"Jevons paradox" jumped into investors' vocabularies this week after Microsoft CEO Satya Nadella mentioned the concept in reference to the potential impact of a new open-source AI program from Chinese startup DeepSeek. Technology and AI stocks rebounded to varying degrees on Tuesday after tumbling on Monday.
DeepSeek Could Illustrate Jevons Paradox
DeepSeek claimed to have created an AI model with capabilities equivalent to those of much larger U.S. rivals like Microsoft-backed OpenAI, but at a fraction of the development cost. It appeared as if that efficiency was tied to lower-cost processing chips, information that led to Monday's rout for AI, or artificial intelligence, chip stocks.
Nuclear power stocks, engineering and construction firms, and related issues also tanked as investors worried that big technology companies would rethink their expensive data-center buildouts.
But responding to the DeepSeek AI news, Nadella offered some positive perspective.
"Jevons paradox strikes again!" he tweeted. "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."
At the heart of the Jevons paradox is the idea that as a technology becomes more energy efficient, the cost of using the technology declines. The lower cost spurs consumption. The increased consumption, in turn, rises to wipe out any decreases in energy use the efficiency gains might have initially represented.
Refrigerators become more energy efficient and their use booms. Cars become more fuel efficient and people drive more. Overall energy demand, in theory, either remains the same or rises.
The idea, according to a 2010 New Yorker article, originated in 1865, when a 29-year-old Englishman named William Stanley Jevons published a book called "The Coal Question."
Energy Efficiency And Usage
Jevons argued that Great Britain's industrial and military might could not last. The country's sway, he wrote, depended on its natural coal resources, which were rapidly diminishing. He suggested that "economy" in coal usage — energy efficiency in today's parlance — may not help either.
"It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption," Jevons wrote. "The very contrary is the truth."
According to the New Yorker, Jevons gave the example of the British iron industry: "If some technological advance made it possible for a blast furnace to produce iron with less coal, he wrote, then profits would rise, new investment in iron production would be attracted, and the price of iron would fall, thereby stimulating additional demand. Eventually, he concluded, "the greater number of furnaces will more than make up for the diminished consumption of each."
Nadella subtly twisted Jevons' concept to refer to more efficient development of artificial intelligence. The CEO emphasized that lower cost meant increased demand. But the comment about AI "commoditization" implied that lower costs for artificial intelligence buildouts will, in the larger picture, boost rather than hurt the overall AI growth story.
Technology, AI Stocks
Analysts quickly began weighing in on what DeepSeek AI might mean for tech companies.
Falling AI compute costs and rising adoption should drive up the return on invested capital for generative AI efforts, analysts at Morgan Stanley said in a 63-page DeepSeek-focused note.
Among internet and software companies, the Morgan Stanley analysts named Alphabet, Meta, Amazon and Microsoft among the biggest beneficiaries from lower costs. All three companies enjoyed wide competitive moats due to "large capital expenditures, installed base of users and ability to extract DeepSeek's improvements and implement them in their own models."
Morningstar analysts also agreed that Microsoft stock, Amazon and Alphabet should benefit "from a commodified LLM (large language model) layer, with increased spending on AI creating tailwinds for their public cloud businesses."
Meta and Amazon rallied to new highs Tuesday. Microsoft rebounded, retaking all of Monday's losses. Alphabet took back a portion of Monday's sell-off.
In AI networking, the Morgan Stanley note highlighted Arista Networks. Other AI-related names highlighted included Ciena in cloud infrastructure and Pure Storage in cloud storage. All three AI-led stocks also rebounded on Tuesday from sharp sell-offs.
AI chip leader Nvidia, Broadcom and other AI chip stocks also regained lost ground.
Please follow Aparna Narayanan on X @IBD_Aparna for more coverage.
