Posts Tagged ‘Entropy’

What happens instantaneously on a pinhead that exists nowhere and everywhere? Most economic activity according to the dominant strain of economics. The absence of space and time is just one reason why such economics is so unhelpful in addressing questions of justice, equality and the environment.

Cities grow in particular places and over certain periods in history, forests grow somewhere and when they are cut down this happens one day at a time and, even in the age of the internet and global trading, most markets still have locations and goods take time to be delivered – from China or elsewhere. Like the movement of the planets, the changing weather, animals hunting and plants growing, economic activity happens in space and time – it can’t do otherwise.

Space and Time play little role in Economics – though they are crucial in all economic activities

Given the absolute centrality of space and time for all things economic you might be forgiven for thinking that they would be important components in modern economic ‘science’. They are not. In neoclassical economics, which retains a vise-like grip on both academia and policy making and provides the intellectual support for the ideology of neoliberalism, space and time are almost totally absent. Why is this? Why does it matter for people and the planet? And are there more useful alternatives?

In the 18th and 19th centuries all economists were political economists – Adam Smith, David Ricardo, J S Mill, David Hume and Karl Marx. Even while they were constructing simplified models of the ‘invisible hand’ and international trade, they were profoundly aware of the negative consequences an unfettered capitalist system can and does have for great swathes of humanity and for the environment.

But economics wanted to be more scientific and ultimately that means more mathematical. Casting around to find a suitable mathematics in the physical sciences, the first neoclassical economists (Leon Walras and W S Jevons for example) adopted the best they could find: Newtonian classical mechanics. Though perhaps natural, this choice has been of crucial importance to how economics has developed since. Even as most other sciences have moved beyond a narrow mechanical view of the world, economics has stuck with it.

Many things in the physical world can be explained and predicted using classical mechanics: how far a bullet will travel or how planets move around the sun in an elliptical orbit. It still lies at the heart of much useful technology.

Billiard balls remain still, in “equilibrium”, until the player uses his cue and applies a force to a ball. The ball moves, bumps into other balls (and indeed into the edge of the table) before eventually everything settles down again in a new equilibrium. If you can specify exactly the starting positions, the masses of the balls, the forces applied and the properties of the materials then you can predict not only where everything will end up but also the routes the balls will take and how long it will all take – so space and time are not only explicitly included but also absolutely fundamental.

What neoclassical economics did was take this model and replace mass and distance with price and quantity.

Neoclassical economics adopted a stripped down version of classical mechanics it still uses to this day

A market is in equilibrium if it “clears”, this means that the quantity people want to buy at a given price equals how much people want to sell. This applies whether the market is for labour, for goods or anything else. Everything is stable until there is an impulse or shock. This is the equivalent to the cue hitting a billiard ball. These impulses might be changes in consumer tastes and preferences, suppliers using a new technology or a change in the price of labour or raw materials. Suddenly it looks as though the market might not clear and unemployment or stock shortages might appear. Of course in mechanical physics such “out-of-equilibria” are normal, the billiard balls are all moving through space and time till they settle down again in new positions.

But to make their models tractable the early neoclassical economists had to completely strip down classical mechanics and drop any concept of space and time. Where exactly is the market operating? Implicitly the answer is that it takes place at a point, but not a real geographic point, rather an abstract point. In this sense economic transactions happen on a pinhead that is both everywhere and nowhere.

It’s the same with time. In neoclassical economics if it takes time to move from one equilibrium to another, this would mean that markets may not clear, trading could take place at “false prices” and they might never settle down again. Initially this problem was overcome by the introduction of what later became known as a Walrasian auctioneer. This purely fictive being, analogous to Maxwell’s Demon in physics, “groped” his way to a solution by repeatedly calling out prices, checking the resultant demands and supplies until prices that will clear the market are found – only then can trading take place. Coupled with the later introduction of “rational expectations” – in which actors have perfect foresight and complete information – this enabled economics to ignore space and time. In a Pollyannaish way, following any disturbance or shock, the economy jumps instantly from one equilibrium to another – going through nowhere on the way – in a type of economic Quantum Leap.

