Entropy and Economics

In this essay, human society is regarded as a “superorganism”, analogous to colonies of social insects. The digestive system of the human superorganism is the global economy, which ingests both free energy and resources, and later excretes them in a degraded form. This process involves an increase in entropy. Early in the 20th century, both Frederick Soddy and Nicholas Georgescu-Roegen discussed the relationship between entropy and economics. Soddy called for an index system to regulate the money supply and a reform of the fractional reserve banking system, while Georgescu-Roegen pointed to the need for Ecological Economics, a steady-state economy, and population stabilization. As we reach the end of the fossil fuel era and as industrial growth falters, massive unemployment can only be avoided by responsible governmental action. The necessary steps include shifting labor to projects needed for a sustainable economy, dividing the available work fairly among those seeking employment, and reforming the practices of the financial sector.

1. Human Society as a Superorganism, with the Global Economy as its Digestive System
A completely isolated human being would find it as difficult to survive for a long period of time as would an isolated ant or bee or termite. Therefore, it seems correct to regard human society as a superorganism. In the case of humans, the analog of the social insects’ nest is the enormous and complex material structure of civilization. It is, in fact, what we call the human economy. It consists of functioning factories, farms, homes, transportation links, water supplies, electrical networks, computer networks and much more. Almost all of the activities of modern humans take place through the medium of these external “exosomatic” parts of our social superorganism.*
The economy associated with the human superorganism “eats” resources and free energy. It uses these inputs to produce local order, and finally excretes them as heat and waste. The process is closely analogous to food passing through the alimentary canal of an individual organism. The free energy and resources that are the inputs of our economy drive it just as food drives the processes of our body, but in both cases, waste products are finally excreted in a degraded form.

Almost all of the free energy that drives the human economy came originally from the Sun’s radiation, the exceptions being geothermal energy which originates in the decay of radioactive substances inside the earth, and tidal energy, which has its origin in the relative motion of the Earth-Moon system. However, since the start of the Industrial Revolution, our economy has been using the solar energy stored in fossil fuels. These fossil fuels were formed over a period of several hundred million years. We are using them during a few hundred years, i.e., at a rate approximately a million times the rate at which they were formed.
The total ultimately recoverable resources of fossil fuels amount to roughly 1260 terawatt-years of energy (1 terawatt-year = 1012 watt-years – 1 TWy is equivalent to 5 billion barrels of oil or 1 billion tons of coal). Of this total amount, 760 TWy is coal, while oil and natural gas each constitute roughly 250 TWy. In 1890, the rate of global consumption of energy was 1 terawatt, but by 1990 this figure had grown to 13.2 TW, distributed as follows: oil, 4.6; coal, 3.2; natural gas, 2.4; hydropower, 0.8; nuclear, 0.7; fuel wood, 0.9; crop wastes, 0.4; and dung, 0.2. By 2005, the rate of oil, natural gas and coal consumption had risen to 6.0 TW, 3.7 TW and 3.5 TW respectively. Thus, the present rate of consumption of fossil fuels is more than 13 terawatts and, if used at the present rate, fossil fuels would last less than a century. However, because of the very serious threats posed by climate change, human society would be well advised to stop the consumption of coal, oil and natural gas well before that time.
The rate of growth of new renewable energy sources is increasing rapidly. These sources include small hydro, modern biomass, solar, wind, geothermal, wave and tidal energy. However, these sources currently account for only 2.8% of total energy use. There is an urgent need for governments to set high taxes on fossil fuel consumption and to shift subsidies from the petroleum and nuclear industries to renewables. These changes in economic policy are needed to make the prices of renewables more competitive.
The shock to the global economy that will be caused by the end of the fossil fuel era will be compounded by the scarcity of other non-renewable resources, such as metals. While it is true (as neoclassical economists emphasize) that “matter and energy can neither be created nor destroyed”, free energy can be degraded into heat, and concentrated deposits of minerals can be dispersed. Both the degradation of Gibbs free energy into heat and the dispersal of minerals involve increase of entropy.

