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A new economic theory, "A New-ish Theory of Economics," has been developed, merging classical economics with modern task-based models. The theory addresses a fundamental gap in current economics: how aggregate wages are determined. It posits that wages are set by the "edge at the marginal human task" (a measure of human advantage over automation, influenced by technology) and the cost of producing machines, which itself is recursive. This model claims to explain historical economic trends, such as rising housing prices relative to other goods, and suggests potential implications for AI's impact on wages. The theory proposes a solution rooted in Henry George's work: taxing scarce resources, like land, and using these revenues for consumption funding, potentially supplemented by sovereign wealth funds to capture other forms of scarcity and international assets.

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The core innovation of this theory lies in its integration of classical economic scarcity models with the task-based framework popularized by Acemoglu and Restrepo. By adding "input-output recursion" and classical economics' scarcity logic to the existing model, the authors claim to have found a mechanism for "pinning" the aggregate wage, a problem that current economic models struggle with due to their reliance on estimates or free parameters. The formula derived, w = γ(x*) ⋅ br / (1 - a - λγ(x*)), explicitly links wages to technological advancement (γ(x*)) and the cost of scarce resources (br), offering a potentially more robust explanation for wage determination than previously available.

Market implications are significant, particularly concerning the long-term trend of rising housing prices and rents relative to other goods. The model predicts this phenomenon as a consequence of declining γ(x*) since the 1970s and the increasing impact of automation. Furthermore, the potential for AI to further reduce γ(x*) could exacerbate these trends. The theory's proposed solution, taxing scarce resources and redistributing revenue, could fundamentally alter fiscal policy and asset valuation, especially for land and other geographically or intrinsically limited assets.

From a technical standpoint, the recursion of the cost of capital (c) and its integration into the wage function represent a novel application of long-standing economic principles (Leontief, Sraffa, Ricardo) to contemporary issues of technological change. The paper highlights how different technological eras, like the Industrial Revolution versus the computer age, have distinct effects on γ(x*), influencing wage levels and economic inequality. The authors suggest that AI might represent another significant shift in this technological dynamic, necessitating a re-evaluation of economic structures.

Looking ahead, the validation of this theory hinges on empirical testing against historical data and its predictive power for future economic scenarios, particularly those involving advanced AI. The proposal for a "scarce tax" system, akin to land value taxation, combined with sovereign wealth funds, presents a concrete policy direction. Continued research into how to effectively implement such a system, accounting for international capital flows and varying definitions of scarcity, will be crucial for its adoption and impact.

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Covered by: hackernews