An irreversible process is a process in a system that changes from a state to another one losing energy. This energy cannot be recovered if the process is inverted. The magnitude used in order to measure irreversibility is entropy. Entropy can be considered as a kind of energy that cannot provide work.
In nature, all processes are irreversible but some of them can be more entropic than other ones. The existence of entropy implies that we cannot go back in time to a previous state. The entropy of universe is always been increased but there is not a reason in order that the entropy of a system cannot be reduced. This fact is possible but we will need to employ a lot of additional energy to do that increasing much more the entropy of the environment.
Economy can be seen as a thermodynamic system, a thermodynamic system is defined by a set of state variables that follows a certain rules and principles. A system is defined but a certain number of state variables, but other additional variables can be obtained from the state variables. The minimum number of the variables that define the state of the system is the dimension of the state space.
Economists use a set of variables to characterize the state of an economy, for instance: savings, investment, employment, debt, GDP.
Entropy usually is not a magnitude used by economists, but it can be calculated as a macroeconomic value from a detailed microeconomic analysis, or from other state variables. Entropy would be proportional to the logarithm of the number of possible microstates.
Entropy is well understood as an energetic magnitude but in simpler words it is related to the degree of disorder in a system. In the statistic approach, it is related to uncertainty. Economy as any other process in nature tends to increase entropy in a natural way. That is because there are much more disordered states than ordered ones.
As I have said before, it is possible to put a system into a more ordered state but it can only be done spending a lot of energy (or in more economic terms, spending a lot of money) and increasing the entropy of the environment (or its uncertainty).
Following this scheme is easy to understand some current economic phenomena. For instance, the crisis of the Euro can be explained under an entropic-based reasoning. The Euro establishes links among different economies with different economic state and production capabilities, without a central controller and a lot of economic subsystems with an own controller. Following a natural behavior all countries should finally reach an equilibrium with a similar relative state, but this is not possible as different controllers and rulers are trying to avoid the deterioration of their own economies getting the effect of preserving the best economies(in higher state of energy) avoiding to improve the state of other economies (in a lower state of energy). The efforts of countries as Germany to preserve its state in an interconnected economy require a lot of energy that must be obtained from its environment (the other countries of the Euro zone). Namely, Germany is not paying the crisis of other countries as many people think. It is avoiding the natural process of equalization, forcing other countries to spend much more money in order to preserve the production level. Although this can be seen as something odd for them, this is real meaning of the risk bonus of the debt. It is only entropy, energy (or money) that cannot provide work (or production). Entropy can explain why German debt is getting negative interests too due to the need of the investors at the peripheral countries of searching for safer investments. This is showing that it can be possible to reduce its own entropy at the expense of the environment.
I know that if we try to do a cause-effect analysis, many people will say that I am changing cause by effect. But this is not important here. I am looking at the final equilibrium state. The aim of the Euro is equalization not differentiation. I am not judging the German government, as it is only satisfying its own function and probably they do it better than other governments but the problem here is not only a problem of local management, it is systemic too, as any action has a reaction, markets were responding only to the different policies in different countries following the natural laws of entropy making the local problems larger.
Germany should understand that with the Euro, competition must not be among countries, only among companies, because preserving a systemic problem would destroy its own economy when the entropy of its enviroment cannot be increased easily if other countries finally collapse. And other countries must understand that if they do not apply good policies they will be the first destroyed economies.
The solution to this problem, as systemic, will need a systemic approach instead of local solutions as some economists have asked for reducing the Euro uncertainty (entropy) with actions from the central bank. With a systemic approach all people win.
Looking at the world we can see the same effect due to the globalization of the economy. Nowadays there are some economists that are searching for an offender of the world economic crisis. There is only one causer, the globalization process, that is natural and then unavoidable, and the different policies that are been applied in different countries.
Globalization is not bad itself. It is based on the other natural trend of systems to increase complexity. Complexity is another kind of energy, but part of this energy can be used to provide production, it is not only entropy. Increasing complexity we can increase production. For instance, an economy with international commerce is more complex than an isolated one but we can get new raw materials and access to new sale markets in order to increase production. Complexity is bad when it has a large entropic component, becuase it turns the system into an unmanageable one.
Graph 1 Growth of World Complexity. Source Ontonix
Back to the previous example Euro was developed in order to provide a system with higher production capability, this objective needs to establish links among economies (increasing complexity) although a unique currency was an attempt of simplification in order to avoid a growth of entropy. Entropy does no grow excessively by the Euro. Entropy grows excessively because the system is not prepared to take advantage of it as there is not a common economic policy. The system is not evolving freely in a uniform way. This problem of a non-uniform system was advanced by economists before the creation of the Euro, and they tried to avoid it as it was established a convergence framework in order to enter the club.
If we analyze the entropy of the world it has been increased from many years ago as the following graph shows.
Graph 2 Growth of world entropy. Source Ontonix
As the links between the economies of different countries have been increased every day, the economy suffers a natural irreversible process. As have said beginning this discussion this means that we are spending in the world a lot of resources that cannot provide production. And we cannot go back in time to a previous state. If we compare this case with the European one, we can see that there are some differences, in the former one the Euro zone has an additional environment (the rest of the world) but in the latter one we cannot find an external economic environment where uncertainty can be increased to reduce ours.
There are two actions that can be done to reduce the hazardous effect of this irreversible process: We can reduce the number of states with high probability increasing control and rules. The effect of this action is to reduce the uncertainty although we can reduce useful functionality too. On the other hand, we can increase links between economies like promoting internationalization for instance, this will increase the maximum complexity. This last action will increase entropy too but the benefit is got due to productive capability will be increased, not only entropy. But the higher the complexity, the more difficult to manage the system.
In order to finish, I propose to think about this issues:
– I would like to indicate that I do not think that the globalization process is good or bad, I have said only that the process of globalization is irreversible (a lot of energy or money that have been applied in the process could not be recovered if we would try to go back to a previous state). Then the efforts of the governments should be done thinking that the current problems are systemic instead of only local.
– Final entropy will depend on the way that we follow in order to get stability. In fact, many recommendations of international organisms are trying to get that the process will be less entropic as possible.
– As different countries have different productive resources, and climate has a strong influence in the economic activity, a certain level of order in the world system will be preserved always. Different raw materials, different technology level and different education will preserve different level of wealth. Education and technology can be finally shared but raw materials and climates are always localized.
– It is important to notice that the equality is not absolute in nature, the process only will make equivalent the variables at a macro level. In the same way that in a gas at a certain temperature the particles have different individual kinetic energy, although connected economies tend to get an equivalent macroeconomic state, this does not imply that all people and businesses will have the same wealth level at the microeconomic level. In every part of the world always there will be richer and poorer people.
– We should not build a system that we cannot manage because it will finally collapse.
Mr. Luis Díaz Saco
advanced consultancy services
|Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels|