Microsoft’s President set out the economic risks of AI with an ominous story about horses and the Great Depression

(L-R): Business Insider founder Henry Blodget, Microsoft President Brad Smith, Jennifer Rexford of Princeton, and McKinsey Global Institute chair James Manyika.

  • Microsoft President Brad Smith warns some of the economic side-effects of automation will be unpredictable.
  • He used the example of how declining horse numbers in the US after the invention of the car had a catastrophic impact on the US farming sector and ultimately inflicted damage on the banking system.
  • It illustrates how governments and industry need to respond swiftly to the coming disruption from artificial intelligence.

DAVOS, Switzerland – The coming wave of automation will mean governments and industry will need to stay alert to unforeseen market changes that have the potential to wreak havoc on national economies.

The risk is illustrated in a story about declining numbers of horses in the US affecting the country’s banks in the 1930s, told by Microsoft President Brad Smith today in a panel session at the World Economic Forum annual meeting in Davos on artificial intelligence and its impact on society.

While companies and policymakers will be able to plan for some of the disruption anticipated by the automation of work, Smith pointed out there will likely be unintended consequences that could rapidly unfold with dramatic consequences – as happened with the market for hay in the US around the time of the Great Depression.

Smith explained (emphasis added):

Before the automobile, in the US, in the UK, across Europe, 25% of all agricultural produce was use to feed horses. So what happened when the horse population declined? Farmers stopped growing so much hay.

Horses like to eat hay. People don’t. So they’ve shifted to produce more of the crops that people like to eat. They shifted to wheat. What did that mean? The price of wheat plummeted in the late 20s and early 30s. And because of the inelasticity of prices, the fortunes of farmers plummeted. And then farmers were unable to pay the local, rural banks.

The rural banks in the United States started to collapse, and that spread to the urban banks, and it greatly accelerated the depression – enough so that in 1932 the US Census Bureau looked at the Great Depression and put out a report that said, you know, an awful lot of this is because we don’t have horses any more.

Smith was speaking at a panel session moderated by Business Insider founder and CEO Henry Blodget along with McKinsey Global Institute chair James Manyika, and Jennifer Rexford, chair of the computer science department at Princeton university.

The lessons from the devastation in farming and then banking from the invention of the car, Smith said, meant that “we’re going to have to be agile, and governments are going to have to be agile, to adapt to the disruption.
“Over 40 years, it all tends to go well. [But] 10, 20 years in, that’s when you’re dealing with the height of the disruption.”

You can watch the full panel below.