Economic Entropy

by Fred E. Foldvary, Senior Editor, 6 May 2013

Entropy can be defined as the degree of either disorder or energy dissipation in a system. In physics and chemistry, entropy is the degree of the dispersal of energy within a system and between the system and its environment at some temperature.

A piece of wood contains potential energy. When it is burned, the energy can be used for heating. After it has burned, the totality of its matter and energy have not changed, but its entropy has increased. The ashes and air molecules can no longer be harnessed for energy.

The meaning of entropy in physics and chemistry has nothing to do with order. The molecules of burned-up wood are not in disorder. They just have less potential energy. When ice melts into water, the uniform temperature has a greater order than the initial ice and water.

Thermodynamics is the branch of physics that, among other things, explains this process of entropy. The first law of thermodynamics is also called the law of conservation of matter and energy: the totality of matter and energy is constant.

The second law of thermodynamics states that closed systems move towards irreversible maximum entropy, as the available potential energy is used up. The second law also implies the direction of time. In a closed system, differences in temperature, pressure, and chemical potential decrease until they achieve an irreversible equilibrium of uniformity.

A different definition of entropy has been applied to useful orders. It requires energy to maintain the useful order of a system. If this energy is not applied, the system degenerates into a greater disorder, which then reduces the system’s potential energy for accomplishing its tasks, as some of that energy would be required to put the system into order.

Consider a shelf of books in a library. Patrons take out a book, read some passages, but then leave the book on a table instead of putting it back on the shelf in the spot from which it was taken. It takes time, effort, and energy to find the place in the sequence that the book was taken from, and put it back there. It requires less work just to leave it on the table. So as several people remove books from the shelves and leave them on the table, the disorder-entropy of the library increases. It requires work for a librarian to put the back the books in their proper order. Librarians prefer to do this, because readers would create even more disorder if they put the books back into the wrong places on the shelf.

As another example, consider a worker’s office. He starts with an orderly desk, but as papers come in, the worker has a choice of how to use his scarce time. He can either work on an urgent task, or else take time to put the incoming papers into order. If at that moment, the worker places a higher priority into finishing the urgent task, the incoming papers will accumulate in random disorder. The disorder-entropy of a desktop increases when it is an open system in which time constraints and priorities leave inputs in an ever-expanding pile of disorder.

Thermodynamics has been applied to economics in various ways. Economists in the field called “thermoeconomics” model economic systems as thermodynamic, as energy and information are used in production and consumption.

There is a research firm named “entropy economics” that publishes a blog called “maximum entropy,” dealing with information theory. Its proposition is that stated by George Gilder, “A high-entropy message requires a low-entropy carrier.” So, for example, in a telephone conversation, a high entropy medium would have a lot of crackling noise, and a low entropy medium has little or no interfering noise. Life relies on the high entropy order of DNA. So too an economy works best when there is a high degree of entropy order in its rule of law that protects property rights and does interfere with peaceful and honest economic action.

E. T. Janyes in 1991 wrote “How Should We Use Entropy in Economics?” His proposition is that economic analysis should take entropy into account in addition to mechanical equilibrium. He writes that systems may not move in reaction to a neighboring state unless something shakes it to overcome inertia, just as a pile of sand does not level itself unless an earthquake hits it. What prevents economic stagnation, and drives the economy up the entropy hill, is the turbulence injected by microeconomic fluctuations such as entrepreneurship.

Another economist, Nicholas Georgescu-Roegen, wrote the book, The Entropy Law and the Economic Process. As he stated, today’s economies are rapidly degrading natural resources and polluting the environment. Economic activity is accelerating the natural entropic process as we use up natural materials. The destruction of the natural environment increases the disorder-entropy of the earth and its atmosphere.

Entropy: a new world view by Jeremy Rifkin (1980) with Ted Howard discusses similar themes. Since economics are not closed systems, they can maintain high order and potential energy by importing labor and matter and energy. However, destructive domestic forces can be more powerful than these imports, which is why economies fall into depression despite the daily dose of new energy from the sun.

Entrepreneurship and investment in human capital and capital goods, and in innovation, create greater potential economic energy. In contrast, the continuous creation of regulations and tax complications create a disorder that drags the economy. Like ordering a cluttered desk, it requires energy for governors to go through the existing laws to remove those with a greater cost than benefit, and put the laws into an order that helps rather than hinders. But governments put greater priority into enacting new laws that deal with urgent problems and special-interest pressures, and so the clutter of restrictions, mandates, subsidies, and taxes keep increasing.

The rent of land is potential economic energy that gets dissipated when it is not equally distributed in funds or in public goods, because the government will instead impose tax costs on the economy, and because rent-seeking by speculators creates land-value bubbles. The minimization of economic entropy, as both disorder and energy waste, requires that land rent be equally distributed.

-- Fred Foldvary

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Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.

 Also see: Bad Comparisons Make for Bad Conclusions http://www.progress.org/2012/glasscei.htm Henry George, The First Progressive http://www.progress.org/2012/heathjoe.htm How Much Leeway Should Bureaucrats Have to Explore? http://www.progress.org/2012/clinical.htm

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