Now in real markets there is no auctioneer; buying and selling is continuous, prices actually emerge from the dynamic interaction of different agents who don’t have perfect knowledge and often use rules of thumb or customs to guide their decisions.

Harold Hotelling looked at how ice cream sellers would space themselves on a beach

Even within the neoclassical tradition there have been many economists who have introduced space and time into their work. Starting with Harold Hotelling’s analysis of where how ice-cream sellers would “space” themselves along a beach, there have developed whole sub-branches of economics: spatial economics, economic geography and regional economics. Similarly with time; economists knew economic processes took time so they introduced various types of “lags” into their models – although these did tend to disappear once “rational expectations” were introduced and things happened instantaneously. Yet unfortunately it is true to say that such approaches have remained peripheral to the big issues of macroeconomics; being confined on the whole to micro, though important, issues like transport and schooling.

The absence of space and time is not the only unrealistic feature of neoclassical economics. It also tend to ignore most important aspects of scale, energy use, resource limits, how aggregate markets are not scaled up individual demand and supply curves, and how economic actors actually interact, adapt, behave and choose. There is also no concept of time’s arrow, i.e. the irreversibility of processes and how such “path dependence” is crucial for economic development. The point is that even though all these factors have been studied by some excellent economists (usually of the non neoclassical variety), they are still marginalised within academia, business and government policy making.  Stripped down classical mechanics still rules the roost.

In 1954 Milton Friedman argued that it doesn’t matter if the assumptions made by economics are unrealistic as long as the models make accurate predictions. The sad fact is, however, that these models have not only proved spectacularly unable to make predictions, and not just of periodic financial and banking crises, but much more importantly they haven’t even been able to explain such events after the fact. When something happens that shouldn’t have been able to occur according to their models, neoclassical economists rush around trying to retrofit their theories – mostly without success.

All complex adaptive systems create inequality as seen in Zipf’s Law

As economies and other social systems evolve through time and space major inequalities emerge, in income, wealth, population densities and so on – all manifestations of Zipf’s Law. Approaches to economics that start with people, firms and institutions interacting with and adapting to each other in space and time can generally “explain” this phenomenon; inequality is endogenous or, better said, an emergent property of all complex adaptive systems.

On the other hand, neoclassical economics struggles with inequalities – they are rather mysterious. Free trade, arbitrage, the invisible hand of the price system plus economic growth “trickling down” to the poor should tend to eliminate them. Obviously they never have, so the answer must lie in making the world better fit the stylised economic models rather than changing the models to better explain the world; a completely unscientific approach that has appalled natural scientists. So, for instance, the IMF and the International Trade Organisation impose “structural adjustment” and free trade with never ending alacrity. The contention is that they will bring about economic growth and ultimately lead to a reduction in poverty and inequality. Of course it never happens and millions suffer the miserable consequences.

Nicholas Georgescu-Roegen an economist who took entropy seriously

Turning to the environment, in scientific terms neoclassical economics is a “closed system”, consumers consume, firms produce and money circulates to oil the wheels. It’s a circular flow. Implicitly a boundary circle has been drawn around the system. Things outside this circle, such as finite energy or resources, the environment or even other species, either don’t exist or are treated as “externalities” and very often not even “priced”. Energy and resources can be had in limitless quantities forever, though the input price may vary. This completely misunderstands the two laws of thermodynamics – the conservation of energy and the entropy law – both of which operate in space and time. All economic wealth is created by energy and resources. These often take eons to accumulate in specific locations and are not limitless, yet they can be used up very quickly indeed in a mass entropic civilisation such as ours. The consequences are there for all but the blinkered to see.

It’s very unlikely that neoclassical economics will ever be able to make a real contribution to alleviating poverty, tackling ecological despoliation and moving us towards a more just and sustainable world. But there are many other sorts of economics in which human and planetary justice matter. It is to these that we must look.

