Thermodynamics and economics - petebachant/petebachant.github.io GitHub Wiki
WARNING: Rambings of an economic layman here.
Hypothesis: An economic transaction is analogous to an energy exchange, i.e., the value of money is reduced each transaction just like the usefulness (exergy) of energy is reduced each transaction. In both cases this would be due to entropy generation.
Money as a fluid
Is it possible to think of money as a fluid that "flows" through the economy, absorbing or emitting value (analogous to heat)?
The ideal currency
Should take into account the usefulness of wealth, sort of like exergy for energy. Useful towards maximizing well-being of humanity, or minimizing suffering. Wealth can also be useful when it helps capture more energy, e.g., a solar panel. Food is very useful. Yachts are not? Art is useful in that it improves mental health, which is clearly a benefit to well-being, and allows humans to keep working, producing useful wealth. Perhaps we'd need to vote on what things maximize human well-being, since it's different for everyone.
Quantity increases as wealth increases, such that buying power can stay constant. This would practically require the currency to be virtual. Your bank balance would fluctuate with the performance of the economy, sort of like a mutual fund but tied very closely to the actual performance, not just human perception of the performance. Perhaps this would give everyone motivation to work hard, increase efficiency, etc. A rising tide would lift all ships, exactly, literally, instead of relying on the inefficient distribution mechanisms in the market.
There is a thermal--fluid analogy here somewhere. Currency stores value (like heat) and flows (like a fluid.) An optimal currency would keep the temperature constant, storing additional energy by adding mass or volume (currency).
The inefficiencies of the market are basically like pipes tapping into the main flow to deliver energy to those who need it. These pipes have varying levels of internal friction or insulation so wealth is lost via transactions, sort of like how entropy is created each time energy is exchanged.
An example of an entropy generating transaction in the economy would be anything where a demand needs to be created artificially, where advertising convinces someone they need something that doesn't actually increase their well-being. We need to spend all that energy to produce the useless product just so some people can draw the wealth fluid away from where it's pooled.
Is this fair though? There could be lots of free-riding. How to balance individual responsibility with the interconnectedness of everything? Right now, if someone purchased 1000 gallons of gasoline and simply burned it in the middle of nowhere, they have hurt the entire economy because that energy was not spent to help continue the flow of energy towards human well-being. Is the fact that they lost money doing this enough? They'd lose even more because of the drop in total currency in the ideal system? Everyone would feel the pain right away so we'd be more likely to ban practices that destroy wealth? Feedback for externalities needs to be carefully calculated.
What about flow rate?
If we bring a new wind farm online, we have increased the rate of injection of useful energy into the economy. If this energy can be stored, the quantity of currency should increase. Or we could view this as an increase in spending rate capacity.
Redistribution
In the current system, to say someone has $1B in wealth doesn't necessarily mean that is liquid. In a crisis, does the value of their wealth drop proportional to how the usefulness of their assets has changed? Should we make sure the value of assets is explicitly tied to the ability to exchange them for useful wealth? Can you trade a yacht for its value in food during a pandemic?
For example, would all Jeff Bezos' assets retain their value if redistributed? Is a factory valuable to 100 random people?
Useful wealth
Production of goods or services that can be purchased is what gives money value, but production of things that produce those things (like robots) are even more valuable.
The COVID-19 pandemic puts some perspective on this. Does halting inessential jobs and services reduce the amount of real wealth in the economy, or simply shut off streams that allowed the wealth produced by essential industries to diffuse out into the population?
Is it efficient to require "non-essential" economic activity in order for wealth to be transported, or does this generate more entropy than its worth? There's probably a basic income argument in there somewhere.
It all comes down to the sun
Is the solar irradiance the limit for the wealth generation rate on Earth?
Can we simply focus on capturing and storing as much solar energy as possible (as food, electrical energy, etc.) and be assured the economy will grow?
That consideration of course neglects the transport of this wealth after its stored, which is a huge problem.