Interests - Science and Economics

I have recently taken a keen interest in economics, with a particular interest in how concepts from science can be applied, by analogy, to the dynamics of economic systems.  The goal of my personal studies, over the past six years, has been to understand the necessary and sufficient conditions for an economy to remain persistent.

Science Concepts Being Applied to Economics

Conservation Laws - In a physical system mass, energy, momentum and other key quantifiable variables must be conserved in every interaction.  These conservation laws place hard constraints on economic activities, especially for non-renewable resources.  In a large world in which supply dwarfs demand, such laws would seem to have little economic relevance.  However, in a small world in which supply and demand are of similar proportions, or in which demand dwarfs supply, conservation laws and associated processes become highly significant.  For many resources, they are accessed via man-made processes (e.g. mining) and the rate of extraction is scalable, but for others we must depend on nature to generate the resource (e.g. fishing) and there is an upper limit to scalability.  The ability of nature to meet the demands for resource generation and waste insertion places hard restraints on economic activities.  I explore the implications of such conservation laws in ecosystems in my PSoup application, and in economic systems in my ModEco application (which is available in three versions ( V1.xx in C++ - full featured; NetLogo - The PMM only; V2.xx in C++ - In development).

The ModEco application conserves mass, energy and money.  I was recently challenged by a reader to the effect that money is NOT conserved in modern economies, and that, in fact, the money supply within any economy expands and contracts at need.  This led me into a study of a modern monetary system, enabled by a modern "fractional reserve banking system" and constrained by modern "double-entry book-keeping".  See my ConserveMoneyLab application.
Carrying Capacities - In any ecological system, the rate of production of sustaining resources places a limit on the number of organisms of each type that can be supported sustainably.  Population spikes and population crashes are common in the natural world, and recent studies have resulted in a deep understanding of such phenomena.  The carrying capacity of a country, a continent, or the world, places hard constraints on economic activity.  In addition, by analogy, an economy is like an ecosystem, and there is a carrying capacity for each type of economic organism (people by skill-type, and corporation by product-type).   I explore the implications of such conservation laws in ecosystems in my PSoup application, and in economic systems in my ModEco application (which is available in three versions ( V1.xx in C++ - full featured; NetLogo - The PMM only; V2.xx in C++ - In development) .

In Orrery, a solar system develops in minutes.

In PSoup, organism Alan 618 has evolved to track prey by smell, and reproduce sexually.  Curiously it is sexually aggressive, but also plays hard-to-get.

Behaviour of Systems Far from Equilibrium - In any closed physical system (i.e. a system separated and cut off from the surrounding environment) processes will occur and energy will redistribute and/or transform itself until equilibrium is reached.  After that, the system will stay in a state of equilibrium.  That is to say, any accidental changes in the system which move it away from a state of equilibrium will have a high probability of being reversed immediately by changes which return the system to equilibrium.  Equilibrium states are very stable and calm.  However, if there is a flow of energy through the system (i.e. if the system is not separated from the surrounding environment, but in fact receives energy from a source in the environment and sends energy back into a sink in the environment), then the system is characterized by restlessness, turbulence or chaos, and it never approaches a state of equilibrium, remaining in a state of perpetual perturbation.  

In place of equilibrium, the system either wanders endlessly through its state space, or performs a random walk in one vicinity of state space in a kind of stationary state.  Though somewhat similar to an equilibrium state, a stationary state is unstable and dependent on a steady flow of mass and/or energy to maintain its position.  Think of a helicopter hovering low above a helipad on a very windy day.  As it is buffeted by winds, its position is continually perturbed by the winds and restored by the pilot, and when the gas runs out it must come to land in a true equilibrium state.  

There has been a tremendous amount of work done on such physical systems far from equilibrium in recent years.  The chaotic behaviour of markets, the continual bursts of technological advances, the endless innovations in financial instruments, and the dramatic changes inflicted upon the ecosystems in which we live and move are all indications that the economy is not in or near an equilibrium state, but is very far from it.  

