Technological Foundations of Artificial Intelligence

Artificial intelligence is on the rise and has already become a buzzword in the legal industry. So far, the discussion around the use of technology in the legal industry focuses on the battle between humans (lawyers) and machines (robots) – and the possibility of the latter taking over the jobs of lawyers. This short article focuses on the underlying technologies behind the paradigm.

What Is Artificial Intelligence?

Artificial Intelligence (AI) was famously defined by John McCarthy as “the science and engineering of making intelligent machines.” AI could also be defined as “cognitive technologies.” However labelled, the field has many branches, with many significant connections and commonalities among them. The most important fields are currently machine learning including deep learning and predictive analytics, natural language processing (NLP), comprising translation, classification & clustering and information extraction.

There is a lot of buzz around the term AI. It is an idea that has oscillated through many hype cycles over many years. AI seems almost magical and a bit scary. In 2015, a group of high-profile scientists and entrepreneurs warned that AI might be the last invention of the human race. In his bestseller Superintelligence: Paths, Dangers, Strategies (2014), Nick Bostrom warns about the potential threat of AI. He warns that an intelligence explosion through AI could lead to machines exceeding human intelligence. In Bostrom’s view, superintelligent AI systems would quickly dominate human species.

Weak vs. Strong AI

Even though the discussion of “superintelligence” is extremely interesting and sometimes mind-boggling, it has nothing to do with AI in law (at least at the moment). If the use of AI in law is discussed it is important to bear one distinction between “weak” and “strong” AI in mind. AI used in the legal industry is commonly referred to as “weak” (or “shallow”) AI. It seems intelligent, but it still has defined functions. It has no self-awareness. Weak AI has to be distinguished from “strong” AI, also known as artificial general intelligence (AGI) or “deep” AI. Strong AI would match or exceed human intelligence which is often defined as the ability “to reason, represent knowledge, plan, learn, communicate in natural language and integrate all these skills toward a common goal.” In order to achieve strong AI status, a system has to be able to carry out these abilities. Whether or when strong AI will emerge is highly contested in the scientific community.

AI In Legal

Al currently used in legal technology is far away from strong AI. Therefore, when we speak of AI in the context of legal, we mean technologies which seems intelligent but have defined functions, i.e. weak AI. It uses models of its problem domain given to it by programmers. Weak AI cannot perform autonomous reduction, whereas strong AI has a real understanding of a problem domain. Therefore, weak AI requires an expert who performs all required reduction in advance and implements it into a system. As a result, weak AI will only have a specific set of tasks it can solve. A chess computer would, for instance, not be able to solve legal problems. The problem statement is outside of its capabilities. A legal technology tool using weak AI would only be able to “understand” the specific problem domain it was designed for. Therefore, modern AI algorithms are only able to replicate some of the human intellectual abilities. This also true for IBM’s cognitive computer Watson which famously won the quiz show “Jeopardy” against human competitors in 2011. IBM’s Watson is a (very advanced) machine learning algorithm, not a computer with human-level intelligence. Current AI tools are not able to mimic advanced cognitive processes, such as logical reasoning, comprehension, meta-cognition or contextual perception of abstract concepts that are essential to legal thinking. We should bear these limitations in mind when we proceed to exploring which techniques are used to “produce” weak AI. 

Today’s Limitations – Tomorrow’s Potential

Even though it is important to understand the current limitations of AI, it is equally important to understand the evolving technological progress which is unfolding in rapid speed. It is essential to understand that computational power is growing exponentially. Exponential growth is difficult to comprehend for humans as we generally think in linear terms. The most famous equation which stands for this exponential growth is Moore’s law. Moore’s Law states that CPU processing power will increase exponentially by a factor of 2 every 18 to 24 months. In other words, Moore’s Law claims that CPU processing power will double approximately every two years. Assuming that computers continue to double in power, their hardware dimension alone will be over two hundred times more powerful in 2030. Differently put, the next decade will witness more than thirty times as much increase in power as the previous one.

Regardless of whether this growth will continue and whether the growth of computational power means that the abilities of AI systems will grow exponentially as well, people have the tendency to underestimate the potential of tomorrow’s applications by evaluating them in terms of today’s enabling technologies. This tendency is sometimes referred to as “technological myopia”. This should be born in mind, when we discuss the application of technology in the legal realm. Current techniques used in legal technology tools are called machine learning (including deep learning and predictive analysis) and natural language processing (NLP).

Current Tools Are Far Away From Rendering Legal Advice… For Now

The work of lawyers is sometimes highly complex. Lawyers need to process complex sets of facts and circumstances, consider applicable legal rights and obligations and render reasoned opinions and guidance on the best course of action based on all of that information. A lawyer (ideally) has the ability to understand the background and context of events, general knowledge of how the world works and knowledge of the law and its application.

