Second Law of Thermodynamics May Explain Economic Evolution

Nov 02, 2009 By Lisa Zyga feature
Scientists have shown that economic activity can be viewed as a manifestation of the second law of thermodynamics. Image shows Brazilian money. Credit: Wikimedia Commons.

(PhysOrg.com) -- Terms such as the "invisible hand," laissez-faire policy, and free-market principles suggest that economic growth and decline in capitalist societies seem to be somehow self-regulated. Now, scientists Arto Annila of the University of Helsinki and Stanley Salthe of Binghampton University in New York show that economic activity can be regarded as an evolutionary process governed by the second law of thermodynamics. Their perspective may provide insight into some fundamental economic questions, such as the causes of economic growth and diversification, as well as why it’s so difficult to predict economic growth and decline.

As Annila and Salthe explain in their study published in Entropy, the was originally formulated to describe the flow of heat from hot to cold areas. However, when formulated as an equation of motion, the second law can be used to describe many other processes in energetic terms, such as natural selection for the fittest species, organization of cellular metabolism, or an ecosystem’s . In these systems, free is consumed; that is, energy is dispersed in a way to promote the maximal increase of entropy, which is the essence of the second law.

While economic activities are traditionally viewed as being motivated by profit, Annila and Salthe argue that the ultimate motivation of economic activities is not to maximize profit or productivity, but rather to disperse energy. From this perspective, a growing economy consists of entities (e.g. products, labor, etc.) that are assigned an energy density resulting from their individual production processes. These density differences are the forces that direct energy flows (e.g. manufacturing processes) to equalize energy density differences within the system and with respect to its surroundings.

The scientists argue that this tendency to disperse the maximum amount of energy (that is, to consume free energy in the least time) is what gives rise to economic laws and regularities. Further, economies organize themselves in hierarchical systems within systems to improve on energy dispersal and to access new sources of energy. For instance, the global economy is comprised of national economies, each housing economic zones that in turn accommodate districts, firms, households and so on, organized so that global resources are produced and consumed most effectively in terms of energy dispersal.

From this thermodynamic perspective, decision making is ultimately about choosing the action that causes energy to flow along the most steeply descending energy gradient. For example, when faced with two identical products where one is cheaper than the other, a consumer will likely choose the cheaper product.

“When investing on the cheaper but equally good product, more energy (in one’s assets) is left to be dispersed by buying other goods,” Annila explained to PhysOrg.com. “Also, when the cheaper product sells better, the energy used in its production gets consumed faster.”

However, decision-making is not always this straightforward because consumers, producers, and other players in the market make decisions based on their subjective views of energy gradients, which are affected by diverse and often conflicting factors. Each player in the market may prefer a particular series of actions (their strategy) to move from one state to another that is higher in entropy production. When the circumstances change, for example due to other players’ actions, a player may revise their strategy in the quest to optimally consume free energy.

As the scientists explain, it’s inherently impossible to predict future and decline in any detail from this perspective. The fundamental reason for this unpredictability is that the economy’s energy density is not constant, so that a player’s decision will affect future decisions that are open for other players. Physically speaking, the forces (free energy in resources) that drive the flows (economic activities) are in turn affected by the flows and so on. Moreover, each player tries to take into account how their decision will affect the decisions made by others. The result of these complex interactions based on subjective decision-making means that economies with highly effective mechanisms of energy dispersal, such as the stock exchange and the market of raw materials, may change very rapidly and unexpectedly.

“The second law encourages activities that consume free energy as soon as possible,” Annila said. “Therefore, there is the quest to increase productivity and throughput and to find new sources of energy. Moreover, the second law reveals that it is impossible to predict in detail the optimal course of energy utilization because the chosen course itself affects the choice for future actions. Therefore, it makes sense to favor statistically independent actions that open new opportunities to consume free energy, and likewise to regard the use of insider information as illegal since it narrows the choices.”

More information: Arto Annila and Stanley Salthe. “Economies Evolve by Energy Dispersal.” , 2009, 11, 606-633; doi:10.3390/e11040606

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marjon
2.8 / 5 (4) Nov 02, 2009
"For example, when faced with two identical products where one is cheaper than the other, a consumer will likely choose the cheaper product."

Cheaper for whom? If such a product is subsidized by a government, it may be cheaper for the purchaser but not for the system.
I wonder if the authors dare to roll in the costs of government regulation and subsidy into the energy costs as well to determine their effect.
nuge
4.2 / 5 (5) Nov 02, 2009
I once read a similar article claiming that life itself is merely a chemical formation that occurred as a means to degrade and dissipate the low-entropy solar energy coming from the sun. This was said to be akin to hexagonal structures that form in a pan of oil being heated, that dissipate the heat more effectively than ordinary convection alone. The Meaning of Life, as it were, is to waste solar energy. The article argued that over time life has become more adept at this task, and we humans are the most efficient energy wasting machines yet. Our cultures and later our technologies have become more efficient at capturing more of the excess energy around us and converting it to 'lower' forms of energy like heat, movement and noise. The idea put forth in this article is really an interesting extension of that general concept. I think it touches on something profound.

