The Dead Economy Theory
Owen McGrann, writing in The Palimpsest:
In competitive markets, an automating firm captures the full cost savings from replacing workers but bears only a fraction of the resulting demand destruction. In a market with twenty competitors, each firm feels one-twentieth of the demand it destroys. The rest falls on rivals. This creates a prisoners’ dilemma: every firm rationally automates beyond the socially optimal level, because the individual incentive to cut labor costs always outweighs the diffuse, shared consequence of eliminating consumer spending.
This is the argument the AI industry doesn’t want to have. Not “can the models do the work” — they can, increasingly. But “what happens when every firm fires its customers?”
The AI Layoff Trap, as Wharton economists Hemenway Falk and Tsoukalas call it, is a prisoners’ dilemma dressed in quarterly earnings calls. Block cuts half its workforce citing AI coding agents, the stock jumps 25% after hours. Rivals see that and follow. Every rational move toward automation is collectively irrational.
The optimist’s rebuttal is that the economy has always absorbed automation. Agriculture went from 90% of the workforce to 2%. Sixty percent of today’s jobs didn’t exist in 1940. True. But the agricultural transition took 140 years. The Industrial Revolution took 70 before wages recovered. The AI industry is compressing this into a decade.
The difference this time is speed and scale. When the product is the removal of the customer base, the feedback loop closes fast enough to matter.