The Jevons Paradox
IN A RECENT INTERVIEW, Dario Amodei, CEO of Anthropic, a leader in artificial intelligence, grabbed headlines. Amodei argued that the next generation of AI systems could replace half of entry-level jobs and drive up the unemployment rate to 20%. All of this could occur in the next five years, he said.
Recent data seem to support these glum predictions. Mark Zuckerberg said AI will be as capable as a mid-level programmer by the end of this year. Microsoft announced thousands of job cuts this spring, with programmers disproportionately affected. In an announcement last week, Amazon’s CEO wrote, “It’s hard to know exactly where this nets out over time, but in the next few years, we expect artificial intelligence to reduce our total corporate workforce...”
If these data points are a sign of things to come, it would certainly be concerning. This outcome isn’t guaranteed, though. To illustrate why I see things differently, let me share a recollection from some years ago.
My father was a lawyer, and I remember visiting his office when I was a child. In hindsight, what was notable was there was no computer on his desk. There were no computers anywhere. To send correspondence, attorneys spoke into dictation machines. They then handed the machines’ miniature tapes to secretaries, who literally typed up a first draft on typewriters, using Wite Out to fix errors and carbon paper to make copies. The draft was then marked up in pen, a final copy retyped, placed in a stamped envelope, and mailed.
Because of the amount of work involved, each attorney had a dedicated secretary who spent his or her days typing and retyping documents in the manner described above. Today, everyone seems to do their own correspondence and, as a result, there are far fewer secretarial jobs. But if we look back at historical data, we see that the invention of both the word processor and email didn’t cause any noticeable increase in unemployment. Why not? For starters, transitions like this occur slowly.
Also, new technologies are rarely a net negative. Instead, they tend to create new jobs. Take a look at today’s law firm. It has far fewer traditional secretaries but significant numbers of IT people. (IT was nonexistent in the days of typewriters and dictaphones.)
The transition in office work is the most recent change, but it’s by no means unique. Years ago, many people were employed as Morse code operators. Sam Altman, founder of OpenAI, commented that in the past there were also large numbers of people employed as lamplighters who traveled the city streets each night lighting gas lamps. More significantly, farming used to be a major sector of the workforce. In 1900, 40% of Americans worked on farms. Today, it’s less than 2%.
These transitions were all significant, but none caused the sort of mass unemployment Dario Amodei forecasted. In fact, Amazon said it doesn’t expect AI to result in significant layoffs. Instead, the bulk of the headcount reduction is expected to occur through attrition—the normal course of employees changing jobs or retiring.
Amazon provides another useful data point on this topic: The company now uses 750,000 robots in its warehouses. In theory, those robots would have taken more than 750,000 jobs, but that’s not what the overall employment data show. Unemployment today is near the low end of where it’s been over the past 75 years.
How is it possible that technology has displaced jobs, and yet unemployment remains low? An economic principle known as the Jevons paradox can help us understand this. In the 1860s, William Jevons, a British economist, observed that manufacturing plants had become more efficient in their use of coal and yet, counterintuitively, the demand for coal was increasing.
The explanation: As manufacturers realized they needed less coal to produce the same amount of output, they chose to expand their businesses into new areas, resulting in the use of more coal.
Over time, a second order effect kicked in. These gains in output led to wage increases and faster economic growth. That, in turn, further increased demand for coal.
The adoption of artificial intelligence might deliver the same positive effects, with greater productivity leading to higher wages and faster economic growth without any loss in employment.
Recent comments by the CEO of software vendor Box illustrate how the Jevons paradox might apply to AI. “AI is not replacing existing work that's being done,” he wrote, “but adding new capabilities to the organization.” Box, in other words, won’t use AI to cut costs; it will use the technology to do more.
He adds: “This means that companies can simply now attack the kinds of problems that just never were economically feasible to solve before…. Yes, there's certainly opportunity to automate some of the work that we currently do to drive efficiency, but the vast majority of work that we will bring automation to is the work that we just never got around to in the first place.”
Interestingly, despite his concerns about employment, Amodei sees some of these same benefits. In the same interview in which he made his comments about unemployment, he also described some of the potential positive effects that AI might deliver: “Cancer is cured, the economy grows at 10% a year, the budget is balanced....”
The reality is that this is all an open question. In a May interview, economist Daron Acemoglu, who recently won the Nobel Prize for his work on economic development, argues that AI will be able to replace only a fraction of jobs. But he adds, “It’s hugely uncertain, and it’s very difficult to know because it’s a very rapidly changing technology.”
