Photo above: Rudolf Clausius (1822-1888) – founding thermodynamicist and originator of the concept of entropy
Saving Capitalism from Finance
Using Science to Dispel the Darkness
By Richard Goldwater and Arthur Jonath
“Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all." --- Attributed to economist John Maynard Keynes
Introducing Entropy Economics
Economic theory is presently unable reliably to predict unusual events, such as our recent crisis. This inability exists because economics has not adapted to major advances in physical science since the age of Isaac Newton.
Social sciences operate as mathematical analogies of physical science. Present economics comes to us from Adam Smith by analogy with Newton’s Laws of Motion. In 1776, Smith described an economy as self-regulating, as though by an “invisible hand.” The invisible hand was no mystery, however. Smith‘s economics in effect compares an economy to a gyroscope, which is a spinning mechanism that Newton’s invisible laws of motion keep in balance.
Newton’s laws describe a universe of balanced forces and repeated motion, in which planets can spin forever in perfectly efficient, friction-free orbits. Because it is not perfectly efficient, a gyroscope cannot spin forever. A gyroscope loses energy to friction as heat. Because no motional force can instantly balance lost heat energy, without replacement energy, any moving device will run down.
Newton’s Third Law is: “for every action there is an equal and opposite reaction”. An analogous economic “law” describes a tendency for supply and demand to balance, and to reach a stable “price equilibrium”. Price equilibrium can never perfectly “break even”, as Newton’s Third Law would imply. Price equilibrium must include a “normal profit” sufficient to justify running a business.
Smith’s successors call normal profit an irreducible “economic inefficiency”. A real economy can no more function without producing profit than a gyroscope can spin without losing energy to friction.
We conclude that an economy is more like an engine that needs new fuel (as well as needing scientific regulation) than it is like a planet in perpetual orbit. The 19th Century science of thermodynamics describes how engines work. In thermodynamics, a quantity called “increasing entropy” accounts for energy that is necessarily wasted or lost whenever anything happens.
We propose a “thermo-economic” model of an economic engine to revise present “Newtonian economics”. A thermo-economic model analogizes increasing entropy (which is thermodynamic inefficiency), and profit (which is economic inefficiency). In our monograph, we explore the multifarious implications of associating profit with increasing entropy.
Left-click to read the paper or right-click to download a PDF of
Saving Capitalism from Finance (twenty-eight pages)
The Conflict of Economic Efficiency and Maximum Profit (two pages)
Financial Regulation and Entropy Economics (two pages)
If you find these ideas interesting, or have comments and questions, we encourage you to contact the authors:
