The paper takes issue with Nicholas Georgescu-Roegen's interpretation of the second law of thermodynamics (entropy law) and its relevance to the economics of production. The paper concurs with experts on thermodynamics that Georgescu-Roegen has committed a major error. Namely, Georgescu-Roegen's notion of "material entropy," which he christened as the "fourth law of thermodynamics," is unfounded. Of more importance, Georgescu-Roegen's purported law, as the application of the second law to the realm of matter, is a grave conceptual blunder.
The paper argues that the first law (conservation law) is the more relevant law of thermodynamics if one wants to account for production costs. Interestingly, the much neglected third law of thermodynamics, rather than the second, should be the one to act as the proper analogy to the nature of production.
Despite the shortcoming of Georgescu-Roegen's concept of material entropy, his distinction between funds and stocks is useful. Stocks--such as oil or mineral deposits--provide flows which necessarily entail the diminishing of the stocks. Funds--such as lakes and forests--provide services which are renewable if the funds are exploited at sustainable rates. With the help of the concepts of production cost and funds, Georgescu-Roegen's thesis about the impossibility of full recycling can be affirmed--but without reference to the entropy law or Georgescu-Roegen's version of that law, what he calls the "fourth law of thermodynamics." In the end, the paper shows that the impossibility of full recycling of matter parallels the basic insight of the third law with regard to energy.
To show this, the paper advances the centrality of institutions and technology, what is coined here the "technological/institutional regime of production" or, in short, the regime of production. The regime is a more-or-less coherent bundle of fundamental institutions and basic technologies that inform everyday productive activities (see Khalil 1995a and 1997). The paper is critical of Georgescu-Roegen's "material entropy" on the basis that it defines resources independently of the regime of production. As Clarence Ayres (1941), Wesley Mitchell (1941), and Erich Zimmermann (1951) argued, resources are not given but rather created by active agents. John Dewey and Arthur Bentley (1973; see Khalil 2003) provided a philosophical framework, the "transactional view," which substantiates the Ayres/Mitchell/Zimmermann thesis. Namely, resources do not exist independently of the active knower. What is a resource depends on the transaction between the knower and the object of knowing, the environment.
However, regimes of production are never static. While they are capable of creating more resources with innovations, there is no guarantee that innovations and the creation of resources will continue at a steady rate. A regime of production, which acts as a fund, may face increasing costs of production as the flow of innovations falls behind the rate of exhaustion of stocks. Any particular regime is highly entrenched either because of high transaction costs or because of the path-dependent (inertia) character of innovations. The inflexibility of regimes of production in the face of declining resource stocks and innovation rates allows pressures to build up. Such a scenario may provide an endogenous account of the discontinuous development of technological/institutional regimes--whose investigation is left for further research.
The second law of thermodynamics is deceptively an attractive tool to discuss the hypothesis of degradation of the environment. The second law seems pliable enough to be stretched in different directions to dress up some divergent approaches to the economics of environmental resources. (1) The entropy law simply states that an isolated system, consisting of segmented but connected domains, tends toward equilibrium. (2) The domains can be made up of different kinds of gases or consist of the same kind of gas but with temperature or pressure differences. Thermodynamic equilibrium, known as the production of maximum entropy, involves the vanishing of differences among the domains. (3)
It would take a whole volume to survey the manner in which economists and other social scientists have employed this law in divergent and confusing ways. The paper rather limits itself to theoretical clarifications and their ramifications with regard to the degradation of environmental resources. It proposes two theses, one positive and the other critical. Concerning the positive thesis, the paper argues that the first law of thermodynamics (i.e., the law of conservation) has immediate relevance to the theory of production and the issue of environmental degradation. This is not a novel conclusion. Many economists have reached the same result (e.g., Ayres and Kneese 1969; Kneese, Ayres and d'Arge 1970; Ayres 1978; Ayres and Millet 1980; Kneese 1989; Ayres 1993; Duchin and Lange 1994). However, this paper reaches this conclusion by relating the degradation of resources to the theory of production via the well-known distinction advanced by Georgescu-Roegen (1970, 1971, 1977, 1979, 1981) between funds and stocks. (4)
Concerning the critical thesis and contrary to Georgescu-Roegen's central claim, the paper maintains that the second law of thermodynamics has only a marginal relevance to the theory of production and the degradation of resources. Other physicists and economists have discredited Georgescu-Roegen's "fourth law of thermodynamics," which invents the concept "material entropy" (e.g., Auer 1977; Ayres and Nair 1984; Young 1991 and 1994; Mayumi 1993; Bianciardi et al. 1993). This paper, however, reaches its conclusion via the distinction between microscopic fluctuations and macroscopic states. The distinction hopefully sheds new insights on the economics of resources in general. One such insight highlights the static character of the entropy law, which economists sometimes confuse with the dynamic version of the law. Such a version is mostly associated with Ilya Prigogine's (1980) work on far-from-equilibrium thermodynamics. (5)
This paper ignores the economic resources literature which applies Prigogine's work or, in general, which tries to link the entropy law to nonergodic dynamics arising from positive feedback (e.g., Perrings 1987; Faber and Proops 1990; O'Connor 1991; passim Burley and Foster 1994; cf. Khalil 1994a and 1995b). The literature focuses on the economics of self-feeding mechanisms, auto-dynamics, discontinuous patterns of regional development, multiple equilibria, discontinuous business cycles, and so on. Such an aspect of the entropy law has also been used by ecologists such as T. F. H. Allen and T. B. Starr (1982). Autocatalytic dynamics has been extended into economics in different directions by authors such as, inter alios, Kenneth Boulding (1978), Peter Allen (1988), Chuck Dyke (in Weber et at. 1988, in Burley and Foster 1994) Michael Radzicki (1990), James Buchanan and Viktor Vanberg (1991), John Foster (1993), and, most comprehensively, Barkley Rosser (1991).
This paper ignores the issue of positive feedback because it raises problems separate from the one pursued here, production theory in relation to environmental resources. The environmental aspect of production/consumption raises the question of how to model the dependency of a complex organization as a unified purposeful agent on the influx of matter/energy from the environment. In contrast, non-equilibrium, positive feedback is about the specificity on how to model the influx, h is true that nonlinear, dynamic models involve environmental degradation. The point is that using nonlinear techniques borrowed from thermodynamics is about the relevance of the techniques, not the relevance of the laws of thermodynamics. (6)
Section one provides an overview. The second and third sections deal with the entropy law in connection to production/consumption activities: While section two discusses the entropy law with regard to material flow, section three handles the entropy law in relation to energy flow. Section four argues that Georgescu-Roegen's thesis about the impossibility of complete recycling can be salvaged if related to the conception of technology and institutions as "funds" in Georgescu-Roegen's sense of the term.
This essay uses Georgescu-Roegen's work on the entropy law as the organizing center of its theses. Georgescu-Roegen (1971 and 1979) has provided the most fundamental rationale for the supposed economic relevance of the entropy law. If one wants to evaluate further refinements of the economic relevance of the entropy law (e.g., Perrings 1987; Faber and Proops 1990; O'Connor 1991; Burley and Foster 1994), one must first deal with foundational issues which no one handled better than Georgescu-Roegen.
Georgescu-Roegen was a pioneer in the advocacy of the reconstruction of theory of production on the basis of the entropy law:
[T]he thesis that I have endeavored to develop in this book [is], namely, that the basic nature of the economic process is entropic and that the Entropy Law rules supreme over this process and over its evolution. (1971, 238) Elsewhere, he similarly asserted, "Most important for the student of economics is the point that the Entropy Law is the taproot of economic scarcity" (1976, 9). (7) The paper examines these statements at the conceptual level. If they are found faulty at that level, there would be no need to judge them at the empirical level. To wit, empirical corroboration of Georgescu-Roegen's argument would not amount to a confirmation of the argument if it were, to start, based on defective conceptual grounds. Even when the predictions of a theory are corroborated with facts, the theory would not be substantiated unless it were logically coherent to begin. Otherwise, the theory of cyclical feuds by ad hoc gods should also become plausible given that the weather patterns are...