Most modern economic theory is based on the assumption that the economy is perpetually in a state of equilibrium or near equilibrium.  This is a false assumption that may only be true to a first-order approximation under very limited circumstances.

My understanding of the behaviour of systems in equilibrium or a stationary state comes from my programs as follows:
 - a solar system is an example of a stationary state that has long-term instability, but apparent stability in the short term.  Using my Orrery software students can watch a 2-dimensional solar system form from 'dust' and then collapse in minutes.
 - the gene pool of a species is an example of a system that may be in a stationary state (in a stable location in its state space) or in a wandering state, depending on the milieu in which it is found.  Using my PSoup software high school students are able to explore a wide variety of scenarios in which evolution is demonstrated.  It was developed for use in preparation for university studies in biology.  In the basic scenarios, a stationary state is approached incrementally and asymptotically as the phenotype becomes stable, but the genotype continues to move through its state space.  In more complex scenarios, multiple species exist in a turbulent but path-dependant trajectory through the genetic space.
 - In modeled complete economic systems, the only sustainable model is a closed system with tightly controlled prices.  All less restrictive price schemes, and all open economies, lead to instability and crash, in which all agents die.  In ModEco students can design and run a model economy, and watch it develop in real time.

<== Uncontrolled price schemes in ModEco economies lead to catastrophic collapse.
Entropy Production - The second law of thermodynamics says that, in a closed thermodynamic system, thermodynamic entropy will always rise to a maximum value, then stay there.

An open physical system that is far from equilibrium is animated by a flow of energy through the system from an external source to an external sink.  The flow of energy drives the internal processes, and, as the usefulness of the energy declines, entropy is produced proportionately.  When energy enters the system, it exhibits low levels of entropy.  When the energy leaves the system it then exhibits high levels of entropy.  The ability of the energy to do useful work degrades as entropy increases.  High energy (low entropy) photons from the sun drive weather, oceanic currents, and biological processes.  But, a relatively higher number of low energy (high entropy) infra red photons escape into space.  Mining, manufacturing, transportation, retailing and waste disposal activities all use energy and produce entropy according to the immutable laws of physics.  

As open systems generate entropy they self-organize to produce entropy at a maximum rate possible.  This is called the Maximum Entropy Production Principle (MEPP) (see here, or here) or Maximum Power Principle (see here).  This is consistent with increasing consumerism, built-in obsolescence, and other characteristics of modern economic systems.

Also, as open systems generate entropy they self-organize to exhibit distributions consistent with maximized entropy, or maximized entropy production.  These distributions of wealth and access to resources shape both local and global economies (see articles by Yakovenko here and here).  

The point is, entropy production places some peculiar constraints on the way economies develop.  Those constraints are not recognized in economic theory, nor in the political views that rest on that theory.  In ModEco and in EiLab I explore the connection between a rise in economic entropy and economic activity in agent-based models.

Entropy production in an extremely simple economic agent-based model.

Distribution of Energy in a Gas - Further to the last point above, concerning distributions, there is a fascinating logical link between the mechanics of a bottle filled with an ideal gas and the economics of a town filled with people.  In the case of the gas, if you could cause each molecule to have the same kinetic energy at the start, the binary interactions between pairs of atoms (the collisions) would soon redistribute the energy to conform to the Maxwell-Boltzmann distribution of energies.  Similarly, in the case of the town, the sustainable model ModEco economy called the PMM demonstrates a situation in which all agents start with the same net worth, but due to the binary interactions between pairs of agents (the commercial transactions) the wealth is soon distributed to conform to a shape very similar to the shape of the Maxwell-Boltzmann distribution.  (See the second row to the right.)  The distribution of wealth in a sustainable society is of great interest.  There appears to be some fundamental mathematical or physical principle which drives both gases and economies towards these distributions.

Last updated: June 2016