As you are no doubt aware, the state of the global economy is messy. There is massive inequality in the distribution of private wealth. In addition, a culture of debt in pervades developed economies. As a consequence of deregulation, irresponsible government and consumer spending, and undue influence from private interests, places like Greece, Italy, and Japan now carry public debt that exceeds 100% of GDP. Japan is the most indebted with over 200% debt to GDP ratio. The USA will cross the 100% threshold some time next year. [CIA World Factbook]
Notwithstanding the technicalities of economics, let us for simplicity agree that massive inequality in wealth and out-of-control public spending has created a perilous economic situation worldwide. There are many actors on the global stage attempting to right the ship by providing corporate bailouts, tampering with currency and interest rates, and propping up banks and governments through institutions such as the International Monetary Fund and the European Central Bank. I believe that their efforts will ultimately fail.
I will attempt to explain my position with an analogy. Global finance is far too complex for average people like me to understand, but I believe that a reasonably clear picture can be framed using a simple and fundamental law of physics. I will do this by simply replacing the quantity of energy with the quantity of money. Before we continue, let me caveat my statements with three clauses:
1) I am not an economist, nor am I a physicist, and my understanding of both economics and thermodynamics is elementary at best.
2) All analogies are inherently flawed. The analogue shares characteristics with the primary concept, but is not derived from it, thus it fails to explain the intricacies of the primary concept.
3) I arrived at this specific idea independently, but it is not original - the underlying concept of maximum entropy production has been applied to discussions of finance and other social sciences by scholars and writers far more educated and astute than me.
Right then. Here’s a very, very brief physics lesson and some generalized definitions for the purposes of this esssay:
Thermodynamics: The study of time-dependent effects (temperature, pressure, chemical reactions, etc) of physical bodies on their surrounding environment within the constraints of that environment.
1st Law of Thermodynamics: Conservation of energy (energy cannot be created or destroyed, only changed in form) requires that a system will exchange energy with its surroundings by way of heat or work.
2nd Law of Thermodynamics: It is impossible to produce positive heat flow from a colder body to a warmer body. In essence, inequalities in temperature and other time-dependent variables represent a potential difference that will always decay from higher to lower until both are equal, given enough time. This leads to the central concept of this essay:
Entropy: The measure of disorder in a system. When a system is decaying towards equilibrium - a room with an open window reaching the same temperature as outside, for instance - entropy measures the progress of this decay. When it reaches equilibrium, it has achieved maximum entropy.
In summary, when a system has minimal or no entropy, there is a large inequality in energy distribution - think of water trapped behind a dam as another example. The potential exists, should the dam break, to equalize the volume and elevation of the water on both sides of the dam. A break in the dam represents the most efficient path to maximum entropy - the “default” state of any system where energy is exchanged. If the dam breaks, maximum entropy will be achieved in a finite time as the rate of flow, volume, and elevation of the water is equalized on both sides of the dam.
[scienceworld.wolfram.com, en.wikipedia.org/wiki/thermodynamics, entropylaw.com]
Now let’s apply this concept to global finance. As of September 2011, the USA owes 3.634 trillion dollars plus interest to its 10 largest foreign creditors, 1.148 trillion of which is owed to China. This represents approximately 20% of the total US public debt, which is currently increasing at a rate of about 10-11% of the GDP annually. This massive imbalance on the budget sheet represents a high potential credit risk which, in thermodynamic terms, should decrease over time until a balanced budget (economic equilibrium) is restored. [gpoaccess.gov/usbudget]
As it stands, debt and therefore credit risk is increasing significantly, and the dam that holds American debt at bay - confidence in the US economy by foreign investors - is weakening, which is evident in the recent decrease in America’s credit rating. If the dam were to break (America goes bankrupt), the tidal wave of its massive unpaid debt would crash through the global economy, devastating the financial systems of every country in the world.
In this example, maximum entropy would mean that US debt and credit risk was distributed more or less uniformly amongst its creditors who, having high confidence in the American economy, would lend money at a fairly low interest rate, keeping American debt low and repayments manageable. It would also add value to the US dollar, increasing its purchasing power, which would thus increase incentive for foreign investors to use the dollar to purchase goods and services worldwide. This notion represents an ideal, if simplistic, foreign economic relationship that is directly in line with the law of entropy.
There is a force that tends to pull economic disparity back towards a state of equilibrium, be it the public interest, public fiscal policy, or the actions of corporations with significant economic clout. Debts demand to be repaid. If the disparity is greatly out of proportion with what might be considered a “safe limit,” the potential difference between the actual entropic state and maximum entropy is much higher. Therefore, the potential corrective force is also much higher, and carries a much greater risk to those who are in its path.
Legislators and bankers are fighting a losing battle against a monetary force that is for all intents and purposes analogous to a fundamental force of nature. There is far too great a disparity between the rich and the poor, and the creditors and their debtors, to be sustainable. The use of bailouts - basically robbing the public purse for the sake of a few more profitable quarters for the banks - is tantamount to using chewing gum to patch the cracks in a dam. Eventually, the massive inertia of an unbalanced system pushing back towards maximum entropy will destroy the last attempts and preserving the status quo.