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There is an English expression that tells us that you can’t make omelettes without breaking a few eggs. This is usually taken to mean that in order to achieve something or make progress there are often losers in the process – true enough though a little hard. With a slight change of verb we can also state that: “You can’t make omelettes without using a few eggs.” This might sound blatantly obvious but its truth seems to have escaped not a small number of commentators on environmental issues and, it is sad to say, even some eminent economists as well. They tell us that as technology progresses we can dematerialize the economy – so we needn’t be too concerned about any supposed limits of resources or energy.  Of course this is fallacious; to use a nice Anglo-Saxon word, it is codswallop. But why?

If you don’t believe that such arguments for dematerialization are still put forward, consider these three recent examples:

Jesse Ausubel and Paul Waggoner write:

If consumers dematerialize their intensity of use of goods and technicians produce the goods with a lower intensity of impact, people can grow in numbers and affluence without a proportionally greater environmental impact.

Ronald Bailey of the neoconservative Reason suggests:

As long as market-driven technological progress is allowed to proceed, taxing and hectoring people into increased material poverty is not necessary to protect the natural world. And as polls show, people won’t put up with it anyway.

While Marian L. Tupy, of the similarly politically oriented Cato Institute, in an article entitled The Miracle that is the iPhone (or How Capitalism Can Be Good for the Environment), concludes:

Dematerialization….  should be welcome news for those who worry about the ostensible conflict between the growing world population on the one hand and availability of natural resources on the other hand. While opinions regarding scarcity of resources in the future differ, dematerialization will better enable our species to go on enjoying material comforts and be good stewards of our planet at the same time. That is particularly important with regard to the people in developing countries, who ought to have a chance to experience material plenty in an age of rising environmental concerns.

There are many more.

I have sincerely tried to find some validity in such arguments. I’d really like to; but try as I might I can’t.

Dematerialization – An answer to ecological and energy problems?

Utterances such as these are just one manifestation or variant of the belief in “techno-fixes” to the ecological and energy crisis we find ourselves in. They are reassuring but they are wrong. They need to be consigned to the dustbin of sloppy thinking. So let me try to do that, both from a strictly physical point of view and from the vantage point of real economics.

What lies at the heart of the physical arguments for dematerialization, such as they appear both in the quotations I have given above and elsewhere, is the view that as technology advances we are, and will be, more and more able to produce the same quantity of “goods” with less and less resources and also, indeed, that certain goods won’t require any resources at all.

Consider a couple of examples. Thirty years ago I had a stereo system that took up half my small room. Not only was there the large and beautifully designed turntable but also I had to have huge amplifiers, immense loud speakers and even separate “woofers” and “tweeters”. Nowadays, or so the argument goes, we can buy tiny iPods, mp3 players or mobile phones that can store and play thousands of songs – and films and books as well. Surely these use much less (material) resources to produce the same result – listening to music? Another line of argument cites supposedly truly dematerialized goods, like the information stored on software or on the internet. No need for printing books and the associated cutting down of trees!

In the case of iPods and the like I’ll ignore the use of fossil fuels or other energy sources involved in their production and transportation, as well as their use of some decidedly limited natural resources, such as noble metals. But even so it’s still not the case that these types of goods are dematerialized – they are not. For sure they do directly use less materials, such as wood, metal and plastic, in their manufacture than did my huge stereo system, but they still use resources and when we add in energy use to the equation maybe not that much less.

In the case of computer software and the internet, I’ll also put to one side the fact that these have in no way diminished the use of paper – our printers are churning out hard copies in ever greater quantities. Not only that, you can’t use software or the internet without a physical, materialized, computer. Anything that might appear dematerialized needs something material to make it useful, and that means the use of natural resources and, without doubt, energy as well.

Before considering the economics of all this, let’s take a look at physics. The dematerialization argument completely ignores the first two laws of thermodynamics. The first law, called “the conservation of matter and energy” tells us that you can’t make something out of nothing and hence, as ecological economist Herman Daly puts it: “All human production must ultimately be based on resources provided by nature.”

The argument for dematerialization completely ignores the first two laws of thermodynamics.

