thermodynamics and economics

Topics: Economics, Thermodynamics, Money supply Pages: 15 (4978 words) Published: September 22, 2013

The paper postulates a thermodynamic theory of money and describes both quantitavely and qualitatively its mechanics that unify economic production and finance in a sustainability framework. The theory will examine various economic issues, such as, full employment, economic growth, economic development, economic justice, the role of financial institutions, technology transitions and sustainable natural resource use, and be contrasted with the dominant money theory. It is claimed that as the current practice lacks any objective natural limit, it artificially violates the 2nd Thermodynamic Law, creating all the conditions for the transformation of a financial crisis to economic and eventually to an environmental one. Finally, the paper proposes a necessary biophysical re-design of the global financial architecture based on the theory’s ideas for overcoming the current financial, economic and environmental crisis. The theory begins from Gessell’s ideas on a natural money system and is further expanded to include Roegen’s ideas as well; thus providing the wide range of the theory’s consistencies with Ecological Economics. Primarily, money must imprint accurately thermodynamic resource depreciation; which means that it must accurately reflect the total entropy increase from natural resource transformation into economic goods. Considering ecosystem entropy as a kind of benchmark entropy, natural resource transformation into products will only increase total entropy in the system; being in accordance to the 2nd Law (dS/dt≥0). Furthermore, products are also subject to thermodynamic depreciation. This effect should also be reflected in the value of money across time, via a respective purchasing power loss and negative interest rates. Generally, as money comprises a social covenant on the accepted means of human economic exchanges, its purchasing power must primarily follow the thermodynamic depreciation of the economy’s material base. This will eventually give motivation for the economy’s perpetual quantitative regeneration and all investments to be oriented solely on the real economy -as all new money can be created only through this process- which makes extreme inflation and involuntary unemployment also absent. Contrarily, when via positive interest rates the money’s purchasing power is artificially not subject to the 2nd Law -although the economy’s material base may be diminishing- it favors the accumulation of non-productive money or lazy money of excessive –but only virtual- purchasing power. Although at the initial stages of the economy’s growth there is a surplus of capacity for real economy investments this may not be quite visible, the economy eventually turns its preference to non-productive financial activities (i.e. financial derivatives) that multiply money at a faster rate and with less risk, instead of re-investing it on the economy’s quantitative regeneration. In turn, lazy money favors motivation for fast resource depletion in order for profits to re-enter the financial sphere and be multiplied. From this vicious circle derive long-term economic and ecological distortions that impact negatively on overall human welfare; such as investment deficits, inflation, involuntary unemployment, extreme income inequalities, resource depletion and environmental degradation. As the economy has to produce new goods to regain its lost purchasing power, the theory is further expanded to deal with the problem of long-term resource sustainability. While for renewable resources the loss of purchasing power may be considered to be naturally regenerated (i.e. biomass, ecosystem carrying capacity), for non-renewable resources (i.e. fossil fuels) it should be considered permanent. This motivates by default the limitation of rapid additional entropy production; hence efficiency increases and resource preservation in order for the purchasing power loss to be limited as much as possible. However, as a consumed nonrenewable...
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