{"id":363,"date":"2026-07-03T03:02:49","date_gmt":"2026-07-03T03:02:49","guid":{"rendered":"https:\/\/valutednews.com\/?p=363"},"modified":"2026-07-03T03:02:49","modified_gmt":"2026-07-03T03:02:49","slug":"how-ai-could-make-markets-worse","status":"publish","type":"post","link":"https:\/\/valutednews.com\/?p=363","title":{"rendered":"How AI could make markets worse"},"content":{"rendered":"<div style=\"text-align:center\"><img decoding=\"async\" src=\"https:\/\/images.ft.com\/v3\/image\/raw\/https%3A%2F%2Fd1e00ek4ebabms.cloudfront.net%2Fproduction%2Fcb49e8c3-5a8f-479b-a820-5d3b9ff43e82.jpg?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1\" class=\"attachment-post-thumbnail size-post-thumbnail wp-post-image\" alt=\"How AI could make markets worse\" title=\"How AI could make markets worse\" \/><\/div><p><\/p>\n<div>\n<p>Unlock the Editor\u2019s Digest for free<\/p>\n<p class=\"article__content-sign-up-topic-description o3-type-body-base\"><span>Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/span><\/p>\n<p><iframe class=\"article__content-sign-up-iframe close\" scrolling=\"no\" id=\"signUpIframe\" data-prev-url=\"\/register\/in-article-sign-up?ft-content-uuid=348a2525-8401-44c3-ba65-46c5458127a9\"><\/iframe><\/div>\n<div id=\"article-body\">\n<div class=\"n-content-layout__container--in-line\">\n<div class=\"cp-info-box\">\n<div class=\"cp-card\">\n<div class=\"cp-card__content o3-type-body-base\">\n<p>This article is an on-site version of the Free Lunch newsletter. Premium subscribers can sign up <a href=\"https:\/\/ep.ft.com\/newsletters\/subscribe?newsletterIds=56388465e4b0c3d64132e189\" title=\"\" data-trackable=\"link\">here<\/a> to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium <a href=\"https:\/\/www.ft.com\/manage\/subscription\/change\/713f1e28-0bc5-8261-f1e6-eebab6f7600e?segmentId=5d1c2689-3304-f81f-a9e5-b3e96e93c176\" title=\"\" data-trackable=\"link\">here<\/a>, or <a href=\"https:\/\/www.ft.com\/newsletters\" title=\"\" data-trackable=\"link\">explore<\/a> all FT newsletters<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<p>Greetings Free Lunch readers. Like everybody else, I\u2019m trying to figure out how to think about the effects artificial intelligence will have on our societies, especially the economy. <\/p>\n<p>It seems like most of what I read is about the technology\u2019s ability to do (better and faster) tasks currently done by humans and therefore boost productivity. I see less about how AI may change the organisation and workings of markets. But productivity also depends on market functioning \u2014 not just on things being done better or faster or more cheaply, but the different things being done fitting together in an efficient way. So today\u2019s column offers some thought about how AI could affect market functioning.<\/p>\n<p>AI is, above all, an information technology: it reduces the cost and friction of acquiring, processing and producing \u2014 sometimes very impressively. So we should look to the economics of information to get insights about its effects. If AI leads to significant productivity increases, it\u2019s by making information cheaper. But information economics is a weird field, with strange results. Here are some.<\/p>\n<p>The classic case of a surprising insight from taking information imperfections seriously was George Akerlof\u2019s \u201cmarket for lemons\u201d \u2014 a term for defective used cars, not the yellow fruit. Akerlof\u2019s model showed how imperfect knowledge could prevent mutually beneficial trade. If a used car seller knows whether the car on offer is of high or low quality but the buyer does not, the buyer will only be willing to pay a heavily discounted price (to account for the risk of buying a lemon). But the owner of a good car (a \u201cpeach\u201d) will find that price too low, and only owners of lemons will sell. Understanding this, buyers will adjust down their price further. The outcome: only lemons get sold, at a fair price, but the market for high-quality used cars breaks down.<\/p>\n<p>Akerlof\u2019s market for lemons showed how costly it can be when information is less than perfect. But it also illustrates a situation where AI should presumably improve efficiency. Armed with their favourite large language model, perhaps buyers could inspect your used car to establish its true condition to their satisfaction, and hence offer an acceptable price for a peach as well as for a lemon. No more would lack of knowledge prevent mutually beneficial exchanges.<\/p>\n<p>But there are other cases of information economics where AI may not make things better and could, in fact, make things worse. Take, for example, a standard solution to when asymmetric information prevents mutually beneficial trades: signalling. In short, when uncertainty makes one side of a transaction unwilling to trade \u2014 Akerlof\u2019s used car buyer, say, or an employer unsure of the quality of a potential hire \u2014 the other side can find \u201csignals\u201d that distinguish them from lower-quality alternatives.<\/p>\n<p>In some cases this can be free (the seller of a \u201cpeach\u201d can offer a guarantee against nasty post-sale surprises); in others it will require expending resources (future workers taking university degrees to prove their mettle). The key is that the signal\u2019s cost is worth paying for the high-quality alternative but not the low-quality one (the seller of a lemon wouldn\u2019t offer a guarantee; the less competent would find it harder to complete the course).<\/p>\n<p>But the information-producing abilities that AI brings could disrupt the availability of such signals. Take education. The hand-wringing over how students are using LLMs at university is well known, and the main question is, of course, what it does to their learning. But we could ask, too, what it does to the signalling function of formal education. If LLMs in effect equalise every student\u2019s measured performance in university, or, to go further, if they equalise their chances of getting into selective universities in the first place, then it\u2019s hard to see degrees retaining their effectiveness as a signal of ability.<\/p>\n<p>Would that make the economy more or less efficient? If it makes it costlier to match up the right jobs with the right workers, it presumably makes labour markets and the overall economy less efficient. Perhaps some of that would be compensated for by young people not spending years of their lives to invest in a signal rather than actual skills, if your view is that degrees are largely about signalling rather than learning. Or it could be that in the AI-infused world we find better signals to compensate for those that no longer carry the information they used to. But taken by itself, the destruction of a signal should be expected to amount to a productivity loss.<\/p>\n<p>This is related to another area of interest to information economics: that of costly search. In a process of matching sides \u2014 take the job market or dating \u2014 it takes time and effort to assess how suitable a potential match is. So those looking for a job, a worker, a date or a mate will have to choose how much time and effort to put into assessing \u201ccandidates\u201d and when to settle and stop searching. Now an important insight from search theory (a field that was <a href=\"https:\/\/www.nobelprize.org\/prizes\/economic-sciences\/2010\/press-release\/\" title=\"\" data-trackable=\"link\">awarded a Nobel Prize<\/a>) is that one person\u2019s search can affect the costs and benefits of the search process of others. In particular, if others search more, you may have to do the same to be able to count on an equally good expected outcome as before \u2014 a negative externality, in the jargon.<\/p>\n<p>Cue AI-assisted job applications, recruitment processes and dating profiles. A likely outcome is that using AI makes rational sense for each individual, but requires more effort to be put in by everybody else \u2014 whether to sift through requests, filter out the slop, or to retain a chance of being noticed when others are swamping the field with applications. And, of course, the aforementioned problem of less valuable signals \u2014 if everyone can write a perfect job application or dating profile, for example \u2014 makes this worse.<\/p>\n<p>We could think of many other examples \u2014 do send us yours (<a href=\"http:\/\/www.ft.com\/cdn-cgi\/l\/email-protection#690f1b0c0c051c070a01290f1d470a0604\" title=\"\" data-trackable=\"link\"><span class=\"__cf_email__\" data-cfemail=\"33554156565f465d505b7355471d505c5e\">[email\u00a0protected]<\/span><\/a>). But they are likely to have in common that while AI makes information cheaper, \u201ctoo much information\u201d can come with its own efficiency cost. There is family resemblance to the contemporary approach to propaganda, of \u201cflooding the zone\u201d \u2014 it matters less to convince someone of something than to put out so many more or less plausible views that people give up trying to seek out the truth.<\/p>\n<p>Perhaps AI will also help find solutions to these problems. But the key lesson as we assess what AI will bring is this: being able to execute tasks more productively does not necessarily make market interactions more productive overall.<\/p>\n<h2 id=\"qxblbzwt\" class=\"n-content-heading-2 o3-editorial-typography-chapter\">Other readables<\/h2>\n<p>\u25cf Both on the battlefield and in the economy, things are turning against Russia and in favour of Ukraine. This is the <a href=\"https:\/\/www.ft.com\/content\/b21b4c57-b403-4748-8b4d-945f5efa9863\" title=\"\" data-trackable=\"link\">right time to increase economic pressure on Moscow<\/a>, I argue in my latest FT column.<\/p>\n<p>\u25cf Some young Chinese find sanctuary in the country\u2019s post-property boom <a href=\"https:\/\/www.ft.com\/content\/510b7c6c-04b4-4ba0-a6bb-5208de76572e\" title=\"\" data-trackable=\"link\">ghost cities<\/a>.<\/p>\n<p>\u25cf Mind in the machine? The <a href=\"https:\/\/www.theguardian.com\/news\/ng-interactive\/2026\/jun\/30\/theres-this-deep-mystery-of-what-actually-is-this-thing-the-philosopher-inside-google-deepmind\" title=\"\" data-trackable=\"link\">philosophers working for the AI creators<\/a>.<\/p>\n<div class=\"n-content-layout\" data-layout-name=\"card\" data-layout-width=\"full-width\">\n<div class=\"n-content-layout__container\">\n<h3 class=\"n-content-heading-3 o3-editorial-typography-subheading\">Recommended newsletters for you<\/h3>\n<div class=\"n-content-layout__slot\">\n<p><strong>Chris Giles on Central Banks<\/strong> \u2014 Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up <a href=\"https:\/\/ep.ft.com\/newsletters\/subscribe?newsletterIds=6501cc9ec6e3c91c18b0b9e6\" title=\"\" data-trackable=\"link\">here<\/a><\/p>\n<p><strong>The AI Shift<\/strong> \u2014 John Burn-Murdoch and Sarah O\u2019Connor dive into how AI is transforming the world of work. Sign up <a href=\"https:\/\/ep.ft.com\/newsletters\/subscribe?newsletterIds=68da4b4af493110b11187d9f\" title=\"\" data-trackable=\"link\">here<\/a><\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Unlock the Editor\u2019s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. This article is an on-site version of the Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here, or explore&#8230;<\/p>\n","protected":false},"author":1,"featured_media":364,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.ft.com\/v3\/image\/raw\/https%3A%2F%2Fd1e00ek4ebabms.cloudfront.net%2Fproduction%2Fcb49e8c3-5a8f-479b-a820-5d3b9ff43e82.jpg?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1","fifu_image_alt":"","footnotes":""},"categories":[19],"tags":[534,744],"class_list":["post-363","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","tag-markets","tag-worse"],"_links":{"self":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/posts\/363","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=363"}],"version-history":[{"count":0,"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/posts\/363\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=\/wp\/v2\/media\/364"}],"wp:attachment":[{"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=363"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=363"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/valutednews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=363"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}