Jevons Paradox

Posted: October 17, 2008 in CRM

The relationship between economics and technology fascinates me.  Economics explains technology markets and technology drives economics.  Anyone who has ever performed or just read about quantitative economics research will agree, I am sure.  We might think this is a modern phenomenon but you can trace the linkage between economics and technology as far back as the birth of economics at the dawn of the industrial revolution.  Jevons Paradox is an example of early economic thinking that comes from another time but resonates with CRM today.

William Stanley Jevons was a Victorian era economist who made a simple but somewhat paradoxical – or at lease counter intuitive – observation that increasing the efficiency with which a resource is used tends to increase, rather than decrease, the rate of consumption of that resource. 

Jevons derived the paradox, which would ultimately bear his name, from observations about coal use.  He noted that as the steam engine became more efficient more coal was consumed over all in his native England.

Further analysis showed that the ratio of work done – or the benefit of that work measured as factory output – to the cost of the raw material, increased.  Generally speaking, as the cost of a good declines, more people will be able to afford it and demand will increase.  As demand for goods increases so will the demand for the materials that go into the good.

You might think that’s all well and good for coal and steam engines but it has little applicability to the modern world where so much is run in software on computers but I would beg to differ.  If you recall Moore’s Law, that computing capacity would double about every eighteen months you realize that the elements for Jevons Paradox are staring you right in the face. 

As the cost of computing has declined over many decades, numerous new computing niches have opened up.  Today computing hardware is embedded in our phones, cars, hand held devices and, oh yes, computers that sit on our laps, desktops or in our hands.  Frequently multiple CPU chips share the load.  In the PC alone we went from a single processor to having multiple specialized processors embedded in subsystems such as graphics cards for example.

That’s not the end of the story either.  Good, fast, cheap computing drove the advance of several waves of software paradigms from green screens to client-server to the on-demand. 

What’s striking to me is that in each era while older users converted to the new paradigm, even more new users who could not afford computing at the prior price point joined the ranks of the on-line world.  On-demand computing has been the most recent example of Jevons Paradox in action.  Not only did on-demand computing cause a revolution in computing but it has made users of people who cannot afford computing infrastructure and that, in turn, has made developers of people who have no special training.

We can even see the effects of Jevons Paradox in CRM.  Initially CRM was expensive in multiple dimensions – licenses were expensive, implementation and training were expensive and then there was all the hardware and labor to contend with.  CRM was also expensive to use, it took a lot of labor to input data, or at least it required a redistribution of labor from old processes to new.  However, as efficiencies caused over all prices to come down, greater efficiency in CRM’s use also increases and the amount of labor required to use CRM stabilized.

Today there is so much CRM available at such low prices that it would be a competitive disadvantage if a company refrained from using it.  That’s why I find it so interesting that there are still companies out there that still use spreadsheets to track leads or who still market by buying generic lists.  Some of them even wonder if they could ever afford the cost of CRM.  My question to them is how long can they afford not to invest in it?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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