Comparing Thermo And Econ

I. APPROACH AND HYPOTHESIS

When examining the flow of energy and mass into and out of a reactor, one cannot help but notice how this resembles the flow of money and raw materials into a factory and the flow of products and profits out of a factory. By expanding upon this notion, the first and most basic comparison that can be made between thermodynamics and economics is the relationship between money and energy. In economics, money is the most basic unit that can be used to describe an economic system. Every aspect of an economic system is related to money, either directly or indirectly. Similar to money, energy is involved in all aspects of thermodynamics directly or indirectly. This similarity between the importance money and energy in their respective fields lends to the observation that energy can be equated to money; this can be used to draw many further comparisons between the two subjects. An intuitive starting point for deriving relationships between thermodynamics and economics, is with the zeroth, first, second, and third laws of thermodynamics. These laws are the foundation of thermodynamics, and using the guiding principle that money is equal to energy, many parallels can be drawn to important and key economic concepts. The relationship between the foundations of thermodynamics and economics allows for many other relationships to develop. The flow of products in economics is similar to the flow of mass in thermodynamics. In thermodynamics, mass flows into a system. The system then either does work to, or has work done on it by the mass; this work changes the mass in some way, and then the mass exits the system. This is very similar to what happens in economics. In economics, a raw product will come into a system. Money is invested into altering the raw materials, making a more useful final product. Eventually, the final product comes out of the system and is sold to consumers. Some other relationships can be made by comparing thermodynamic principles of intensive and extensive properties, efficiency, and equilibrium, to their equivalents in economics. Other connections are made by examining economic concepts of supply and demand curves, utility, and liquidity, and relating them to key principles in thermodynamics. Based upon the relationship between money and energy, other relationships between thermodynamic and economic ideas can be observed, such as the relationship between entropy and utility. Based upon the assumption that energy can be equated to money, many different and diverse comparisons of the subjects can be derived, new and previously unrecognizable relationships between economics and thermodynamics arise; showing that the subjects are related in many important ways. Upon initial inspection, one might think that topics so broad and different as economics and thermodynamics could not be related, but upon further investigation it becomes clear that the two subjects are intuitively related.

II. APPLICATIONS OF THE THERMODYNAMIC LAWS TO ECONOMICS

The Zeroth Law

The zeroth law of thermodynamics has clear parallels to economics. This thermodynamic law states that if two systems are in equilibrium with a third system, then these first two systems are also in equilibrium with each other. In economics, there are many different forms of goods that have monetary value. Despite these differences, there are many cases where these different goods have the same value. By applying the zeroth law to economics, the value of goods can be easily compared. For example, if the value of a stereo is equal to the value of a cell phone and the value of a baseball card is also equal to the value of a cell phone, then the zeroth law states that the value of the baseball card is equal to the value of the stereo.

The First Law

The first law of thermodynamics can be applied to economics. This law, also known as the conservation of energy principle, states that energy can be neither created nor destroyed during a process; it can only change forms. For example, if an object in a system is at the top of a ramp and not moving, it posses some amount of potential energy. When the object begins to move down the ramp, the potential energy is converted to kinetic energy. However, some of the energy will be dissipated as heat due to the friction between the object and the ramp. The heat generated is another form of energy, so the law still holds true even though the kinetic energy at the bottom of the ramp will not equal the potential energy at the top of the ramp. This principle can be applied to an economic system as well. Using the previously established relationship that money is equal to energy, the law would state that money can be neither created nor destroyed; it can only change forms. In an economic system, goods and services are exchanged for money or other things of monetary value. During these exchanges, the total value of all the goods, services, and money is held constant. For example, if someone was hired to paint a house, that service would have a certain monetary value associated with it. In exchange for the service, the homeowner would pay the painter for his or her work. The painter has just exchanged the work done, which has a monetary value, for actual money. On the other hand, the homeowner exchanged money for the work done. For each person, something of monetary value was exchanged for some other form of money. However, the total value of the system was kept constant throughout the process. This holds true for all economic systems.

The Second Law

The second law of thermodynamics can also be applied to economics. The second law asserts that energy has quality as well as quantity. This implies that if two sources have an equal amount of energy stored, the actual amount of energy that is usable from them may be different. That is because the quality of the energy that is stored can be different. In one of the sources, it could be easier to convert the energy into useful work than the other source. This can be applied to the economic term liquidity, which is a measure of an assets ability to quickly be converted to usable money through an action of buying or selling without causing a significant movement in the price and with minimum loss of value. An example of this would be a checking account versus a bond. If both of these accounts had an equal amount of money, the amount of usable money would be different. All of the funds in a checking account can be accessed instantly by the owner of the account, making the funds very liquid, which correlates to a high quality of energy. With a bond, funds are much harder to access. The owner commits his or her funds to the