The second law of thermodynamics is usually called the entropy law. In non-technical terms this basically tells us that in any closed-system without the input of energy everything will, over time, deteriorate from order to disorder. Everything will become some sort of dead mush. In universal terms a “heat death” which is irreversible. Entropy increases. Not only that, but only things with order can do work and be useful. Over millions of years the sun has supplied energy to allow trees and animals to grow. The trees have order and we can burn them either to do work, to produce useful energy, or to make “ordered” goods. But after that we’re just left with useless waste. Plants die and are fossilized as oil. Oil has order and we can use it, but again after the work we’re left with “high entropic” waste in the form of heat and gases (such as CO2).

Whether in physical or economic terms, the production of any physical thing that has some order, and is thus useful and not a mush, requires either pure energy (as from the sun) or energy stored in matter. Remember Einstein showed energy and matter are convertible.

When asked whether the transformations of matter and energy required by economic activity are constrained by the entropy law, the usually very thoughtful Nobel Prize winning economist Robert Solow replied:

No doubt everything is subject to the entropy law, but this is of no immediate practical importance for modelling what is after all a brief instant in a small corner of the universe.

To which Herman Daly rightly responded:

Solow seems to identify the entropy law only with the ultimate heat death of the universe. … But the entropy law has more immediate and relevant implications: that you can’t burn the same lump of coal twice; that when you burn it once you get soot, ashes, CO2, and waste heat, as well as useful heat. The entropy law also tells us that recycling energy is always a losing proposition, that there are limits to the efficiency of conversion of energy from one form to another, and that there is a practical limit to materials recycling – all in the here and now, not just in the cosmic by and by.

If you want to produce anything at all you need both matter and energy and if you want to produce something with order and structure (and production and consumer goods are absolutely prime examples of this) you need to use at least as much (low entropy) energy and resources as inputs to achieve this as what you will get as outputs. In fact because of the severe wastages in the production process you usually need to input much more than you get out.

To think that physical goods can be produced without physical inputs and energy is to show not the slightest understanding of thermodynamics and science in general.

We can see this impossibility even more clearly when we look at what we actually need, desire and buy. We don’t live by iPods and software alone – though some teenagers seem to believe this to be the case. What do miniaturized or dematerialized houses, cars, planes, refrigerators or production-line robots really look like? Have you ever seen one? Will you?

Let’s look at the iPod/internet example again but this time from the point of view of some simple, though real, economics.

In the 1970s, my stereo “sound system” cost a lot of money. I had to save for some years to be able to afford it. As technology has advanced, not only have things got smaller but they’ve also got cheaper. It costs my daughter only a few weeks pocket money to be able to buy an amazing iPod. I’m even thinking of getting one myself. But what happens when such prices come down? Do we as individuals or as a society generally say: “Well that’s great! I can now use this freed-up disposable income to save for my retirement or give to charity?” In general we don’t. No, what we humans tend to do is go out and buy more stuff – more cars, more computers, more TVs and more mobile phones. This tendency is even exacerbated by the fact that consumer goods are now invariably designed with built-in obsolescence. Your mobile phone or computer starts to play up and go slow after a couple of years. Not only that but in the meantime there have appeared newer models with lots of additional “functionality”. No worries! We throw away the “old” mobile and buy a new one.

The first economic point is this: As technology improves and prices of technological goods fall, we don’t just buy the same amount of stuff (products) using less materials, what we do is buy more of the same stuff and lots more other stuff as well. The marginal propensity to consume out of technologically driven price reductions and the resulting extra disposable income is basically one. Never in the field of human economies has technology and miniaturization ever led to less demand and less resource use and I doubt it ever will. Demand for goods, demand for stuff, is infinite, and as in Say’s law, supply creates its own demand.

Coventional economic “Production Functions” ignore factor complementarity and assume complete substitutability as well as multiplicity.

