Large Language Models are a positive supply shock
We are currently witnessing the biggest positive supply shock ever seen in knowledge work.
What is a supply shock?
A supply shock is an unexpected event or condition that changes the price and quantity of goods or services available for sale in a market.
A positive supply shock is an increase in the quantity of goods or a reduction in price of the good - so there is suddenly way more of a good being produced for a given price.
In the short term, positive supply shocks lower production costs meaning profits for businesses as the market takes time to adjust to the new quantity and price.
In the longer term, businesses and consumers adjust their behaviour, ultimately increasing consumer surplus and driving economic growth.
Short term: lower prices for consumers of the good and higher profits as the increased consumer surplus is eroded by business with market power.
Long term: Structural changes in markets and expansion in production capacity.
We are currently witnessing what is undoubtedly the biggest supply shock to white collar work ever.
The knowledge work revolution
Think about what AI models can do today that required human expertise just a few years ago: write code, analyse data, create marketing copy, draft legal documents, design graphics, translate languages with almost imperceptible accuracy, summarise research papers.
The "good" being produced here is cognitive output - the thinking, writing, analysing and creating that forms the backbone of modern knowledge work. And suddenly, there's an enormous increase in the supply of this cognitive capacity. (Whether LLMs are actually “thinking” is up for debate, but I’m happy with this over-simplification for the sake of this post)
Just as the printing press created a supply shock for written information, or the industrial revolution created one for manufactured goods, AI is creating one for human thinking itself.
The short-term effects are already visible
Right now, we're seeing the classic signs of a positive supply shock playing out in real time:
Businesses are capturing immediate profits by maintaining their pricing while dramatically reducing their production costs. A marketing agency can now produce ten times the content with the same team. A software company can ship features that would have taken months in a matter of weeks.
But consumers haven't yet fully adjusted their expectations or behaviour. They're still paying roughly the same prices for services that now cost a fraction of what they used to produce.
This is the temporary imbalance that always follows a supply shock - the market hasn't yet figured out the new equilibrium.
What the long term looks like
But just like every supply shock before it, the market will adjust. Or more specifically: human behaviour and work culture will adjust. And when it does, the changes will be structural and permanent.
We're already seeing the early signs: new types of businesses that simply couldn't exist before, like AI-first consulting firms that can tackle problems previously reserved for McKinsey-sized teams. Tools that put sophisticated analysis in the hands of small business owners who could never afford it before. Startups with over $1m ARR / staff member.
The real transformation will come when we stop thinking about AI as a replacement for human work, and start thinking about it as an amplifier of human capacity. Just as the industrial revolution didn't eliminate human labor but changed what humans do, the AI revolution will change the nature of knowledge work itself.
In five years, the idea of writing a business plan without AI assistance will seem as antiquated as doing accounting by hand. The humans who thrive will be those who learned to work with these tools, not against them.
And just like farming gave way to factories, and factories to offices, knowledge work as we know it today will give way to something entirely new - something we're only just beginning to see emerge.
The supply shock we're experiencing isn't just about doing the same work cheaper and faster. It's about redefining what knowledge work is when we can produce an infinite amount of output.