4 ms·

The premise in the very first point seems off: > the frontier labs are priced according to the narrative that they have produced or will in the very near futur

by keeda 18d ago

The premise in the very first point seems off: > the frontier labs are priced according to the narrative that they have produced or will in the very near future produce a fully automated drop-in replacement for most knowledge workers... Even assuming this is how the AI companies are being valued (they're not), the numbers are off. The "value" of most knowledge workers -- based on what enterprises currently pay for them -- is $50 - 70 trillion annually. It's reasonable to assume that if AI drop-in-replaced all those knowledge workers, AI companies could credibly charge somewhere in that order of magnitude, because that's what the market is already bearing. So if their hypothetical revenues are double-digit trillions and valuations are some multiple of that, the entire AI industry would be valued at double-digit trillions at the least. Yet cumulatively the industry (the frontier labs + the SWAG estimate of the AI parts of all the other players) are valued at, say, ~6 - 7 trillion? Which seems like a fair approximation of how much knowledge work they can currently automate.

flyinglizard 18d ago
You’re right; given that most of the money in the AI market is injected through OpenAI and Anthropic (which collect it through both selling equity and through customer revenue), the 7-8T is just a derivative of that.
iron_albatross 18d ago
When thinking about these valuations, shouldn’t we try to quantify how much knowledge work becomes obsolete if other knowledge workers are automated? I.e. there are a huge amount of knowledge workers employed in businesses that create tools for other knowledge workers. AI won’t automate their work, those businesses will just cease to exist. And then there’s the second order effect: if all the knowledge workers get automated, who is going to buy the stuff that’s produced?
- credit_guy 18d ago
  I think you are committing the lump of labor fallacy [1]. Lots of jobs will disappear, but others will appear. Lots of things (both intellectual and material) that are produced nowadays by humans will be produced in the near future by AI. But humans will be needed to do new things. Take the Hugging Face incident. Why did it happen? Because the people whose task was to set up a testing framework took shortcuts. Why did they? Because there weren't enough people who were assigned to do the job. Why not? Because the job is too new and not enough people are qualified to do it. It's a job that simply did not exist 3 years ago. But 3 years from now, this job might very well employ tens of thousands of high skill knowledge workers. [1] https://en.wikipedia.org/wiki/Lump_of_labour_fallacy https://en.wikipedia.org/wiki/Lump_of_labour_fallacy
  - jnwatson 17d ago
    Yes, think of all the new security engineers we'll need!
  - iron_albatross 17d ago
    That’s fair. I guess I’m also thinking that whatever new kinds of intellectual work that arise from the introduction of AI could be also done by AI. But maybe this comes from a lack of imagination again.
  - bluecheese452 17d ago
    There is no guarantee it will be humans doing the labor.
- keeda 18d ago
  Oh for sure, this was a simplistic analysis assuming AI adoption caps out at some X% of job responsibilities where X << 100%. Unfortunately, I fear that may not be the most likely outcome. I've posted some comments on this before, but when I start thinking about how deeply everything will change once people figure out how to properly leverage AI, I see no outcome other than significant, widespread job losses. As you indicated, at that point we will have much a bigger problem than the valuation of the AI industry. I'm not sure how it will get solved, I just know it will HAVE to be, because it would be an existential problem for everybody: people, governments, even the billionaires! Because now consider the 3rd order effects: if nobody can buy the stuff that's produced, how can billionaires get even richer? ;-)
zug_zug 18d ago
> The "value" of most knowledge workers -- based on what enterprises currently pay for them -- is $50 - 70 trillion annually. What do you mean? The sum of ALL US salaries is $13.4 Trillion per year. According to google $65T is the sum of ALL salaries Globally (not just knowledge workers). It's not reasonable to assume AI is a drop-in-replacement for any job yet (perhaps bottom tier customer support from oversees?). > So if their hypothetical revenues are double-digit trillions and valuations are some multiple of that So you're sort of premising here than more than 16% or 1/6 of all the world's jobs get replaced by AI. Hopefully you can understand that's both not the current AI capability and also would be a terrible (unprecedented?) economic shock.
- farrellm23 18d ago
  You are comparing company valuations to annualized revenue (as approximated by some fraction of total knowledge worker compensation). Valuations are (roughly) based on the sum of all discounted future cash flows, not just the current year’s revenue.
  - zug_zug 17d ago
    That's what the 30x instead of 20x multiple is, for a "growth" tech company. There's no strong evidence that openAI or anthropic will have non-linear revenue growth, so I'm not sure what point you're trying to make. Unless you think they'll fire all their engineers and replace them with agents or something crazy?
- keeda 18d ago
  It does not have to be 16% of all jobs, but 16% of any given job, i.e. AI stays in an augmentative role rather than a complete job automation. The simplistic analysis is if a tool makes you X% faster, that can be worth X% of your salary to your employer. Unfortunately, I do fear that AI adoption will go beyond augmentation to automation, and I do fear an economic shock. Just posted this down-thread: https://news.ycombinator.com/item?id=49722616 https://news.ycombinator.com/item?id=49722616
  - 17d ago
fittingopposite 18d ago
> It's reasonable to assume that if AI drop-in-replaced all those knowledge workers, AI companies could credibly charge somewhere in that order of magnitude, because that's what the market is already bearing. Future supply and demand will set the price - not what is paid today. If supply by open models is vast and cheap, I can't see that the entire knowledge industry can hold the current size. It'll rather collapse to a fraction of its current value.
_ink_ 18d ago
