Economics and Information in the Financial Age
© Arthur Jonath and Richard Goldwater 2015
Contemporary economics is "price economics", in which profit plays a minor role as "price inefficiency". Price inefficiency means that goods and services must sell for more than they cost to produce. Ideally, market competition improves price efficiency by keeping profits in check. This book presents "profit economics", a thermoeconomic model that compares currency flow to heat flow, and the production of profit to the production of increasing entropy.
Because entropy increases everywhere that heat flows, increasing entropy is known in physical science as the "arrow of time". Because profit increases everywhere that cash flows successfully from Buyer to Seller, profit represents the "arrow of time" in economics.
The Second Law of Thermodynamics points to a future of temperature equilibrium and maximum entropy known as the "heat death" of the universe. The Second Law of Thermoeconomics points toward a medium or long term future of civilized progress, provided that investment sequesters profit in new value production. When financial manipulation produces profit directly from profits without investment in value, an economy risks a rapid approach to thermoeconomic equilibrium and thermofinancial heat death. A new thermoeconomics offers perceptibly scientific and systematic solutions to longstanding and otherwise incomprehensible economic problems.
It is better science to compare forces in economics to the flow of heat, than to fit measurements of price and sales volume into a Law of Supply and Demand. We revise economics conceptually and mathematically, using a thermodynamic, currency flow analogy. Thermoeconomics invites considering the place of economics in the wider worlds of math and science, and of philosophy and clinical psychology.
The authors wish to express their appreciation of the works of
- Edward Thompson Jaynes, 1922-1998, Wayman Crow Distinguished Professor of Physics at Washington University, St. Louis. We have freely adapted ideas from his remarkable essay, How Should We Use Entropy in Economics? We refer the reader to: http://bayes.wustl.edu/
- Frank H. Knight, 1885-1972, founder of the Chicago school of economics is perhaps the last, great author directly to address profit in Risk, Uncertainty and Profit. We find concepts in Profit and Entropy extend his ideas and respond directly to challenges he raises.
- Jeff Madrick. His Seven Bad Ideas, A.A. Knopf, New York, NY, 2014 admirably describes how wrong-headed economic thinking drives policy.