Week 5: Econothermodynamics, and Other Words My Spell-Checker Doesn't Like

Hello hello!
This week, I will be talking largely about the efforts of physicists to make concrete parallels between the laws of thermodynamics and the behavior of the economy.
Thermodynamics is one of my weak spots, as for some reason I never studied it for longer than a day or two in Physics or Chemistry, so let me know if I've made any mistakes here!

The nice thing about thermodynamics is that it does not concern itself with the nature of interactions on a micro-level, but rather the behavior as a whole.  This makes it ideal to apply in macroeconomics, because then we don't have to justify studying the individual behaviors; instead, we can look at overall movement, as I've discussed quite a bit in previous blog posts.

Vilfredo Pareto was an Italian civil engineer-economist famous for discovering that income distribution follows a power law.  (Distributions that follow power laws have the fat tails that I discussed a few weeks ago.)  Pareto's work with income distribution is another example of fat tails cropping up in nature and economics alike, but in this case they also apply in econothermodynamics as well.

It turns out that you can model the relative fraction of people possessing some range of wealth with an equation that is eerily similar to the Boltzmann-Gibbs-Maxwell equation.  The B-G-M equation defines the relative fraction of gas molecules with some temperature T, within some range of energy.
Perhaps what makes the two equations commutative is the fact that they both depend on conservation laws.  (In an economic transaction, someone gains a specific amount of money and someone loses the same amount of money.  This is sometimes called conservation of cash flow.)

Here, we appear to be modeling economic interactions as if they were an interaction between two gas molecules; one agent gains, another loses.  However, most economists object to this idea, because no individual would freely enter into an arrangement where they knew themselves to be losing; after all, the theory of rational expectations states that in any given transaction, everyone should "win."

Econothermodynamic advocates decided that to solve this problem, they would rewrite laws of economics in terms of calculus, so that all economic interactions (which required some driving energy) ended up exploiting a third party-- nature.

Jurgen Minkes, one of the aforementioned advocates, took this theory a step further and wrote the laws of thermodynamics in terms of economic terms like capital growth, value added, and labor costs, rather than conventional physical quantities like heat, work, and energy.

Of course, we can't claim that the two fields are equatable simply because some equations are analogous.  The field of econothermodynamics endeavors to answer many questions, including:

• Should an economy be considered an open or closed thermodynamic system?
• Could entropy, as a measure of system disorder, be used to indicate the state of an economy?
• What are the macroscopic values that could give stability to an economy? (keep it in a state of thermodynamic equilibrium?)
• If economies are closed systems, are they at risk for a "thermal death"?
• What are more possible analogous values for magnetic field, pressure, temperature, volume, etc.?
• What is the role of phase transitions in an economy?
• How should the activity of a (macro)economy best be organized for it to be successful?

The best paper by far that I've found on the subject can be found here.  It answers all of the questions that I posed above (some of the above questions are  actually word-for-word from the text), and tries to do so in a manner accessible to physicists and economists both.  (It's about 25 pages long, which is why I didn't try to cram everything I learned into one blog post.)
I think my favorite quote from it, however, is the following:

"We do not claim (and it would be somewhat strange if we did) that a business community can only develop according to the laws of nature. Macroeconomic systems (like the real activity of individual large companies) are very complex, and since it is impossible to acquire completely comprehensive information about them, it is not possible to postulate formulas for their development. But we suggest taking these natural laws into account in the macro-economy. The possibility of their application should by all means be checked and tested scientifically, but we cannot afford to ignore them."  (p. 13)

This quote is actually applicable beyond econothermodynamics, to my project as a whole.  While it would be a mistake to rely fully on natural laws when developing laws regarding the economy, they can still be taken into account and tested scientifically to make our current understanding more complete.

That's all I've got for now.  In other news, I ended up ordering some of the materials for my sandpile experiment.  One of the things that I had to go on a scavenger hunt for (and found, thanks to the help of our very own Mr. Winkelman) was glass powder.  It turns out that "regular" (beach) sand is too variable in size and shape to be much use in consistent experimentation with basic sandpiles.  (I'm not sure if that's ironic or not.)  The glass powder is the same material as sand, but ground to a more uniform shape.

Glass powder (above) is much more uniform than normal
sand (below)

Fun fact: glass powder is generally added to paint to make it reflective.  Who knew?

If you have any questions, or one of the above questions I posed stood out to you and you'd like me to try to explain it (so you don't have to read the whole paper) let me know in the comments!
Have a lovely week everyone!