The Thermodynamics of Economics

[ravingdave]

In regards to the notion that we should "Spread the Wealth around " I would point out that Economics operate much like Thermodynamics.


Work is produced by Differentials between Hot and Cold. If the entire environment is at the same temperature, then no meaningful work can be produced.


If money is not accumulated into "Hot Spots", there can be no differential temperature, and therefore no work can be accomplished.


To put it another way, if everyone were a Billionaire, you'd have to pay someone a Million just to get your lawn mowed.


The only thing that occurs when you minimize the differentials between Rich and Poor is that you devalue the money, or in theremodynamic terms you bring the temperature into equilibrium. .



David

[Skipjack]

This the typical republican trickle down system and is not entirely correct.
You need people that can afford buying your products, or you will never become a billionare. That means you need a large middle class.
Ideally the wealth curve is a gaussian bell curve, with the middle class being the largest group and the very rich and the very poor making the smallest part of the population.

[MSimon]

This the typical republican trickle down system and is not entirely correct.
You need people that can afford buying your products, or you will never become a billionare. That means you need a large middle class.
Ideally the wealth curve is a gaussian bell curve, with the middle class being the largest group and the very rich and the very poor making the smallest part of the population.

So who can afford to buy a nuclear power plant? Or a coal fired one for that matter?

[clonan]

So who can afford to buy a nuclear power plant? Or a coal fired one for that matter?

Almost no one, even the super rich can't typically free up a billion dollars to spend without getting a return in 5+ years.

HOWEVER I am personally fairly well off, about 100K family income and increasing. I can invest 10-20K and not worry about it generating much of a return for a few years. So can a lot of people. Put us all together in say a fund...maybe in the form of stock we buy perhaps, and we can all buy a plant together.

The super rich can't afford major projects. Their money is not as liquid since it is stuck in large chunks and thoes chunks can't be readily sold. The middle class through the near rich have the most fluid investment dollars around. Thoes are the people who you need to buy your power plants.

[jmc]

In regards to the notion that we should "Spread the Wealth around " I would point out that Economics operate much like Thermodynamics.


Work is produced by Differentials between Hot and Cold. If the entire environment is at the same temperature, then no meaningful work can be produced.


If money is not accumulated into "Hot Spots", there can be no differential temperature, and therefore no work can be accomplished.


To put it another way, if everyone were a Billionaire, you'd have to pay someone a Million just to get your lawn mowed.


The only thing that occurs when you minimize the differentials between Rich and Poor is that you devalue the money, or in theremodynamic terms you bring the temperature into equilibrium. .



David

No. This has nothing to do with thermodynamics. You certainly don't need the "super-rich" to exist in order to create wealth. All you need is a bunch of hard-working motivated people willing do an honest day's work.

In principle, if an honest trustworthy CEO who wasn't greedy, issued some shares in a company, then alot of people of medium wealthy could invest in them. This could be used to raise enough capital to pay workers to engage in a wealth creating project that makes money. Our honest CEO could then award himself a modest salary of say $50,000 dollars and then divide the remaining profits equitably among the middle income shareholders and workers. You still have a money-making enterprise, wealth is created and there are no super-rich.

Perhaps you need the laziest members of society need to be less well-off than everyone else, or noone would do any work, but the have-nots, certainly don't need to be in the majority, people would still work if lazy have-nots only consisted of 5% of the population or less. (By the way, I'm speaking of a Utopian ideal, I'm not saying that those less well off are necessarily lazy in the real world. After all in some sweat shops in the 3rd world people work 80 hours a week for less than people in the 1st world get off welfare).

To increase the wealth per capita, you essentially need to amplify the ammount of usefulness someone can achieve from a given ammount of effort. With technological innovation, in principle, everyone can win.

Your super-rich aren't required to create wealth, it is the creation of wealth that almost inevitably leads to the super-rich. Your mixing the chicken up with the egg. This is because the people that create every organizational structure will arrange it to maximize the benefit to themselves. The CEO does not primarily exist to serve the company, the company exists to serve the CEO and shareholders, with the exception of institutional investors are just sources to raise capital from who must occassionally be placated with the odd dividend.

When you create wealth who does it get distributed to? Primarily to the person who has most control over its distribution!

In addition, with regards to speculation inevitably some people will be better investors than others, and even a slight differential in the exponential rate at which different people can increase their wealth, over a long enough time will lead to a few people getting very rich indeed. This trend can only be reversed either through revolution, through frugal parents giving profligate sons their inheritance or through philanthropy, I believe Warren Buffet has ear-marked most of his personal stock-holdings for charity when he dies. We'll just have wait and see if he goes through with it.

[ravingdave]

This the typical republican trickle down system and is not entirely correct.
You need people that can afford buying your products, or you will never become a billionare. That means you need a large middle class.
Ideally the wealth curve is a gaussian bell curve, with the middle class being the largest group and the very rich and the very poor making the smallest part of the population.

The term "trickle down" is intended to be a derogatory reference for describing a naturally occuring process. It is roughly akin to refering to rain as "cloud piss."


My effort in starting this thread was to look at economics in thermodynamic terms because I believe the analogy will be usefull in predicting and understanding economics without the emotional baggage of preconceived notions about rich/poor, etc.

I agree with you that a bell curve is the best distribution of wealth, and this is and ought to be the natural state of things. However, my point is still that if there are no money "Hot Spots." It is impossible to make any work happen. If everone were a Billionaire, a billion dollars would be virtually worthless.

In any case, I would like to see any description of an economic process explained in terms of thermodynamics.



David

[Skipjack]

So who can afford to buy a nuclear power plant? Or a coal fired one for that matter?

I do not quite understand what your question is in this regard.
I would say that it is most likely a government of a country which should generate the largest income from taxes from a large middle class.
Or... it is a large corporation or organization that buys the plant. Either of these are usually funded by investors or middle class people that buy their shares (via investment fonds) and/or provide the corporations finances by buying its products (e.g. electricity, or cars, or heat, or whatever the company produces, if it is not solely a powercompany).
To give an example: You have a rich man, he is rich because he is the CEO of a car producing company. Who buys his cars mostly? The middle class! Thats where most cars are sold. You take away the middle class and turn them into poors, you will loose clients. Less clients means less money for the car company and that means less money for the CEO, everyone looses.
Now, there still has to be a pyramid in the salaries and earnings of people. After all, people need to have a motivation to work harder or more. If your lawn mowing man makes very little per lawn that he mowes, but mowes a lot of lawns, he might be able to afford a better fast lawn mower that he buys from the company that one of his clients is the CEO of. That allows him to mowe even more lawns and make even more money. Maybe he will then hire another guy to help him mow lawns and ten years down the road he has a 100 employees that mow lawns all over town, who knows? Of course, if only 3 or 4 people can afford hiring someone to mow their lawns, then he will never get anywhere, but then he will never be able to afford the new lawn mower and the the CEO of the lawn mowing company will make less money next year. Thats the way it goes.

[ravingdave]

In regards to the notion that we should "Spread the Wealth around " I would point out that Economics operate much like Thermodynamics.


Work is produced by Differentials between Hot and Cold. If the entire environment is at the same temperature, then no meaningful work can be produced.


If money is not accumulated into "Hot Spots", there can be no differential temperature, and therefore no work can be accomplished.


To put it another way, if everyone were a Billionaire, you'd have to pay someone a Million just to get your lawn mowed.


The only thing that occurs when you minimize the differentials between Rich and Poor is that you devalue the money, or in theremodynamic terms you bring the temperature into equilibrium. .



David

No. This has nothing to do with thermodynamics. You certainly don't need the "super-rich" to exist in order to create wealth. All you need is a bunch of hard-working motivated people willing do an honest day's work.

In principle, if an honest trustworthy CEO who wasn't greedy, issued some shares in a company, then alot of people of medium wealthy could invest in them. This could be used to raise enough capital to pay workers to engage in a wealth creating project that makes money. Our honest CEO could then award himself a modest salary of say $50,000 dollars and then divide the remaining profits equitably among the middle income shareholders and workers. You still have a money-making enterprise, wealth is created and there are no super-rich.

