The Jevons paradox may debunk the AI market panic triggered by DeepSeek

On 20 January, the Chinese AI firm DeepSeek announced that it had developed a chatbot matching OpenAI’s performance while requiring significantly fewer computational resources. This revelation sent shockwaves through the market, culminating in a 17% plunge in NVIDIA’s stock price by 27 January.

Tech industry leaders, including Microsoft CEO Satya Nadella, invoke the Jevons paradox to argue that lower costs will drive up demand for AI chips rather than diminish it. First articulated by economist William Stanley Jevons in 1865 about coal consumption, the paradox suggests that greater efficiency in resource use paradoxically leads to an overall increase in its consumption rather than a decline. Nobel laureate economist William Nordhaus observed a similar phenomenon in the evolution of lighting technology: while a Babylonian oil lamp produced a mere 0.06 lumens per watt, modern LEDs can generate up to 110 lumens per watt. Yet, instead of reducing energy consumption, this dramatic efficiency gain has led to an exponential rise in artificial light usage.

The DeepSeek R1 model, available as open-source, enables significantly more efficient resource utilisation on NVIDIA chips. According to Hamish Low, an analyst at Enders Analysis, the market’s reaction was exaggerated, as improved computational efficiency is by no means detrimental to demand. Major tech companies continue to plan substantial investments in AI infrastructure, signalling that the industry’s leading players remain committed to long-term development.

Sources:

1.

Tech tycoons have got the economics of AI wrong

Following DeepSeek’s breakthrough, the Jevons paradox provides less comfort than they imagine

The EconomistThe Economist

2.

DeepSeek’s Latest Breakthrough Is Redefining AI Race

DeepSeek’s R1 breakthrough isn’t a one-off Sputnik moment. Instead, it signals a new era in the AI race—one defined by continuous innovation, a narrowing tech gap, and the transformative power of open-source collaboration in reshaping global competitiveness.

Center for Strategic and International Studies

3.

DeepSeek sparked a market panic — but some think the sell-off is overblown

China’s DeepSeek has panicked investors in top AI stocks after it said its new model was built with less computing power than would be expected.

Business InsiderHasan Chowdhury

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After DeepSeek, AI developers are wrong that The Jevons Paradox will bail them out

The dramatic drop in the cost of AI demonstrated by Chinese upstart DeepSeek is great for buyers of AI tools, but very bad for the incumbent developers of those tools.

resilienceBart Anderson