The Need For A New Economic System
By John Scales Avery
27 July, 2015
PART 2: ENTROPY AND ECONOMICS
Part 1 of this series of articles documented the world's urgent need for a reformed economic system. Here are a few more links that underline the pressing need for change.
We urgently need to shift quickly from fossil fuels to renewable energy if we are to avoid a tipping point after which human efforts to avoid catastrophic climate change will be futile because feedback loops will have taken over. The dangerous methane hydrate feedback loop is discussed in an excellent short video made by Thom Hartmann and the Leonardo DiCaprio Foundation:
Celebrated author and activist Naomi Klein has emphasized the link between need for economic reform and our urgent duty to address climate change:
Rebel economist Prof. Tim Jackson discusses the ways in which our present economic system has failed us, and the specific reforms that are needed. In one of his publications, he says: “The myth of growth has failed us. It has failed the two billion people who still live on $2 a day. It has failed the fragile ecological systems on which we depend for survival. It has failed, spectacularly, in its own terms, to provide economic stability and secure people's livelihood.”
What is entropy?
Entropy is a quantity, originally defined in statistical mechanics and thermodynamics, which is a measure of the statistical probability of any state of a system. The greater the entropy, the greater the probability. The second law of thermodynamics asserts that entropy of the universe always increases with time. In other words, the universe as a whole is constantly moving towards states of greater and greater probability.
For any closed system, the same is true. Such systems move in time towards states of greater and greater probability. However, the earth, with its biosphere, is not a closed system. The earth constantly receives an enormous stream of light from the sun. The radiation which we receive from the sun brings us energy that can be used to perform work, and in physics this is called “free energy”. Because of this flood of incoming sunlight, plants, animals and humans are able to create structures which from a statistical point of view are highly unlikely.
The disorder and statistical probability of the universe is constantly increasing, but because the earth is not a closed system, we are able to create local order, and complex, statistically improbable structures, like the works of Shakespeare, the Mona Lisa and the Internet. The human economy is driven by the free energy which we receive as income from the sun. Money is, in fact, a symbol for free energy, and free energy might be thought of as “negative entropy”. There is also a link between free energy and information.
Human society as a superorganism, with the global economy as its digestive system
A completely isolated human being would find it as difficult to survive for a long period of time as would an isolated ant or bee or termite. Therefore it seems correct to regard human society as a superorganism. In the case of humans, the analog of the social insects' nest is the enormous and complex material structure of civilization. It is, in fact, what we call the human economy. It consists of functioning factories, farms, homes, transportation links, water supplies, electrical networks, computer networks and much more.
Almost all of the activities of modern humans take place through the medium of these external “exosomatic” parts of our social superorganism. The terms "exosomatic" and "endosomatic" were coined by the American scientist Alfred Lotka (1820-1949). A lobster's claw is endosomatic; it is part of the lobster's body. The hammer used by a human is exosomatic, like a detachable claw. Lotka spoke of "exosomatic evolution", including in this term not only cultural evolution but also the building up of the material structures of civilization..
The economy associated with the human superorganism "eats" resources and free energy. It uses these inputs to produce local order, and finally excretes them as heat and waste. The process is closely analogous to food passing through the alimentary canal of an individual organism. The free energy and resources that are the inputs of our economy drive it just as food drives the processes of our body, but in both cases, waste products are finally excreted in a degraded form.
Almost all of the free energy that drives the human economy came originally from the sun's radiation, the exceptions being geothermal energy which originates in the decay of radioactive substances inside the earth, and tidal energy, which has its origin in the slowing of the motions of the earth-moon system. However, since the start of the Industrial Revolution, our economy has been using the solar energy stored in of fossil fuels. These fossil fuels were formed over a period of several hundred million years. We are using them during a few hundred years, i.e., at a rate approximately a million times the rate at which they were formed.
The present rate of consumption of fossil fuels is more than 13 terawatts and, if used at the present rate, fossil fuels would last less than a century. However, because of the very serious threats posed by climate change, human society would be well advised to stop the consumption of coal, oil and natural gas well before that time.
