Jevons Paradox and AI – what’s it all about?

In the early 1860s, many English leaders began to worry about the rapidly dwindling coal reserves. After all, the dirty fossil fuel powered the Industrial Revolution. And England’s economy was completely dependent on it. At the time, many believed the solution or at least, an immediate one, was more-efficient technologies. The thinking behind this is…

More-efficient technologies would reduce coal consumption, and therefore, help the country avert a coal crisis.

However, British economist William Stanley Jevons, thought the opposite. And so, in 1865, he published, The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines.

Here, Jevon argued that greater efficiency of coal-powered technologies would — paradoxically — lead to more consumption of coal, not less.

Why?

Because greater efficiency lowers the cost of using coal, which can lead to increased demand for it.

This happened with coal usage in steam engines. As coal-powered steam engines became cheaper to run, it led to broader adoption. And ultimately increased overall coal consumption.

This is known as Jevons Paradox

And there are many examples of this concept in action throughout modern history…

For instance, more-efficient blast furnaces, which used heat from coal to smelt iron, helped the iron industry become bigger and more profitable.
It also happened a century later with the internet. As computers got smaller and cheaper – and access to the internet became widespread – demand soared.

Scholars and writers have seen versions of Jevons Paradox in other places too.

For example, in 2020, Chinese scholars found evidence of a Jevons paradox in water markets, where greater efficiency in irrigation leads to greater overall water consumption. And in 2021, studies from around the world found evidence of a Jevons paradox in infrastructure, where, for example, more highway lanes end up creating more traffic congestion.

So, where does “Jevons Paradox” and AI come in?

The release of the “cost-efficient” DeepSeek AI model didn’t only spark panic throughout Wall Street…

It also brought about the potential for a Jevons paradox in AI.

You see, as AI model training and inference costs get slashed, more companies and people will build AI models, paving the path for AI to become global.

That means more — not less — AI spending. More AI models mean more AI chips. More AI chips mean more AI compute. And all that means more AI spending.

Some of the biggest companies and their leaders in AI today think so too…

Leading chip equipment supplier, ASML, said the cost efficiencies unlocked by DeepSeek would just open the door for more AI models to be created, which will lead to more AI chips, and more demand for the semiconductor equipment needed to make those chips.

Semiconductor firm KLA Corp echoed this sentiment in its most recent earnings call.

And we know DeepSeek and other competitor’s breakthrough AI models won’t derail big tech’s AI spending plans in 2025.

In fact, Meta, Amazon, Alphabet, and Microsoft will allocate up to $320 billion combined to develop AI infrastructure.
Jevons Paradox and AI may seem relevant today for another reason…

What would happen to some industries if AI revolutionised them and made workers more productive?

Just as more coal-powered tech increased demand for coal, Stanford University economist Erik Brynjolfsson believes something similar could happen. That is, as AI makes certain industries more efficient, it could boost demand for human labour, instead of mass layoffs.

Of course, this would only happen if AI made workers more productive, which in turn leads to lower prices, and eventually increases demand.

None of these things are guaranteed.

That being said, the race for AI supremacy is heating up with more competition and that can only be positive for the AI industry. If you wanting to set up your own AI portfolio but are not sure where to start, then South African Investor’s newest report could hold the answers. You can claim a free copy here.