Weird title, I know.
My question is this.
Is it meaningful, maybe even useful to look at economics through the lense of the laws of thermodynamics?
I understand that when you get it down to small enough groups or individuals, the idea breaks down, but at larger scales? Maybe?
My thinking, early this am, was that a unit of currency is a unit of organized energy (lacking entropy) used to decrease entropy in various ways around the world and that energy tends to move from areas with little entropy to areas with high entropy. It seems like money or wealth or whatever term you like, moves around the world in a similar fashion.
Am I onto something here or did I just find some magic beans?
Money isn’t a natural phenomenon. Its creation, definition, uses and “behaviour” are determined by human intervention, not some immutable endogenous law.
Entropy is a measure of disorder, so it is the other way around.
Wouldn’t surprise me if there was some common ground, or shared concepts. Statistical mechanics is a fundamental part of physics, that uses statistical methods to understand thermodynamics as an ensemble of particles. Econo-physics, apparently a thing, takes a similar approach to aspects of economics.
Thermodynamics is really difficult, as anyone who has studied chemistry or physics can attest to - even if you’re on top of it at an undergrad level there’s still the feeling that you’re just scratching the surface of a deep understanding IME. But at heart there is total clarity. Immutable laws. Complete consensus. Awesome predictive power. Given this describes the antithesis of economics, pretty much, I suspect that the overlap may not be all that profound at a conceptual level or we would see a stronger economics than we currently do. Overlap of methods derived from things like statistical mechanics may be very important, though.
I think so. For example, capital flowed from Britain (a rich place, ‘hot’?) to projects in India and Africa. Just as temperature tends to equalize, so a natural law caused that British capital to flow from Britain – already well invested – to poor countries where investment was missing. (The investors were not altruistic: they retained property deeds for their capital in the developing countries.)
Similarly the U.S.A. invested heavily in developing countries during the 50’s, 60’s, and 70’s.
These economic “laws” are not immutable. Or rather there are multiple, possibly contradicting laws. For example, money will also flow from a low-interest or low-profit regime to a high-return market. Thus we see the first rule violated by in-flow into the U.S. due to its high returns. Non-U.S. world markets remain in doldrums, so excess capital feeds an asset price bubble in the U.S. rather than funding capital development in poorer countries.
It’s an interesting question. I’ve given some thought to this before.
But I don’t see any possible way that you could work it out into something that was useful for making predictions about how the economic world actually works.
How would this even work, with “money” as a unit of organized energy? If this were true, money would just settle into its highest entropy state, and then stop moving (since the thermodynamic equivalent would be that the money’s energy would no longer be able to do any work). But this simply isn’t how money works. It circulates. It remains useful as it circulates. I guess you could make the analogy between inflation and entropy, where money loses its usefulness as “entropy” (inflation) increases, but the analogy breaks down almost immediately.
If there were a thermo-economics, it wouldn’t work in that fashion.
If we look at the sun as the source of almost all our wealth, then it can still work.
The earth is not a closed system. The “wealth” of the earth increases because we’re being sustained by an external energy source. All of this is actually true. If there were a thermo-economics, “money” wouldn’t be the unit of energy. Energy would be the unit of energy. One way to think about this would be to “measure” our economy using units of energy.
There’s some counterintuitive aspects to this. A lot of people’s first instinct is to measure the size of an economy by how much fuel it burns, but this is in some ways the opposite of correct. An economy that develops a technology that increases the energy efficiency of its machines by a factor of 4 would be increasing its usable energy sources by the same factor. The fact that the economy was using less energy would mean that they were potentially wealthier in future available energy.
The problem with all of this is that it’s purely supply based. There is no demand here: value doesn’t come from BTUs, but from what we do with them. It’s possible to have [X] amount of energy available, but in a way that provides only a fraction of the value that such an amount should be able to provide. So… how is that fraction measured? As soon we start thinking about that, huge questions arise about why we should be measuring things in BTUs in the first place.