A bit more economics. How we produce things has long been a central component of economics. Usually this is encapsulated in something economists call a “Production Function”. To use Adam Smith’s example of the production of pins, let’s think of ourselves as manufacturers of pins. I can decide that everything should be made by individual craftsmen, each of whom will take a certain time to produce a pin. The cost to me, before I add in my profit, will be the cost of the craftsman’s wages plus the costs of materials. On the other hand, I might decide that it would be better if I employed a bit of “capital” as well. I could use some capital goods – i.e. machines. If I do this I should be able to employ less labour. I can substitute capital for labour. Although the size of the available machines might be somewhat “chunky”, in general I can choose whatever combination of capital and labour will maximize my profits and chose the optimal combination accordingly. The key point is that the two factor inputs, capital and labour, are substitutes – more of one and less of the other. Economics takes a further step and considers technological progress. As technology advances I can produce more pins with the same amount of both capital and labour. Or I can produce the same with more capital and less labour.

But what is not explicitly considered is the role of natural resources – the metal, wood, and energy that is of necessity used. In economists’ production functions if these are considered at all (and usually they are not) they are seen as just another factor of production which can be had in unlimited quantities at the prevailing price.

Most importantly for the dematerialization issue is that just as capital and labour are viewed as substitutes for each other, so too are raw materials and energy viewed as substitutes for capital and labour.

Robert Solow, the “father” of modern growth theory wrote in 1974;

If it is easy to substitute other factors for natural resources, then there is in principle no ‘problem’. The world can, in effect, get along without natural resources.

Although this seems like a conditional sentence (if…then), Solow and many other economists have assumed it to be true.

 In 1972, economics professors Nordhaus and Tobin put it thus:

The prevailing standard model of growth assumes that there are no limits on the feasibility of expanding the supplies of nonhuman agents of production. It is basically a two-factor model in which production depends only on labor and reproducible capital. Land and resources, the third member of the classical triad, have generally been dropped… the tacit justification has been that reproducible capital is a near perfect substitute for land and other exhaustible resources.

Without any equivocation this means that I should be able to produce more and more pins by using more and more capital and/or labour while using less and less materials. But in the real world – if we can escape the fantasies of neoclassical economics – raw materials are not optional; you can’t endlessly substitute capital and labour for them. In fact raw materials are “complementary” to capital and labour – you need both.

Returning to making omelettes, if I  want to make some I can ask lots of my friends over to help me cook – to provide more labour – I can even invest in lots of stoves and pans. But however many friends, stoves and pans I have I can’t make any more omelettes than my supply of eggs will allow. If I have two eggs then maybe I can make one decent omelette on my own with one pan and stove. Adding more capital and labour will not change this equation. I can’t make 100 omelettes with two eggs however many friends and stoves I throw at the problem.

Not only does conventional economics assume that raw materials are complementary, it also assumes that the output gained from all factors of production are multiplicative, even if natural resources and land are included:

Most production functions are multiplicative forms – that is, the relationship among the factors is one of multiplication (e.g. the Cobb-Douglass production function). After all, what could be more natural than ‘multiplying’ together things that we call ‘factors’ to produce something we call a ‘product’! Unfortunately there is nothing in the real-world process of production that corresponds at all to multiplication. There is only transformation. This means that substitutability is built into these production functions from the beginning as a mathematical artefact, including substitutability between r (resources) and K (capital), and r and L (labour) – between funds and flows. In these multiplicative production functions, we can make one factor as small as we wish, while keeping the product constant, if we increase the other factor sufficiently. The only restriction is that no factor can be reduced to zero, but it can approach zero. But according to this logic, if our cook is making a 5-pound cake, he can increase it to a 1000-pound cake with no extra ingredients – just by stirring harder and baking longer in a bigger oven! – Herman Daly.

Making omelettes is a bit like putting Humpty Dumpty together again. Once you’ve cracked the eggs all the king’s horses and all the king’s men can’t put the egg back together again – the process is irreversible. Cracking eggs, like everything else, increases entropy.  I can eat a raw egg if I want and the energetic order in the egg will be converted into useful energy to keep me alive and, sometime later, will produce a bit of waste as well. If you want to make a tasty omelette or maybe a cake then you’ll have to add some extra ingredients as well. But make no mistake, absolutely anything we want to make that will be useful to us must obey both laws of thermodynamics.