And that just may be the best way to think about AI. It’s all very new and still uncertain. While Amodei worries about a potentially negative impact, that’s just a guess. Economic history suggests it may very well go the other way.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Recent data seem to support these glum predictions. Mark Zuckerberg said AI will be as capable as a mid-level programmer by the end of this year. Microsoft announced thousands of job cuts this spring, with programmers disproportionately affected. In an announcement last week, Amazon’s CEO wrote, “It’s hard to know exactly where this nets out over time, but in the next few years, we expect artificial intelligence to reduce our total corporate workforce...”
If these data points are a sign of things to come, it would certainly be concerning. This outcome isn’t guaranteed, though. To illustrate why I see things differently, let me share a recollection from some years ago.
My father was a lawyer, and I remember visiting his office when I was a child. In hindsight, what was notable was there was no computer on his desk. There were no computers anywhere. To send correspondence, attorneys spoke into dictation machines. They then handed the machines’ miniature tapes to secretaries, who literally typed up a first draft on typewriters, using Wite Out to fix errors and carbon paper to make copies. The draft was then marked up in pen, a final copy retyped, placed in a stamped envelope, and mailed.
Because of the amount of work involved, each attorney had a dedicated secretary who spent his or her days typing and retyping documents in the manner described above. Today, everyone seems to do their own correspondence and, as a result, there are far fewer secretarial jobs. But if we look back at historical data, we see that the invention of both the word processor and email didn’t cause any noticeable increase in unemployment. Why not? For starters, transitions like this occur slowly.
Also, new technologies are rarely a net negative. Instead, they tend to create new jobs. Take a look at today’s law firm. It has far fewer traditional secretaries but significant numbers of IT people. (IT was nonexistent in the days of typewriters and dictaphones.)
The transition in office work is the most recent change, but it’s by no means unique. Years ago, many people were employed as Morse code operators. Sam Altman, founder of OpenAI, commented that in the past there were also large numbers of people employed as lamplighters who traveled the city streets each night lighting gas lamps. More significantly, farming used to be a major sector of the workforce. In 1900, 40% of Americans worked on farms. Today, it’s less than 2%.
These transitions were all significant, but none caused the sort of mass unemployment Dario Amodei forecasted. In fact, Amazon said it doesn’t expect AI to result in significant layoffs. Instead, the bulk of the headcount reduction is expected to occur through attrition—the normal course of employees changing jobs or retiring.
Amazon provides another useful data point on this topic: The company now uses 750,000 robots in its warehouses. In theory, those robots would have taken more than 750,000 jobs, but that’s not what the overall employment data show. Unemployment today is near the low end of where it’s been over the past 75 years.
How is it possible that technology has displaced jobs, and yet unemployment remains low? An economic principle known as the Jevons paradox can help us understand this. In the 1860s, William Jevons, a British economist, observed that manufacturing plants had become more efficient in their use of coal and yet, counterintuitively, the demand for coal was increasing.
The explanation: As manufacturers realized they needed less coal to produce the same amount of output, they chose to expand their businesses into new areas, resulting in the use of more coal.
Over time, a second order effect kicked in. These gains in output led to wage increases and faster economic growth. That, in turn, further increased demand for coal.
The adoption of artificial intelligence might deliver the same positive effects, with greater productivity leading to higher wages and faster economic growth without any loss in employment.
Recent comments by the CEO of software vendor Box illustrate how the Jevons paradox might apply to AI. “AI is not replacing existing work that's being done,” he wrote, “but adding new capabilities to the organization.” Box, in other words, won’t use AI to cut costs; it will use the technology to do more.
He adds: “This means that companies can simply now attack the kinds of problems that just never were economically feasible to solve before…. Yes, there's certainly opportunity to automate some of the work that we currently do to drive efficiency, but the vast majority of work that we will bring automation to is the work that we just never got around to in the first place.”
Interestingly, despite his concerns about employment, Amodei sees some of these same benefits. In the same interview in which he made his comments about unemployment, he also described some of the potential positive effects that AI might deliver: “Cancer is cured, the economy grows at 10% a year, the budget is balanced....”
The reality is that this is all an open question. In a May interview, economist Daron Acemoglu, who recently won the Nobel Prize for his work on economic development, argues that AI will be able to replace only a fraction of jobs. But he adds, “It’s hugely uncertain, and it’s very difficult to know because it’s a very rapidly changing technology.”
And that just may be the best way to think about AI. It’s all very new and still uncertain. While Amodei worries about a potentially negative impact, that’s just a guess. Economic history suggests it may very well go the other way.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.The post The Jevons Paradox appeared first on HumbleDollar.
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