On top of the China Shock, the AI Productivity Shock could further widen the gap between global supply and demand, and create new economic imbalances and strains on a scale the world has not witnessed.
The coming AI productivity shock
The China Shock and the AI Productivity Shock share one critical feature: both can produce a glut of output without generating a corresponding increase in demand. In China, production has grown faster than consumption; with AI, the fear is that the technology will generate wealth without creating jobs. In both cases, the gains tend to flow to the owners of capital—and in China’s case, also to the government—rather than to workers and households.
But the iron law of economics still holds: supply requires demand, and an economy can absorb a large increase in output only if enough people have the income to buy what it produces. Economists have long described it as a problem of effective demand: the recognition that supply does not automatically create its own demand. For that to happen, greater production and supply have to translate into more jobs and higher incomes.