EconomistTech tycoons have got the economics of AI wrong
Following DeepSeek’s breakthrough, the Jevons paradox provides less comfort than they imagine
Even as economic growth was just taking off, some economists were already pessimistic. Coal, wrote William Stanley Jevons in 1865, is “the mainspring of modern material civilisation”. Yet it was finite and would soon run out. Although more could be found by digging deeper, it would be increasingly expensive to extract and these higher costs would reduce the competitiveness of Britain’s manufacturers. After all, in other countries the black fuel was still in sight of daylight. Efficiency gains—using less coal to produce the same amount of stuff—would not save the country. Indeed, cleverer use of limited resources would simply provide an incentive to burn even more coal, which would, paradoxically, lead to an even faster use of British reserves. There was no escape, the Victorian economist believed. Coal would be exhausted and the country was likely to “contract to her former littleness”.
The Jevons paradox—the idea that efficiency leads to more use of a resource, not less—has in recent days provided comfort to Silicon Valley titans worried about the impact of DeepSeek, the maker of a cheap and efficient Chinese chatbot, which threatens the more powerful but energy-guzzling American varieties. Satya Nadella, the boss of Microsoft, posted on X, a social-media platform, that “Jevons paradox strikes again! As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can’t get enough of,” along with a link to the Wikipedia page for the economic principle. Under this logic, DeepSeek’s progress will mean more demand for data centres, Nvidia chips and even the nuclear reactors that the hyperscalers were, prior to the unveiling of DeepSeek, paying to restart. Nothing to worry about if the price falls, Microsoft can make it up on volume.
The logic, however self-serving, has a ring of truth to it. Jevons’s paradox is real and observable in a range of other markets. Consider the example of lighting. William Nordhaus, a Nobel-prizewinning economist, has calculated that a Babylonian oil lamp, powered by sesame oil, produced about 0.06 lumens of light per watt of energy. That compares with up to 110 lumens for a modern light-emitting diode. The world has not responded to this dramatic improvement in energy efficiency by enjoying the same amount of light as a Babylonian at lower cost. Instead, it has banished darkness completely, whether through more bedroom lamps than could have been imagined in ancient Mesopotamia or the Las Vegas sphere, which provides passersby with the chance to see a 112-metre-tall incandescent emoji. Urban light is now so cheap and so abundant that many consider it to be a pollutant.