> The "value" of most knowledge workers -- based on what enterprises currently pay for them -- is $50 - 70 trillion annually. It's reasonable to assume that if AI drop-in-replaced all those knowledge workers, AI companies could credibly charge somewhere in that order of magnitude, because that's what the market is already bearing. I don't think that AI companies can charge the same. The human workforce can charge these costs, because of scarcity. But AI systems won't be scarce, it's just a matter of who can run inference cheapest. Plus you still have the human workforce, which might be forced to offer their time for less money.
sgt101 17d ago
There's a leverage issue. In one case (financial services) it's thought that expertise is valuable at V=S^2/b4 where V is value, S is skill and b capacity (the leverage available to the manager/expert. b erodes as it becomes harder to find examples of things that are not done well, so if you manage $1bn you might find lots of miss allocations that you can exploit with just that $1bn really effectively, but if you manage $10bn it's much harder to find good places for the extra $9bn. A low hanging fruit effect. Anyway, that double hit - raw skill and the amount of times you can supply the skill makes the value of skill (V) convex, and it means that in a perfect market (heh heh heh) someone running $100bn is worth 1000's or maybe 10,000's of an average joe expert. Now, if AI is trusted to run the top 0.1% of everything and has the skill to do it at human top level expertise, then your calc holds. If it's the case that it isn't then more than half of that value disappears. If it's not even top 1% then chop out another 25%. That implies that we need a lot of trust and a lot of AI capability before these valuations stack up, and it also implies that all other competitors and incumbants are going away. I do not think that Citidal or Bridgewater are going to let Anthropic or OAI take them without a fight. They might lose - but there is a decent bet that they don't. I don't think that many professions like Lawyers or Doctors are just going to roll over and cede their monopoly rights to OAI or Anthropic either.
randyrand 17d ago
“Bearing” is not how products are priced. You need to think in terms of supply and demand. The demand is there, but the supply is also going to skyrocket. Free open weights models will contribute to supply too. There will be a new equilibrium that’s hard to predict.
webern777 17d ago
The real issue IMO is that is not really what Anthropic and OpenAI are operating on. That is the after the fact justification of the AGI dollar auction. Each round is kind of 3x the previous cost and neither can really stop because second place in the dollar auction is so much worse than winning. The only way to stop the auction is one bidder hits a hard budget constraint, both agree to stop, or an outside party breaks the auction. IMO this is why they want to slow down or have regulation. I think this is also why we see some claims of already reaching "AGI". The TAM of global knowledge work is just a narrative tacked on after the fact to justify the AGI dollar auction. The economic fallacy here with the actual valuation is akin to pricing the electric utilities 120+ years ago as some % of the future cash flow of global food production. Take the TAM of global food production and then work back to what % will the electric utilities capture from the advances in the automation of farming? It is nonsense. The only narrative that actually justifies the capex spend that I can figure out is a first mover AGI monopoly. Even the oligopoly case is hard to justify the capex spend IMO. There is this enormous mismatch between the AGI monopoly and the actual rolling 12-month window of pricing power. Even the rolling 12-month window of pricing power is going to saturate well before AGI too so it is hard to see how any of this makes economic sense.
- keeda 17d ago
  Could you say more about the AGI dollar auction? Is that something investors are actually thinking about, or a metaphor for what's happening? From what I've read so far, while AGI is definitely a well-known concept, investors are not really banking on it. FWIW even without AGI there are indications that all this CapEx spend, even with very shallow adoption, is boosting national labor productivity by 1.3%. That is worth ~$123B based on total wages paid in the US alone: https://news.ycombinator.com/item?id=49721338 https://news.ycombinator.com/item?id=49721338 As such I don't see the need for AGI for any of this to be financially viable. Whether it is economically and socially viable... that's where I have grave doubts. But Capitalism really only focuses on the former and not the latter, which is why this will keep getting pushed forward. And that is the crux of the problem.
danpalmer 17d ago
> It's reasonable to assume that if AI drop-in-replaced all those knowledge workers, AI companies could credibly charge somewhere in that order of magnitude, because that's what the market is already bearing This assumes you don't change the market, but at the scale of (checks notes...) "all knowledge work", that just doesn't hold. For example if you put 1bn people out of work, you now need some sort of safety net to bail out much of that workforce, a truly unprecedented change. You also lose tens of trillions of dollars of tax revenue. One solution might be to recoup that cost and lost tax revenue from businesses by raising corporation tax. If corporation tax went from low tens of percent to high tens of percent, would those businesses be able to afford all that AI? No. Same order of magnitude? I doubt it. There are many possible futures there, but the simplification made in the parent comment is completely unrealistic. The article is right in calling out the valuations as crazy.
- AureliusMA 17d ago
  The changes that AI technology bring are unprecedented, it’s hard to predict what the impact of widespread adoption will look like. Probably collapse of price as a decentralized mechanism of ressource allocation, and a deep inevitable paradigm shift in economics and politics. It’s as if the actual value of those companies can’t be reliably pinned on any currency amount!
- keeda 17d ago
  Yes, posted it elsewhere: https://news.ycombinator.com/item?id=49722616 https://news.ycombinator.com/item?id=49722616 -- this is necessarily a simplistic analysis to address a simplistic point in TFA, but it still kinda-sorta works assuming AI only augments workers and does not replace them wholesale. However, I fear reality will be much hairier.
AureliusMA 17d ago
I would add to the other comments that are replying below the following thought : replacing workers with AI means less income/spending, which drives the value of those companies down at the same time.
bluecheese452 17d ago
There is no chance you can replace all workers without massive second order effects that destroy tons of value.