The rate of growth of of new renewable energy sources is increasing rapidly. These sources include small hydro, modern biomass, solar, wind, geothermal, wave and tidal energy. There is an urgent need for governments to set high taxes on fossil fuel consumption and to shift subsidies from the petrolium and nuclear industries to renewables. These changes in economic policy are needed to make the prices of renewables more competitive.
The shock to the global economy that will be caused by the end of the fossil fuel era will be compounded by the scarcity of other non-renewable resources, such as metals. While it is true (as neoclassical economists emphasize) that “matter and energy can neither be created nor destroyed”, free energy can be degraded into heat, and concentrated deposits of minerals can be dispersed. Both the degradation of free energy into heat and the dispersal of minerals involve increases of entropy.
One of the first people to call attention to the relationship between entropy and economics was the English radiochemist Frederick Soddy (1877-1956). Soddy won the Nobel Prize for Chemistry in 1926 for his work with Ernest Rutherford demonstrating the transmutation of elements in radioactive decay processes. His concern for social problems then led him to a critical study of the assumptions of classical economics. Soddy believed that there is a close connection between free energy and wealth, but only a very tenuous connection between wealth and money.
Soddy was extremely critical of the system of "fractional reserve banking" whereby private banks keep only a small fraction of the money that is entrusted to them by their depositors and lend out the remaining amount. He pointed out that this system means that the money supply is controlled by the private banks rather than by the government, and also that profits made from any expansion of the money supply go to private corporations instead of being used to provide social services. Fractional reserve banking exists today, not only in England but also in many other countries. Soddy's criticisms of this practice cast light on the subprime mortgage crisis of 2008 and the debt crisis of 2011.
As Soddy pointed out, real wealth is subject to the second law of thermodynamics. As entropy increases, real wealth decays. Soddy contrasted this with the behavior of debt at compound interest, which increases exponentially without any limit, and he remarked:
“You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest] against the natural law of the spontaneous decrement of wealth [entropy]”. Thus, in Soddy's view, it is a fiction to maintain that being owed a large amount of money is a form of real wealth.
Frederick Soddy's book, “Wealth, virtual wealth and debt: The solution of the economic paradox”,
published in 1926 by Allen and Unwin, was received by the professional economists of the time as the quixotic work of an outsider. Today, however, Soddy's common-sense economic analysis is increasingly valued for the light that it throws on the problems of our fractional reserve banking system, which becomes more and more vulnerable to failure as economic growth falters.
Currency reform, and nationalization of banks
Frederick Soddy was writing at a time when England's currency was leaving the gold standard, and in order to replace this basis for the currency, he proposed an index system. Soddy's index was to be based on a standard shopping basket containing items for household items, such as bread, milk, potatoes and so on. If the price of the items in the basket rose, more currency would be issued by the nationalized central bank. If the price fell, currency would be withdrawn.
Nationalization of banks was proposed by Soddy as a means of avoiding the evils of the fractional reserve banking system. Today we see a revival of the idea of nationalized banks, or local user-owned cooperative banks. The Grameen Bank, founded by Prof. Muhammad Yunus, pioneered the idea of socially-motivated banks for the benefit poor people who would ordinarily be unable to obtain loans. The bank and its founder won a Nobel Peace Prize in 2006.
The incorporation of the idea of entropy into economic thought also owes much to the mathematician and economist Nicholas Georgescu-Roegen (1906-1994), the son a Romanian army officer. Georgescu-Roegen's talents were soon recognized by the Romanian school system, and he was given an outstanding education in mathematics, which later contributed to his success and originality as an economist.
Between 1927 and 1930 the young Georgescu studied at the Institute de Statistique in Paris, where he completed an award-winning thesis: “On the problem of finding out the cyclical components of phenomena”. He then worked in England with Karl Pearson from 1930 to 1932, and during this period his work attracted the attention of a group of economists who were working on a project called the Harvard Economic Barometer. He received a Rockefeller Fellowship to join this group, but when he arrived at Harvard, he found that the project had been disbanded.
In desperation, Georgescu-Roegen asked the economist Joseph Schumpeter for an appointment to his group. Schumpeter's group was in fact a remarkably active and interesting one, which included the future Nobel laureate Wassely Leontief; and there followed a period of intense intellectual activity during which Georgescu-Roegen became an economist.
