The Economy of Social and Biological Systems: A Physical Theory

Abstract

Many people have recognized the fundamental flaws in the mainstream economic theory. At the same time, most people feel that it is unlikely to develop an economic theory that is both relevant and analytical tractable. It is often thought that social problems are too complex to be described by a simple mathematical theory. Whether or not a system is complex to the human mind depends on whether we can detect simple mathematical structures among various factors in a system. Recently, a mathematical theory of economics of social and biological systems has been derived from the laws of statistical thermodynamics. The main result is a formula of variable cost as a mathematical function of product value, fixed cost, uncertainty, discount rate and project duration. From this formula of variable cost, together with fixed cost and volume of output, we can compute and analyze the returns and profits of different production systems under various kinds of environment in a simple and systematic way. The results are highly consistent with the empirical evidences obtained from the vast amount of literature in economics and biology. Furthermore, by putting major factors of production into a compact mathematical model, the theory provides precise insights about the tradeoffs and constraints of various business or evolutionary strategies that are often lost in intuitive thinking.