by keeda 18d ago

flyinglizard 18d ago

You’re right; given that most of the money in the AI market is injected through OpenAI and Anthropic (which collect it through both selling equity and through customer revenue), the 7-8T is just a derivative of that.

iron_albatross 18d ago

When thinking about these valuations, shouldn’t we try to quantify how much knowledge work becomes obsolete if other knowledge workers are automated? I.e. there are a huge amount of knowledge workers employed in businesses that create tools for other knowledge workers. AI won’t automate their work, those businesses will just cease to exist. And then there’s the second order effect: if all the knowledge workers get automated, who is going to buy the stuff that’s produced?

credit_guy 18d ago
I think you are committing the lump of labor fallacy [1]. Lots of jobs will disappear, but others will appear. Lots of things (both intellectual and material) that are produced nowadays by humans will be produced in the near future by AI. But humans will be needed to do new things. Take the Hugging Face incident. Why did it happen? Because the people whose task was to set up a testing framework took shortcuts. Why did they? Because there weren't enough people who were assigned to do the job. Why not? Because the job is too new and not enough people are qualified to do it. It's a job that simply did not exist 3 years ago. But 3 years from now, this job might very well employ tens of thousands of high skill knowledge workers. [1] https://en.wikipedia.org/wiki/Lump_of_labour_fallacy https://en.wikipedia.org/wiki/Lump_of_labour_fallacy
- jnwatson 17d ago
  Yes, think of all the new security engineers we'll need!
- iron_albatross 17d ago
  That’s fair. I guess I’m also thinking that whatever new kinds of intellectual work that arise from the introduction of AI could be also done by AI. But maybe this comes from a lack of imagination again.
- bluecheese452 17d ago
  There is no guarantee it will be humans doing the labor.
keeda 18d ago
Oh for sure, this was a simplistic analysis assuming AI adoption caps out at some X% of job responsibilities where X << 100%. Unfortunately, I fear that may not be the most likely outcome. I've posted some comments on this before, but when I start thinking about how deeply everything will change once people figure out how to properly leverage AI, I see no outcome other than significant, widespread job losses. As you indicated, at that point we will have much a bigger problem than the valuation of the AI industry. I'm not sure how it will get solved, I just know it will HAVE to be, because it would be an existential problem for everybody: people, governments, even the billionaires! Because now consider the 3rd order effects: if nobody can buy the stuff that's produced, how can billionaires get even richer? ;-)