Perhaps you need the laziest members of society need to be less well-off than everyone else, or noone would do any work, but the have-nots, certainly don't need to be in the majority, people would still work if lazy have-nots only consisted of 5% of the population or less. (By the way, I'm speaking of a Utopian ideal, I'm not saying that those less well off are necessarily lazy in the real world. After all in some sweat shops in the 3rd world people work 80 hours a week for less than people in the 1st world get off welfare).

To increase the wealth per capita, you essentially need to amplify the ammount of usefulness someone can achieve from a given ammount of effort. With technological innovation, in principle, everyone can win.

Your super-rich aren't required to create wealth, it is the creation of wealth that almost inevitably leads to the super-rich. Your mixing the chicken up with the egg. This is because the people that create every organizational structure will arrange it to maximize the benefit to themselves. The CEO does not primarily exist to serve the company, the company exists to serve the CEO and shareholders, with the exception of institutional investors are just sources to raise capital from who must occassionally be placated with the odd dividend.

When you create wealth who does it get distributed to? Primarily to the person who has most control over its distribution!

In addition, with regards to speculation inevitably some people will be better investors than others, and even a slight differential in the exponential rate at which different people can increase their wealth, over a long enough time will lead to a few people getting very rich indeed. This trend can only be reversed either through revolution, through frugal parents giving profligate sons their inheritance or through philanthropy, I believe Warren Buffet has ear-marked most of his personal stock-holdings for charity when he dies. We'll just have wait and see if he goes through with it.

I'm really not refering to "Super Rich". I am refering to "Differential" hot spots. You have basically said the same thing i'm tring to say, but my essential point is that Economics cannot exist without some differentials. As you have mentioned, people have to want something to be induced to work for it.

If you take money away from someone, Let's say the "Rich", and give it to the poor, you are bleeding off potential work (heat) and accomplishing only a devaluation of the money. (an increase in thermal equilibriam.)



If people don't have to work for money, what good is it ? If we are all billionaires then we will be equally poor.




David

[Skipjack]

The term "trickle down" is intended to be a derogatory reference

I apollogize, I was not aware that trickle down was a derogatory term (I thought it was the term most commonly used in the US for this kind of economic ideology).
I agree that equilibrium can not work. This would be comunism, where everyone makes the same money no matter how hard they try. The biggest flaw of this system is that it requires an ideal kind of human being that does not exist. Humans are generally competitive. We strive to surpass others in everything, be it beauty, sports and also money.
It is our nature. There is no question about it. If noone gets to be "better" no matter what they do, there is no motivation in keeping working.
Equally, if your lawn mower man can never have the chance to afford his better lawn mower, he will inevitably lack motivation. Demotivated workers are bad workers.
However poor people are bad comsumers. You need consumers in order to generate wealth. A few rich people can not consume enough to create a wealthy economy. It just does not work.

[clonan]

I'm really not refering to "Super Rich". I am refering to "Differential" hot spots. You have basically said the same thing i'm tring to say, but my essential point is that Economics cannot exist without some differentials. As you have mentioned, people have to want something to be induced to work for it.

If you take money away from someone, Let's say the "Rich", and give it to the poor, you are bleeding off potential work (heat) and accomplishing only a devaluation of the money. (an increase in thermal equilibriam.)



If people don't have to work for money, what good is it ? If we are all billionaires then we will be equally poor.




David

Lets take your analogy further.

A hot spot is only usefull when you drain off the heat into a cold spot and bring the system closer to equilibrium. At the time of the transfer you have the ability to do work with the energy.

Therefore I think you may be right! Economics IS like thermodynamics. You have to have high temp spots (producers) and cold temp spots (consumers with spare income). By moving energy from high to low you CAN use it for work (creating value).

Where your anaolgy is wrong is assuming that rich people are the Hot side and poor people are the cold side. I know some rich people who do nothing...they add nothing to the economy. I know poor people who do a lot...they add a lot to the economy. The number of zero's in there bank accounts make no difference.

The actual hot spot is the producer while the actual cold spot is the consumer. Unless you have both a producer with something to sell and a consumer with the ability to but then you ARE in equilibrium and no value can be created.