On a personal note, I hate the Second Law. It really captures the most depressing possibilities in all of human awareness
marjon
Nov 02, 2009
This comment has been removed by a moderator.
ricarguy
1.7 / 5 (3) Nov 02, 2009
"decision making is ultimately about choosing the action that causes energy to flow along the most steeply descending energy gradient. For example, when faced with two identical products where one is cheaper than the other, a consumer will likely choose the cheaper product." “When investing on the cheaper but equally good product, more energy (in one’s assets) is left to be dispersed by buying other goods,”

OK, so maximum energy = maximum profit

or better bang for the buck. Just a different way of looking at the same old thing.

The article does make a good case against heavy regulation and central planning as being ultimately inefficient, doesn't it?
marjon
2.7 / 5 (3) Nov 02, 2009
I have always thought the value of money should be based upon the joule.
I could be sold as the 'jewel' for added customer satisfaction.
Noumenon
4.4 / 5 (53) Nov 02, 2009
We know that free market capitalism is the greatest invention of man, and is the motivating force behind all that is good; tech, medicine, trans, etc. It works because at it's core is the natural instinct of man, to improve his condition.

Now what does this study say about governmental redistribution of wealth, printing money to devalue the currency, and accumulating massive debt (?), I.e., the governemnt is comically inefficient and wasteful, and tends toward economic button pushing and meddling, a counter-productive ad-hoc force. Does the study consider that? For example the US economy was hurt recently because of politicians pushing banks to hand out home loans to anyone (sub-prime). This was a unnatural force in respect to capitalism.
Noumenon
4.8 / 5 (48) Nov 02, 2009
.... in the U.S. we are conducting this 'experiment' and the results so far are terrible.
jselin
4.3 / 5 (3) Nov 02, 2009
So would government regulations be analogous to Maxwell's Demon?
otto1923
2 / 5 (3) Nov 02, 2009
I hate the Second Law. It really captures the most depressing possibilities in all of human awareness
Only if you see it as a barrier instead of an opportunity. What is the ultimate purpose of intelligence if not to counter the tendency of the universe to degrade? Arent we here to save something, to protect, to rescue rather than just to know -? A teleological epistemology? OK, i already got a headache-
jgelt
Nov 02, 2009
This comment has been removed by a moderator.
kasen
4.7 / 5 (3) Nov 02, 2009
So would government regulations be analogous to Maxwell's Demon?


Hehe, that's smart.

I doubt I'm the only one who thought "well, duh" when reading the article's title. The Second Law, and thermal physics in general, can be applied to any system with lots of entities. Well, physics as a whole is a pretty decent philosophy to live by.

We mustn't forget, however, that theories rely on approximations and abstractions. Thermal physics is most accurate over large periods of time relative to the size of the system. For an ice cube in water, it takes less than an hour to confirm that entropy is rising. The global market is a bit bigger, I reckon. And far more complex, not to mention exhibiting chaotic behaviour.

Interesting thoughts, overall, but for practical purposes, gut feeling or tarot cards are equally effective. Of course, there's a whole other discussion when purpose becomes the issue.
KBK
2.7 / 5 (3) Nov 02, 2009
We are talking about PARASITES posing as a beneficial component of society (financial-banks-fiat currencies-elites)..and thus making sure that the host dos not figure out that the relationship is NOT symbiotic..but is actually one of the parasite damaging the host.

Anyone attempting to fit the theories of thermodynamics upon the human condition is either very bored, full of carp, or working for the wrong people.

This is how one ends up with 'scientific' articles on such foolishness. It's a canard,a smokescreen.

The bigger the falsified backdrop; the more references of the past, or essentially..the creation of history can be enacted. This article is part of that process of the creation of a backdrop or history for such garbage.

See it for what it is.
Alexa
1.8 / 5 (4) Nov 02, 2009
Aether theory can be applied to human society easily. Main point here is, most of personal motivations of intelligent individuals compensate at distance, because they're often in mutual contradiction (what is god for me, isn't good for others). Which leads to behavior of chaotic gas at large scope - human society cannot handle emergent phenomena like global warming or fossil fuel crisis well. Under such situation, global war conflicts are often becoming undeniable.

