Review of the Book:
The Physical Foundation of Economics:
An Analytic Thermodynamic Theory

by Jing Chen

H. William Batt

[The book is published by World Scientific Press, 2005. This review is reprinted from GroundSwell, July-August 2006]

Books with sweeping scope present challenges to a reader, and even more to reviewers, but they are the ones that often push discourse to new levels. Professor Jing Chen has written a short book – only about 125 pages – that attempts to integrate physics, biology, economics, information science, and still other fields as they may relate, into a grand theory. If his effort is only suggestive and not conclusive, it is only because much more empirical work is necessary to demonstrate the validity of his constructs.

The economic traditions that insist on the central importance of natural resources in their discussion – mainly ecological and Georgist economics – will find this book valuable for its bridge to other disciplines, and in a way that is both clear and compelling. Central is the concept of entropy, the tendency toward increased dissipation and randomness found in all of nature, and of negative entropy, which is the contrary proclivity for concentrations of energy and materials, the growth of life forms, and ultimately of social order.

Nicholas Georgescu-Roegen, at least conceptually, reaffirmed the place of thermodynamics in the discipline economic thought a generation ago after it had been lost for half a century. Chen has attempted to improve upon this perspective by showing ways to quantify earlier qualitative dimensions. He cites British chemist P.W. Atkins who argued that, “[t]he progress of science is marked by the transformation of qualitative into the quantitative. In this way not only do notions become turned into theories and lay themselves open to precise investigation, but the logical development of the notion [sic] becomes, in a sense, automated. Once a notion has been assembled mathematically, then its implications can be teased out in a rational, systematic way.” [p.37] Contemporary economics has endured harsh criticism for its mathematical rigor but at the expense of any connection with reality. The result is that many of its ideas are largely untestable and have little more than heuristic value. Chen’s approach in contrast is grounded in solid physics, even though it awaits more concerted explorations and applications.

The starting point for the book is the observation of Nobel prize-winning physicist Erwin Schroedinger that “the most fundamental property of life is their [sic] ability to extract negative energy from the environment to compensate continuous dissipation,” [p.33] and that “[l]iving organisms need to extract low entropy from the environment, to defend their low entropy sources, and to reduce the diffusion of low entropy. The struggle to stay in low entropy states is called natural selection.” [p.1] Chen will conclude by arguing that “… the laws that govern human activities, including mental activities, are the same physical laws that govern non-living systems.” [p.5] This is some jump, one that many contemporary social scientists have rejected, but posing so bold a leap to grand theory makes this book both interesting and a challenge.

However, his path to this point does not track the conventional patterns of behavioral social science or other better-known perspectives. Rather, he observes that, “[l]ife systems are non-equilibrium thermodynamic systems. The current dominant economic theory is general equilibrium theory. Social system is a special case of living systems. When a theory about a special case is inconsistent with general foundation, either the special theory or the general foundation is wrong. So far, economists have not challenged the validity of the non-equilibrium thermodynamic theory of life systems. This theory shows that an analytical theory of economics can be derived from basic physical and biological laws. By this, it establishes social sciences as an integral part of physical and biological sciences.” [p.43]

One should recall that the prevailing neoclassical economics school claims that natural resources are peripheral, and perhaps even non-essential factors in economics, because it is always possible to make substitutions of one resource for another, especially when technology is applied. But Chen points out that “[i]f the consumption level of natural resources is higher than what the nature can regenerate, mostly by energy from the sun, then this level of consumption is unsustainable. Historically, all the high consumption societies collapsed because of the depletion of natural resources. When natural resources are depleted, the accumulated technology and human capital, which are really means to utilize natural resources, lose their value as well.” [p.53] Equilibrium states in nature are impossible.

In one final swipe at conventional economic thinking, he observes that “economic activities provide low entropy sources for the survival and comfort of human beings. From the second law of thermodynamics, the reduction of entropy locally is always accompanied by the increase of high entropy waste globally. So ‘externality’ is not a form of ‘market failure’ but a direct consequence of fundamental natural laws. Since low entropy product is more concentrated while high entropy product is more diffuse, the economic value of a product is easier to measure than the harmful effects of the wastes.” [p.30] A sounder economics would include both.

It is at this point that Professor Chen turns his focus on the basis of information theory, relying on 19th century Scottish physicist and mathematician James Clerk Maxwell, who posited that “the physical cost of obtaining information must be at least as much as the value of the information.” [p.2] Nearly a century later Professor Jing Chen observed that “since information is the reduction of entropy, an entropy theory of value is inevitably an information theory of value.” And finally, that “information as an economic commodity shares most of the important properties with physical commodities.” [p.18] An interesting thought: that the economic value of information is related to the amount of energy that has been expended in the course of obtaining it.