[ravingdave]

The term "trickle down" is intended to be a derogatory reference

I apollogize, I was not aware that trickle down was a derogatory term (I thought it was the term most commonly used in the US for this kind of economic ideology).
I agree that equilibrium can not work. This would be comunism, where everyone makes the same money no matter how hard they try. The biggest flaw of this system is that it requires an ideal kind of human being that does not exist. Humans are generally competitive. We strive to surpass others in everything, be it beauty, sports and also money.
It is our nature. There is no question about it. If noone gets to be "better" no matter what they do, there is no motivation in keeping working.
Equally, if your lawn mower man can never have the chance to afford his better lawn mower, he will inevitably lack motivation. Demotivated workers are bad workers.
However poor people are bad comsumers. You need consumers in order to generate wealth. A few rich people can not consume enough to create a wealthy economy. It just does not work.

I believe the term "Trickle Down" was first used by Ronald Reagan when he was trying to explain the economics of tax reduction and his politcal opponents seized on that comment and repeated it mockingly for the last 24 years or so. It has become a term of derision, and most people using it generally oppose free market economics.

You are right about the motivation of human beings. A lot of people don't realize that virtually eveything we do is about status in our social structure, and money is just one of the ways we keep score.



David

[ravingdave]

I'm really not refering to "Super Rich". I am refering to "Differential" hot spots. You have basically said the same thing i'm tring to say, but my essential point is that Economics cannot exist without some differentials. As you have mentioned, people have to want something to be induced to work for it.

If you take money away from someone, Let's say the "Rich", and give it to the poor, you are bleeding off potential work (heat) and accomplishing only a devaluation of the money. (an increase in thermal equilibriam.)



If people don't have to work for money, what good is it ? If we are all billionaires then we will be equally poor.




David

Lets take your analogy further.

A hot spot is only usefull when you drain off the heat into a cold spot and bring the system closer to equilibrium. At the time of the transfer you have the ability to do work with the energy.

Therefore I think you may be right! Economics IS like thermodynamics. You have to have high temp spots (producers) and cold temp spots (consumers with spare income). By moving energy from high to low you CAN use it for work (creating value).

Where your anaolgy is wrong is assuming that rich people are the Hot side and poor people are the cold side. I know some rich people who do nothing...they add nothing to the economy. I know poor people who do a lot...they add a lot to the economy. The number of zero's in there bank accounts make no difference.

The actual hot spot is the producer while the actual cold spot is the consumer. Unless you have both a producer with something to sell and a consumer with the ability to but then you ARE in equilibrium and no value can be created.

Rich people who do nothing simply represent stores of latent heat energy. When they spend their money the potential energy is converted into work. If it just sits in a bank, no work is being extracted from it. (unless you count the work produced by loaning it to people for interest, which everyone does.)

I'm not intending to be specific about rich people. I just look at varying degrees of wealth as varying temperature differentials. Various heat engine designs can extract work from various temperature levels, but efficiency always goes up with a greater temperature differential, meaning the hotter the temperature, the greater the efficiency at converting heat to work. (of course it is probably the opposite in economics. The more money you have, the less incintive to use it efficiently. )


Middle class people would be like steam temperatures,(800 degrees F ?) while rich people would be internal combustion temperatures. (2800 degrees F?)

I just thought the whole thing was an interesting analogy.

David

[jmc]

Wealth is created by people working and also by machines working. In labour terms the work done by machines is essentially free, except you need an energy source, but if the work of machines is used to harvest the energy to drive themselves, then in labour terms that is free aswell.

The only danger then is by reducing the amount of labour input humans put into the system progressively to zero though making machines more and more autonomous we run the risk of becoming dunces and getting completely taken over and perhaps exterminated by the machines.

------------------------------------------------------------------

Ignoring machines the ideal civilsation is one where humans help each other and organise together in such a way to maximize everyones collective happiness.

Individual human being don't spontaneously do this, they try and make themselves happy and are generally ambivalent as to whether this happiness is acquired at the expense of others.

