Why The Invisible Hand Is So Inefficient

In the 1800s the economist Jevons noticed a strange thing about finite resources. If you have a valuable resource in short supply, it’s a precious so it makes sense to use sparingly, ie: efficiently. What Jevons noted in his study on coal, The Coal Question, was that we devise ways to get the most value out of resources that are in short supply and so precious and expensive. For example we might improve the steam engine to get more power out of coal. This makes it cheaper to use coal – you need to buy less to get the same power. Because it’s cheaper it makes it financially viable to do things that would have been too expensive before, so you end up using more coal.

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.

Jevons, The Coal Question

The paradox is that by using scarce resources more efficiently, we reduce the cost of using them, which makes it more profitable to use them, which makes us use more of them. Our most well known finite resources are a perfect example, which is probably why Jevons noticed this paradox when considering ‘the coal question’ – coal and oil, which cannot be renewed have been burned off at ever increasing rates since and have been exhausted in Britain (the subject of Jevons book), which is now only a small country off the coast of Europe, no longer the greatest empire in the world.

Civilization, says Baron Liebig, is the economy of power, and our power is coal.

Jevons, The Coal Question

What is most strange is that despite Jevon’s Paradox being well known to economists since 1865, and so also to the big businesses and governments who employ and consult with economists, nobody has factored into their planning, into economic management and government – leaving us in the ever more desperate situation we are in now. Business and government seem unconcerned to conserve their own ‘civilisation’ as Liebig put it.

Many economists since Adam Smith have been keen to reassure us that the ‘invisible hand’ of the market will lead to an equilibrium of low prices, optimal use of resources and the best possible satisfaction of human wants and needs, if only it’s competitive nature is left alone and not regulated or manipulated with collusion. There are many arguments against this as a naive ideology that works in theory but not always in practice, but Jevons’ paradox is interesting in that it occurs in a so called ‘free market’ without intervention – it’s inherent in a free market that it will use scarce resources inefficiently, and the more scarce the more inefficiently they will be used.

In Economics 101 they teach that one way of defining economics is ‘the allocation of scarce resources’ (from there we examine how this relates to unlimited wants, supply and demand, individuals, businesses, government etc). Even with renewable resources there is a limit to how quickly they can be renewed. We can expect Jevons paradox to apply to all of economics, to all our use of the world’s resources. If you look around, it does indeed seem to be the way of ‘the West’, ‘capitalism’, ‘modernity’, ‘globalisation’, or whatever you want to call it, ‘the way of the world’ which claims to maximise wealth for all (a very dubious claim already) – it seems not so much wealth but profligacy, waste, thoughtless dissipation.

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