Entrepreneurs and Central Bankers Don’t Agree on AI

THIS IS NOT INVESTMENT ADVICE

Lawyers are trained to be risk-averse, while entrepreneurs are inherently risk-takers. – Google Gemini

Entrepreneurs (Altman, Musk, Jensen, Zuckerberg) at the epicenter of the AI experiment are both great salesmen and big risk takers. They don’t know if AI will be profitable. But they are betting big it might be, as are the households that keep buying their stock (OpenAI isn’t public).

Despite this entrepreneurial leap of faith, central bankers must be skeptical these big bets will pay off or they would not be doing what they are doing, which is waiting to see if the labor market gets disrupted rather than getting ahead of it. Perhaps it is the wiring and training of entrepreneurs versus lawyers, a group whose members include Powell and Lagarde (apologies to my lawyer readers!).

The gap in perception was evident this week because OpenAI is now expected to go public, forcing investors to answer the question of what the pay off might be, even as the Fed, Bank of Canada and ECB chiefs said either explicitly or implicitly they doubt AI will meaningfully impact demand for labor. If OpenAI and their competitors are going to make money, Powell and Lagarde are going to be wrong. It’s about visualizing a probabilistic future versus rigidly following backward looking data.

Will Open AI make money? The company is spending $1 trillion to find out. At first glance, that sounds like a crazy idea. Who spends $1 trillion when their revenue is a few billion and profits are negative? Well, imagine they need to earn a 10% return on the money invested, or $100 billion. That’s also a lot of money. However, last year the revenue of the Mag7 was around $2 trillion and their profits were around $500 billion.

Could OpenAI become as profitable as some of the Mag7? What if OpenAI works like Netflix, you pay a subscription? Right now OpenAI has 800 million users who mostly get it free. If everyone is charged $300 a year, that’s $240 billion. But that’s revenue. Profits would be a fraction. From this perspective, OpenAI is a speculative. But what if you change the assumption? What if Open AI can effectively replace people, in scale?

For instance, we know AI is great at writing code. There are about 30 million software engineers in the world. Many of them don’t live in the US. Let’s say the average salary is $160k in the US and $30k in the developing world. Say you replace half these people with OpenAI? The US people cost $800B a year and the foreign ones cost about the same (assuming 1/6 of them are in the US). Said differently, it costs companies about $1.5 trillion a year to have people write code. So this means that if they can pay less than that to switch to an OpenAI, then it is rational for a company to do. Say the revenue is $750 billion a year from replacing software engineers and the margin is 50%. Then you have hundreds of billions of dollars of profit, meaning the return on invested capital might be more than 10%.

And that is just software engineers. What about investment bankers, lawyers, and doctors? Lawyers and doctors risk liability, so maybe the going is slower. Investment bankers look like a prime target, however. Copy editor, cashier, teacher, interpreter, paralegal? The global cost of labor is about $50 trillion.

Investors are struggling to price this possibility. Meta got crushed this week because it announced yet more capital expenditures, spending big enough that it will probably turn them from cash flow positive to cash flow negative. But given the stakes in a rapidly moving game, spending a few hundred billion dollars to be in the game is rational.

Central bankers, meanwhile, are confident this shift is something to observe, not get in front of. At this point, the information pointing to weakness in labor markets is more anecdotal, as it often is at big turning points. Big companies are laying off tens of thousands of employees due to both AI and automation, yet unemployment is only climbing gradually. Maybe those fired don’t all file for unemployment? Youth unemployment is up all over the world, but if they are fresh out of school they also can’t file. I know Kate Capital uses AI to accelerate our development in ways that reduce demand for labor.

What seems likely is both that a narrow group of companies is making money and many people are now living with a heightened sense of concern—is my job safe? I think the answer in many cases is “no.” That is likely the core reason why politics is so topsy-turvy; the cold reality of this technology is that AI is disruptive and no politician has a ready solution—be that taxing the rich, tariffs, rent freezes or other ideas that play well on TikTok but don’t address the underlying issue.

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