The Paper That Proves AI Will Kill Jobs Misses the Variable That Saves Them
Why do we assume that the thing that replaces us will leave us nothing?
Brett Hemenway Falk and Gerry Tsoukalas published a paper last month called “The AI Layoff Trap.” They build a game-theoretic model, pull from Ricardo, Keynes, and Leontief, and prove something uncomfortable. Competitive firms will automate themselves into a ditch, even when they can see the ditch coming.
Each firm automates because the savings go straight to its bottom line. The damage from layoffs, the collapse in consumer spending, gets spread across every firm in the market. No single company can afford to stop. Even if all of them know they’re collectively sawing off the branch they sit on.
They test every fix people have proposed. UBI doesn’t change the incentive. Upskilling helps but isn’t enough. Coasian bargaining can’t work when automation is already the dominant strategy.
Their answer: a tax on every task automated, set to the exact amount of demand destruction that task causes. Revenue goes to retraining.
The logic holds. The problem is what it doesn’t look at.
In 1982, Wassily Leontief asked whether humans would “go the way of the horse.” Would technology make workers irrelevant the way tractors made draft animals irrelevant?
Ricardo in 1821 showed machines could hurt workers even when total output went up. Keynes in 1930 warned about “technological unemployment.” Leontief in 1982 said the wound might be permanent. The AI Layoff Trap turns this fear into a mathematical proof.
But horses were inputs. They ate feed, produced traction, and when tractors showed up, the whole loop collapsed. Horses didn’t face unemployment. They just stopped being part of the economy.
Humans are producers and consumers at the same time. When a worker loses their job, they don’t stop eating. They stop spending. The paper models that part. What it skips is what happens to the cost of eating when AI runs the entire supply chain.
AI systems growing crops, processing those crops, building the machines that do both, then building machines to maintain and replace those machines. The marginal cost of food production rounds to zero. Not approximately zero. Zero. Energy and raw materials are the only costs left, and if AI is running the grid and the mines, those fall too.
The paper says AI destroys income. Same force also destroys cost. Cost destruction compounds across every sector at once. Income destruction is concentrated in labour. Over time, cost wins.
The paper assumes firms will always defend their profit margins. In a world where operating costs approach zero, that breaks down. Open-source AI systems don’t need margins. Zero-margin providers can run forever. No shareholders. No earnings calls. They just run.
The model has N firms choosing automation rates to maximise profit. What happens when some of those firms are open-source ecosystems that don’t maximise profit at all? When a zero-margin competitor prices at marginal cost, which is zero? The prisoner’s dilemma assumes every player has the same payoff structure. Bring in a player who doesn’t care about payoffs and the equilibrium dissolves.
Ricardo saw a version of this. His “On Machinery” chapter argued that machinery could hurt workers in the short run, but the long-run effects depended on whether capital would find new productive uses. He couldn’t have imagined open-source AI. The principle still holds. When the structure of production changes completely, the distributional effects change too.
The paper’s proposed fix, a Pigouvian automation tax, has a coordination problem. How do you price the social cost of automation when you can’t know what would have happened without it? Too low and it’s theatre. Too high and you push automation to jurisdictions that won’t tax it.
Two better options exist.
First: redistribute ownership, not income. Give every citizen a fraction of company equity. As firms automate and profits rise, citizen income rises with it. The more a firm automates, the more its shares are worth, the more citizens receive. No tax rate to set. No jurisdiction to flee to.
Second: follow the paper’s own logic and flip it. Every firm fires workers to cut costs. Those workers need to eat. If the cost of food has been driven to near-zero by the same AI that displaced them, they don’t need traditional employment to survive. They need access to the automated production chain. The problem isn’t unemployment. It’s access. And access is a political problem, not an economic one.
At the bottom of the cliff, someone’s been building a very cheap restaurant.