In the real world you can’t make omelettes without using, and breaking, a few eggs. Dematerialization is a myth. A dematerialized economy is oxymoronic – and possibly the shortened version of this word as well.

If we are going to examine seriously possible reductions in the use of energy and material resources in the economy then let’s at least start with some grasp of physics and economics.

What happens instantaneously on a pinhead that exists nowhere and everywhere? Most economic activity according to the dominant strain of economics. The absence of space and time is just one reason why such economics is so unhelpful in addressing questions of justice, equality and the environment.

Cities grow in particular places and over certain periods in history, forests grow somewhere and when they are cut down this happens one day at a time and, even in the age of the internet and global trading, most markets still have locations and goods take time to be delivered – from China or elsewhere. Like the movement of the planets, the changing weather, animals hunting and plants growing, economic activity happens in space and time – it can’t do otherwise.

Space and Time play little role in Economics – though they are crucial in all economic activities

Given the absolute centrality of space and time for all things economic you might be forgiven for thinking that they would be important components in modern economic ‘science’. They are not. In neoclassical economics, which retains a vise-like grip on both academia and policy making and provides the intellectual support for the ideology of neoliberalism, space and time are almost totally absent. Why is this? Why does it matter for people and the planet? And are there more useful alternatives?

In the 18th and 19th centuries all economists were political economists – Adam Smith, David Ricardo, J S Mill, David Hume and Karl Marx. Even while they were constructing simplified models of the ‘invisible hand’ and international trade, they were profoundly aware of the negative consequences an unfettered capitalist system can and does have for great swathes of humanity and for the environment.

But economics wanted to be more scientific and ultimately that means more mathematical. Casting around to find a suitable mathematics in the physical sciences, the first neoclassical economists (Leon Walras and W S Jevons for example) adopted the best they could find: Newtonian classical mechanics. Though perhaps natural, this choice has been of crucial importance to how economics has developed since. Even as most other sciences have moved beyond a narrow mechanical view of the world, economics has stuck with it.

Many things in the physical world can be explained and predicted using classical mechanics: how far a bullet will travel or how planets move around the sun in an elliptical orbit. It still lies at the heart of much useful technology.

Billiard balls remain still, in “equilibrium”, until the player uses his cue and applies a force to a ball. The ball moves, bumps into other balls (and indeed into the edge of the table) before eventually everything settles down again in a new equilibrium. If you can specify exactly the starting positions, the masses of the balls, the forces applied and the properties of the materials then you can predict not only where everything will end up but also the routes the balls will take and how long it will all take – so space and time are not only explicitly included but also absolutely fundamental.

What neoclassical economics did was take this model and replace mass and distance with price and quantity.

Neoclassical economics adopted a stripped down version of classical mechanics it still uses to this day

A market is in equilibrium if it “clears”, this means that the quantity people want to buy at a given price equals how much people want to sell. This applies whether the market is for labour, for goods or anything else. Everything is stable until there is an impulse or shock. This is the equivalent to the cue hitting a billiard ball. These impulses might be changes in consumer tastes and preferences, suppliers using a new technology or a change in the price of labour or raw materials. Suddenly it looks as though the market might not clear and unemployment or stock shortages might appear. Of course in mechanical physics such “out-of-equilibria” are normal, the billiard balls are all moving through space and time till they settle down again in new positions.

But to make their models tractable the early neoclassical economists had to completely strip down classical mechanics and drop any concept of space and time. Where exactly is the market operating? Implicitly the answer is that it takes place at a point, but not a real geographic point, rather an abstract point. In this sense economic transactions happen on a pinhead that is both everywhere and nowhere.

It’s the same with time. In neoclassical economics if it takes time to move from one equilibrium to another, this would mean that markets may not clear, trading could take place at “false prices” and they might never settle down again. Initially this problem was overcome by the introduction of what later became known as a Walrasian auctioneer. This purely fictive being, analogous to Maxwell’s Demon in physics, “groped” his way to a solution by repeatedly calling out prices, checking the resultant demands and supplies until prices that will clear the market are found – only then can trading take place. Coupled with the later introduction of “rational expectations” – in which actors have perfect foresight and complete information – this enabled economics to ignore space and time. In a Pollyannaish way, following any disturbance or shock, the economy jumps instantly from one equilibrium to another – going through nowhere on the way – in a type of economic Quantum Leap.

