Originally posted as a Twitter thread on August 22, 2024
New Essay: The Transmutation of Capital into Labor
https://a16z.com/ai-turns-capital-to-labor/
The first era of software took analog files, digitized them, and made them accessible with a specialized interface. Think PeopleSoft for HR files, Quickbooks for ledgers, Epic/Cerner for health…
This has played out for 50+ years as more industries have moved to running on software, not files. Cloud lowered the adoption barrier. Adding financial services to cloud made more markets “big enough” for specialized companies (e.g., Toast, ServiceTitan) to exist.
But the same humans that acted on the analog files now act on the digital files! And sometimes it’s impossible to align hiring and training (of those humans) with business needs.
This is what’s exciting about AI. It’s not filling software budget. It’s filling “labor” budget.
Wages in the US alone are $10T+ per year. The worldwide software market is a few hundred billion dollars.
The original “digital filing cabinet” winners have a tremendous amount of potential to add AI, but also have a daunting task of shifting from “per seat” pricing to “per outcome” pricing. Zendesk monetizes per seat. What if a business needs 95% fewer seats because of AI?
Some of the biggest startup outcomes will likely be “net new” industries where a business runs on nothing but Excel…because the software budget was small, the human budget large, and the ability to hire humans was so hard…think compliance officers at a bank.
There’s a saying in economics: “the cure for high prices, is high prices.” As the price goes up, more widgets get manufactured, which increases supply, which lowers the price.
But when it comes to humans and wages, there’s too much latency because of training, licensing, etc.
AI will largely augment employment, and fix many of the “market failures” present with highly skilled yet episodic labor. Imagine: I need your skill for 3 days a year (peak demand), but you need to go to school for 3 years to earn it.