The Jevons' Paradox: Will Increased Efficiency Lead to Increased Consumption?
The Economics of Jevons
Last week was all about the DeepSeek (a Chinese AI company known for developing large language models and other AI technologies). But in the middle of that buzz, came another buzz, the buzz for Jevons' Paradox.
As you can see the surge in their search globally as well as in India(see the image).
How Jevons' Paradox Applies to AI (and DeepSeek)
Jevons' Paradox occurs when efficiency gains reduce the cost of using a resource, leading to higher overall demand. In AI, this can manifest in several ways:
Efficient Models → More Usage:
If DeepSeek develops more efficient AI models (e.g., requiring less computational power per task), the cost of running AI applications drops. This could incentivize:Wider deployment of AI in new industries (e.g., real-time analytics, personalized services).
Training larger or more complex models (e.g., "bigger" LLMs with trillions of parameters).
Proliferation of AI-driven products (e.g., chatbots, automation tools), increasing total energy/resource use.
Lower Costs → Scaling Up:
Cost savings from efficiency might be reinvested into scaling operations. For example:Companies using DeepSeek’s models could deploy AI across more use cases.
Startups might enter the market due to lower barriers, multiplying total compute demand.
Indirect Effects:
Savings from AI efficiency could fund other energy-intensive activities (e.g., expanding data centers, developing blockchain tech).
Ok. We will pause on the AI buzz and go deep on Jevons’s Trap. Since, we love History over the call of ‘Future-Predications!’ . Also, because the Person is far more interesting to be talked about than just for Jevons’s Paradox.
Jevons's Legacy: Utility, Choice, and the Mathematical Turn in Economics
While his name may not be as widely recognized as some of his contemporaries, Jevons's intellectual footprint is undeniable. William Stanley Jevons stands as a key architect of the Marginalist Revolution, a paradigm shift that fundamentally altered the way economists understood value, utility, and market dynamics.
The Utility Revolution: How Jevons Shaped Modern Economics
In his book "The Theory of Political Economy" published in 1871, Jevons argued that "value depends entirely on utility," meaning the worth of a good is determined solely by its usefulness to the consumer, not by its production cost or inherent qualities; this concept is central to the marginal utility theory of economics.
Subjective Utility and Value: Jevons broke away from the classical emphasis on labor or cost of production as the determinant of value. Instead, he argued that value is derived from subjective utility, or the pleasure and pain individuals experience from consuming goods and services.
This was a departure from the Ricardo-Mill tradition, which focused on the cost of production as the main determinant of value. Jevons believed that the laws of human enjoyment could provide a psychological foundation for a theory of economic maximization with universal application. Some of his key contributions are:
Marginalism: Jevons emphasized the importance of the "final degree of utility". Although he did not use the phrase "marginal utility". This refers to the additional satisfaction gained from consuming one more unit of a good, which he argued diminishes as consumption increases. For instance, the first slice of pizza provides a lot of satisfaction, while the tenth slice might not provide any additional utility, and may even cause discomfort. This concept of diminishing marginal utility is a cornerstone of modern microeconomics.
Mathematical Approach: Jevons believed that economics, as a science dealing with quantities, should be mathematical. He used differential calculus to model economic relationships, arguing that it was essential for economics to be considered scientific. For instance, he used mathematical functions to analyse the relationship between utility and quantity, although some scholars have argued that he did not make extensive use of mathematical reasoning. But still this formal, mathematical approach to economic theory, with its focus on quantitative relationships, became a hallmark of neoclassical economics.
Theory of Exchange: Jevons shifted the focus of economics from production to exchange, emphasizing how individuals make choices based on their perceptions of utility. For example, in a market, individuals exchange goods and services based on their individual calculations of the ratio of utility, as opposed to some objective measure of cost of production. This was different from classical economics, which tended to focus on production and the social relations inherent in the production process. Jevons’s concentration on the mechanics of self-interest and utility paved the way for more formalized and abstract theories of exchange.
Specialisation: Jevons's work encouraged the specialisation of economists. Instead of trying to be a master of all aspects of the field, he encouraged economists to specialize in certain areas, either subject matter or methodology. This was a departure from the classical approach of a synthesis of theory and practice and opened the door for the development of the sub-disciplines such as empirical economics and welfare economics.
Microfoundations of Macroeconomics: Jevons saw the economy as ultimately driven by individual deliberation. His focus on utility and individual choice provided a basis for understanding economic phenomena at a microeconomic level, which could then be used to understand macroeconomic outcomes. While Jevons was interested in fluctuations and business cycles, his focus was always on the individual as the fundamental unit of analysis.
Business Cycles: Jevons was interested in the causes of economic fluctuations and considered various factors such as the weather and sunspots. He argued that expectations, influenced by changing price patterns, played a role in amplifying fluctuations. For example, he attempted to correlate fluctuations in agricultural output with trade cycles, suggesting that the psychology of expectations could influence investment and speculative behaviour.
and,
Jevons Paradox: In his book The Coal Question, Jevons observed that increased efficiency in the use of a resource, such as coal, can actually lead to increased consumption.
Context
He viewed coal as the primary source of energy and industrial power for Britain, stating it "stands not beside, but entirely above, all other commodities". He was acutely aware that coal reserves were finite and that their depletion would inevitably lead to a decline in Britain's economic and industrial power. His analysis was heavily influenced by Malthusian thought, where he saw coal replacing corn as the primary factor limiting growth. He noted that population tends to increase geometrically while resources tend to grow arithmetically, leading to potential resource scarcity.
The Implication of Resource Depletion
Jevons was concerned that the depletion of coal would lead to:
Increased Costs: As easily accessible coal was exhausted, the cost of mining would increase, making British industry less competitive. He realised that Britain ran on cheap coal, so deeper mining would undermine its economic advantage.
Decline in British Supremacy: He worried that the exhaustion of coal would diminish Britain's manufacturing and maritime dominance.
Return to Poverty: He feared that without coal, Britain would be thrown back into "the laborious poverty of earlier times".
Stagnation: He believed that limits to coal would cause stagnation, as without an energy source to facilitate growth, the economy would enter a stationary state.
But then as he was monitoring the data, he discovered his paradox.
He noted that improvements in steam engine efficiency had led to more, not less, coal consumption as the lower price led to more demand. He stated,
"It is wholly a confusion to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth".This highlights how efficiency gains can sometimes be offset by an increase in the scale of consumption.
In conclusion, William Stanley Jevons's contributions to economics were groundbreaking, laying the foundation for neoclassical thought and continuing to resonate with economists today. His emphasis on individual utility, exchange, and the application of mathematical and empirical methods marked a turning point in the field. Furthermore, his recognition of the critical connection between resource scarcity and economic growth provides a vital framework for understanding the challenges of sustainable development. His Paradox highlights the counterintuitive relationship between efficiency gains and resource consumption. While technological advancements aim to reduce resource usage, they can inadvertently lead to increased demand and overall consumption.