The Business of Artificial Intelligence

For more than 250 years the fundamental drivers of economic growth have been technological innovations. The most important of these are what economists call general-purpose technologies — a category that includes the steam engine, electricity, and the internal combustion engine. Each one catalyzed waves of complementary innovations and opportunities. The internal combustion engine, for example, gave rise to cars, trucks, airplanes, chain saws, and lawnmowers, along with big-box retailers, shopping centers, cross-docking warehouses, new supply chains, and, when you think about it, suburbs. Companies as diverse as Walmart, UPS, and Uber found ways to leverage the technology to create profitable new business models.

The most important general-purpose technology of our era is artificial intelligence, particularly machine learning (ML) — that is, the machine’s ability to keep improving its performance without humans having to explain exactly how to accomplish all the tasks it’s given. Within just the past few years machine learning has become far more effective and widely available. We can now build systems that learn how to perform tasks on their own.

Why is this such a big deal? Two reasons. First, we humans know more than we can tell: We can’t explain exactly how we’re able to do a lot of things — from recognizing a face to making a smart move in the ancient Asian strategy game of Go. Prior to ML, this inability to articulate our own knowledge meant that we couldn’t automate many tasks. Now we can.

Second, ML systems are often excellent learners. They can achieve superhuman performance in a wide range of activities, including detecting fraud and diagnosing disease. Excellent digital learners are being deployed across the economy, and their impact will be profound.

In the sphere of business, AI is poised have a transformational impact, on the scale of earlier general-purpose technologies. Although it is already in use in thousands of companies around the world, most big opportunities have not yet been tapped. The effects of AI will be magnified in the coming decade, as manufacturing, retailing, transportation, finance, health care, law, advertising, insurance, entertainment, education, and virtually every other industry transform their core processes and business models to take advantage of machine learning. The bottleneck now is in management, implementation, and business imagination.

The Authors


Erik Brynjolfsson (@erikbryn) is the director of MIT’s Initiative on the Digital Economy, the Schussel Family Professor of Management Science at the MIT Sloan School of Management, and a research associate at NBER. His research examines the effects of information technologies on business strategy, productivity and performance, digital commerce, and intangible assets. At MIT he teaches courses on the economics of information and the Analytics Lab.

Brynjolfsson was among the first researchers to measure IT’s productivity contributions and the complementary role of organizational capital and other intangibles. His research provided the first quantification of online product variety value, known as the “long tail,” and developed pricing and bundling models for information goods. He earned his AB and his SM in applied mathematics and decision sciences at Harvard and his PhD in managerial economics at the Sloan School.

Brynjolfsson is the author of several books, including, with Andrew McAfee, Machine, Platform, Crowd: Harnessing Our Digital Future (2017) and the New York Times best seller The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (2014). You can find his papers here.

Andrew McAfee (@amcafee), a principal research scientist at MIT, studies how digital technologies are changing business, the economy, and society. With Erik Brynjolfsson he coauthored Machine, Platform, Crowd: Harnessing Our Digital Future (2017) and The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (2014), which was a New York Times best seller and was shortlisted for the Financial Times/McKinsey Business Book of the Year Award. McAfee writes academic papers, a blog for the Financial Times, and articles for publications including Harvard Business Review, the Economist, the Wall Street Journal, and the New York Times. He has talked about his work on Charlie Rose and 60 Minutes; at TED, Davos, and the Aspen Ideas Festival; and in front of many other audiences.

McAfee was educated at Harvard and MIT, where he is a cofounder of the institute’s Initiative on the Digital Economy.

Like so many other new technologies, however, AI has generated lots of unrealistic expectations. We see business plans liberally sprinkled with references to machine learning, neural nets, and other forms of the technology, with little connection to its real capabilities. Simply calling a dating site “AI-powered,” for example, doesn’t make it any more effective, but it might help with fundraising. This article will cut through the noise to describe the real potential of AI, its practical implications, and the barriers to its adoption.

What Can AI Do Today?

The term artificial intelligence was coined in 1955 by John McCarthy, a math professor at Dartmouth who organized the seminal conference on the topic the following year. Ever since, perhaps in part because of its evocative name, the field has given rise to more than its share of fantastic claims and promises. In 1957 the economist Herbert Simon predicted that computers would beat humans at chess within 10 years. (It took 40.) In 1967 the cognitive scientist Marvin Minsky said, “Within a generation the problem of creating ‘artificial intelligence’ will be substantially solved.” Simon and Minsky were both intellectual giants, but they erred badly. Thus it’s understandable that dramatic claims about future breakthroughs meet with a certain amount of skepticism.

Let’s start by exploring what AI is already doing and how quickly it is improving. The biggest advances have been in two broad areas: perception and cognition. In the former category some of the most practical advances have been made in relation to speech. Voice recognition is still far from perfect, but millions of people are now using it — think Siri, Alexa, and Google Assistant. The text you are now reading was originally dictated to a computer and transcribed with sufficient accuracy to make it faster than typing. A study by the Stanford computer scientist James Landay and colleagues found that speech recognition is now about three times as fast, on average, as typing on a cell phone. The error rate, once 8.5%, has dropped to 4.9%. What’s striking is that this substantial improvement has come not over the past 10 years but just since the summer of 2016.

Although AI is already in use in thousands of companies around the world, most big opportunities have not yet been tapped.