Now in real markets there is no auctioneer; buying and selling is continuous, prices actually emerge from the dynamic interaction of different agents who don’t have perfect knowledge and often use rules of thumb or customs to guide their decisions.

Harold Hotelling looked at how ice cream sellers would space themselves on a beach

Even within the neoclassical tradition there have been many economists who have introduced space and time into their work. Starting with Harold Hotelling’s analysis of where how ice-cream sellers would “space” themselves along a beach, there have developed whole sub-branches of economics: spatial economics, economic geography and regional economics. Similarly with time; economists knew economic processes took time so they introduced various types of “lags” into their models – although these did tend to disappear once “rational expectations” were introduced and things happened instantaneously. Yet unfortunately it is true to say that such approaches have remained peripheral to the big issues of macroeconomics; being confined on the whole to micro, though important, issues like transport and schooling.

The absence of space and time is not the only unrealistic feature of neoclassical economics. It also tend to ignore most important aspects of scale, energy use, resource limits, how aggregate markets are not scaled up individual demand and supply curves, and how economic actors actually interact, adapt, behave and choose. There is also no concept of time’s arrow, i.e. the irreversibility of processes and how such “path dependence” is crucial for economic development. The point is that even though all these factors have been studied by some excellent economists (usually of the non neoclassical variety), they are still marginalised within academia, business and government policy making.  Stripped down classical mechanics still rules the roost.

In 1954 Milton Friedman argued that it doesn’t matter if the assumptions made by economics are unrealistic as long as the models make accurate predictions. The sad fact is, however, that these models have not only proved spectacularly unable to make predictions, and not just of periodic financial and banking crises, but much more importantly they haven’t even been able to explain such events after the fact. When something happens that shouldn’t have been able to occur according to their models, neoclassical economists rush around trying to retrofit their theories – mostly without success.

All complex adaptive systems create inequality as seen in Zipf’s Law

As economies and other social systems evolve through time and space major inequalities emerge, in income, wealth, population densities and so on – all manifestations of Zipf’s Law. Approaches to economics that start with people, firms and institutions interacting with and adapting to each other in space and time can generally “explain” this phenomenon; inequality is endogenous or, better said, an emergent property of all complex adaptive systems.

On the other hand, neoclassical economics struggles with inequalities – they are rather mysterious. Free trade, arbitrage, the invisible hand of the price system plus economic growth “trickling down” to the poor should tend to eliminate them. Obviously they never have, so the answer must lie in making the world better fit the stylised economic models rather than changing the models to better explain the world; a completely unscientific approach that has appalled natural scientists. So, for instance, the IMF and the International Trade Organisation impose “structural adjustment” and free trade with never ending alacrity. The contention is that they will bring about economic growth and ultimately lead to a reduction in poverty and inequality. Of course it never happens and millions suffer the miserable consequences.

Nicholas Georgescu-Roegen an economist who took entropy seriously

Turning to the environment, in scientific terms neoclassical economics is a “closed system”, consumers consume, firms produce and money circulates to oil the wheels. It’s a circular flow. Implicitly a boundary circle has been drawn around the system. Things outside this circle, such as finite energy or resources, the environment or even other species, either don’t exist or are treated as “externalities” and very often not even “priced”. Energy and resources can be had in limitless quantities forever, though the input price may vary. This completely misunderstands the two laws of thermodynamics – the conservation of energy and the entropy law – both of which operate in space and time. All economic wealth is created by energy and resources. These often take eons to accumulate in specific locations and are not limitless, yet they can be used up very quickly indeed in a mass entropic civilisation such as ours. The consequences are there for all but the blinkered to see.

It’s very unlikely that neoclassical economics will ever be able to make a real contribution to alleviating poverty, tackling ecological despoliation and moving us towards a more just and sustainable world. But there are many other sorts of economics in which human and planetary justice matter. It is to these that we must look.