The work of lawyers also involves a lot of automatic filtering out of irrelevant noise and focusing in on the signal. For computers it is generally highly challenging to perform these tasks. To completely replicate a human lawyer would mean to re-engineer a process that could produce creative, imaginative and innovative ideas and results whilst drawing on a comprehensive set of legal information and an “experience database” comparable to an experienced lawyer. As lawyers know, it can be an extremely complex task to render legal advice. Thus, it will be an extremely difficult task to replicate this with computers using AI. Current tools are far away from achieving this.

Even though there are some substantial limitations today this does not mean that these limitations will still exist in five or ten years. The ability of technology might change more radically and sooner than we expect. Hence, although machines are just beginning to perform legal tasks, it is likely that we can expect substantial progress in the coming years. Someday computers may mimic intelligent legal reasoning. Until then, the question is not whether they’re replacing lawyers, but how they impact the way a lawyer works.

Construction complex financing: a lot of money in the country, but nowhere to put it

When there is a lot of money in the country but few financial and investment technologies, there is little use for money.

The 7th “Economy real sector financing” business forum has taken place in the Moscow “Marriott Moscow Royal Aurora” hotel. One of the most discussed topics was the problem of construction industry financing sources. Heated disputes flared up among the participants, which showed that the market is actively searching for a new financial model - but it is a long way from finding it as yet.  

 

According to the Japanese scenario

In the introduction to the discussion, the moderator, the Chair of the “Integration” international club and famous expert  Irina Radchenko shared her opinion on communication with developers. According to them, the current economic crisis is the longest and most complicated that the realty market has faced in the post-Soviet period.  This determines the necessity of searching for new ways of financing the industry, or otherwise its fall may be a catastrophe.

There are precedents. In 1991, there was a disastrous fall on the Japanese realty market. Though many years have passed since, the market has not risen higher than the level of 25 years ago.

A number of analysts hold to the idea that the current realty market in Russia may return to the prices from which it has moved away from. 1 square meter for $600 is not utopian; it is quite possible if new models of financing are not found.

Existing trends support the pessimistic prognosis.

Construction complex financing: a lot of money in the country, but nowhere to put it 

An obedient market 

However, the situation is not yet that dramatic. According to Ivan Grachev, Deputy of the State Duma of the 4th calling, the domestic realty market is quite primitive: it obediently follows oil prices. It is likely to grow in the near future, according to parliamentarians.

Lately, residential realty price changes have not surpassed 500 roubles for 1 m2, so the market is not threatened by any dramatic events, Andrei Shelkovy,the “Morton” GC President’s Councilor, says, agreeing with the ex-Deputy.

But there is another problem: the current demand is of a non-market character, as it is supported by the state program of mortgage loan subsidizing. More than 40% of all deals on the primary market are of this kind. But the state’s help is likely to finish in 2016 - what then?

If the demand for consumer goods falls, it is easy to decrease their output and even stop production for a short time, but how is the construction of a house to be stopped if part of the money for its construction has already been collected? Hoodwinked investors may not be forthcoming so when purchasing of housing decreases, panic envelops developers.

Construction complex financing: a lot of money in the country, but nowhere to put it 

Close to exhaustion

Important processes are taking place now on the market, and one can’t but take them into consideration.

According to the Deputy Minister of Construction and Utilities of the RF, Oleg Betin, polls show that purchasers prefer buying finished housing, which demands new financial mechanisms and tools. The previous ones proved their efficiency in the past, but their growth potential is close to exhausted.  

Thus, for the last nine years the total sum of mortgage loans lent has grown 99-fold. It is clear that mortgage loan crediting cannot go on at the same rate, and so new financial approaches are necessary.

And they exist. But not in Russia – in Czechia.

 

Looking at Czechia and Germany

The Chief Executive Officer & Managing Director of PPF Real Estate Russia, Martin Schaffer, spoke on how the Czech state helps people save money for buying houses.   

A citizen transfers part of his money to a special bank account, and the state adds subsidies. People often start saving money after a baby is born and keep on saving while it is growing up. When the child is 18 he has tax-free startup capital. In Czechoslovakia, with a population of 10m people, about 1 m citizens are part of the scheme. Besides this, there are both mortgage loans and co-financed construction available.

In Russia the use of building-and-loan associations (BLA) may become a new option. Oleg Betin remarked that a building-and-loan association is a good idea, but when the priority financial mechanism was being chosen, it was considered to be an untimely measure.

