Who actually benefits from AI? Businesses, or customers?

If AI makes businesses dramatically more productive, who actually keeps the value?

Many people assume the answer is obvious. Businesses. At least, that's what I expected. Then I found a paper by Nobel Prize-winning economist William Nordhaus. It completely changed how I think about the question.

The biggest winner from innovation has historically not been the producer. It has been the customer.

Productivity is not the same as profit

AI is already helping organisations write software faster, analyse information more quickly, create content in minutes and automate routine work. Research continues to show meaningful productivity gains across many knowledge-work tasks.

But productivity and profitability are not the same thing. History shows they often move together. It also shows they don't always. The missing ingredient is competition.

The evidence surprised me

In his landmark paper Schumpeterian Profits in the American Economy, William Nordhaus examined who captured the economic value created by innovation in the United States between 1948 and 2001.

His conclusion was striking. Innovators captured, on average, about 2.2% of the total social returns created by technological advances. The remaining value flowed largely to consumers and the broader economy through lower prices, better products and wider economic benefits.

Read that again. The biggest winner from innovation has historically not been the producer. It has been the customer.

If AI follows a similar pattern, the biggest beneficiaries may ultimately be customers rather than the companies deploying it.

Some will say this time is different

I know the counterargument. The internet produced some of the most valuable companies in history. Google. Amazon. Meta. Surely AI will do the same.

Perhaps. But that does not invalidate Nordhaus' findings. It explains them.

Nordhaus argued that the ability of producers to capture value varies dramatically by industry. Where innovations are difficult to protect, competition passes much of the benefit to customers. Where businesses have strong intellectual property, network effects or exceptional pricing power, producers retain a much larger share of the value.

That may become one of the defining strategic questions of the AI era. Which side of that line is your business on?

Pricing power still matters

Warren Buffett once said: "The single most important decision in evaluating a business is pricing power." He followed it with another observation that has become equally well known: "If you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business."

AI makes those observations even more relevant. If competitors gain access to increasingly similar capabilities, maintaining pricing power may become harder in many industries. Not because AI destroys value. Because competition redistributes it.

The businesses that continue to command premium prices are unlikely to be those with the best AI. They will be those with the strongest brands, the deepest customer relationships, the highest levels of trust and the clearest differentiation.

AI changes the conversation

For years, organisations have asked: "How much money can AI save us?" That remains an important question. But there is another one: how much of those savings will we actually keep?

Those are very different conversations. The first is about technology. The second is about strategy.

The bottom line

AI is increasing productivity. The evidence for that continues to grow. Whether it permanently increases profits is a different question.

History suggests that competition has a habit of redistributing the value created by innovation. Sometimes businesses keep more of it. Often they do not.

The organisations that create lasting value will not simply reduce costs. They will build products, services and customer experiences that remain valuable even when competitors have access to similar AI capabilities.

So here is the question I will leave you with. If AI cuts your operating costs tomorrow, how much of that value will your customers expect you to give back?

Sources

Nordhaus, W. D. (2004). Schumpeterian Profits in the American Economy: Theory and Measurement. National Bureau of Economic Research.

Brynjolfsson, E., Li, D. & Raymond, L. (2023). Generative AI at Work. National Bureau of Economic Research.

Warren Buffett, interview with the Financial Crisis Inquiry Commission (2010), discussing pricing power.