From[Bill Williams 29 April 2004 8:50 PM CST]
For whatever reason, probably my clumsiness, the Chen's text was truncated
in my previous posting.
Jing Chen's Manefesto
Since the publication of What Is Life and other works more than half century
ago, there is a consensus in the scientific community that life processes
are thermodynamic processes. However, the theory of thermodynamics only has
limited impact on economic theory and social sciences. This is largely due
to the lack of an analytical theory of economics based on the foundation of
thermodynamics. Recently, we have developed such a theory and show how it
provides much more realistic and intuitive understanding of economic and
social phenomena than the general equilibrium theory, the analytical
foundation of neoclassical economic that was inspired by Newtonian
mechanics.
Human activities are predominantly economic activities, which are chiefly
regulated by the exchange value of different economic commodities. The
current value theory does not provide a measurable quantity to value. Since
all human activities represent extraction and transformation of low entropy
from the environment, it is natural to relate economic value to low entropy.
From the properties that the value of commodities should satisfy, we derive
that the only mathematical formula to represent value, as a function of
scarcity, is the entropy function. This is parallel to that the only
mathematical formula to represent information, as a function of probability,
is the entropy function. The entropy theory of value offers a unified
understanding of physical entropy, information and economic value. It
provides a quantitative measure of value that is highly consistent with our
intuitive understanding. Just like the entropy theory of information
provided a clear understanding of the fundamental problems in communication
theory, the entropy theory of value provides clear understanding of the
fundamental problems in social activities.
The entropy law states that systems tend toward higher entropy states
spontaneously. Living systems, as non-equilibrium systems, need to extract
low entropy from the environment to compensate for continuous dissipation.
This process is the most fundamental property of life. It can be represented
mathematically by geometric Brownian motion. From the entropy law, the
thermodynamic diffusion of an organic or economic system is spontaneous. The
extraction of low entropy from the environment, however, depends on specific
biological or institutional structures that incur fixed or maintenance
costs. Higher fixed cost systems generally have lower variable costs. In
this book, we derive the thermodynamic equation that variable cost of a
production system should satisfy, determine the initial value and solve the
thermodynamic equation to derive an analytic formula that explicitly
represents the relation among fixed costs, variable costs, uncertainty of
the environment and the duration of a production system, which is the core
concern in most economic decisions. This analytical representation of
various factors in production processes enables us to directly compute and
analyze the returns of different production systems under different kinds of
environment in a simple and systematic way.
Social sciences are about conscious decisions of human beings. To understand
social sciences, we must understand human mind, which is an organ of
computation engineered by natural selection. We find that some psychological
patterns, such as conservatism, reflect the constraint of entropy laws.
Others, such as framing and herding, are evolutionary adaptations to enable
the efficient processing of information, which is the reduction of entropy.
Still others, such as overconfidence and loss aversion, are mental attitudes
that help us survive the constant dissipation endured by all non-equilibrium
systems. The entropy theory offers a unified understanding of the patterns
of human mind. It provides an alternative theoretical foundation to rational
expectation theory, which does not fit well with empirical evidences.
Modern science was germinated from astronomy, which Wiener termed as "an
ideally simple science". Finance, which studies prices changes under
uncertainty abstracted from all the intrigues of social and organizational
complexities, is indeed an ideally simple social science. It is usually in
simple subjects that original insights and methodologies are developed and
applied with great effectiveness. For example, calculus was invented by
Newton to calculate the planet orbits. This analytical thermodynamic theory
was inspired by Black-Scholes option theory, a highly technical theory in
finance.
We have applied the theory to understand many fundamental problems in social
sciences. All the problems are analyzed with the unified methodology. This
is in sharp contrast to analysis based on general equilibrium theory, where
many different models are developed for different problems. Even patterns
easily understood by most people, such as increasing returns, have to be
described by extremely ingenious and arcane mathematical models.
The development of a new science takes the efforts of many people. I hope
you find the theory helpful to your thinking and research. If you have any
comments or questions, please drop me a note. I will be very happy to hear
from you.