What thermodynamics can teach us about economics – money is NOT wealth

One of the basic assumptions of Keynesian economics is that government can plop money into the system when the system is slowing down. The new money starts flowing around and things get revitalized. The new money is either borrowed from someone else, say China, or it is stolen from the population of the US itself by printing it and slicing off a piece of everyone’s wealth by diluting the dollar.

Let’s just assume for now that the money is borrowed instead of printed. OK, so the US government borrows money from someone else by selling a bond and then using that money to “jumpstart” the economy. They “jumpstart” it by sticking that money somewhere and hoping that whoever they give it to uses it to make more money. Eventually, the money that they borrowed has to be repaid.

The moral hazard here is that the government feels that it can just print the money when the bill comes due. Technically, they can. And that’s the problem.

Here’s the problem restated: Let’s say a group of people get together to invest in a start up. They risk their wealth to pour into a business that is going to produce…I don’t know…hoverboards. If they successfully produce one, then they’ll get a return on their wealth and end up with even more wealth. Because this group of investors knows very well that if they fail, they can’t just “print” the money to pay their debts. They have to succeed or they go bankrupt. They lose their wealth, and that’s it. That’s why they try really hard to succeed.

They are taking their wealth, which they worked for, and sticking it into hoverboards, and risking it. If they win, the economy grows and more wealth is added to the economy. If they don’t, that welath is lost in consumption that didn’t produce any wealth in the end.

But if the GOVERNMENT gives out a loan for hoverboards and the people they gave it to are lazy asses and they use it to buy jaguar-skinned comforters filled with platinum dust instead of figuring out how to produce hoverboards and the government doesn’t really care because if they lose the money, they can just PRINT it, then the chances that the money loaned will produce NOTHING, skyrockets.

So when the government moves to stimulate the economy with someone else’s wealth, they are ideally trying to get people to produce things with that wealth so in the end there is more wealth so they can theoretically pay back the people they borrowed money from. But if they can’t, they just print up money and steal wealth from you and ship it to China thereby taking even more wealth out of the economy and draining the whole system. Or even more ludicrously, they can print it up to pay an American citizen back, thereby stealing from him and paying him back at the same time.

So where do thermodynamics come in? The first law of thermodynamics states that the amount of matter and energy in the universe is constant. The second law of thermodynamics states that the universe tends towards chaos inexorably. The only reason things can get organized here on planet Earth is that we have a constant source of energy pouring in here, which is the sun. But we have to do work in order to organize things here. The economic equivalents of those laws, as close as I can parallel them, would be these:

Matter and energy in thermodynamics equals money in economic terms. Organization in thermodynamics equals wealth. So the economic equivalents of the first two laws of thermodynamics are

  1. The amount of money in the economy is always constant
  2. The economy always tends towards chaos, unless we use money to organize things, thereby producing “wealth”.
So, whereas the amount of money in the world is constant, the amount of wealth in the world is always changing. If money is used to produce things (organize things, create hoverboards), wealth increases. If money is used to consume things (eat, party, purchase jaguar skinned comforters stuffed with platinum dust) wealth decreases. But money always stays constant. Money is only a means with which one can either produce or consume wealth. Just as matter and energy is only a means with which one can either create or destroy.


The Keynesian approach contradicts these laws by equating money with wealth. It says that the amount of money that exists in the world varies at any given time by government decree. It also assumes that the economy tends towards wealth instead of chaos, because it doesn’t matter where the money goes as long as it’s flowing according to Keynes. For Keynes, the very act of money moving through the system means that wealth is being increased. Yeah, and I have a voodoo doll at home that works just great.

So what you’ll have in the end is a big ball of flaming economic entropy with a whole bunch of money but no wealth anywhere. Welcome to the Keynesian Debt Bubble. Welcome to the 21st century.

 

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2 thoughts on “What thermodynamics can teach us about economics – money is NOT wealth

  1. The laws of thermodynamics as a science are actually the least known in physics or the most unstable ones. Or was that hydrodynamics? Oh well, who cares?

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