A Thermodynamics approach to Marcroecnomics

## Thermoeconomics

An axiomatic theory of aggregate economic phenomena

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## Principal Investigator: Robert MacKay

## Principal Investigator: Nick Chater

Professor of Mathematics, Director of Mathematical Interdisciplinary Research at University of Warwick

Professor of Behavioural Science (Behavioural Science Group), Warwick Business School

#### Project Summary

An axiomatic approach to macroeconomics based on the mathematical structure of thermodynamics is presented. This approach deduces relations between aggregate properties of an economy, concerning quantities and flows of goods and money, prices, and the value of money, without any recourse to 'microeconomic' foundations about the preferences and actions of individual economic agents.

The approach has three important payoffs. Firstly, it provides a new, and more solid, foundation for some aspects of standard macroeconomic theory, such as the existence of market prices, the value of money, inflation, the symmetry and negative-definiteness of a macro-version of the Slutsky matrix, and the Le Chatelier-Samuelson principle, without relying on implausibly strong rationality assumptions over individual microeconomic agents.

Secondly, the approach generates new results, including implications for money flow and trade when two or more economies are put in contact, in terms of new concepts such as economic entropy, economic temperature, goods values, and money capacity. We will see that some of these are related to standard economic concepts (e.g. marginal utility of money, market prices), yet our approach derives them at a purely macroeconomic level and gives them a meaning independent of usual restrictions, e.g. to rational agents. Others of the concepts, such as entropy and temperature, have no direct counterparts in standard economics, though they have important economic interpretations and implications. Thirdly, this analysis promises to open up new frontiers by building a bridge to ideas from non-equilibrium thermodynamics. In contrast to the strict economic notion of equilibrium, the present approach starts from a statistical physics notion of equilibrium and thereby has the potential to extend to the more realistic non-equilibrium settings, as in physics. More broadly, we hope that the economic analogue of entropy (governing the possible transitions between states of economic systems) may prove to be as fruitful for the social sciences as entropy has been in the natural sciences.

#### Results

Thermoeconomics: An axiomatic theory of aggregate economic phenomena | November 09, 2023