Everyday entropy: stovetop economics

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Supernova

The entropy of a wood stove has been well-defined since the late nineteenth century, both classically and statistically.  The increase in entropy  (as heat added to the room) equals the entropy of the byproducts (CO2, ash, water vapour) minus the entropy of the reactants (wood plus oxygen) and the heat that goes up the chimney.  There are also two spacial concerns in the entropy of the working stove.  First, the oxygen that goes into the fire is bigger than the byproducts in the smoke.  Second, a home needs to be designed around the stove for it to work as anything more than a decoration.

The total change in entropy may give you an idea of the resources needed to heat your room for the winter, but it doesn’t tell you much about starting a fire or keeping it going, and the picture it gives you is hyper-idealised.  What’s more interesting, economically, is the different configurations you need to use depending on the burn phase. To start the fire, you need an energetic moment, like a match, to overcome the inertia of the fuel, and you have to open the vent and the flue so there is plenty of oxygen and exhaust to get the fuel burning and heat up the chimney. It’s wasteful, but the fire won’t start by itself, and if you rush to isolate the flame it will choke and you’ll get a flue inversion where the cold air outside rushes back down and fills your room with smoke. Once the fire is going, you can close the vent and flue and slow the burn to minimise the loss to the chimney. After the initial peak of productivity, there is a period when you need to feed in fuel and remove ash. You have to balance the losses of opening the door against the losses of excess ash and insufficient wood. Too hot and you’ll be dumping heat into the atmosphere but too cold and you’ll have to open the flue and vents to initiate burn again.  More to the point, no matter how well you know the entropy of a system, you cannot make the system run at maximum efficiency at all times.

The entropy of a functioning economy is not well-defined, but it consists of a significant set of analogous entropies: free capital equals the entropy of the byproducts (goods, real estate, services) minus the entropy of the reactants (energy, open space, people).  This is worth bearing in mind when you’re wondering why the best and brightest economists run the global economy like a bunch of drunks at a wild west casino. Some parts of a functional economy are in each of the different burn phases at any  given moment.  Economists get paid to advise people on how to move their money into those parts of the economy that are in the best phase.  Over time, that money concentrates on a shrinking set of “efficient” industries until the whole thing flames out.  Nobody wants to take responsibility for the open education and infrastructure needed to initiate a good burn or the waste elimination systems needed to keep it from snuffing itself out.  This is one reason why economists who are well aware of the Minsky cycle are unable to avoid it: they can’t get paid to tell people how to lose money.  The other reason is that economists have no sense or training in space or design.

The Minsky cycle is simple: regardless of outside forces or unforseen events, banking (investing and lending) goes through three phases: hedged, speculative and ponzi.  Then there is a collapse and the process starts over again.  With global capital, the phases can exist simultaneously even within one financial institution, but the phases may be inevitable like entropy, nuclear decay, or stellar evolution.  Immediately after a financial crash, when there aren’t many banks with capital to lend, banks can lend conservatively, hedge their loans, and make sure that all loans are secured by property that will produce enough income to cover principle and interest over the life of the loan.  However, there is a finite amount of such property, so once that’s used up, banks can only increase their revenue by lending speculatively, i.e., by lending to people or companies that won’t generate enough income to pay back the principle, but can make interest payments while waiting for the value of the property to rise enough to make a profit.  When those lending opportunities are exhausted, the ponzi phase begins, and banks can only generate additional profits by making loans that won’t be repaid at all, to make it appear that the bank is still growing its mortgage book.  Extremely optimistic bankers may believe that accelerating growth will cover both interest and principle.  Financial collapse follows.  This is analogous to the entropy of a stove, or, more spectacularly, to stellar collapse at the end of the burn phase:

“In all massive stars, electron degeneracy pressure is insufficient to halt collapse by itself, so as each major element is consumed in the center, progressively heavier elements ignite, temporarily halting collapse… Once the nucleosynthesis process arrives at iron-56electron degeneracy pressure will be unable to support its weight against the force of gravity, and the core will undergo sudden, catastrophic collapse to form a neutron star or a black hole.  Some of the gravitational potential energy released by this core collapse is converted into a Type Ib, Type Ic, or Type II supernova.”

When it hits a molecular gas cloud, the supernova shock wave can initiate a collapse in the cloud that will lead to a new star and the heavy elements created in the old star’s core can provide the rocky base for a new planetary system, so the wheel keeps on turning.  Still, given that an economy is an informational concept, given what we know now, it seems like it should be possible to avoid economic collapse, even if stellar collapse is inevitable.  At the very least, we can feed the fire and empty the ash, and maybe even build a new stove before the old one disintegrates.

You may wonder why government economists seem equally clueless, but you have to remember that nobody works for the government.  Every government agent reports to a politician who works for a set of constituents who either provide votes or donations.  Some government agents are able to work more or less directly for their past or future private employers, as is the case with the FDA, CIA, and Federal Reserve.  Public bankers just need to make sure that some part of the economy is hot enough to feed the big banks where they will go to work at the end of their tenures, so there’s no incentive to worry about the economy as a whole.

Slow Crash, Economist Michael Hudson on the future of the stock market, Harper’s Blog –

“Wall Street’s investment banks and bondholders were rescued, not the economy. The debts were left in place, and continue to grow not only by compound interest but by arrears and penalties compounding. The proportion of national income paid as interest, insurance fees and economic rent is rising faster than the economy is growing.

Banks lend mainly to other financial institutions. They don’t lend to factories that are creating jobs. They don’t lend out for goods and services. They lend to other financial institutions. The whole economy has turned into trying to make money on speculation and arbitrage, not on producing goods and services, not on hiring people to actually do work. The economy therefore is very fragile.

The whole economy at the end of the road is going to look like Greece or Spain or Portugal or Italy. All of these economies are shrinking by what’s called debt deflation. In other words, people have to pay either so much debt or they have to have forced saving, like pension fund saving, that the economy is shrunk for financial reasons, for putting more and more of its money out of the real economy of goods and services into the financial sector.

Is that your prediction for our future here in the United States? Greece?

Yes, a slow crash as more and more money is drained from the economy to pay the FIRE sector—finance, insurance, and real estate—not the goods and service producing sector.

It all sounds like a ghastly inevitability. Is there anything to be done  to save us from this?

Sure. There are a number of things. One of the things that Trump had suggested in the campaign was to remove the tax deductibility of interest. The tax system subsidizes the financial sector and subsidizes going into debt. It would be best not to give the favoritism to the financial sector. For example the real estate sector since World War II has hardly paid any income tax at all, because it has fictitious deductions.”

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