Patents and copyrights readily fit into the idea of information as property, and thereby affect the market prices they command. “Since scarcity of resources, including human resources, is [sic] often regulated by institutional measures such as immigration laws and patent laws, the values of economic commodities are in great part a reflection of institutional structures. . . . Economic value, as a function of scarcity, is to a great extent regulated by institutional structures. Among all the institutional measures that regulate the scarcity, the most important regulation is [sic] immigration laws that regulate the scarcity of labor forces, which makes persistent wage differentials across regions possible.” [p. 19, 27]

And how are these scarcities maintained by various institutional structures? By consolidating resources: “Roughly speaking, economic value is the low entropy value of a commodity whose property rights are reinforced by governments or other institutions. Since the costs and the willingness to enforce property rights on different kinds of commodities are different, which, among other factors causes commodities of similar physical entropy level to be priced very differently.” [p.17] How social systems consolidate their positions against the forces of entropy and other competing systems, social and other, explains the dynamics of politics and economics. “While over exploitation of natural resources is often thought to be caused by some specific mistakes, it is an intrinsic consequence from competitive pressure. If a community can develop methods to extract more natural resources faster than its neighbors, it will become stronger and gain ability to take over its neighbors’ resources. So competitiveness is intrinsically incompatible with sustainability.” . . . Ultimately, it is amount of energy and other natural resources that a country can control that determines the economic wealth and military power of a nation. [p.56, 67.]

Professor Chen admits that he began his academic travels in the life sciences, and this accounts for the metaphors he employs and his appreciation of life dynamics. Organisms and other systems consolidated and stabilized either at the biological or the social level, reflect the allocation and investment of resources into fixed costs and variable costs. The more stable the environment, the more strategies warrant investment in fixed costs; changing environments require adaptations, and warrant greater allocation to variable costs. Systems with higher fixed costs are more productive and efficient, at least so long as environments are stable. But when environments unexpectedly change, organisms and systems with heavy fixed investments are at risk, and may fail. “Fast evolving and highly specialized species, which are more efficient and tend to dominate the ecological systems, are more prone to extinction than the slow evolving and unspecialized species, which are less efficient, less competitive, but more flexible. . . . The main theme of economic and biological evolution is the tradeoff between competitiveness of high fixed costs systems in a stable and resource rich environment and flexibility of low fixed cost systems in a volatile and resource poor environment. Since there is no dominant strategy in all environments, the beautiful and diverse ecological system does not reach an equilibrium state, even after four billion years of biological evolution. For the same reason, economic organizations and systems will not converge to an equilibrium state.” [p.60]

Chen then goes on to explore the implications of this for competition among nation-states, to argue that “. . . ultimately, it is amount of energy and other natural resources that a country can control that determines the economic wealth and military power of a nation. . . . Therefore, it is the difference in resources -- which cannot be changed easily, and not the differences in institutional structures, which can be changed -- that determines the long run social performance, (and that) high living standard without the support of natural resources is unsustainable. . . . The collapses of all past highly developed civilizations due to resource depletion offer a clear understanding of long term patterns, which should make us prepare for a soft landing when resources become very scarce. Instead, our society keeps on increasing consumption whenever it is possible. [p.65-67]

All this offers a very challenging perspective on how nations like the USA will survive the near future. With increasing awareness of how extraordinary prodigal our lifestyles have become, especially with respect to fossil fuels, it is obvious that the US, and the earth itself, are not only far from an equilibrium state, but also that forces are now let loose by human intercession leading to reeling patterns of weather, fauna and flora changes, and climate modification. They go far beyond simply the balance of power among regions and nations.

It is clear that the thermodynamic approach has utility for understanding social systems and nations in their use of material and energy resources. But Chen suggests that the approach may also have utility in explaining other factor dimensions like labor policies. He argues that value of labor in a society reflects its investment in education, and immigration policies are related to these fixed investments. Whether a nation is likely to favor free trade or not also depends on its level of capital investments. He points out that “all superpowers throughout time advocate free trade, while poor countries prefer protectionist policies. So it is easy to link free trade with prosperity and protection with poverty. But historically, all latecomers that turned into industrial powers, including England, the USA, Japan, and Germany, adopted protectionist policies in the period of takeoff.” [p.77] It all reflects the balance of fixed and variable costs in their social systems. Even birth rates, he argues, can be explained in terms of investment in fixed costs and the abundance of natural resources, “just like any other plants or animals.”

All this has much wider import than for academic discussion alone. Professor Chen’s ideas have radical implications for public policies of a very immediate nature. And the messages of his book are ominous and provocative, not only for nations perched at the apex of competition but for worldwide trade and influence. I find them not only plausible but appealing for their intellectual challenge, even though the book is a troubling read. This work therefore deserves the attention of readers in several fields of endeavor. The one unfortunate failing is the faulty syntax at several points, due to the fact that English is not Jing Chen’s first language. He would have done well to have a native speaker of English go over the pages and make the minor corrections necessary for a smooth reading. A publishing house with greater resources would have been able to help.

Having recently read several other books on “peak oil,” sustainable development, globalization and free trade, and economic theory, I cannot put this book aside easily or quickly. One hopes that further work will come both from Professor Chen and from those who have similar thoughts along these lines to share.

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