Speculative Growth and the AI "Bubble" [pdf]

https://economics.mit.edu/sites/default/files/2026-07/speculative_growth_AI_public.pdf

by johnbarron • 8 days ago

55 65 8 days ago

economics.mit.edu

cmiles8• 8 days ago

Tl;dr is:

A temporary overvaluation can build enough real capital that the economy lands in a permanently higher-capital equilibrium, even after the inflated valuations correct. The future for AI companies may look rather iffy, but the whole economy may not be as screwed as some fear.

vmesel• 8 days ago

the guy wrote a paper on what a VC is, amazing

aureate• 8 days ago

Surely that outcome requires that the capital retains its value/usefulness. One advantage of crypto and AI is that they can utilise massively parallel computational resources (and don't have tight latency requirements, like gaming) in an age where we've hit the physical limits of sequential computation.

If the "higher capital" that results from an AI boom consists of massively parallel computational resources that currently can only be fully utilised by AI and crypto, and if those things turn out to be a bust, the "higher capital" only has value if we find something else to do with it.

Maybe we will...

largbae• 8 days ago

Do you believe that machine learning or even specifically LLMs will "bust" out of existence?

The model in my head is more like DotCom telecom. The massive overbuild in fiber was eventually used and even used for the purpose that it was imagined for during the boom. It's just that the companies that built it mostly went under and new owners acquired it at a profit-supporting price.

chongli3• 8 days ago

Doesn't that only apply if the capital is reusable? If we end up with a bunch of data centre GPUs after an AI bubble collapse, there's no guarantee those GPUs will find productive use for other things.

It's like the tulip bubble of the 17th century [1]. Having a bunch of money tied up in useless tulip bulbs didn't do anything productive after the collapse.

[1] https://en.wikipedia.org/wiki/Tulip_mania

elefanten• 8 days ago

But it’s not just GPUs that result from it but also a lot of other infrastructure including, prominently, energy.

And beyond physical infrastructure there are the intangible assets: the learning and the process innovation across multiple fields.

The upfront price for all that may end up steep, or fair, or even cheap… the truth is no one knows yet

whimsicalism• 8 days ago

yeah how will we ever find a usecase for the machines that can run thinking software

Avicebron• 8 days ago

The author starts out with a quote from Keynes about the speculation/growth from 1925-1929, is the permanently high-capital equilibrium supposed to happen 10 years after the crash or after we win the world war that follows..?

Mistletoe• 8 days ago

The reality will be something more like this-

https://en.wikipedia.org/wiki/Minsky_moment

bluefirebrand• 8 days ago

the economy lands in a permanently higher-capital equilibrium

Good for the economy, what about the value of the labor that it's currently screwing over?

I don't give a single damn if "the economy" grows if it means my skills become worthless and I become basically unemployable anywhere near my previous earning ability

Edit: even if the value of "the economy" does strongly in the future, is the value of "my labor" ever going to recover?

If no, then fuck it. Why should I care?

bze12• 8 days ago

The book Boom argues something similar

https://press.stripe.com/boom

croemer• 8 days ago

This has strong signs of LLM writing, potentially Claude.

Animats3• 8 days ago

"Workers supply labor, hold no assets, and consume their wage." Ouch. There was a time in the US when most capital was the assets backing workers' pensions.

We've seen speculative over-growth with a good legacy at least three times in the last three decades. First was the dot-com boom. Overpromotion made it necessary for every business to have a web site. That wasn't pre-ordained. The Web could have maxed out as a distribution system for catalogs, data sheets, academic papers, and similar business to business info. Overpromotion created the business to consumer web, which turned out to be useful.

The second overbuild was long-haul fiber optics. Look up Global Crossing. So much fiber was put into the ground and water that intercontinental spam is not a problem. That didn't have to happen. If traffic was billed, it wouldn't have happened. It turned out to be useful, but was not pre-ordained from the economics.

A third overbuild was the solar panel industry, especially in China. So much money was thrown at solar panel manufacturing that the price became very, very low. Solar deployment accelerated and started to take over, after decades of panels costing too much. Now China has a solar panel glut. They're dealing with it intelligently - minimum efficiency standards are coming into effect, and pollution controls on panel manufacturing are being tightened.

cgyvbunji• 8 days ago

The Web could have maxed out as a distribution system for catalogs, data sheets, academic papers, and similar business to business info.

Strong disagree, demand for the internet was insatiable, all one had to do to see the future of the internet in the 90s was observe just one school age person using AIM or MSN Messenger.