Arguably true, but so what? My arguments weren’t about currency but about capital. Start a new thread to discuss the difference. I won’t try to construct a complete map on the fly, but accumulated cash capital would be similar to free energy, capital movement would be in response to temperature differences. Temperature might map to interest rate in simple models, but details would be complicated.
I wouldn’t relate currency trading to ‘lubricant or catalyst.’ I’d treat currency exchange mechanisms as similar to a valve, regulator or blockage on a pathway where some advantageous energy/temperature transfer is available.
A paper by Shyam Sunder and a co-author has the following abstract:
Social sciences start by looking at the social-psychological attributes of humans to model and explain their observed behavior. However, we suggest starting the study of observed human behavior with the universal laws of physics, e.g., the principle of minimum action. In our proposed three-tier framework, behavior is a manifestation of action driven by physical, biological, and social-psychological principles at the core, intermediate, and top tier, respectively. More broadly, this reordering is an initial step towards building a platform for reorganizing the research methods used for theorizing and modeling behavior. This perspective outlines and illustrates how a physical law can account for observed human behavior and sketches the elements of a broader agenda.
I don’t know whether that fits the bill or not, but minimum action is certainly closely related to conservation of energy which is essentially the first law of thermodynamics.
This is a link, but I can’t tell if it’s restricted or not:
And so it is, in the model I already outlined. Cash is the manifestation of particularly liquid capital, wealth has the units of energy in my metaphor (probably with only a complicated formulae for entropic weight).
I’m not an economist, but it seems money moves to places where that money can be used to create more money, not to the places with less money.
Africa has far less money than China, but more money moves from the west to China because China can create more money out of the money you invest there than Africa can. Money doesn’t just move to places with less money, it moves to places where it can be used to create even more money (even if those places are already wealthy).
Also as mentioned wealth tends to accumulate, in part because wealth allows you to influence the levers of power that determine where wealth goes (politics, media, etc). Nothing like that exists in thermodynamics.
This would be the small group/individual scale where the idea breaks down that I conceded at in my op.
Regarding money as a unit of energy.
I think we have to first figure out what money is. Here is what I concluded on my own;
Money is a symbol of value for two things, time and energy. At my job I am given a certain amount of money for the expenditure of my energy for a set period of time. In turn, I exchange that money for the expenditure of someone elses time and energy. I may have the knowledge and materials to repair my own roof but not the time, or you can reverse that statement and get the same result, I hire a roofer to do it. Thus, money is a unit or store of energy, (plus time which is the element that is variable) even if only indirectly.
The flow of money from wealthy to less wealthy areas and entropy: in my mind I was thinking more along the lines of things like manufacturing or assembly jobs moving from, say the US to Mexico for example, because labor is cheaper enough there to make the impact of moving that money there worthwhile. So, while the same or similar amounts of money may still infact exist in the US, much of it has already been usefully transformed into a higher standard of living generally and workers get the same units of energy but at a lower rate because there is less of them. Meanwhile Mexican citizens have more energy units available to usefully convert to a higher standard of living, thus catching up at some rate of progress with the US until standard of living is equal on both sides and the flow stops, having run out of potential.
I think the main difference is that a unit of energy is constant while a unit of value (money) is not. There are some parallels in that energy cannot be created or destroyed and in standard double-entry bookkeeping accounting, dollars can’t be created or destroyed either. But while a joule or newton-meter is always the same amount of energy, a dollar or yen does not have a constant purchasing power.
This is true, a unit of money does not have consistent potential, p+t or p×t or p/t (I don’t actual know what the correct operation would be) that I posited earlier for what currency fundamentally is, perhaps should be considered a unit of entropy. In my last post where I talked about equalizing standards of living between the US and Mexico, I realized that I had some things backwards in my head. A higher standard of living would represent higher entropy in my model.
Currency over time varies in usefulness per unit. Either the potential or the time is variable in the equation, but not both.