Connecting thermodynamics and economics: well-lit roads and burned bridges

Abstract

Almost 40 years have passed since Georgescu-Roegen's seminal work, The Entropy Law and the Economic Process. During this time there has been much debate on the relevance of thermodynamics to economics, and many attempts to build bridges between the two. There has also been much confusion as to what the laws of thermodynamics actually say. This article clearly explains heat, work, and the thermodynamic laws, the meaning of entropy, and the importance of kinetics as a barrier to thermodynamically favorable processes. The two most important misunderstandings in the literature, namely entropy as disorder, and entropy as a measure of information, are highlighted. Reviewing the literature shows that thermodynamics is most relevant for building a descriptive model, or preanalytic vision of economics, because it implies physical constraints on production and consumption. Similarly, it suggests that there may be serious flaws with neoclassical economic models, and in particular the primacy of sustained growth. However, thermodynamics does not seem to aid mathematical modeling in economics, nor does it provide normative insights. As an aid to energy policy, thermodynamics is useful for assessing the feasibility of technology options--those that have the potential to meet our goals, and should be counted as options, and those that should not. But it does not provide a prescription outside of this technical realm. Factors, such as environmental impact, cost, and social acceptability, will ultimately determine which technically feasible options are most desirable.