Increasing efficiency can actually mean decreased returns

The Jevons paradox challenges the assumption that efficiency alone will reduce resource consumption or environmental impact

In the early days of the Internet in the mid-90’s, I founded one of New Zealand’s first ISP’s (Internet Service Providers). Back then, the promise was clear: faster, cheaper connectivity would democratize information and empower users. And it did. But also the more bandwidth and connectivity we deployed, the more users seemed to need, and the less money we made.

This phenomenon is known as the Jevons Paradox. In 1865, economist William Stanley Jevons observed that improvements in coal-use efficiency led to increased overall coal consumption, not less. The reason? As coal became cheaper to use, it was used more widely. This paradox has resurfaced in various industries, including telecommunications and aviation

“It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.”

— William Stanley Jevons

Telecommunications: More Bandwidth, More Problems

In the 1990s, as internet infrastructure expanded, the cost per megabyte plummeted. Logic suggested that telecom companies would thrive with increased usage. However, the reality was starkly different.

Companies like Level 3 Communications and Global Crossing invested heavily in infrastructure, anticipating massive returns. Yet, the market became saturated, prices dropped, and many of these companies faced financial ruin. Despite the surge in internet usage, profitability didn’t follow suit.

Although Internet speeds have been getting faster and faster for decades, and usage has been going up and up - the price per Mbit keeps dropping, offsetting any gains in revenue for Internet Service Providers.

Aviation: Flying into the Paradox

Air travel has become significantly more fuel-efficient over the decades. One would expect this to reduce overall fuel consumption. Instead, cheaper flights have led to more people flying more often, increasing total fuel use and emissions.

Investors, seeing the growth in passenger numbers, poured money into airlines, expecting robust returns. Yet, the industry has been plagued with bankruptcies and thin margins. As Warren Buffett famously noted, airlines have been a “deathtrap for investors.”

The AI Revolution: A Familiar Pattern

Today, we’re witnessing a similar trend in artificial intelligence. As AI models become more efficient, the cost of deploying them decreases, leading to broader adoption and increased demand for computational resources. This surge mirrors the Jevons Paradox: efficiency gains leading to higher and higher overall consumption.

Microsoft CEO Satya Nadella recently acknowledged this dynamic directly:

“Jevons Paradox strikes again,” he wrote on X.

The Investor’s Dilemma

The Jevons Paradox teaches us that being right about a trend doesn’t guarantee investment success. Efficiency can drive growth, but it can also erode margins and profitability. As someone who has navigated the highs and lows of the telecom industry, I learnt that sustainable success requires more than just riding the wave of efficiency - customer numbers, margins and profit has to be monitored and preserved too