Nothing to Smile About: Why Progressive Institutional Change in the AI Era May Fail

Avraham Izhar Baranes

Journal of Economic Issues, 2026, vol. 60, issue 2, 413-419

Abstract: This article argues that the development of artificial intelligence threatens the process of progressive institutional change by severing the link between knowledge creation and knowledge diffusion. Progressive institutional change begins with the process of ceremonial encapsulation, where new instrumental methods of problem solving in the form of new technologies are captured by vested interests to reinforce their own dominant position, but ends with the broader adoption of such methods to areas beyond the initial adoption. Key to this process, however, is knowledge diffusion, whereby a greater portion of the community becomes more adept at using the new technology and can apply it to this wider range of problems. While the introduction of AI should follow this path, we use Stan Shih’s smile curve framework, as extended by Cedric Durand and William Milberg, to demonstrate how intellectual monopoly capitalism concentrates AI’s value among creators and IP owners, while reducing or eliminating the middle-stage employment where knowledge accumulation and diffusion occur. As argued here, the current employment crisis for recent college graduates is the outcome of this deepening smile curve. Without intervention, AI risks remaining permanently trapped in the stage of ceremonial encapsulation, serving only the dominant interests, rather than enabling progressive institutional change.

Date: 2026
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DOI: 10.1080/00213624.2026.2657214

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