Therefore if we realize it, we can improve the stability of human society a lot. It may become even more important, then the application of Aether concept in physics. Even better, the dynamics of many social phenomena can simplify the understanding of physical phenomena due the existence of analogies. For example, every sectarian society is behaving like boson condensate. I described many these models on my blog.
Alexa
3 / 5 (2) Nov 02, 2009
..anyone attempting to fit the theories of thermodynamics upon the human condition is either very bored, full of carp, or working for the wrong people..
They just cannot be quantified so easily, which makes problem for some formally thinking people. Formally thinking people hate multiparticle models of reality in general, because they demonstrate limitations of formal math. In formal math everything is exactly predictable, like in computer program (what you put in is what you get). With compare to it, highly dimensional particle models are stochastic. So I can understand your negativism perfectly.

Thermodynamical models are extremely important, though. For example, we can derive the risk condition of wars by using of them. The risky situation doesn't occur when small country is facing large one, but the situation, when some country becomes richer faster, then other countries. For example, when price of oil increases fast, it makes Russia very dangerous for other countries.
bredmond
not rated yet Nov 02, 2009
I was confused by the word "entities" when describing products and labor. Isn't entities more about like an organization of those RESOURCES for a particular goal (traditionally for the sake of a profit, but here, for dispersion of energy)? I mean, Microsoft is an entity, T Mobile is an entity, Tom's Local Drug Store is an entity, Big T Widget factory is an entity, etc.
Alizee
Nov 02, 2009
This comment has been removed by a moderator.
Ethelred
2.4 / 5 (5) Nov 02, 2009
Boy this article brought out the nonsense.

Some claiming it supports laisez faire capitalism and another claiming its part of a conspiracy to turn everything over to the government AND the banks via the magic of fiat currency.

When an article produces such diametrically opposite opinions it is a sign that it is full of crap. In this case the authors are increasing the entropy of the Universe by turning information into noise.

Ethelred
Alexa
Nov 03, 2009
This comment has been removed by a moderator.
GaryB
4.3 / 5 (3) Nov 03, 2009
This explains why Americans accumulate so much debt spending money that they don't have -- they're going for negative entropy!

Seriously though: I've always been a saver, so does that make me an entropy bottleneck?
Alizee
Nov 03, 2009
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Alizee
Nov 03, 2009
This comment has been removed by a moderator.
ormondotvos
2 / 5 (2) Nov 03, 2009
The article is crap. Humans aren't random, but they're way too unpredictable to be treated as rational particles. This must be written by some out-of-work, or wannabe economic "quants" q.v. Let me guess: the first word in their argument is "assuming"... and they then go on to make humans simpler.

Doesn't work. Ask Ayn Rand. Or better yet, ask Alan Greenspan.
lorry
Nov 03, 2009
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Myria83
3 / 5 (2) Nov 03, 2009
It's the same thing I wrote in the book I'm about to publish here in Italy...
Myria83
not rated yet Nov 03, 2009
Applying Chaos Theory to economics is a promising field of study.
Alexa
1 / 5 (1) Nov 03, 2009
Isn't entities more about like an organization.

The both. Entities are goods (services) and they behave like bosons exchanged by another market entities - companies in role of fermions. But broker companies are dealing with stock market and they're effectivelly selling another companies like goods.

Analogously, inside of atom nuclei bosons are so massive, they're forming another generation of fermions, which can exchange another bosons. And so on - on such model for example Lisi Garrett's model of E8 geometry is based.
Alexa
1 / 5 (1) Nov 03, 2009
The article is crap. Humans aren't random, but they're way too unpredictable to be treated as rational particles..
Yes, this is exactly the way, why they're handled like thermodynamical system (ideal gas). The motion of particles inside of gas is unpredictable at macroscopic level - this is why it can be described by using of entropy only.
peteone1
Nov 04, 2009
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peteone1
Nov 04, 2009
This comment has been removed by a moderator.
Ethelred
Nov 04, 2009
This comment has been removed by a moderator.
Noumenon
4.7 / 5 (47) Nov 05, 2009
Why would a ? get a (1) rating,.. anyway, my question was,...

With regard to the thermodynamics- economic evolution analogy,... since the evolutionary growth of an economy requires concentrated wealth as a means of reinvestment into new technologies and efficiencies,... what are the effects of a liberal government in redistributing wealth ("energy")? In other words, in-effect dispersing wealth ("energy") into the masses.

Concentrated energy (wealth) is in a low entropy state and is able to do work (in creating businesses and so jobs, innovations, etc),.. while energy distributed amongst all degrees of freedom (the masses) becomes a high entropy state and thus is a useless form of energy with regard to the growth of an economy.

