(re: OpenAI and Anthropic IPO news, a preprint)
Scaling up training reliably improves LLMs, but it also increases training and inference costs, leading to massive capital expenditure by AI firms. How can we understand what level of LLM scaling is justified economically? 馃У猬囷笍
We study this by proposing a microeconomic model grounded in scaling laws. An AI firm chooses how to scale their LLM size and data budget, balancing increased quality and consumer demand against training and inference costs. We study the firm鈥檚 profit maximization problem.
(re: OpenAI and Anthropic IPO news, a preprint)
Scaling up training reliably improves LLMs, but it also increases training and inference costs, leading to massive capital expenditure by AI firms. How can we understand what level of LLM scaling is justified economically? 馃У猬囷笍
Our theoretical analysis is based on these assumptions (see 搂7.2): 1. The LLM firm has a monopoly on selling tokens 2. LLM quality increases only when N, D are scaled jointly (~Chinchilla) 3. Consumer demand increases diminishingly (or at most linearly) with quality
Next, we consider training bound by data. In this regime, data efficiency improvements incentivize larger models and more train spend. In contrast, hardware and parameter efficiency advances incentivize *smaller* train spend when data bound.
Interestingly, optimal model size, data budget, and train expenditure *decrease* as training gets more parameter-efficient. Thus, in the compute-bound setting, pretraining advances in parameter efficiency incentivize small LLMs (rather than further scaling) under our model.
The scaling exponent depends on how consumer demand diminishes with quality: it is slightly superlinear when demand ~ quality. If demand diminishes (eg, demand ~ log quality), optimal model size, data budget, and train spend scale no more than linearly in hardware efficiency.
When compute-bound, we show optimal model size n*, data budget d*, and train spend C*_train scale at most polynomially with hardware efficiency E. The scaling exponent is at most slightly superlinear.
We study this by proposing a microeconomic model grounded in scaling laws. An AI firm chooses how to scale their LLM size and data budget, balancing increased quality and consumer demand against training and inference costs. We study the firm鈥檚 profit maximization problem.
Paper link: https://arxiv.org/abs/2605.16430
Our model enables understanding the interaction of research and market forces in LLM scaling, going beyond Chinchilla. We hope this provides a foundation for engaging critically with industry statements and supporting long-term economic decision making.
Our model enables understanding the interaction of research and market forces in LLM scaling, going beyond Chinchilla. We hope this provides a foundation for engaging critically with industry statements and supporting long-term economic decision making.
Thus, our results suggest that current investments in scaling are (perhaps implicitly) based on expectations of continued advances in hardware and algorithmic efficiency and expectations that consumer demand for LLMs will grow almost linearly with model quality.
Thus, our results suggest that current investments in scaling are (perhaps implicitly) based on expectations of continued advances in hardware and algorithmic efficiency and expectations that consumer demand for LLMs will grow almost linearly with model quality.
Finally, we compare our theory to empirical trends in AI reported by http://Epoch.ai. Our model applied to this data predicts current expenditure is higher than profit-optimal unless consumer demand is almost linear in model quality (i.e., almost non-diminishing).
The scaling exponent depends on how consumer demand diminishes with quality: it is slightly superlinear when demand ~ quality. If demand diminishes (eg, demand ~ log quality), optimal model size, data budget, and train spend scale no more than linearly in hardware efficiency.
When compute-bound, we show optimal model size n*, data budget d*, and train spend C*_train scale at most polynomially with hardware efficiency E. The scaling exponent is at most slightly superlinear.
In the compute-bound regime, data efficiency improvements always incentivize larger models, but data budgets and compute spend can either increase or decrease depending on the relationship between demand and quality.
Interestingly, optimal model size, data budget, and train expenditure *decrease* as training gets more parameter-efficient. Thus, in the compute-bound setting, pretraining advances in parameter efficiency incentivize small LLMs (rather than further scaling) under our model.
Finally, we compare our theory to empirical trends in AI reported by http://Epoch.ai. Our model applied to this data predicts current expenditure is higher than profit-optimal unless consumer demand is almost linear in model quality (i.e., almost non-diminishing).
Our theoretical analysis is based on these assumptions (see 搂7.2): 1. The LLM firm has a monopoly on selling tokens 2. LLM quality increases only when N, D are scaled jointly (~Chinchilla) 3. Consumer demand increases diminishingly (or at most linearly) with quality
Next, we consider training bound by data. In this regime, data efficiency improvements incentivize larger models and more train spend. In contrast, hardware and parameter efficiency advances incentivize *smaller* train spend when data bound.
In the compute-bound regime, data efficiency improvements always incentivize larger models, but data budgets and compute spend can either increase or decrease depending on the relationship between demand and quality.
(re: OpenAI and Anthropic IPO news, a preprint)
Scaling up training reliably improves LLMs, but it also increases training and inference costs, leading to massive capital expenditure by AI firms. How can we understand what level of LLM scaling is justified economically? 馃У猬囷笍