The following has been contributed by a reader. It raises a few points, worthy of discussion. It suggests that the law of entropy should be applied to economic systems policies. For those not familiar with the entropy, it means that order will always tend towards disorder over time. It is a principle applied now to all branches of science. And it should be applied to economics. Entropy, it is suggested, is linked to economy and business cycles. It emerges within the Second Law of Thermodynamics. applied to economics, it has given rise to what is often called ecological economics, which includes earth’s natural systems, human values and human health and well-being as critical factors in change. The root is in the Marxian concept of of change (dialectics), which holds that systems emerge from earlier ones, grown (ordered) and then broken down (disordered), as well as insisting that human economic activity can only occur successfully within the conditions set by nature. This runs contrary fr m the alternative view that is confined to the concepts that nature is regarded as a resource only and growth is merely accumulation.
Entropy is involved in the evolution of business structures, to the corporate model of today, and this in turn, is driving further entropy, through a contradiction between the pursuit of profit and social responsibility. It is also suggested that government intervention can make all the difference.
Comments are invited. For instance, can the concept of entropy be applied to economic theory? Can the present course be changed? Is the an alternative to the present economic system?
This is what our reader had to say.
We may consider the free market/market value in terms of the concept of entropy in thermodynamics.
Entropy is the degree of disorder or freedom in the system, the free market.
The formation of businesses reduces the freedom or disorder by creating order. The formation of these businesses in to corporate entities further reduces the freedom or disorder, with an increase in order.
The system reaches equilibrium [balance], supply and demand satisfied, for those products [created].
For the system to expand, economic growth, new products or a demand for new products must be created, and so the cycle is repeated.
From a practical point of view, we may consider that there is a finite number of cycles and will reach equilibrium. Therefore, the economic returns, profit, will be in equilibrium [profits will equal costs for the economy as a whole].
Attempts to revitalise the system, by out sourcing, such as, production of products in a low-cost country, to sell in a high cost country, reduction in work force, downsising results in a reduction of capital flow in to the system. This is because capitalism requires the capital [as well as the product] to be recycled between the manufacturer, the workers and consumers who are the workers.
In the case of producing in a low-cost country, as the capital flow increases in that country, equilibrium will be reached, and another low-cost production country will be sought.
Similarly, attempts to revitalise the system by an increase in productivity, and decrease in wages also reduces capital flow. All these attempts lead to a multiple of complex structures within the system, explained by the Chaos Theory of fractals.
A fractal is a geometric shape that keeps adding to itself at a specific point. We can equate this with the repetitive attempts to revitalise the system.
For example, if we take a geometric shape such as a triangle and keep adding triangles to its trisection points, it builds up in to a multi-pointed star and then a complex snowflake structure.
In our system, the complex structures result in the formation of multinational corporations, which exacerbates the situation. Hence the system is collapsing and the combined attempts to revitalise the system results in short term recovery.
These cycles will increase in frequency as the system enters the final stage of terminal collapse. This sets the stage for strategic alliance between the multinationals. This strategic alliance is the foundation for a geo-economy and geo-political power base. Is it possible for an international geo-economy-political power (INGEPP) to develop? It did in Victorian Britain, the Government outsourced the administration of India to the East India Company, that had its own army.
Consider strategic alliance between the multinational corporations for energy, medicine, crop production and water rights/ownership. These multinationals do not have to be planning such a takeover it is inherent in the system, assisted by deregulation and privatisation of utilities. It is the next step in the search for profit and power; it becomes irresistible.
So, what is the alternative? There is no alternative in the present system, but we need to understand the factors that drive the system to change it. The three major drivers are profit, growth and lack of corporate social responsibility.
Corporate social responsibility is derived from the fact that the corporation in law is considered as and given the rights of an individual. An individual has social responsibility and a duty of care. But the corporations can and do circumvent these responsibilities. This is because the corporate bodies are profit driven, a balance between cost and gain.
For example, environmental pollution, it may be profitable to pollute relative to the fine that will be imposed, and the cost of decontamination in some cases becomes the responsibility of the local authority. Even if a corporation helps a local community, this is linked to the profit margin through marketing, promotion and corporate imagine.
And how can you hold a person responsible in the corporation for corporate irresponsibility. Perhaps by making the board of directors the corporate body, the individual in law, the directors also fined and imprisoned, and or revoke their corporate charter.
In order that corporations cannot circumvent their social responsibility, governments need to create corporate social responsibility laws. This may require a cap being placed on profits, that above the cap being directed into social development. The reason for this is basically a moral obligation and market support. The environment for business development has been provided by society and society is the market. Therefore, society is a stakeholder in the corporate structure.
In this respect, it requires us to see wealth as commonwealth, not private ownership. This is socio-economic responsibility.
Socio-economic responsibility is the hallmark of a civilised country, care of the poor, the infirmed; displaced persons and old people.
Let I = Investment: C = total capital: N = number of businesses
value (v) of business (b) vb = IC / N
Let L = capital loss from the system due to attempts to revitalise the system
vb = IC – L
Change in entropy from b0 to b = e0 – e = ∫IC / N – L
At IC / N = 0 then L = 0 and e0 = e = 0
Let IC / N – L = 20 then e0 — e = 20: If e = 100 then e1= 80
Similarly, this can be used to express the formation of corporations.
Let K the number of corporations formed. Then K to K 1 =e to e1 = ∫ IC / N x K – LΩ Based on the same argument, when IC / N x K = 0 then LΩ = 0 and e = e1
Let IC / N – L = 20 then e — e1 = 20: if e = 100 then e1 = 80
That is in both cases the new market value is 80 in monetary units
The combined effect on market value: e – e1 ∫IC / N – L + IC / N x K – LΩ
At e = e1: e – e1 = 0: market value zero; system collapses. This is because attempts to revitalise the system, opposes the function of the system. That is trying to satisfy two opposing tendencies; maximum stability a decrease in entropy/free market and maximum entropy/increase in free market. This is a simple maths explanation of a complex system of algorithms.
We could conclude that we need a new monetary system/value system. But this is not the problem. The problem is how the system is owned and operated.
The system at present is based on private ownership to accumulate wealth. This reduces the driving force of capital in the system. In terms of utilities such as transport, roads, rail and buses, health and education, they are examples of utilities that started off in private ownership and then transferred to public ownership (commonwealth) and are now being transferred back to private ownership or on lease. This is at the expense of governmental social responsibility and duty of care. That is, utilities are there to serve the people, so are governments, rather than the people serving the utilities; the utilities are not meant to make a profit.
The operational cost of the utilities can be funded by above the profit cap. The profit cap can be applied directly by government allocation or indirectly by corporate adoption of a utility. The adoption of a utility by a corporation removes the profit cap. The profit cap could be set at 1.5 times production cost