Redistribution of wealth (energy) can take on many subtle guises. For example, devaluation of the currency by governmental overspending, causing huge deficits and the printing of money by the government,... dilutes the value of the currency.
Noumenon
Nov 05, 2009
This comment has been removed by a moderator.
Noumenon
Nov 05, 2009
This comment has been removed by a moderator.
Ethelred
Nov 05, 2009
This comment has been removed by a moderator.
Ethelred
Nov 05, 2009
This comment has been removed by a moderator.
Noumenon
Nov 05, 2009
This comment has been removed by a moderator.
Noumenon
4.7 / 5 (48) Nov 05, 2009
Some 40,000 people die in car crashes EACH YEAR,.. well, we should ban driving then according to your logic,.. but no we don't because that doesn't cause a few seagulls to get oily.

"...leftist, anti-capitalistic and irresponsible environmentalists" wasn't name calling, it was an apt description. Environmentalists tend to be liberals (fact), and tend to favour government control rather than free market capitalism (fact), and I already cited why they are irresponsible. Tree-hugger was a another name for devout environmentalist.

[quote]Have you been watching Fox? Glenn Beck?[/quote]

You admonish me for 'name calling', and here YOU are doing worse by implying I'm being brain washed?

Conservatism is a legitimate political philosophy, and has existed long before Fox news and Glenn Beck.
Noumenon
4.7 / 5 (49) Nov 05, 2009
What free market? Where is ANY company doing such research? Its governments that are paying for most of the research into viable alternative sources.
You are living in a fantasy world. There is no free market in oil.


That's utter nonsense, oil/gas companies have poured over $100 billion into alternative research over the past five years, because they want to be in the energy business. The government only knows how to waste money and resources. When there is no profit to be had, there is disrespect of tax money, in addition to nonsense decisions like ethanol.

There IS free market in energy, that is my point. Once oil/coal become more and more expensive to extract, alternative markets will then be able to compete. Not until then though.
Ethelred
Nov 06, 2009
This comment has been removed by a moderator.
Noumenon
Nov 06, 2009
This comment has been removed by a moderator.
dacroz
5 / 5 (1) Nov 06, 2009
Annila and Salthe argue that the ultimate motivation of economic activities is not to maximize profit or productivity, but rather to disperse energy.
Not necessarily inaccurate, but a rather trivial explanation -- like explaining biology in terms of its underlying physics. An economic system can be more usefully understood as a complex self-organizing ecosystem. In such systems the kinetics change, depending on whether a source (e.g. fossil) or a flow (renewable) is used. Our present fossil-dependent socio-economic system is like a young ecosystem: our economic behavior is characteristic of bacteria on a carcass, or mold on a slice of bread.

For more, see http://www.holon....en.shtml
ank6
Nov 07, 2009
This comment has been removed by a moderator.
dacroz
5 / 5 (1) Nov 07, 2009
ank6, if you write something that indicates that you actually get the point being made, I'd be glad to respond.

Just calling someone ignorant and stupid, then following it with a truism (which isn't particularly relevant to the point being made) doesn't leave much to engage with.
ealex
4 / 5 (2) Nov 07, 2009
This study might be right in finding that the thermodynamic model fits certain patterns in the economy, but sadly it doesn't actually bring any revelations into the field of economics, it just makes it a game of finding things that match in behaviour.

I don't really find an explanation for anything that was not explained before. The fact that you can substitute spending money for dispersing energy, is just a metaphor, or a semantical substitution not an explanation.

And since they themselves say that i"t’s inherently impossible to predict future economic growth and decline in any detail from this perspective." the whol thing becomes pretty much pointless.
ealex
3.5 / 5 (2) Nov 07, 2009
Also the fact "when faced with two identical products where one is cheaper than the other, a consumer will likely choose the cheaper product" is false as it is. This is obvious to anyone that knows a minimum amount about marketing and that fact that "equally good" can be a highly subjective notion. For some the more expensive product will be better just because it is more expensive and/or marketed better, even if it is "equally good" to a cheaper one. So in real market terms this notion is false.
LeoKlem
not rated yet Nov 20, 2009
Entropy, as a tendency of complex systems to disorder, is particularly useful if viewed in its probabilistic version, i.e, as the amount of "uncertainty" (as dubbed by Shannon in 1949) that affects the distribution of interaction probability between any system's components. Physical as well as social systems, though, act and evolve undergoing specific constraints, which do also constrain the amount of "useful energy/resources" that can be dispersed. An interesting theory based on such assumptions was worked out in 1988 by an Italian author (Mario Ludovico, "L'evoluzione sintropica dei sisyemi urbani", Bulzoni, Rome), an English summary of which is available in http://www.mario-...opy/pdf. In that theory, entropy is complemented by syntropy, and the two quantities establish 'conservative fields' apt to favor the evolution of complex systems.
Myria83
not rated yet Dec 02, 2009
@LeoKlem:
"http://www.mario-...."
I would be interested in reading Ludovico's findings, but the link you posted doesn't work... I'm Italian, and I can read the original book if it's available.