Notwithstanding the technicalities of economics, let us for simplicity agree that massive inequality in wealth and out-of-control public spending has created a perilous economic situation worldwide. There are many actors on the global stage attempting to right the ship by providing corporate bailouts, tampering with currency and interest rates, and propping up banks and governments through institutions such as the International Monetary Fund and the European Central Bank. I believe that their efforts will ultimately fail.
I will attempt to explain my position with an analogy. Global finance is far too complex for average people like me to understand, but I believe that a reasonably clear picture can be framed using a simple and fundamental law of physics. I will do this by simply replacing the quantity of energy with the quantity of money. Before we continue, let me caveat my statements with three clauses:
1) I am not an economist, nor am I a physicist, and my understanding of both economics and thermodynamics is elementary at best.
2) All analogies are inherently flawed. The analogue shares characteristics with the primary concept, but is not derived from it, thus it fails to explain the intricacies of the primary concept.
3) I arrived at this specific idea independently, but it is not original - the underlying concept of maximum entropy production has been applied to discussions of finance and other social sciences by scholars and writers far more educated and astute than me.
Right then. Here’s a very, very brief physics lesson and some generalized definitions for the purposes of this esssay:
Thermodynamics: The study of time-dependent effects (temperature, pressure, chemical reactions, etc) of physical bodies on their surrounding environment within the constraints of that environment.
1st Law of Thermodynamics: Conservation of energy (energy cannot be created or destroyed, only changed in form) requires that a system will exchange energy with its surroundings by way of heat or work.
2nd Law of Thermodynamics: It is impossible to produce positive heat flow from a colder body to a warmer body. In essence, inequalities in temperature and other time-dependent variables represent a potential difference that will always decay from higher to lower until both are equal, given enough time. This leads to the central concept of this essay:
Entropy: The measure of disorder in a system. When a system is decaying towards equilibrium - a room with an open window reaching the same temperature as outside, for instance - entropy measures the progress of this decay. When it reaches equilibrium, it has achieved maximum entropy.
In summary, when a system has minimal or no entropy, there is a large inequality in energy distribution - think of water trapped behind a dam as another example. The potential exists, should the dam break, to equalize the volume and elevation of the water on both sides of the dam. A break in the dam represents the most efficient path to maximum entropy - the “default” state of any system where energy is exchanged. If the dam breaks, maximum entropy will be achieved in a finite time as the rate of flow, volume, and elevation of the water is equalized on both sides of the dam.
[scienceworld.wolfram.com, en.wikipedia.org/wiki/thermodynamics, entropylaw.com]
Now let’s apply this concept to global finance. As of September 2011, the USA owes 3.634 trillion dollars plus interest to its 10 largest foreign creditors, 1.148 trillion of which is owed to China. This represents approximately 20% of the total US public debt, which is currently increasing at a rate of about 10-11% of the GDP annually. This massive imbalance on the budget sheet represents a high potential credit risk which, in thermodynamic terms, should decrease over time until a balanced budget (economic equilibrium) is restored. [gpoaccess.gov/usbudget]
As it stands, debt and therefore credit risk is increasing significantly, and the dam that holds American debt at bay - confidence in the US economy by foreign investors - is weakening, which is evident in the recent decrease in America’s credit rating. If the dam were to break (America goes bankrupt), the tidal wave of its massive unpaid debt would crash through the global economy, devastating the financial systems of every country in the world.
In this example, maximum entropy would mean that US debt and credit risk was distributed more or less uniformly amongst its creditors who, having high confidence in the American economy, would lend money at a fairly low interest rate, keeping American debt low and repayments manageable. It would also add value to the US dollar, increasing its purchasing power, which would thus increase incentive for foreign investors to use the dollar to purchase goods and services worldwide. This notion represents an ideal, if simplistic, foreign economic relationship that is directly in line with the law of entropy.
There is a force that tends to pull economic disparity back towards a state of equilibrium, be it the public interest, public fiscal policy, or the actions of corporations with significant economic clout. Debts demand to be repaid. If the disparity is greatly out of proportion with what might be considered a “safe limit,” the potential difference between the actual entropic state and maximum entropy is much higher. Therefore, the potential corrective force is also much higher, and carries a much greater risk to those who are in its path.
Legislators and bankers are fighting a losing battle against a monetary force that is for all intents and purposes analogous to a fundamental force of nature. There is far too great a disparity between the rich and the poor, and the creditors and their debtors, to be sustainable. The use of bailouts - basically robbing the public purse for the sake of a few more profitable quarters for the banks - is tantamount to using chewing gum to patch the cracks in a dam. Eventually, the massive inertia of an unbalanced system pushing back towards maximum entropy will destroy the last attempts and preserving the status quo.
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