Economics as energy framework: Complexity, turbulence, financial crises, and protectionism

• Date: 01 April 2015
• DOI: http://doi.org/10.1016/j.rfe.2015.02.003
• Published date: 01 April 2015
• Author: John Rutledge

Economics as energy framework: Complexity, turbulence, financial

crises, and protectionism

John Rutledge ⁎

Dept.of Economics, ClaremontGraduate University,United States

SAFANADInc., New York

abstractarticle info

Availableonline 7 March 2015

JEL classification:

B52

F60

G11

G15

Keywords:

Non-equilibrium

Turbulence

Financialcrisis

Thermodynamics

Complexity

This paper presents a frame work for thinking about economic growth, trade, and capital flows viewed as

transformationsof currentand vintage solar energy,stored in the form of naturalresources, human capital,phys-

ical capitaland technology described by the laws of thermodynamics. Recentdevelopments in nonequilibrium

thermodynamics(NET)show how efficient globalcapital markets andhigh-speed communicationsnetworksac-

celerateenergy flow and growth butalso create turbulence,financial crisis, protectionismand conflict.The paper

discussesthe role that NET can play in helping us understandstock market bubbles and financial crises.

© 2015 The Author.Published by ElsevierInc. This is an open access articleunder the CC BY-NC-ND license

(http://creativecommons.org/licenses/by-nc-nd/4.0/).

1. Introduction

Advances in information technology and communications

networks affect global growth through three primary channels.

First, they allow people to view each other's lives in real time for

the first time in history, exposing gaping income and wealth differ-

entials within an d across nations to public view. Th is instantaneous

transparency motivates people in low-income countries to demand

pro-growthpolicy reforms from theirgovernments. And it motivates

people in high-income countries to demand protection from cheap

foreign labor.

Second, communicat ions technology makes it faster, cheaper and

easier to move resourc es around the globe to take advanta ge of price

and return differentials. Labor, capital, and technology move at the

speed of light through fiber-optic networks at practically no cost,

accelerating growth in emerging market countrie s.

Third, cheap, fast communications make global capital markets

more efficient, reducing the cost of moving capital and, therefore,

the minimum return-differential threshold for triggering capital

redeployment.

1

Policy reforms make capital still easier to move.

These changes facilitate higher growth but they increase volatility

and can trigger financi al crises. Both intensify ec onomic and political

conflicts within and amon g nations.

This paper outlinesa framework for economicactivity based on the

laws of thermodynamics. In this framework,economic agents respond

to energygradients—priceand return differentials—totransformcurrent

and stored energy—natural resources, human capital, physical capital,

and technology—to create work,or economic activity according to the

Reviewof Financial Economics 25 (2015)10–18

⁎Tel.:+ 1 203 313 4000(M).

E-mailaddress: drjohnrutledge@mac.com.

1

In economics,speed of adjustment toward equilibriumis driven by price and return

differentialssubjectto transactions or transportationcosts thatlimit arbitrage. In thermo-

dynamics, speed of adjustmenttoward (thermal) equilibrium depends on temperature

and activation energy. Accor ding to Atkins (1991), Arrhenius Behavior—proposed by

DutchChemist Jacobusvan't Hoff in 1884, interpretedby Svante Arrheniusin 1889—states

thatreaction rate isan exponential functionof temperature,or Rate = k

0

e

−Ta/T

.Inthisex-

pression, T

a

represents the reaction-specificactivation temperature—theminimum tem-

perature at which a reacti on will occur. Boltzmann (1886/1974) derived a related

expressionfor theproportion of collisionsbetweenmolecules in a reactionthat occur with

atleast the activation energyE

a

, thethreshold below whichno reaction willoccur, as e

−Ea/

kT

, where k,known as Boltzmann's constant,is a fundamental constantof nature. In eco-

nomics E

a

would play therole of transportation or transactionscosts in determining the

minimum price or return on capitaldifferential needed to trigger a profitable arbitrage

transaction.In either case, reducingE

a

wouldincrease adjustment speedfor a given price

gradient.

http://dx.doi.org/10.1016/j.rfe.2015.02.003

1058-3300/©2015 The Author. Publishedby Elsevier Inc. This isan open access article under the CC BY-NC-NDlicense (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe