Profit and Entropy
Profit and Entropy
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Introduction to A NEW ECONOMIC SCIENCE
A free market economy is in theory a mechanism like a cradle that forces called supply and demand rock back and forth, as though guided by an Invisible Hand toward an equilibrium of stable prices. Profit appears as economic inefficiency that prevents perfect price equilibrium. A new thermoeconomic model compares the flow of financial currency to the flow of heat energy, and profit production at a price point to increasing entropy, as both measure inefficiency.
The science of heat-energy and work called thermodynamics offers a plausible model for re-imagining supply-demand economics from the ground up. Nineteenth century economists like Vilfredo Pareto attempted this very project, but accepted the First Law of Thermodynamics, the Law of Conservation of Energy, as sufficient for their purposes. They ignored the Second Law, which describes increasing entropy.
Currents of heat flow from warmer to cooler temperatures. In thermodynamics, any temperature scale arising from absolute zero is valid, including one we can imagine to apply to an economic temperature gradient from warmer Buyer to cooler Seller to account for currency flow in analogy to heat flow. The mathematics that describes physical, increasing entropy generation is also useful to calculate expectations of profit production.
The authors explain free market concepts simply and carefully, showing that they lack scientific justification, as well as any obvious capacity to fix instabilities that reckless finance causes. The authors propose NVAT, a Non-Value-Added Tax on reckless profits, defined as profits from investments in financial vehicles that neither produce new economic value, nor contribute to market, financial liquidity.
The authors, a physicist and a psychiatrist explore the origins of economics in the science of the European Enlightenment, and its dualism of subjectivity and objectivity. Because thermodynamic formulations are neutral with respect to that distinction, thermoeconomics identifies Buyers and Sellers, consumers and traders as real people in economics. Thermoeconomics generates testable hypotheses pertaining to subjective motivation, as well as conclusions arising from objective calculations that anticipate economic stasis events, like those of 2008.
Information Theory arose in 1948 from the mathematics of the Second Law, making possible the Information Age. The implications of Information Theory for economics include updating Schumpeter's classic concept of entrepreneur as change-agent, as an Agent of Entropy.
Appreciation
The authors wish to express their appreciation of the work 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/
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