The City has to cut costs and artificial intelligence will help it do this.
AI is a hot topic and last week’s international summit at Bletchley Park in Buckinghamshire focused on the problems AI can bring. But let’s leave out the fun, because, unfortunately, Elon Musk’s idea that all jobs will become obsolete is nonsense. Instead, let’s think about the economic consequences of all this.
I’ll be back in town in a moment. First, let’s accept that all new technologies bring problems as well as benefits, which is why we introduce regulations to reduce the harm. But that has always been the case.
Look at motorsport. In 1930, the year before the Highway Code was enacted, more than 7,300 people died in accidents on British roads. Every death is a tragedy, but last year, even though there were many more cars on the roads, the number fell to 1,695. The world will develop a highway code for AI.
Then, while AI has been around since the 1960s, it wasn’t of much use until the combination of huge amounts of data and huge increases in computing power in recent years.
Universal problem: the harsh reality is that municipal services are too expensive
At this point, it is very difficult to predict who will be the winners, or even who will fail. But as argued in this column a month ago, I agree with former Prime Minister Gordon Brown that this is the technology that will allow service industries to increase both their productivity and the quality of their output. This means, contrary to current pessimism, that the world will be able to increase both living standards and human well-being in the coming years.
Domestically, this is good news for the UK. We are the second largest exporter of services in the world, after the United States. If, as seems to be happening, global trade shifts from moving goods to selling services, this is doubly good news. So how can we make money from it?
It is very difficult to foresee how any new technology will develop business functions, and why some will take off and why others will prove to be dead ends. However, we can make a decent guess about where to look.
Geographically, it is the west coast of the United States, where there are thousands of companies developing promising AI applications, many of which are attracting the interest of giants. Look at the way Microsoft has made a huge investment in OpenAI, the most important of the pioneers.
Here in Britain, the best place to find a small business that ends up being worth a billion or more is Cambridge or London. As you can imagine, the search to find them has begun. The problem is that there are thousands of potential winners, but only a small number will strike gold. That’s wonderful if you can find one, but extraordinarily difficult even for experienced early-stage investors, and impossible for the rest of us.
Instead, let’s focus not on the developers of the technology but on the industries that apply it most effectively. The game will be partly about cutting costs by replacing expensive people with relatively cheap technology, and partly about using some AI development to provide a better service.
All industries that use well-paid people will benefit: healthcare, education, business services, lawyers and, hopefully, the public sector as well. However, the biggest winner of all should be financial services.
But how? There are a lot of experiments going on right now and some things are already obvious. For example, drafting financial documents could probably be done as well by an AI as by a human, although customers would understandably be upset if they paid for a known, trusted contact only to discover that most of the work had been done. by a robot.
Economic research is using AI to reduce costs, although given the performance of our profession, I wish it focused less on costs and more on judgment. That’s where Musk goes wrong. It’s not about people being displaced by technology, but rather how to best use technology to enable workers to provide a better service at a cheaper cost.
The hard truth is that city services are too expensive. It’s a universal problem, but let’s focus on one area: fund management. Here in the UK, half a million people have a SIPP, a personal pension that they invest themselves. But managing that typically costs 1.5 to 2 percent a year.
Thus, if the real return on the portfolio is only four to five percent, a third of the income disappears as fees. The prizes will go to managers who can do an equal or better job, with 0.5 percent. They finally have a tool that, if implemented intelligently, can allow them to do so.
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