AI Gives Us a New Kind of Arbitrage

If the tech blogs I read are to be believed, we are nearing the commoditization of intelligence. In other words, if intelligence is how you play the game, you can now pay to win. Now, I don’t believe you can actually pay to win just yet, but if you told me three years ago that you could have an App developed, deployed, translated to 17 languages, simply by sending messages to a chat group without ever meeting someone, I would not have guessed AI was on the other side of that chat group. I definitely would not have guessed that you could do it with a few dollars.

This isn’t new per se. Labor arbitrage was like this before, where cost of skill work was low in some countries, and therefore businesses moved manufacturing to those countries to save on cost, and therefore either earn more profit, or reduce costs to expand their market share.

Knowledge arbitrage is a little different, but a related idea. Rather than exploiting the ‘haves’ versus the ‘have-nots’, this exploits a gap in knowledge in such a way, or in such volume, that a strategic difference appears. And this provides a person or entity with the ability to move advantageously compared to their peers.

With AI, we might now be seeing Intelligence arbitrage, where certain types of work requiring certain types of intelligence can now be done easily, cheaply, ubiquitously. Not all work will be like this, surely; craftsmen still exist despite the rise of industrial manufacturing, and in fact many modern craftsmen make use of industrial manufacturing to produce even more complex and beautiful items. But it does mean that we can no longer command a premium for things that require intelligence, and increasingly so.

What is left for us then?

Let’s do a thought experiment.

What happens when the cost of producing goods goes toward zero? It becomes cheap to produce, and quality floor is raised while pricing is pressured downward because demand for highest quality goods comes down when mediocre quality goods can meet user needs.

What happens when the cost of producing intelligence goes toward zero? It becomes cheap to produce things, and the quality floor is raised. Software is a prime example of this; it is in essence stored text which can be - essentially freely - converted into a binary. Now that AI can create software better than pretty much any fresh graduate, and in fact better than many experienced engineers, there is no longer a reason to keep producing lousy software.

Will pricing be pressured downward? It is hard to say, but on the whole you could expect that something like software will be cheaper to produce and therefore cheaper to sell. So while a company’s product might not become cheaper, and engineers might not be paid less, they might have to produce more to justify the same pricing and salaries.

This very quickly becomes a bit of a scramble to the bottom; the cheapest working product that is fastest to market wins the masses.

How does one differentiate yourself in such an age?

Wisdom might be the next arbitrage

Much like having certain knowledge makes one able to take advantage of a situation, I think the arbitrage we have left is Wisdom. This is a hard concept to explain, but if we were to qualify it in hindsight, we could say it is doing the right thing, at the right time, in the right way, for the right people.

Yes, we can now produce goods and software and information with a couple of taps and a click (talking to your computer works too). But for who? With what features? With what guarantees? At what price? On which device? How do you know the user found it valuable?

There are numerous questions that go into the creation of value, and only a small portion of these can be answered with ‘just use AI’.

How do we build up the right questions to ask, and how do we arrive at the right answers? I think the wise are differentiated from the rest exactly because they are asking the right questions, and know how to find the right answers, and therefore the right thing, at the right time, in the right way, for the right people.

Calling in the Public Square

The Bible has a lot to say about Wisdom. There’s a whole book of Proverbs. It characterizes Wisdom not as something hidden or hard to find or even rare. Instead Wisdom is personified and calling out in the public square (Proverbs 1:20-21).

Wisdom is not rare, we humans are just reluctant to listen, empathize, and respond. And soon, that might be a key differentiator.