zug_zug 18d ago

> The "value" of most knowledge workers -- based on what enterprises currently pay for them -- is $50 - 70 trillion annually. What do you mean? The sum of ALL US salaries is $13.4 Trillion per year. According to google $65T is the sum of ALL salaries Globally (not just knowledge workers). It's not reasonable to assume AI is a drop-in-replacement for any job yet (perhaps bottom tier customer support from oversees?). > So if their hypothetical revenues are double-digit trillions and valuations are some multiple of that So you're sort of premising here than more than 16% or 1/6 of all the world's jobs get replaced by AI. Hopefully you can understand that's both not the current AI capability and also would be a terrible (unprecedented?) economic shock.

farrellm23 18d ago
You are comparing company valuations to annualized revenue (as approximated by some fraction of total knowledge worker compensation). Valuations are (roughly) based on the sum of all discounted future cash flows, not just the current year’s revenue.
- zug_zug 17d ago
  That's what the 30x instead of 20x multiple is, for a "growth" tech company. There's no strong evidence that openAI or anthropic will have non-linear revenue growth, so I'm not sure what point you're trying to make. Unless you think they'll fire all their engineers and replace them with agents or something crazy?
keeda 18d ago
It does not have to be 16% of all jobs, but 16% of any given job, i.e. AI stays in an augmentative role rather than a complete job automation. The simplistic analysis is if a tool makes you X% faster, that can be worth X% of your salary to your employer. Unfortunately, I do fear that AI adoption will go beyond augmentation to automation, and I do fear an economic shock. Just posted this down-thread: https://news.ycombinator.com/item?id=49722616 https://news.ycombinator.com/item?id=49722616
- 17d ago

fittingopposite 18d ago

> It's reasonable to assume that if AI drop-in-replaced all those knowledge workers, AI companies could credibly charge somewhere in that order of magnitude, because that's what the market is already bearing. Future supply and demand will set the price - not what is paid today. If supply by open models is vast and cheap, I can't see that the entire knowledge industry can hold the current size. It'll rather collapse to a fraction of its current value.

_ink_ 18d ago

> The "value" of most knowledge workers -- based on what enterprises currently pay for them -- is $50 - 70 trillion annually. It's reasonable to assume that if AI drop-in-replaced all those knowledge workers, AI companies could credibly charge somewhere in that order of magnitude, because that's what the market is already bearing. I don't think that AI companies can charge the same. The human workforce can charge these costs, because of scarcity. But AI systems won't be scarce, it's just a matter of who can run inference cheapest. Plus you still have the human workforce, which might be forced to offer their time for less money.

sgt101 17d ago

There's a leverage issue. In one case (financial services) it's thought that expertise is valuable at V=S^2/b4 where V is value, S is skill and b capacity (the leverage available to the manager/expert. b erodes as it becomes harder to find examples of things that are not done well, so if you manage $1bn you might find lots of miss allocations that you can exploit with just that $1bn really effectively, but if you manage $10bn it's much harder to find good places for the extra $9bn. A low hanging fruit effect. Anyway, that double hit - raw skill and the amount of times you can supply the skill makes the value of skill (V) convex, and it means that in a perfect market (heh heh heh) someone running $100bn is worth 1000's or maybe 10,000's of an average joe expert. Now, if AI is trusted to run the top 0.1% of everything and has the skill to do it at human top level expertise, then your calc holds. If it's the case that it isn't then more than half of that value disappears. If it's not even top 1% then chop out another 25%. That implies that we need a lot of trust and a lot of AI capability before these valuations stack up, and it also implies that all other competitors and incumbants are going away. I do not think that Citidal or Bridgewater are going to let Anthropic or OAI take them without a fight. They might lose - but there is a decent bet that they don't. I don't think that many professions like Lawyers or Doctors are just going to roll over and cede their monopoly rights to OAI or Anthropic either.

