The Economist: “…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.
Likewise, more efficient chatbots could mean that AI finds new uses (some no doubt similarly obnoxious). The ability of DeepSeek’s model to perform about as well as more compute-hungry American AI shows that data centres are more productive than previously thought, rather than less. Expect, the logic goes, more investment in data centres and so on than you did before.
Although this idea should provide tech tycoons with some solace, they still ought to worry. The Jevons paradox is a form of a broader phenomenon known as “rebound effects”. These are typically not large enough to fully offset savings from improved efficiency….Basing the bull case for AI on the Jevons paradox is, therefore, a bet not on the efficiency of the technology but on the level of demand. If adoption is being held back by price then efficiency gains will indeed lead to greater use. If technological progress raises expectations rather than reduces costs, as is typical in health care, then chatbots will make up an ever larger proportion of spending. At the moment, that looks unlikely. America’s Census Bureau finds that only 5% of American firms currently use AI and 7% have plans to adopt it in the future. Many others find the tech difficult to use or irrelevant to their line of business…(More)”.