Monday, November 9, 2009

Economies Evolve by Energy Dispersal

( -- Terms such as the "invisible hand," laissez-faire policy, and free-market principles suggest that economic growth and decline in capitalist societies seem to be somehow self-regulated. Now, scientists Arto Annila of the University of Helsinki and Stanley Salthe of Binghampton University in New York show that economic activity can be regarded as an evolutionary process governed by the second law of thermodynamics. Their perspective may provide insight into some fundamental economic questions, such as the causes of economic growth and diversification, as well as why it’s so difficult to predict economic growth and decline.

Abstract: Economic activity can be regarded as an evolutionary process governed by the 2nd law of thermodynamics. The universal law, when formulated locally as an equation of motion, reveals that a growing economy develops functional machinery and organizes hierarchically in such a way as to tend to equalize energy density differences within the economy and in respect to the surroundings it is open to. Diverse economic activities result in flows of energy that will preferentially channel along the most steeply descending paths, leveling a non-Euclidean free energy landscape. This principle of 'maximal energy dispersal‘, equivalent to the maximal rate of entropy production, gives rise to economic laws and regularities. The law of diminishing returns follows from the diminishing free energy while the relation between supply and demand displays a quest for a balance among interdependent energy densities. Economic evolution is dissipative motion where the driving forces and energy flows are inseparable from each other. When there are multiple degrees of freedom, economic growth and decline are inherently impossible to forecast in detail. Namely, trajectories of an evolving economy are non-integrable, i.e. unpredictable in detail because a decision by a player will affect also future decisions of other players. We propose that decision making is ultimately about choosing from various actions those that would reduce most effectively subjectively perceived energy gradients.

Read the full research here: Economies Evolve by Energy Dispersal by Arto Annila and Stanley Salthe.

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