2. Frederick Soddy
One of the first people to call attention to the relationship between entropy and economics was the English radiochemist Frederick Soddy (1877-1956). Soddy won the Nobel Prize for Chemistry in 1926 for his work with Ernest Rutherford demonstrating the transmutation of elements in radioactive decay processes. His concern for social problems then led him to a critical study of the assumptions of classical economics.
Soddy believed that there was a close connection between Gibbs free energy and wealth, but only a very tenuous connection between wealth and money. He was working on these problems during the period after World War I, when England left the gold standard, and he advocated an index system to replace it. In this system, the Bank of England would print more money and lend it to private banks whenever the cost of standard items indicated that too little money was in circulation, or conversely destroy printed money if the index showed the money supply to be too large.
Soddy was extremely critical of the system of “fractional reserve banking” whereby private banks keep only a small fraction of the money that is entrusted to them by their depositors and lend out the remaining amount. He pointed out that, in this system, the money supply is controlled by the private banks rather than by the government, and also that profits made from any expansion of the money supply go to private corporations instead of being used to provide social services. Fractional reserve banking exists today, not only in England but also in many other countries. Soddy’s criticisms of this practice cast light on the subprime mortgage crisis of 2008 and the debt crisis of 2011.
As Soddy pointed out, real wealth is subject to the second law of thermodynamics. As entropy increases, real wealth decays. Soddy contrasted this with the behavior of debt at compound interest, which increases exponentially without any limit, and he remarked: “You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest] against the natural law of the spontaneous decrement of wealth [entropy]”. Thus, in Soddy’s view, it is a fiction to maintain that being owed a large amount of money is a form of real wealth.
Frederick Soddy’s book, Wealth, virtual wealth and debt: The solution of the economic paradox, published in 1926 by Allen and Unwin, was received by the professional economists of the time as the quixotic work of an outsider. Today, however, Soddy’s commonsense economic analysis is increasingly valued for the light that it throws on the problems of our fractional reserve banking system, which becomes more and more vulnerable to failure as economic growth falters.

3. Nicholas Georgescu-Roegen
The incorporation of the idea of entropy into economic thought also owes much to the mathematician and economist Nicholas Georgescu-Roegen (1906- 1994), the son of a Romanian army officer. Georgescu-Roegen’s talents were soon recognized by the Romanian school system, and he was given an outstanding education in Mathematics, which later contributed to his success and originality as an economist.
Between 1927 and 1930 the young Georgescu studied at the Institut de statistique in Paris, where he completed an award-winning thesis: On the problem of finding out the cyclical components of phenomena. He then worked in England with Karl Pearson from 1930 to 1932, and during this period his work attracted the attention of a group of economists who were working on a project called the Harvard Economic Barometer. He received a Rockefeller Fellowship to join this group, but when he arrived at Harvard, he found that the project had been disbanded. In desperation, Georgescu-Roegen asked the economist Joseph Schumpeter for an appointment to join his group. Schumpeter’s group was in fact a remarkably active and interesting one, which included the Nobel laureate Wassily Leontief, and there followed a period of intense intellectual activity during which Georgescu-Roegen became an economist.
Despite offers of a permanent position at Harvard, Georgescu-Roegen returned to his native Romania in the late 1930s and early 1940s in order to serve his country. He served as a member of the Central Committee of the Romanian National Peasant Party. His experiences at this time led to his insight that economic activity involves entropy. He was also helped to this insight by Borel’s monograph on Statistical Mechanics, which he had read during his period of stay in Paris.
Georgescu-Roegen later wrote: “The idea that the economic process is not a mechanical analogue, but an entropic, unidirectional transformation began to turn over in my mind long ago, as I witnessed the oil wells of the Plosti field of both World Wars’ fame becoming dry one by one, and as I grew aware of the Romanian peasants’ struggle against the deterioration of their farming soil by continuous use and by rains as well. However it was the new representation of a process that enabled me to crystallize my thoughts in describing the economic process as the entropic transformation of valuable natural resources (low entropy) into valueless waste (high entropy).” After making many technical contributions to economic theory, Georgescu-Roegen returned to this insight in his important 1971 book, The Entropy Law and the Economic Process (Harvard University Press, Cambridge, 1971), where he outlines his concept of bioeconomics. In a later book, Energy and Economic Myths (Pergamon Press, New York, 1976), he offered the following recommendations for moving towards a bioeconomic society:
• the complete prohibition of weapons production, thereby releasing productive forces for more constructive purposes;
• immediate aid to underdeveloped countries;
• gradual decrease in population to a level that could be maintained only by organic agriculture;
• avoidance, and strict regulation if necessary, of wasteful energy use;
• abandon our attachment to “extravagant gadgetry”;
• “get rid of fashion”;
• make goods more durable and repairable; and
• cure ourselves of workaholic habits by rebalancing the time spent on work and leisure, a shift that will become incumbent as the effects of the other changes make themselves felt.
Georgescu-Roegen did not believe that his idealistic recommendations would be adopted, and he feared that human society was headed for a crash.

John Scales Avery, University of Copenhagen, Denmark; Fellow, World Academy of Art and Science
* The terms “exosomatic” and “endosomatic” were coined by the American scientist Alfred Lotka (1820-1949). A lobster’s claw is endosomatic – it is part of the lobster’s body. The hammer used by a human is exosomatic − like a detachable claw. Lotka spoke of “exosomatic evolution”, including in this term not only cultural evolution but also the building up of the material structure of civilization.

Pages: 1 2 3