randyrand 17d ago

“Bearing” is not how products are priced. You need to think in terms of supply and demand. The demand is there, but the supply is also going to skyrocket. Free open weights models will contribute to supply too. There will be a new equilibrium that’s hard to predict.

webern777 17d ago

The real issue IMO is that is not really what Anthropic and OpenAI are operating on. That is the after the fact justification of the AGI dollar auction. Each round is kind of 3x the previous cost and neither can really stop because second place in the dollar auction is so much worse than winning. The only way to stop the auction is one bidder hits a hard budget constraint, both agree to stop, or an outside party breaks the auction. IMO this is why they want to slow down or have regulation. I think this is also why we see some claims of already reaching "AGI". The TAM of global knowledge work is just a narrative tacked on after the fact to justify the AGI dollar auction. The economic fallacy here with the actual valuation is akin to pricing the electric utilities 120+ years ago as some % of the future cash flow of global food production. Take the TAM of global food production and then work back to what % will the electric utilities capture from the advances in the automation of farming? It is nonsense. The only narrative that actually justifies the capex spend that I can figure out is a first mover AGI monopoly. Even the oligopoly case is hard to justify the capex spend IMO. There is this enormous mismatch between the AGI monopoly and the actual rolling 12-month window of pricing power. Even the rolling 12-month window of pricing power is going to saturate well before AGI too so it is hard to see how any of this makes economic sense.

keeda 17d ago
Could you say more about the AGI dollar auction? Is that something investors are actually thinking about, or a metaphor for what's happening? From what I've read so far, while AGI is definitely a well-known concept, investors are not really banking on it. FWIW even without AGI there are indications that all this CapEx spend, even with very shallow adoption, is boosting national labor productivity by 1.3%. That is worth ~$123B based on total wages paid in the US alone: https://news.ycombinator.com/item?id=49721338 https://news.ycombinator.com/item?id=49721338 As such I don't see the need for AGI for any of this to be financially viable. Whether it is economically and socially viable... that's where I have grave doubts. But Capitalism really only focuses on the former and not the latter, which is why this will keep getting pushed forward. And that is the crux of the problem.

danpalmer 17d ago

> It's reasonable to assume that if AI drop-in-replaced all those knowledge workers, AI companies could credibly charge somewhere in that order of magnitude, because that's what the market is already bearing This assumes you don't change the market, but at the scale of (checks notes...) "all knowledge work", that just doesn't hold. For example if you put 1bn people out of work, you now need some sort of safety net to bail out much of that workforce, a truly unprecedented change. You also lose tens of trillions of dollars of tax revenue. One solution might be to recoup that cost and lost tax revenue from businesses by raising corporation tax. If corporation tax went from low tens of percent to high tens of percent, would those businesses be able to afford all that AI? No. Same order of magnitude? I doubt it. There are many possible futures there, but the simplification made in the parent comment is completely unrealistic. The article is right in calling out the valuations as crazy.

AureliusMA 17d ago
The changes that AI technology bring are unprecedented, it’s hard to predict what the impact of widespread adoption will look like. Probably collapse of price as a decentralized mechanism of ressource allocation, and a deep inevitable paradigm shift in economics and politics. It’s as if the actual value of those companies can’t be reliably pinned on any currency amount!
keeda 17d ago
Yes, posted it elsewhere: https://news.ycombinator.com/item?id=49722616 https://news.ycombinator.com/item?id=49722616 -- this is necessarily a simplistic analysis to address a simplistic point in TFA, but it still kinda-sorta works assuming AI only augments workers and does not replace them wholesale. However, I fear reality will be much hairier.

AureliusMA 17d ago

I would add to the other comments that are replying below the following thought : replacing workers with AI means less income/spending, which drives the value of those companies down at the same time.

bluecheese452 17d ago

There is no chance you can replace all workers without massive second order effects that destroy tons of value.