities. In the long run, however, AI has the potential to elevate the economic standing of workers by amplifying their capabilities.

One of AI's most significant long-term economic impacts will be its ability to lower the cost of labor inputs for a given level of output. By drastically reducing the number of workers needed to create competitive products, AI increases the return on capital and spurs investment and economic activity. This reduction in costs makes it easier for new companies to enter the market and innovate. Small, highly specialized products that were previously unprofitable to produce can now find their niche, creating new economic opportunities and fostering a more dynamic market environment.

For companies to fully realise AI's benefits, it is crucial to measure productivity increases accurately. This involves assessing how AI tools enhance performance, streamline operations, and contribute to overall business goals. Metrics such as time saved, error reduction, and improved customer satisfaction can provide a clear picture of AI's impact. By focusing on these metrics, companies can ensure that AI investments are adding genuine value rather than just cutting costs.

Another critical consideration is maintaining the quality of products and services while integrating AI. Cutting costs should not come at the expense of quality, as this can lead to long-term reputational damage and loss of customer trust. Companies must strike a balance between efficiency and excellence, ensuring that AI enhancements do not dilute the quality that customers expect.

Case Study: AI in Software Engineering
A practical example of AI's impact can be seen in the field of software engineering, where engineering employees are the single most expensive resource for tech companies (taking to account the high salary an engineer demands and the number of software engineers any tech company must employ). AI tools can significantly boost the productivity of software engineers by automating routine tasks, identifying bugs, and suggesting code improvements. This not only speeds up development cycles but also allows engineers to focus on more complex, value-adding activities. However, it's essential for companies to measure the actual productivity gains and ensure that the use of AI does not compromise the quality of the software produced.

Many AI tools in software engineering, such as Copilot, have been introduced. It is crucial to test and validate the actual increase in output, however. Critical metrics such as time-to-deploy, shipping velocity, bugs reported, system performance, etc. should be carefully considered before a long-term decision to replace a considerable amount of your engineering workforce with AI is made.

The importance of fiscal performance due to the improvements in value addition by AI cannot be overstated. As the average annual salary of a software engineer in India is ₹8 lakhs, and the average number of software engineers in India is 4 million, the market as a whole would save a massive ₹32,000 crores per year if AI could replace even a slim 10 per cent of all engineers. Even looking at it from a single firm’s perspective, an average Indian company hires 200 engineers, and cutting just 20 of them would save each company in India ₹1.6 crores per year, which is far greater than the annual net profit of over 80 per cent of all listed companies in India.

As we stand on the brink of an AI-driven economic revolution, our paramount challenge is to responsibly harness its vast potential. AI's influence on the global economy is set to be transformative, with extensive and multifaceted effects. Although the immediate appeal of cost-cutting is enticing, AI's true strength lies in its capacity to dramatically enhance productivity, stimulate innovation, and unlock entirely new economic opportunities. Companies that adeptly balance leveraging these transformative capabilities with adding genuine value will spearhead unprecedented growth.

Our future isn’t solely about reducing expenses; it’s about fostering innovation, boosting productivity. As we venture and eventually embrace this AI-powered future, we must prioritise creating an economy where the benefits are broadly shared, and growth is both equitable and sustainable.

Virat Singh

Guest Author Virat Singh is a product manager with years of experience in the AI & software industry and a graduate of the Indian School of Business where he was awarded for academic excellence and leadership.