Life has not been too cheerful lately. The recent financial crisis prompted a renewed interest among economists to construct an “early warning system” but a new study concludes that out of 65 potential causes of a global economic meltdown, few factors would have predicted the severity of the crisis or the fact that it would have spread worldwide. Maybe the problem is that we need to apply a mathematical formula to our predictions!
Economist Andrew Rose says, “If the causes of the crises differ across countries, there is little hope of finding a common statistical model to predict them. Our research found that size [of the economy], from an economic perspective, had no significant impact on the incidence of crises across countries, while income has a significantly negative impact; richer counties experienced more severe crises.”
Meanwhile, another study demonstrates that despite all the economic theories that abound in these recessionary times, economic activity is an evolutionary process governed by the Second Law of Thermodynamics.
The First Law of Thermodynamics, known as the Law of Conservation of Matter, states that matter and energy cannot be created or destroyed, just changed from one form to another. The Second Law is known as the Law of Increased Entropy, meaning that while the AMOUNT of matter and energy stays the same, its QUALITY decreases over time. Usable energy gradually becomes Unusable energy, or to put it in colloquial terms, “Everything goes to H— in a hand basket.” Until you realize this, according to economists Arto Annila and Stanley Salthe, you’ll never be able to figure out the causes of economic growth and diversification, as well as why it’s so hard to predict when a recession will hit.
While economic activities are traditionally viewed as being motivated by profit, Annila and Salthe argue that the ultimate motivation of economic activities is not to maximize profit or productivity, but rather to disperse energy. From this thermodynamic perspective, decision making is ultimately about choosing the action that causes energy to flow along the most steeply descending energy gradient. For example, when faced with two identical products where one is cheaper than the other, a consumer will likely choose the cheaper product.
Since most of us are used to encountering that Second Law in our ordinary lives (which are often far from ordinary), this seems like simple common sense.
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