PaulDavisThe1st2• 8 days ago

The Web could have maxed out as a distribution system [...]

thing is, a few of us (mea culpa, sadly) figured out how to use it, even in 94, to sell stuff. the technology even back then was adequate for this.

cryzinger3• 8 days ago

I'm curious about the "if traffic was billed, it wouldn't have happened" part... are you saying that if traffic had been billed per [unit]byte, there would've been no incentive to build fiber networks?

AnimalMuppet2• 8 days ago

No, if traffic were billed rather than free, we would only get traffic that was deemed to be worth the bill. Most spam, for example, has a very low rate of return. If it cost to send - even a little bit - much of it would become unprofitable.

So in that world, we would have fiber, but not (much) international spam.

AloysB2• 8 days ago

I won't pretend to fully understand the paper, but I did try to read it.

A few notes:

1. This assumes that there is notable ROI on 'AI labor'. That is still up for debate.

2. This assumes that the interests are currently falling, unless I misread the paper.

3. This affirms that we are in an over valuated, speculative bubble which will inevitably correct; but it needs to "correct" at the exact right time defined by multiple factors.

First, "correction" can be an euphemism for a disastrous financial crisis. It could take years and years for most people to see the end of the tunnel. I don't know if the end justify the means.

Do we really need to engineer a financial crisis to build more energy facilities? And will they be built the 'right way', using renewable energy for example? What if we invested half of those trillions directly in socially impactful measures, instead of having the money flow through a speculative bubble first?

Finally, I am not an economist, but I wonder how accurate a mathematical model is to the real world - i.e. what happens to the model when Donald keep changing the opening hours of the Hormuz?

It does feel a bit like trying to read tea leaves to me. This reminds me of Hari Seldon's psychohistory:

In Foundation (1951), famed mathematician and psychologist Hari Seldon has developed the science of psychohistory, which uses sophisticated mathematics and statistical analysis to predict future trends on a galactic scale. He has predicted the unavoidable and relatively imminent fall of the Galactic Empire, and intends to establish the Foundation, "a repository of crucial, civilization-preserving knowledge" that will enable society to revive itself more quickly and efficiently [...] [1]

---

[1](https://en.wikipedia.org/wiki/Foundation_universe#Psychohist...)

andsoitis3• 8 days ago

What if we invested half of those trillions directly in socially impactful measures

There’s no real “we” in this case. The money is coming from private coffers, people looking for ROI on their hard-earned money. The money isn’t coming from a central planning process.

AloysB2• 8 days ago

Fair point.

Yet, "we" will suffer the potential consequences.

PaulDavisThe1st2• 8 days ago

As noted elsewhere in these comments, it was that long ago before the biggest thing propping up capital investment in the USA were the assets backing union workers' retirement funds. That very much wasn't "people looking for ROI on their hard earned money" and was very much closer to a "central planning process" (though admittedly, not all the way there).

trescenzi• 8 days ago

There is a we though. Society might not act collectively or via central planning but culture can function as such to a degree. The culture in the US is currently that it is ethical to seek returns on your capital regardless the source. This didn’t always used to be the case and it doesn’t have to be the case.

fwlr• 8 days ago

    If enough capital has been installed before learning removes the wedge, the economy lands in the high-capital state,

I’m gonna need an honest caveat on the load-bearing assumption here.

twothreeone• 8 days ago

I looked at the actual article and your instinct is exactly right: it's precisely the kind of hand-waving that makes clicking or not clicking a clear decision point.

wpasc2• 8 days ago

thank you for this comment, "wedge" has been one of the words that has been popping up in a lot of LLM writing i've seen lately. (source: it was me asking the LLM to summarize some features in a repo! the words "load-bearing" "wedge" "spike" "crux" and plenty others have been driving me crazy)

edit: as I keep reading the paper, I keep noticing some common sentence construction patterns, stylistic choices, and other little tics that I find frustrating because they are the very same things that I've been working on a few "writing-style skills" to get rid of

mattas• 8 days ago

The unlock is probably somewhere in that honest, load-bearing caveat.

dankai• 8 days ago

No word about taxes and the paper describes workers as being “protected on the downside.” while the model has removed the downside risk that workers actually face. I could write a long essay with all the issues this "paper' has.

Truly dismal science of an Economics professor at MIT.

mctaylor5• 8 days ago

This reads like a propaganda piece aimed at mathematically inclined knowledge workers to try to stave off risk perception as their economic and political power is undermined by the US shift towards kakistocracy.