Image recognition, too, has improved dramatically. You may have noticed that Facebook and other apps now recognize many of your friends’ faces in posted photos and prompt you to tag them with their names. An app running on your smartphone will recognize virtually any bird in the wild. Image recognition is even replacing ID cards at corporate headquarters. Vision systems, such as those used in self-driving cars, formerly made a mistake when identifying a pedestrian as often as once in 30 frames (the cameras in these systems record about 30 frames a second); now they err less often than once in 30 million frames. The error rate for recognizing images from a large database called ImageNet, with several million photographs of common, obscure, or downright weird images, fell from higher than 30% in 2010 to about 4% in 2016 for the best systems. (See the exhibit “Puppy or Muffin?”)

The speed of improvement has accelerated rapidly in recent years as a new approach, based on very large or “deep” neural nets, was adopted. The ML approach for vision systems is still far from flawless — but even people have trouble quickly recognizing puppies’ faces or, more embarrassingly, see their cute faces where none exist.

The second type of major improvement has been in cognition and problem solving. Machines have already beaten the finest (human) players of poker and Go — achievements that experts had predicted would take at least another decade. Google’s DeepMind team has used ML systems to improve the cooling efficiency at data centers by more than 15%, even after they were optimized by human experts. Intelligent agents are being used by the cybersecurity company Deep Instinct to detect malware, and by PayPal to prevent money laundering. A system using IBM technology automates the claims process at an insurance company in Singapore, and a system from Lumidatum, a data science platform firm, offers timely advice to improve customer support. Dozens of companies are using ML to decide which trades to execute on Wall Street, and more and more credit decisions are made with its help. Amazon employs ML to optimize inventory and improve product recommendations to customers. Infinite Analytics developed one ML system to predict whether a user would click on a particular ad, improving online ad placement for a global consumer packaged goods company, and another to improve customers’ search and discovery process at a Brazilian online retailer. The first system increased advertising ROI threefold, and the second resulted in a $125 million increase in annual revenue.

Machine learning systems are not only replacing older algorithms in many applications, but are now superior at many tasks that were once done best by humans. Although the systems are far from perfect, their error rate — about 5% — on the ImageNet database is at or better than human-level performance. Voice recognition, too, even in noisy environments, is now nearly equal to human performance. Reaching this threshold opens up vast new possibilities for transforming the workplace and the economy. Once AI-based systems surpass human performance at a given task, they are much likelier to spread quickly. For instance, Aptonomy and Sanbot, makers respectively of drones and robots, are using improved vision systems to automate much of the work of security guards. The software company Affectiva, among others, is using them to recognize emotions such as joy, surprise, and anger in focus groups. And Enlitic is one of several deep-learning startups that use them to scan medical images to help diagnose cancer.

These are impressive achievements, but the applicability of AI-based systems is still quite narrow. For instance, their remarkable performance on the ImageNet database, even with its millions of images, doesn’t always translate into similar success “in the wild,” where lighting conditions, angles, image resolution, and context may be very different. More fundamentally, we can marvel at a system that understands Chinese speech and translates it into English, but we don’t expect such a system to know what a particular Chinese character means — let alone where to eat in Beijing. If someone performs a task well, it’s natural to assume that the person has some competence in related tasks. But ML systems are trained to do specific tasks, and typically their knowledge does not generalize. The fallacy that a computer’s narrow understanding implies broader understanding is perhaps the biggest source of confusion, and exaggerated claims, about AI’s progress. We are far from machines that exhibit general intelligence across diverse domains.

Understanding Machine Learning

The most important thing to understand about ML is that it represents a fundamentally different approach to creating software: The machine learns from examples, rather than being explicitly programmed for a particular outcome. This is an important break from previous practice. For most of the past 50 years, advances in information technology and its applications have focused on codifying existing knowledge and procedures and embedding them in machines. Indeed, the term “coding” denotes the painstaking process of transferring knowledge from developers’ heads into a form that machines can understand and execute. This approach has a fundamental weakness: Much of the knowledge we all have is tacit, meaning that we can’t fully explain it. It’s nearly impossible for us to write down instructions that would enable another person to learn how to ride a bike or to recognize a friend’s face.

In other words, we all know more than we can tell. This fact is so important that it has a name: Polanyi’s Paradox, for the philosopher and polymath Michael Polanyi, who described it in 1964. Polanyi’s Paradox not only limits what we can tell one another but has historically placed a fundamental restriction on our ability to endow machines with intelligence. For a long time that limited the activities that machines could productively perform in the economy.

Machine learning is overcoming those limits. In this second wave of the second machine age, machines built by humans are learning from examples and using structured feedback to solve on their own problems such as Polanyi’s classic one of recognizing a face.

Different Flavors of Machine Learning

Artificial intelligence and machine learning come in many flavors, but most of the successes in recent years have been in one category: supervised learning systems, in which the machine is given lots of examples of the correct answer to a particular problem. This process almost always involves mapping from a set of inputs, X, to a set of outputs, Y. For instance, the inputs might be pictures of various animals, and the correct outputs might be labels for those animals: dog, cat, horse. The inputs could also be waveforms from a sound recording and the outputs could be words: “yes,” “no,” “hello,” “good-bye.” (See the exhibit “Supervised Learning Systems.”)

Successful systems often use a training set of data with thousands or even millions of examples, each of which has been labeled with the correct answer. The system can then be let loose to look at new examples. If the training has gone well, the system will predict answers with a high rate of accuracy.