Entropy and Economics: The G-R Conditions

In a short conversation with Steve Randy Waldman, in which I was pleasantly surprised to hear him praise my article about “failing faster“, I was inspired to write a bit about entropy — a concept that doesn’t have a very clear place in “traditional economics”. This is a curious fact, seeing as the concept of entropy is integral to all ordered systems, and even the functioning of the universe. Broadly speaking, the Second Law of Thermodynamics states that for a given system in disequilibrium, entropy will increase over time. Order is only created by the application of energy to matter, and that processes in disequilibrium are irreversible. Entropy, of course, reaches maximum value in equilibrium (is that not ironic?[1]).

Of course, no discussion of the role entropy plays in economics could be complete without a discussion of Nicholas Georgescu-Roegen* (from whom this post’s namesake comes). Georgescu-Roegen was a Romanian-born economist who fled the increasingly communist-controlled region in 1947. He eventually reached the United States, where he held a faculty position at Vanderbilt University in Nashville, TN. He was praised by none other than Paul Samuelson as “an economist’s economist”. He spent twenty years bringing mathematical virtuosity to neoclassical economics, before in 1966 attacking the very foundations of traditional theory…eventually answering these shortcomings in his 1971 magnum opus, The Entropy Law and the Economic Process.

Jumping to Conclusions Equilibrium Conditions

Georgescu-Roegen, in his book, laid out the foundational explanations of growth, and how it interacts with other networks of natural systems. This is the reason he is very popular among environmentalist groups (detail later). He posited that while human beings evolved slowly (“endosomatically”), we are at the same time rapidly evolving “exosomatically” through our social and physical technologies. Of course, Darwin saw this as an implication of his theories of evolution, as well. Frederich Hayek is also famous for writing about cultural evolution. But while Hayek wrote about this concept in the context of his more general theories of philosophy, Georgescu-Roegen was careful to ground his theory in the science of the connection between evolution and thermodynamics.

According to the second law of thermodynamics, the world drifts from order to disorder. It is only through the application of energy into an open system that one can (temporarily) fight rising entropy and create local order. However, as economists are quick to drill into your head, there is no such thing as a free lunch. By creating this local order of decreasing entropy, the system must ultimately export this cost back into the universe in the form of heat and waste, so that total entropy continues to rise.

Maintaining the distinction between outside and inside requires energy. Everywhere in the world, molecules of highly ordered systems are bounded and separated from the disordered exterior universe. Think about the highly ordered cells in your body, which interact by expelling waste through the membrane of your skin. The chance of randomosity creating order located inside your body is infinitesimally low. Indeed, a thought experiment I find quite amusing is one from Robert Shapiro, who likens this type of interaction to the odds of a tornado in a junkyard creating a Boeing 747.

As we can see, the second law provides a basic constraint on all life; over time, energy inputs must be greater than energy expenditures. If this condition is not met in biological systems, the result is of course death. Similarly, Gerogrescu-Roegen notes, “the economic process materially consists of a transformation of high entropy into low entropy.” Indeed, he harshly criticized “traditional economics” for ignoring the role of entropy in economics and even went so far as to claim that neoclassical economics violated the laws of physics, and referred to the neoclassical production function as a “conjuring trick” (Daly 1999). His point being that unless humans continually apply energy to disordered matter, we will fall to entropy (which in this case means poverty, or sustenance living).

Of course, this is not to say that applying the concept of entropy to economics was never attempted. Indeed, many researchers[2] have tried to make metaphysical distinctions. like money and budget constraints. Paul Samuelson was often displeased by this, and noted that fact in his 1970 Nobel prize lecture. Metaphysical comparisons, as is nearly universally the case, are nonsense (which is kind of unsettling, as economics is built on these foundations!). It should be self-evident; being that economies exist in the real world, the must obey the laws of entropy, just like the rest of us. An interesting observation of this fact is that online worlds often have very oddly functioning economies — because they are not bound by the second law, and much like the human brain, it is very hard to anticipate and program for the effects of this.

Value Creation: A New Paradigm

To conclude this portion, I would like to list three conditions for value creation under complexity economic theory, which I will elaborate upon in subsequent blog posts. These are not original to me, so I can not take credit for them — but I do find them very useful building blocks in thinking about how wealth is created in economies. A pattern of matter, energy, and or information has economic value if the following three conditions are jointly met[3]:

  1. Irreversibility: All economic transactions that create value are thermodynamically irreversible.
  2. Entropy: All transactions that create value reduce entropy locally within the economy and increase entropy globally.
  3. Fitness: All transactions that create value produce goods/services that are fit for human purposes.

In subsequent blogs in this series, I will elaborate upon each of these three conditions, and (hopefully!) show why each is a necessary condition in the creation of value and wealth.

— — — —

*A quick note on Nicholas Georgescu-Roegen: While often correct in principle, Georgescu-Roegen’s tone was oftentimes apocalyptic when it came to environmental issues, which reduced his credibility. In his 1971 book, he goes as far as to predict that by the year 2000, humans will be living on artificial protein due to the human creation of instability in nature, and that we would return to animals (as transportation) and plows as fossil fuel supplies run out.

[1]The entire field of economics is the study of humans’ battle against entropy. Economically, the equilibrium condition of humanity given a maximum level of “entropy” is abject poverty. The whole of the study of poverty and development is not located in explaining poverty (which is very easy), it is in analyzing and explaining the conditions by which societies overcome this (ultimate) equilibrium condition.
[2] J.H.C. Lisman, Robert Bordley (1983).
[3]Even though these may appear to on the surface, they do not deny the antecedent.

5 thoughts on “Entropy and Economics: The G-R Conditions

  1. This is probably my favorite blog post yet. I’ve wondered about how economics mixes with the natural sciences.

    As for Georgescu-Roegen’s credibility and apocalyptic tone, his predictions are not that far from possible, if not probable.

    We already have nutritionally balanced food tubes that have become novelty items; the lack of demand comes from both the fall of interest in its novelty and the undesirable taste. Despite the surge against Monsanto, genetically altered foods will have to be the norm in a more hostile environment if climate change comes to full bloom. In order to maximize food production, especially as the need for more and more food grows with population growth, protein-rich edibles would be the most efficient means to feed the world.

    Climate change is bound by entropy and it’s eventual, whether there is an anthropogenic effect on it or not.

    As an aside, the Obama administration is about to investigate agricultural anti-trust issues.

    It would be very interesting to see a division of study in economics devoted to economic entropy theory. That kind of research, I’d imagine, would lead to a much stronger understanding of how markets work and could, perhaps, beget greater predictability of market failures or booms.

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