Tag Archives: economics

Delaying cataclysmic events might hasten their advent

detail tl from abstract painting by Zahrah RIn thermodynamics, students are taught to draw a boundary around the system they want to analyse and to decide whether the boundary is open or closed to transfers of mass and energy based on the scenario they want to model.  The next step is to balance the energy flows across the boundary with the change in the energy content of the system.  This is an application of the first law of thermodynamics which is that energy can neither be created nor destroyed.  Rudolf Clausius is credited with discovering entropy when he realised that when energy flowed as heat across a system boundary it became entropy or disordered energy. For instance, when a steam engine does work and discharges heat to the environment. The second law of thermodynamics states that entropy of the universe increases in all real processes.  Thermodynamicists are not the only people who draw boundaries and decide whether they are open or closed.  Politicians and generals draw national boundaries occasionally and more frequently decide whether they are open or closed to people, goods and capital.  After the first world war economists, such as Friedrich Hayek and Ludwig von Mises, proposed that conflict would be less likely if people, goods and capital could flow freely across national boundaries.  These ideas became the principles on which the IMF and World Bank were formed at Bretton Woods in July 1944 in the closing stages of the second world war.  Presidents of the USA, since Ronald Reagan, have taken these ideas a step further by unleashing capitalism through deregulation of markets in the belief that markets know best.  However, ever-growing capital generates an ever-increasing rate of creation of entropy and disorder in the world [see ‘Existential connection between capitalism and entropy‘ on May 4th 2022] and perhaps attempting to reduce conflict by unfettering capital actually accelerates the descent into chaos and disorder because entropy increases in every transaction.

Sources:

Rana Foroohar, When the market fails us, FT Weekend, 23 April/24 April 2022.

Gary Gerstle, The Rise and Fall of the Neoliberal Order: America and the World in Free Market Era, Oxford: OUP, 2022.

The cataclysmic events referred to in the title are those identified by Thomas Piketty as being the only means by which economic inequality is reduced, i.e., wars and revolutions [see ‘Existential connection between capitalism and entropy‘ on May 4th 2022].  The title was inspired by correspondence from Bob Handscombe with whom I wrote a book entitled ‘The Entropy Vector: Connecting Science and Business‘.

Existential connection between capitalism and entropy

global average temperature with timeAccording to Raj Patel and Jason W Moore, in his treatise ‘Das Kapital’ Karl Marx defined capitalism as combining labour power, machines and raw materials to produce commodities that are sold for profit which is re-invested in yet more labour power, machines and raw materials.  In other words, capitalism involves processes that produce profit from an economic perspective, and from a thermodynamic perspective produce entropy because the second law of thermodynamics demands that all real processes produce entropy.  Thermodynamically, entropy usually takes the form of heat dissipated into the environment which raises the temperature of the environment; however, it can also be interpreted as an increase in the disorder of a system [see ‘Will it all be over soon?’ on November 2nd, 2016].  The ever-expanding cycle of profit being turned into capital implies that the processes of producing commodities must also become ever larger.  The ever-expanding processes of production implies that the rate of generation of entropy also increases with time.  If no profit were reinvested in economic processes then the processes would still increase the entropy in the universe but when profit is re-invested and expands the economic processes then the rate of entropy production increases and the entropy in the universe increases exponentially – that’s why the graphs of atmospheric temperature curve upwards at an increasing rate since the industrial revolution.  As if that is not bad enough, the French social economist, Thomas Piketty has proposed that the rate of return on capital, “r” is always greater than the rate of growth of the economy, “g” in his famous formula “r>g”.  Hence, even with zero economic growth, the rate of return will be above zero and the level of entropy will rise exponentially.  Piketty identified inequality as a principal effect of his formula and suggested that only cataclysmic events, such as world wars or revolutions, can reduce inequality.  The pessimistic thermodynamicist in me would conclude that an existential cataclysmic event might be the only way that this story ends.

Sources

Raj Patel & Jason W. Moore, A history of the world in seven cheap things, London: Verso, 2018.

