How the AI Bubble Will Pop

Summary

Some people think artificial intelligence will be the most important technology of the 21st century. Others insist that it is an obvious economic bubble. I believe both sides are right. Like the 19th century railroads and the 20th century broadband Internet build-out, AI will rise first, crash second, and eventually change the world. The numbers just don’t make sense. Tech companies are projected to spend about $400 billion this year on infrastructure to train and operate AI models. By nominal dollar sums, that is more than any group of firms has ever spent to do just about anything. The Apollo program allocated about $300 billion in inflation-adjusted dollars to get America to the moon between the early 1960s and the early 1970s. The AI buildout requires companies to collectively fund a new Apollo program, not every 10 years, but every 10 months.It’s not clear that firms are prepared to earn back the investment, and yet by their own testimony, they’re just going to keep spending, anyway. Total AI capital expenditures in the U.S. are projected to exceed $500 billion in 2026 and 2027—roughly the annual GDP of Singapore. But the Wall Street Journal has reported that American consumers spend only $12 billion a year on AI services. That’s roughly the GDP of Somalia. If you can grok the economic difference between Singapore and Somalia, you get a sense of the economic chasm between vision and reality in AI-Land. Some reports indicate that AI usage is actually declining at large companies that are still trying to figure out how large language models can save them money.Every financial bubble has moments where, looking back, one thinks: How did any sentient person miss the signs? Today’s omens abound. Thinking Machines, an AI startup helmed by former Open AI executive Mira Murati, just raised the largest seed round in history: $2 billion in funding at a $10 billion valuation. The company has not released a product and has refused to tell investors what they’re even trying ...