In collaboration withVanguard
AI evolution could go down various routes. At one pole, AI is viewed as a fleeting trend, another bubble driven by hype and misallocated resources. At the other pole, it is seen as a foreboding force, anticipated to significantly eradicate jobs and destabilize economies. Markets fluctuate between doubt and the anxiety of missing out, as the technology swiftly advances and investment capital flows in a manner unseen for years.
Meanwhile, numerous contemporary financial and economic thought leaders maintain the belief that the financial landscape will persist unchanged as it has over the last several years. Two years back, Joseph Davis, the global chief economist at Vanguard, along with his team, shared similar sentiments but sought to refine their views on AI technology with a stronger basis grounded in history and data. Utilizing a proprietary data set that spans the last 130 years, Davis and his team crafted a new framework, The Vanguard Megatrends Model, from studies indicating a more complex path than the extremes of hype: that AI holds the promise of being a general-purpose technology capable of enhancing productivity, transforming industries, and augmenting human labor instead of replacing it. In essence, AI will not be marginal nor dystopian.
“Our analysis indicates that perpetuating the status quo—what most economists expect—is actually the least probable outcome,” remarks Davis. “We anticipate that AI will exert a more profound influence on productivity than the personal computer ever did. Moreover, we foresee a scenario where AI rejuvenates the economy being much more plausible than one where AI fails to deliver and fiscal deficits overshadow growth. The latter scenario would likely bring about slower economic expansion, heightened inflation, and rising interest rates.”
Consequences for business leaders and employees
Davis is blunt about the implications. Although AI offers prospects for economic expansion and increased productivity, it will be disruptive, particularly for business executives and employees in knowledge-based fields. “AI is poised to be the most transformative technology affecting the nature of our work since the advent of the personal computer,” says Davis. “Those who are older might remember how the widespread adoption of PCs redefined many professions. It didn’t so much eliminate jobs as it enabled individuals to dedicate their efforts to more valuable tasks.”
The framework developed by the team allowed them to assess AI automation risks across over 800 distinct occupations. Their findings suggested that while the risk of job displacement extends to over 20% of occupations due to AI-driven automation, the majority of jobs—approximately four out of five—will witness a blend of innovation and automation. Employees’ roles will increasingly pivot towards higher value and distinctly human endeavors.
This sparks the notion that AI could operate as a co-pilot in various positions, managing repetitive tasks and generally assisting with responsibilities. Davis posits that conventional economic models frequently underestimate AI’s potential because they overlook the deeper structural impacts of technological change. “Most frameworks for potentially assessing future growth, like GDP, do not sufficiently consider AI,” he clarifies. “They fail to connect short-term fluctuations in productivity with the three dimensions of technological evolution: automation, augmentation, and the emergence of new sectors.” Automation boosts worker productivity by managing routine duties; augmentation enables technology to function as a co-pilot, enhancing human abilities; and the birth of new industries generates new avenues for growth.
Consequences for the economy
Ironically, Davis’s research points out that one reason productivity growth has been relatively stagnant in recent times may be insufficient automation. Despite a decade of rapid advances in digital and automation technologies, productivity growth has remained lagging since the 2008 financial crisis, reaching 50-year lows. This appears to support the notion that AI’s influence will be minimal. However, Davis contends that automation has not been applied in the most effective areas. “What astounded me was the limited amount of automation in sectors such as finance, healthcare, and education,” he notes. “Outside of manufacturing, automation has been poorly implemented. This has stifled growth for at least twenty years.” The services industry constitutes over 60% of US GDP and 80% of the workforce yet has witnessed some of the lowest productivity growth. Here, Davis asserts, is where AI has the potential to create the biggest impact.
One of the foremost challenges confronting the economy is demographics, as the Baby Boomer generation retires, immigration rates decline, and birth rates drop. These demographic obstacles further emphasize the necessity for accelerated technological integration. “Concerns about AI being dystopian and inciting massive job losses are present, but soon we will face a shortage of workers rather than an excess,” states Davis. “Countries like the US, Japan, China, and various European nations will have to enhance automation as their populations age.”
For instance, take nursing, a field where empathy and the human touch are irreplaceable. AI has already demonstrated its potential to enhance operations rather than replace functions, streamlining data entry in electronic health records and enabling nurses to reclaim precious time for patient care. Davis estimates these innovations could boost nursing productivity by up to 20% by 2035, a vital improvement as healthcare systems adapt to aging demographics and rising demands. “In our most probable scenario, AI will help mitigate demographic pressures. Within five to seven years, AI’s capacity to automate segments of work will equate to adding 16 to 17 million workers to the US labor market,” Davis asserts. “That’s essentially as if every individual turning 65 in the next five years chose not to retire.” He anticipates that more than 60% of occupations, including nurses, family doctors, high school educators, pharmacists, human resource directors, and insurance sales representatives, will gain from AI as an augmentation tool.
Consequences for all investors
With the proliferation of AI technology, the most successful entities in the stock market will not be its creators, but those who utilize it. “This is logical because general-purpose technologies enhance productivity, efficiency, and profitability across entire industries,” remarks Davis. The integration of AI is facilitating a variety of investment opportunities, suggesting that diversifying beyond technology stocks could be wise, as shown in Vanguard’s Economic and Market Outlook for 2026. “As this unfolds, the benefits extend beyond regions like Silicon Valley and Boston into sectors that leverage the technology in transformative manners.” Historical trends indicate that early adopters of new technologies enjoy the most substantial productivity gains. “We are clearly in the experimental phase of learning through practice,” Davis emphasizes. “Organizations that foster and reward experimentation will harness the most value from AI.”
On a global scale, Davis perceives the United States and China as significantly ahead in the AI competition. “It’s an almost tied race,” he states. “This indicates that the rivalry between the two will remain fierce.” However, other nations, particularly those with low automation levels and extensive service sectors, such as Japan, Europe, and Canada, may also experience considerable advantages. “If AI is indeed to be transformative, three industries stand out: healthcare, education, and finance,” affirms Davis. “For AI to realize its true potential, it must radically transform these sectors, which contend with high costs and an increasing demand for enhanced, faster, and more personalized services.”
Nonetheless, Davis indicates that Vanguard is more optimistic about AI’s capacity to redefine the economy than it was just a year prior. Particularly because such transformation necessitates application beyond Silicon Valley. “When I engage with business leaders, I remind them that this change hasn’t occurred yet,” says Davis. “It’s their investment and innovation that will dictate whether it does.”
This content has been generated by Insights, the custom content division of MIT Technology Review. It was not authored by the editorial team of MIT Technology Review. This was developed through research, design, and writing by human writers, editors, analysts, and illustrators. This encompasses the crafting of surveys and data collection for surveys. AI tools that may have been employed were restricted to secondary production processes that underwent thorough human vetting.
