Entropy in Economics

Saleem Ali's brief overview of the evolution of ecological economic thinking is fascinating. I wasn't familiar with Nicholas Georgescu-Roegen until reading Ali's description of The Entropy Law and the Economic Process. A quick search on Google turned up a 1986 paper by Georgescu-Roegen entitled "The Entropy Law and the Economic Process in Retrospect" that provides a good introduction and contextualization of the work. Within the paper, Georgescu-Roegen identifies the lineage of his research:

To be sure, the formal analogy between the basic equations of thermodynamics and some of those used in economics has periodically fired the imagination of some students. Apparently, the first to argue on this ground that money is the economic low entropy was G. Helm (1887), a prominent chemist in his time. L. Winiarski (1900) carried the analogy to the point that "Gold is ... the incarnation of scocio-biological energy." About the same time, E. Solvay (1902), the millionaire patron of the famous congresses of illustrious physicists, used an accounting scheme similar to that of Karl Marx's labor theory of value to conclude the equivalence of economic value to embodied energy. (Pg. 8)

This description of gold as "... the incarnation of socio-biological energy" is intriguing because it evokes both alchemy and supply chain thinking. Later in the paper Georgescu-Roegen outlines the perils of an unchecked faith in technology:

Many writers, who have made a vocation of "resources for the future", have opined that thermodynamics cannot teach anything to an economist. Their claim reflects the principle, traditional in modern economics, of ignoring the scarcity of natural resources completely. The mainstream view is that there is only superficial scarcity, because anything is obtainable if one is prepared to invest the necessary capital and labor and equipment. The must stronger thesis that technological innovations can always do away with scarcity of any item (H. Barnett and C. Morse, 1963) has become the first article of economic faith of virtually all economists ... (Pg. 11)

This commentary considered, it is clear why Ali identifies Georgescu-Roegen as an important thinker in problematizing the notion of "priceless value" within economics. Or, as encapsulated by an astute RevMinds commenter responding to Ali's answer: "Economic value is marginal; most transactions presume that there will continue to be an economy, regardless of the choice made in the transaction. As the existence of extinction demonstrates, that can be an oversimplifying approximation at some edge cases."

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Thanks for the link. Very pleased to see someone exploring in this direction. Have puzzled for many years why social science restricts its explanations to psychological notions, e.g. values, ethics, fears, etc. and to some biological/evolutionary notions, e.g. nutrition, climate, etc. Clearly something physical involving energy, matter, and entropy happens when chemically stored energy is released through concrete action that has been triggered by a communication of some sort, e.g. "Honey, will you please pickup a gallon of milk." Physics has the tools to analyze such transactions and so do economists, but they do not. Physics focuses on non-living systems. Economists focus on money and neglect the interactions between living thinking beings and environment. Biologists could do the analysis, but they don't either, preferring instead to leave out the cognitive. Cognitive psychologists could, but they don't, preferring instead to focus on the mechanisms of thought instead of the consequences. The interesting question to me would be to try to understand what is happening when humans, and likely all living organisms, create things that do not conform to the strict rule of increasing entropy. That is, locally they create negative entropy, highly ordered objects such as buildings and blog posts instead of disordered objects like exploding buildings and random assortments of letters and numbers. It seems to me that a more rigorous understanding of human behavior in terms of physics might be quite helpful in trying to understand everything from the crumbling of advanced civilizations down to the failure of marriages and the rise of gangs.

Entropy is a fine but confusing idea in physics. It is fine in that it greatly simplifies certain problems. It is confusing in that it applies only when the "closed system" approximation is valid. There are a great many systems in physics and economics which can not be considered "closed systems". For an exaample, an electron is not a closed system; rather it persistently emits and absorbs photons. The problem from my point of view of talking about entropy in economics is that the discussion shifts from something understandable (.e.g. scarcity) to something confusing (e.g. entropy). If we want to talk about an holistic economic approach, I think, we can do better by leaving the word "entropy" in the textbooks and out of the discussion. Whether economists use or don't use the term and the equations of "entropy" in their unreadable papers is of little concern to the public discussion of values (e.g. eating an endangered specie's steak versus saving endangered species).