Ideally the financial system is a way of ensuring that everyone "does they're fair share" if you want someone to do something for you you pay them money. If you do something for someone else they pay you money. If you ask people repeatedly for favours while giving nothing in return you rapidly run out of money and noone does anything for you. If you do lots of nice things to other people you become rich and everyone else will be willing to perform allsorts of services to you in exchange for the money you have amasses. Money, in its ideal is a points system to make sure that the work that needs to be done to keep civilisation going, gets done and that those that do it are rewarded duly.

The problem is that there are ways of making money that don't involve doing other people favours or helping your fellow man. Mugging and racketeering on the criminal side, forcefully taxing people and then using those taxes to build yourself a mansion on the despotic side, and attaining a monopoly over something that everyone needs ring fencing it as your property, engaging in aggressive takeovers and then forcing people to pay extortionate prices that do not reflect the effort or the cost which went into providing the necessary service. That is a sin of capitalism.

[Skipjack]

I think the real issue is having energy move from hot spots to cold spots and back again, to stick with this analogy.
I think that the ideal situation is not having an equilibrium, but having a constant flow of energy in either direction.
Thinking about it, it might be why the two general schools of thoughts on this matter seem to replace each other every 8 years (well more or less, with variations). In a republican governed US you have an increase in both number and intensity of hot spots and cold spots on the cost of "room temperature" areas (very wonky analogy here, sorry).
In this case energy flows one way.
In a democratic government, you have the oposite reaction, leading to more generally liked temperature all over the place, with very few hot and cold spots. Energy flows back again.
A good economy has cash flow. It does not really matter so much what direction, as long as the money moves. Money that does not move is bad for the economy and basically not worth anything. So basically an equlibrium is bad, as is a total concentration of heat in one area with total insulation towards a larger cold area on the other side of the room (oi this is ugly a comparison).
Anyway my point is, you will always want as much cash to flow as possibly, either which way.
Financial ministers across the world are actually trying to keep this balance, which is something they do not always succeed in. The ideal is to have an economy that is slowly growing then declinging a bit again and then to grow a bit more again, creating a (rather shallow)wave pattern that is still resulting in a general growth though.
One factor that allows for this slow growth is the improvement in our technological abilities. Due to the fact that our technology got better and cheaper, even poor people can afford more and live healthie and better now than wealthy people could some 50 or even more so some 100 years ago.
It has always been my personal understanding that it is not so much the economic, or social system that allowed for our increased wealth, but the improvements in technology. If you have a system that is liberal enough to allow for technological development to strive and you have enough scientists and engineers to make it happen (that also want to live in your system), your technological advancements will improve everyones lives in the long term.
For this you need smart people with good education though and you need to have good schools and the people need to be motivated enough. All these things require energy to flow.

[wwb]

You have something here, but I apply it differently. Let’s look at thermodynamics of economy in the view of the thermodynamic box.
We have an economic engine and our fuel is the money into the box (energy in). Our engine runs with 40% losses and therefore our wealth produced (energy out) is 60%. By adding more fuel (money) we just increase the losses of the engine (inflation), because our output (wealth production) still remains at 60%. Only by increasing the efficiency of the engine do we produce more wealth. Shifting fuel around the engine does not necessarily increase engine efficiency. In fact, artificially shifting fuel (government and taxes) to the less efficient parts of the engine, opposed to the more efficient parts, would only decrease engine efficiency and reduces engine output. So, the current and old question is how much fuel should be shift to the less efficient parts (consumption) of the engine to keep the engine from blowing up, while trying to increase fuel to the more efficiency parts (investment) of the engine to increase output for all. Under the current circumstances one may be asking are the efficient parts (investment) of the engine working to increase engine output by promoting efficiencies or just their own consumption (engine losses). This is where Obama and I differ in the thermodynamic box. It is my belief that tax policy should mainly be used to reduce engine losses to increase engine efficiency for higher output for all. It should promote savings, investment and efficiencies in production over consumption. Labor and pay is part of the engine and I won’t go into here.
On other thermodynamics of the economy: Currently we are watering down our fuel (printing money) and lowering its BTUs value. To keep the engine (wealth production) at an output of 60% we are adding a less efficient fuel and more of it to keep the engine running. Sooner or later we will reach a point when we have watered down the fuel some much that the engine won’t run or its efficiency drops off.