Thomas Piketty, A brief history of equality, translated by Steven Rendall, Harvard: Belknap, 2022.

Diane Coyle, Piketty the positive, FT Weekend, 16 April/17 April 2022.

Image: Global average near surface temperature since the pre-industrial period from www.eea.europa.eu/data-and-maps/figures/global-average-near-surface-temperature

Certainty is unattainable and near-certainty unaffordable

The economists John Kay and Mervyn King assert in their book ‘Radical Uncertainty – decision-making beyond numbers‘ that ‘economic forecasting is necessarily harder than weather forecasting’ because the world of economics is non-stationary whereas the weather is governed by unchanging laws of nature. Kay and King observe that both central banks and meteorological offices have ‘to convey inescapable uncertainty to people who crave unavailable certainty’. In other words, the necessary assumptions and idealisations combined with the inaccuracies of the input data of both economic and meteorological models produce inevitable uncertainty in the predictions. However, people seeking to make decisions based on the predictions want certainty because it is very difficult to make choices when faced with uncertainty – it raises our psychological entropy [see ‘Psychological entropy increased by ineffective leaders‘ on February 10th, 2021].  Engineers face similar difficulties providing systems with inescapable uncertainties to people desiring unavailable certainty in terms of the reliability.  The second law of thermodynamics ensures that perfection is unattainable [see ‘Impossible perfection‘ on June 5th, 2013] and there will always be flaws of some description present in a system [see ‘Scattering electrons reveal dislocations in material structure‘ on November 11th, 2020].  Of course, we can expend more resources to eliminate flaws and increase the reliability of a system but the second law will always limit our success. Consequently, to finish where I started with a quote from Kay and King, ‘certainty is unattainable and the price of near-certainty unaffordable’ in both economics and engineering.

Inconvenient facts

The latest UN Climate Change Conference in Madrid, which is holding its closing session as I am writing this post, does not appear to have reached any significant conclusions.  Unsurprisingly, vested interests have dominated and there is little agreement on a plan of action to slow down climate change or to mitigate its impact. However, perhaps there is progress because two recent polls imply that 75% of Americans believe humans cause climate change and roughly half say that urgent action is needed.  This is important because the USA has made the largest cumulative contribution to greenhouse gas emissions with 25% of total emissions, followed by the EU-28 at 22% and China at 13%, according to the Our World in Data website.  However, the need for urgent action is being undermined by suggestions that we cannot afford it, or that we will have better technology in the future that will make it easier to act.  However, much of the engineering technology that is needed to remove fossil fuels from our economy is already available.   Of course, the technology will be improved in the future but that is always true because we are continually making technological advances.  We could replace fossil fuels as the energy source for all of our electricity, buildings and heating (31%) and for most of our industry (21%) and transportation (14%) using the technology that is available today and this could eliminate about two-thirds of current global greenhouse gas emissions. The numbers in parentheses are the percentage contributions to global greenhouse gas emissions according to the IPCC. Of course, it would require a massive programme of infrastructure investment; however, if we are serious then the subsidies paid to the oil and gas industry could be redirected toward decarbonising our economies.  According to the IMF, that is approximately $5.2 trillion per year in subsidies, which is about the GDP of Japan.  The science of climate change is well-understood (see for example ‘What happens to emitted carbon‘ and ‘Carbon emissions and surface warming‘) and widely recognised; the engineering technology to mitigate both climate change and its impacts is largely understood and implementation-ready; however, most urgently, we need well-informed public debate about the economic changes required to decarbonise our society.

Sources:

Mark Maslin, The five corrupt pillars of climate change denial, The Conversation, November 28th, 2019.

United Nations Blog, The drive to a conclusion, December 13th, 2019.

Sandra Laville, Top oil firms spending millions lobbying to block climate change policies, says report, The Guardian, March 22nd 2019.

Footnote: The videos ‘What happens to emitted carbon‘ and ‘Carbon emissions and surface warming‘ are part of a series produced by my colleague, Professor Ric Williams at the University of Liverpool.  He has produced a third one: ‘Paris or Bust‘.