Economy for Engineers

Many dollar banknotes.
Many dollar banknotes. (Photo credit: Wikipedia)

Energy can be seen in simple words as the ability to provide work, and economy is the relationship among production, trade and supply of money.

Production can be seen as conversion between energy and, work or heat, trade can be seen as interchange of energy, and money can be seen as store of energy. This analogy could help us to understand many things applying some physics principles.

Unfortunately, the problem is more complex that we could expect initially, because money can change its value. In a chemical reaction, the conversion between hydrogen and oxygen, and water always produces the same amount of energy. But we know that the prices of goods can change, that is a reason because we cannot apply directly physical laws to forecast the evolution of an economy. Of course, money is a store of energy, but the stored energy in a dollar or Euro can increase or decrease. This fact cannot be an inconvenient, because a chemical battery is a store of energy too, and its stored energy decreases with time, and we know that it can be recharged. I only mean that money is not a direct measure of energy, it is only analogue to a battery.

This issue is very important, because, accountancy uses money as a measuring unit of the energy stored in a company, and as I wrote previously this is not correct. The real measuring unit could be an absolute value, but value cannot be easily measured, and it is always subjective instead of absolute.

Initially, money was a real asset (gold) with a subjective value. But, today money is a virtual asset with a subjective value. We know that physics laws can be useless in a virtual environment; the laws in a virtual environment are defined by its programming, and many of these laws seem to have been written without a good interface with the real world, introducing a lot of additional complexity into the system.

Social sciences have a peculiarity: people have the ability to learn and to change their behaviors. This fact makes so difficult to model a social system that we should work only with general principles and we should not use deduction carelessly. Economy models are very useful to understand many things but they do not fit reality as well as physics models do.

But as I proposed initially, economy can be seen a matter of energy, and the principles of thermodynamics must be satisfied, at least in the real world, although in the virtual part of the system we will be able find some odd accidents. In the real economy, power can be got working on real assets but in the virtual economy a man can become rich simply buying and selling virtual assets while their subjective values change. As the virtual economy is connected to the real one this fact is reducing its energy. Following the first principle of thermodynamics, this aspect would not be important, as the total energy remains and it would be used again, but the second principle of thermodynamics will show us that the entropy of the universe is increasing, and our capability to take advantage of the energy is decreasing.


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