Macro-Thermodynamic Economics. The Human Factor

Abstract

Many theorists have deliberated whether time plays a significant role in the growth of an economy. The dominant part of economic literature, the theory of neoclassical economics, has borrowed from thermodynamics the opinion that the economy is an ergodic system and economics is a science like the physical sciences. In a world that is ergodic, past experiences allow researchers to construct the probability distribution of future events and predict the path of the system independently of its initial state. Thus, if the economy (as an isolated system) is ergodic, it is in stochastic equilibrium at the macro level, time does not play a crucial role, and economic policies disturb, rather than contribute, to its natural growth. In this paper we argue that the economy is not a fully ergodic system, but it is a system experiencing ergodicity breaks, i.e. a system that behaves like being ergodic for a limited time, but frequently (because of external and internal disturbances) loses the independence from its historical time. The disturbances, that are inevitable, alter the institutional framework, and modify the way economic agents behave when they face uncertainty. Consequently, time plays an important role and economic policies are inevitable. The object of this article is the lessons we can learn from the parallelism between thermodynamics economics and recommend macroeconomic policies that minimize the entropy created as the economy moves between equilibria. To start with we use a very simple thermodynamic system to clarify concepts that are not familiar to social scientists. To discuss the path the economy follows over time, we consider events that create uncertainties ranging from statistical to chaotic disturbances. Several events create disturbances that violate the laws of classical thermodynamic, and based on this, we deduce that the economy is not ergodic but it is a system that experiences ergodicity breaking. Next, we clarify our view of this process and we recommend policies that would minimize the entropy that ergodicity breaking would create. Finally, we use the human factor to justify why we believe that our suggestions are in line with the lessons from thermodynamics.