"workers operate with a larger conventional capital stock and wages rise even as the worker share falls."

Liberal Democratic capitalism splits power into two primary buckets: political and economic.

Marx provided the critique of consolidated economic power. The Soviet union proved the dangers of consolidated political power and Hayek made the mechanism explicit.

The "election tampering" BS is their attempt to try to undermine plutocratic political power. This looks like an attempt to justify the insane concentration of economic power that clearly goes against Hayek's description of free markets as a mechanism to discover preferences. Whose preferences?

If worker share is falling, workers are losing their share of the economic voting mechanism. Whether or not the emerging capital ownership class chooses to keep rents and subscriptions affordable to the new working subclass if and when they accomplish this power grab is immaterial, no matter how much math they try to wrap the propaganda in.

nubg• 8 days ago

high quality post

ls6123• 8 days ago

This is a well thought out macro-finance paper. The space of multiple equilibria models is understudied because it is hard to solve computationally (or rather, it is hard to say that you have actually found all of the equilibria computationally unless you get really creative with the model).

mctaylor5• 8 days ago

Right. "Multiple equilibria". Like the two branches of the "K" in the K-shaped economy: capital owners gaining, workers losing.

So we're trying to prove "mathematically" that the K-shaped economy is "rational", and trying to circumvent the fact that the mathematical rules of economics depend on the social, political, and behavioural substrate by which those rules derive their efficacy.

Which is fine if nobody has agency, politics is irrelevant, and we just accept everything we're told at face value if it's framed in sufficiently mathematical language.

rossdavidh• 8 days ago

So, some of the capital invested due to the AI boom may be for stuff like buildings, energy infrastructure, and other long-lasting stuff. I am reminded of all of the spending done in the runup to the Y2K, when I saw factories able to get all kinds of upgrades to equipment done, outside of the normal budgetary restraints, simply because the vendors were smart enough to say "not fixable, you'll have to buy the new model". It could happen.

However, GPUs and memory chips are some of the fastest-depreciating capital investments one can make. Overinvesting in this generation's GPU model will either be wasted (because the chips are worthless in a few years) or result in a lot of underinvestment in future years (because instead of replacing those GPUs with newer models you keep using them, unwilling to admit you bought several times as much as you should have).

If we have reached the point in the cycle where the boom's proponents are trying to argue that even if it was all a mistake, maybe it's ok, then one suspects were might be late in the boom part of the cycle.

jeffreyrogers• 8 days ago

Seems like this is basically the same theory as what happened in the late 90s internet boom. Lots of speculative investment, over build out of core technology like fiber networks, then a crash, and an eventual recovery where that additional capacity was eventually put to use. Similar thing happened with railroads and the airline industry to some extent (pretty sure airlines as a whole had net negative investment returns until recently).

rajangdavis• 8 days ago

I have a hypothesis that the bubble in and of itself would not be so problematic if the United States was not in a war with Iran.

I am looking to test if there are several second order effects of rising oil prices and supply chain issues that can exacerbate financial contagion from an AI bubble (assuming we are in one) and, to the best of my understanding, it depends on what kind of mechanisms fail to contain the fall out.

I don't think it is reasonable to assume doom, but I would imagine there needs to be considerations from a much broader perspective as to discuss the possibility of 'a larger capital stock, higher wages, and a lower interest rate' that is paper is asserting.

I could be wrong (I am still trying to assess my hypothesis), but I am skeptical that the increased value/productivity from AI can overcome a rising cost of living if the war is sustained.

AnimalMuppet2• 8 days ago

When a bubble pops, there's always a cause. But it's a messy, chaotic world out there. If it wasn't that cause, then it would be a different one.

jeezfrk• 8 days ago

This has a lot riding on a fallacy.

Interest rates in fiat currency, these days, are not due to scarcity of lendable funds. Saving rates by consumers actually are just a low-risk or high-risk form of rent seek8ng., depending on the economy.

There's no world these days where a vast amount of collected wealth by a few makes credit suddenly cheap for all consumers.

All wage earners will still be able to drive up inflation if they demand goods that are not able to keep up easily... therefore pressure to save (to not take out debt) will raise interest rates fine by itself.

Unless we are talking about fiscal-based government spending (and interest on fiscal debt), no increased access to credit will become "better for all". Businesses can absorb all the credit offered during good times and consumers may see none.

Business failures will suddenly dump some assets on the market at fire sale prices, but a lost job makes those fire sales of little solace.

Speculative Growth and the AI "Bubble" [pdf]

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