Was the decision right? It is known that those whose monthly salary is equal to the cost of 1 m2 of housing can afford a mortgage loan. Those whose income is only half that may participate in a BLA scheme, and there are many more of them than there are current mortgage loan borrowers.  

Today, mortgage loans exist due to the non-market measures of state support. And what will become of them when the program ends?

Meanwhile, Czech and German experiences with a mature BLA scheme shows that their use does not result in budget losses. Our mortgage loan model,copied from the American one, is threatened by great risks.  We all remember the large-scale mortgage crisis of 2008 in the USA, which grew into a global financial crisis, but in Europe, since 1945 no BLA has gone bankrupt! According to some experts, the BLA can conscript up to $150 bln.  

Housing construction in Russia may stop without cooperative housing schemes. At the same time, a number of experts think that this system has no future in the long term. Firstly, it involves great risks. Secondly, it courts controversy with the market trend of buying the finished housing with the necessary infrastructure.

What might co-funded construction be replaced with? Neither a banking system, nor mutual funds, nor securities issuers are ready to offer alternative ways of construction financing on the same scale as co-funding.  

For example, in Moscow, “the population and co-funders have become the largest investors in the city in recent years: they have gathered and invested  569 bln roubles in housing construction”, claimed the Deputy Mayor of Moscow for construction and urban development, Marat Khusnullin, said at the end of 2015. “In Russia, few may boast of such investment volumes, including first level oil and gas companies.”

Of course, the BLA has proven its sustainability in Czechia and Germany, but it is dangerous to switch over to this system in crisis conditions. If the model is changed in current conditions, both the old and the new may fail. It is a difficult moment for the implementation of alternative variants.

Construction complex financing: a lot of money in the country, but nowhere to put it  

1:0 to the banks

One of them is project financing.

Vladimir Gamza, Chair of the RF CCI Committee for financial markets and credit institutions, thinks that there was a strategic mistake made recently. Instead of introducing amendments to 214-FL, it should have been transformed into a law on project financing.  

Though 214-FL is being changed and improved by introducing additional security mechanisms, co-funded construction, alas, retains some signs of being a pyramid. 

With project financing, non-purpose use is impossiblea priori. Banks control financial money expenditure, strictly and gradually allotting it when necessary, after a definite stage of construction is completed.  

Besides this, the appearance of escrow accounts provided by 214-FL as an alternative financial variant deprives developers of direct financing.

In this case all the co-funders’ money is kept in a bank, which spends it according to its own desires. The situation is quite advantageous for credit institutions, as they needn’t even charge interest on the savings.

Nevertheless, we may see an imbalance again. Besides this, if developers lose the co-funders’ money at the construction stage, they will have to replace it with banking credits, which will eventually increase the final cost of housing.  

Construction complex financing: a lot of money in the country, but nowhere to put it 

The eternal issue

Today, everybody is complaining about a lack of money: developers, financial institutions, buyers. In fact, there is a lot of money in the country. The state has 7.5 trn roubles, the population has saved 6 trn roubles, the banks have 1.5 trn roubles and as much as 20 trn roubles are owned by state corporations. Besides this, one should add the CB’s forex/gold holdings.

That is, we may speak not of the lack of finance but of the lack of clear mechanisms for efficiently attracting it to the economy, including the construction industry. Unfortunately, the authorities are not looking for ways to do it, but prefer investing large volumes of statefinance in US treasury bonds. For “our American partners”… joy.

The state has no clear and distinct policy as to Russian construction support, Kirill Kulakov, Professor of the NRU MSUCE, says. “Now it buys realty, then subsidizes mortgage loans. The state does not seem to analyze its activity or foresee its consequences but seems to take impulsive measures. As a result, money bypasses construction, due to the lack of investment mechanisms.

In highly developed countries, the volumes of mortgages in local central banks may be compared with the GDP volume. In Russia this sum should be about $650 bln, thinks the Vice-President of “Business Russia”, Nickolai Ostarkov.  But this money is not real, as we cannot capitalize realty.

The Russian credit-linked market is badly developed, yet it determines the development of the economy. If Marx wrote his fundamental work now, he would have called it “Debt”, not “Capital”, Mr Ostarkov supposes… and we lack both.

The economy’s condition depends to a great extent on developed financial technologies, but Russia uses a very narrow and archaic set of financial tools. Though financiers know about the full range of instruments, they cannot introduce them to the full.  

The discussion which took place proves it. By the way, nothing was said about such an important financial mechanism as the financing of rental housing construction, but the future of the Russian construction complex depends on it to a great extent. For now, it is the most complicated and the least explored issue. The construction industry is unlikely to grow without it.