“The Radical Consequences of a Digital Economy” | Bob Rice, Managing Partner of Tangent Capital Partners | March 21, 2024

Bob Rice told the Club that the current digital revolution is making radical changes in the economy which will have radical societal consequences.  The changes are occurring at a rate of speed that is hard, even for him, to comprehend.

He pointed out that the first digital camera was invented less than 50-years ago. With the popularity of the Internet and the Personal Computer, anyone can now transmit a photograph to half the world’s population instantly.  “The latest iteration is Artificial Intelligence or AI, created by machine, and it’s just getting started.  The advances and the consequences are mind-blowing and we have to be ready,” Rice said.

He then showed three brief videos that were created by computers solely with human text commands.

“They literally started with a blank screen with no pixels at all on the screen,” Rice said of the AI process.  “Tyler Perry, the big movie guy in Atlanta, was shown this a month ago.  He walked out and told The Hollywood Reporter ‘I’m putting my $800 million studio expansion on hold.  Jobs are going to be lost.’”

He calls both the advances and the consequences “shocking.”  Mr. Rice said we are seeing a “revolutionary revolution,” and he calls it that because it’s not happening in just one domain of human existence.  It’s affected things such as the war in Ukraine, entertainment, and also medicine.

“Some of the medical advances that are coming out of this are absolutely mind blowing.  The ability to create brand new antibodies that are proteins, specifically for your body, is happening right now.”

It’s a revolution that everyone will have access to.

“You don’t need to be a specialist with 20-years of training to use this tool.  You need to be able to speak or write something, and it will take care of it and do what you want it to do.”

He said that the Meta (formerly Facebook) open-source AI has been downloaded about 150-million times.

Mr. Rice also discussed human productivity and said the invention that most improved the world was the washing machine.

“Suddenly, electric washing machines freed up essentially half of humanity from six hours of drudgery every single day.  And half of humanity was unleashed into things that were more economically productive,” he said, alluding that AI holds the same potential.

While “no one really knows what this all means and where it will lead,” Rice referenced a McKinsey & Company study, which projects that by 2030 Generative AI will double the growth of productivity and increase the world’s annual Gross Domestic Product (GDP) by $4 trillion, an amount equal to the GDP of Germany or Japan.  Total AI will increase GDP by $17 trillion, equal to China’s annual GDP.

Production also changes. There are many limits on industrial growth – local workforce, the need for factories, shipping costs, production costs.  But companies have little cost in upgrading software.  And that, he argued, changes outcomes.

“With traditional industries, there’s a bell curve outcome.  Most of the stuff is gathered in the middle, and some people in the very top and it’s fine.  Digital outcomes follow a Pareto curve, not a bell curve.  So, 80% or more of the benefits flow to 20% or fewer of the participants.”

Rice is the author of three books on private investment and an adjunct Professor of Law at Florida State University, teaching how the law impacts the business of investment management.  He told the Club that investment strategies also change under a digital economy.

“The whole idea of ETFs (Exchange-Traded Funds) and passive investing is to be average for cheap.  Because if you do as well as the markets, and you’re not paying fees, well, then you’re coming out ahead,” he said.  “But how do you diversify, when you’ve got five stocks driving all of the performance?  I can own a bunch of other stuff, but what the heck is the point?”

Comparing revenues, Microsoft and Apple come in behind only the US, China, and Japan, “and are the new superpowers.”

He points out that the new digital revolution has increased efficiency.

“Digital enables things like Airbnb, the fourth or fifth largest hotel chain in the world.  How much money did they spend on building new buildings?  How much money did they spend on employees?  Nothing.  Super-efficient.”

Rice pointed to Ned Ludd and the Luddites attack on weaving machines in the 19^th-century.  Those machines eliminated jobs and skilled people had nowhere to go.

To avoid that fate in our future, he said we have to take control of AI and shape it.  “All of us are going to have to learn AI and how to use it,” he said, adding that schools have to teach new skills, and they have to teach multi-dimensional skills.  People have to learn to combine talents to keep them immune.

“(Machines are) not real good at warming up to people.  The ability to take that expertise and apply it in soft ways, focusing, bluntly, on what makes humans human and bringing your skill sets there.”

He pointed to the new job of AI prompt engineer as a good, high paying job.  The engineer asks better questions or gives better instructions to AI, all in order to connect what a person wants to create with what a machine can create.

“This is a clarion call,” Rice concluded.  “This is a five-alarm fire.  It’s not going away.  You can’t ignore it out of existence.  It’s going to fundamentally change the way most occupations operate.”

(You can also view the entire Club meeting on YouTube.)