Jevons Paradox?

There has been quite a lot of handwringing that AI would be like a neutron bomb as it relates to many industries and white-collar work in general. The knee-jerk reaction to AI is that it could displace entire industries and fields, such as software and computer science, to say nothing of law and accounting. But at least anecdotally, that’s not entirely what we are seeing in the economy right now. While hiring in certain industries seems to have slowed (and I would not want to trade places with a newly minted college graduate right now—well, actually, I would, but not for this job market), there is growing anecdotal evidence that demand for young workers and others who can implement AI agents is extraordinarily high. These workers are hyper- efficient, and they foster giant leaps forward within organizations.

This phenomenon, when a new technology would seem poised to displace a commodity or an industrial process, was first described by the 19th century economist William Stanley Jevons, who observed that improvements in coal-use efficiency actually increased total coal consumption instead of replacing it.

Jevons paradox could also be applied to the invention and societal impact of the steam engine, computers, the internet or, perhaps, the most dramatic, the cotton gin. The cotton gin markedly increased the efficiency of processing cotton. However, rather than reducing the need for enslaved labor, it made cotton production vastly more profitable and had the horrifying effect of significantly increasing the demand for enslaved labor to farm more acreage.

The point is that there is a rebound effect of new, revolutionary technologies where efficiency gains lower costs and therefore increase total demand. Perhaps software becomes less expensive, but vastly more software is developed. Maybe legal services become cheaper, but there will be more analysis performed, not less.

Reality Check

As interesting as it is to ponder such matters, no one has a crystal ball, and meanwhile, there are still plenty of real-world problems that need solutions. The Iran conflict is proving to be no quick fix, and the global economy, especially outside of the U.S., is going to begin slowing significantly if the Strait of Hormuz is not reopened soon. The market seems to be discounting a favorable and relatively swift resolution to these hostilities, but with limited hard evidence of any lasting agreement. Futures markets have abandoned any hope of a Fed rate cut before the end of the year, a significant change in expectations from the start of the year. Higher fuel prices are feeding inflation, and, likely, the worst is yet to come. The Fed will certainly not cut rates again until the inflation outlook begins to improve. This suggests that bond prices will not have a great deal of room to run in the near term, and that would seem to create some competition for stocks as yields rise.

Looking Ahead

The “on sale” sign that appeared in markets in March is long gone, and markets have become, at least compared to historical levels, expensive again. That gives us some pause, but with our value orientation giving us some room to play defense and with our small-cap allocation allowing us to participate in a broadening rally, we believe our clients are positioned well in this environment. We know Maycember has just come to a close, and everyone may have been too busy to notice that the calendar has turned, but please do not hesitate to reach out to us with any questions.