Despite offers of a permanent position at Harvard, Georgescu-Roegen returned to his native Roumania in the late 1930's and early 1940's in order to help his country. He served as a member of the Central Committee of the Romanian National Peasant Party. His experiences at this time led to his insight that economic activity involves entropy. He was also helped to this insight by Borel's monograph on Statistical Mechanics, which he had read during his Paris period.
Georgescu-Roegen later wrote: “The idea that the economic process is not a mechanical analogue, but an entropic, unidirectional transformation began to turn over in my mind long ago, as I witnessed the oil wells of the Plosti field of both World Wars' fame becoming dry one by one, and as I grew aware of the Romanian peasants' struggle against the deterioration of their farming soil by continuous use and by rains as well. However it was the new representation of a process that enabled me to crystallize my thoughts in describing the economic process as the entropic transformation of valuable natural resources (low entropy) into valueless waste (high entropy).”
After making many technical contributions to economic theory, Georgescu-Roegen returned to this insight in his important 1971 book, “The Entropy Law and the Economic Process” (Harvard University Press), where he outlines his concept of bioeconomics. In a later book, “Energy and Economic Myths” (Pergamon Press, New York, 1976), he offered the following recommendations for moving towards a bioeconomic society:
1 The complete prohibition of weapons production, thereby releasing productive forces for more constructive purposes;
2 Immediate aid to underdeveloped countries;
3 Gradual decrease in population to a level that could be maintained only by organic agriculture;
4 Avoidance, and strict regulation if necessary, of wasteful energy use;
5 Abandon our attachment to "extravagant gadgetry";
6 “Get rid of fashion”;
7 Make goods more durable and repairable; and
8 Cure ourselves of workaholic habits by re-balancing the time spent on work and leisure, a shift that will become incumbent as the effects of the other changes make themselves felt.
Georgiescu-Roegen did not believe that his idealistic recommendations would be adopted, and he feared that human society is headed for a crash.
Limits to Growth: A steady-state economy
Nicholas Georgescu-Roegen's influence continues to be felt today, not only through his own books and papers but also through those of his student, the distinguished economist Herman E. Daly, who for many years has been advocating a steady-state economy. As Daly points out in his books and papers, it is becoming increasingly apparent that unlimited economic growth on a finite planet is a logical impossibility. However, it is important to distinguish between knowledge, wisdom and culture, which can and should continue to grow, and growth in the sense of an increase in the volume of material goods produced. It is growth in the latter sense that is reaching its limits.
Daly describes our current situation as follows: “The most important change in recent times has been the growth of one subsystem of the Earth, namely the economy, relative to the total system, the ecosphere. This huge shift from an 'empty' to a 'full' world is truly `something new under the sun'... The closer the economy approaches the scale of the whole Earth, the more it will have to conform to the physical behavior mode of the Earth... The remaining natural world is no longer able to provide the sources and sinks for the metabolic throughput necessary to sustain the existing oversized economy, much less a growing one. Economists have focused too much on the economy's circulatory system and have neglected to study its digestive tract.”
In the future, the only way that we can avoid economic collapse is to build a steady-state economy. There exists much literature on how this can be achieved, and these writings ought to become a part of the education of all economists and politicians.
John Avery received a B.Sc. in theoretical physics from MIT and an M.Sc. from the University of Chicago. He later studied theoretical chemistry at the University of London, and was awarded a Ph.D. there in 1965. He is now Lektor Emeritus, Associate Professor, at the Department of Chemistry, University of Copenhagen. Fellowships, memberships in societies: Since 1990 he has been the Contact Person in Denmark for Pugwash Conferences on Science and World Affairs. In 1995, this group received the Nobel Peace Prize for their efforts. He was the Member of the Danish Peace Commission of 1998. Technical Advisor, World Health Organization, Regional Office for Europe (1988- 1997). Chairman of the Danish Peace Academy, April 2004. http://www.fredsakademiet.dk/ordbog/aord/a220.htm. He can be reached at firstname.lastname@example.org
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