I’m having another round of studying thermodynamics, and I’m running into more interesting leads than I can keep up with. Like this paper:
• Eric Smith and Duncan K. Foley, Classical thermodynamics and economic general equilibrium theory, Journal of Economic Dynamics and Control 32 (2008) 7–65.
I’ve always been curious about the connection between economics and thermodynamics, but I know too little about economics to make this easy to explore. There are people who work on subjects called thermoeconomics and econophysics, but classical economists consider them ‘heterodox’. While I don’t trust classical economists to be right about things, I should probably learn more classical economics before I jump into the fray.
Still, the introduction of this paper is intriguing:
The relation between economic and physical (particularly thermodynamic) concepts of equilibrium has been a topic of recurrent interest throughout the development of neoclassical economic theory. As systems for defining equilibria, proving their existence, and computing their properties, neoclassical economics (Mas-Collel et al., 1995; Varian, 1992) and classical thermodynamics (Fermi, 1956) undeniably have numerous formal and methodological similarities. Both fields seek to describe system phenomena in terms of solutions to constrained optimization problems. Both rely on dual representations of interacting subsystems: the state of each subsystem is represented by pairs of variables, one variable from each pair characterizing the subsystem’s content, and the other characterizing the way it interacts with other subsystems. In physics the content variables are quantities like asubsystem’s total energy or the volume in space it occupies; in economics they area mounts of various commodities held by agents. In physics the interaction variables are quantities like temperature and pressure that can be measured on the system boundaries; in economics they are prices that can be measured by an agent’s willingness to trade one commodity for another.
In thermodynamics these pairs are called conjugate variables. The ‘content variables’ are usually called extensive and the ‘interaction variables’ are usually called intensive. A vector space with conjugate pairs of variables as coordinates is a symplectic vector space, and I’ve written about how these show up in the category-theoretic approach to open systems:
• John Baez, A compositional framework for passive linear networks, Azimuth, 28 April 2015.
The significance attached to these similarities has changed considerably, however, in the time from the first mathematical formulation of utility (Walras, 1909) to the full axiomatization of general equilibrium theory (Debreu, 1987). Léon Walras appears (Mirowski, 1989) to have conceptualized economic equilibrium as a balance of the gradients of utilities, more for the sake of similarity to the concept of force balance in mechanics, than to account for any observations about the outcomes of trade. Fisher (1892) (a student of J. Willard Gibbs) attempted to update Walrasian metaphors from mechanics to thermodynamics, but retained Walras’s program of seeking an explicit parallelism between physics and economics.
This Fisher is not the geneticist and statistician Ronald Fisher who came up with Fisher’s fundamental theorem. It’s the author of this thesis:
• Irving Fisher, Mathematical Investigations in the Theory of Value and Prices, Ph.D. thesis, Yale University, 1892.
Continuing on with Smith and Foley’s paper:
As mathematical economics has become more sophisticated (Debreu, 1987) the naive parallelism of Walras and Fisher has progressively been abandoned, and with it the sense that it matters whether neoclassical economics resembles any branch of physics. The cardinalization of utility that Walras thought of as a counterpart to energy has been discarded, apparently removing the possibility of comparing utility with any empirically measurable quantity. A long history of logically inconsistent (or simply unproductive) analogy making (see Section 7.2) has further caused the topic of parallels to fall out of favor. Samuelson (1960) summarizes well the current view among many economists, at the end of one of the few methodologically sound analyses of the parallel roles of dual representation in economics and physics:
The formal mathematical analogy between classical thermodynamics and mathematic economic systems has now been explored. This does not warrant the commonly met attempt to find more exact analogies of physical magnitudes—such as entropy or energy—in the economic realm. Why should there be laws like the first or second laws of thermodynamics holding in the economic realm? Why should ‘utility’ be literally identified with entropy, energy, or anything else? Why should a failure to make such a successful identification lead anyone to overlook or deny the mathematical isomorphism that does exist between minimum systems that arise in different disciplines?
The view that neoclassical economics is now mathematically mature, and that it is mere coincidence and no longer relevant whether it overlaps with any body of physical theory, is reflected in the complete omission of the topic of parallels from contemporary graduate texts (Mas-Collel et al., 1995). We argue here that, despite its long history of discussion, there are important insights still to be gleaned from considering the relation of neoclassical economics to classical thermodynamics. The new results concerning this relation we present here have significant implications, both for the interpretation of economic theory and for econometrics. The most important point of this paper (more important than the establishment of formal parallels between thermodynamics and utility economics) is that economics, because it does not recognize an equation of state or define prices intrinsically in terms of equilibrium, lacks the close relation between measurement and theory physical thermodynamics enjoys.
Luckily, the paper seems to be serious about explaining economics to those who know thermodynamics (and maybe vice versa). So, I will now read the rest of the paper—or at least skim it.
One interesting simple point seems to be this: there’s an analogy between entropy maximization and utility maximization, but it’s limited by the following difference.
In classical thermodynamics the total entropy of a closed system made of subsystems is the sum of the entropies of the parts. While the second law forbids the system from moving to a state to a state of lower total entropy, the entropies of some parts can decrease.
By contrast, in classical economics the total utility of a collection of agents is an unimportant quantity: what matters is the utility of each individual agent. The reason is that we assume the agents will voluntarily move from one state to another only if the utility of each agent separately increases. Furthermore, if we believe we can reparametrize the utility of each agent without changing anything, it makes no sense to add utilities.
(On the other hand, some utilitarian ethicists seem to believe it makes sense to add utilities and try to maximize the total. I imagine that libertarians would consider this ‘totalitarian’ approach morally unacceptable. I’m even less eager to enter discussions of the foundations of ethics than of economics, but it’s interesting how the question of whether a quantity can or ‘should’ be totaled up and then maximized plays a role in this debate.)