Invitations and Becomings

Wanted to mention David Foley's article on the interesting limits to the analogy between classical thermodynamics and the general equilibrium view of economics. I can't do it justice, but I'll try to give you the gist.

Foley argues that there is a significant difference between the prevailing general theory of economics and its thermodynamical analog. Thermodynamics restricts itself to the measurement of reversible transformations - or at worst, irreversible transformations that are path-independent, and so effectively equivalent to some alternative path of reversible transformations.

By contrast, the general equilibrium view of economics recognizes no such restriction, but rather finesses the very real problem of path-dependency. This is what is going on when the theory helps itself to Wealth Preservation as a constraint on the irreversible process of moving from non-equilibrium starting points (e.g. endowment conditions) to a market equilibrium. This implicitly and unjustifiably treats this process as deterministic, when this need not be the case.

To put the point another way, price means something different in equilibrium exchange to what it means in a market that is far from equilibrium (for example, a nation moving from an agrarian to an industrial economy, or a market in shock).

"The most important point of this paper (more important than the establishment of formal parallels between the thermodynamics and utility economics) is that economics, because it does not recognize an equation of state or define prices intrinsically in terms of equilibrium, lacks the close relation between measurement
and theory physical thermodynamics enjoys."

Or, as I would put it, while you can ignore it under the particularly stable conditions enjoyed until recently by many Western economies, you can't ignore the institutional history of economies outright, without condemning yourself to perennially inaccurate economics and potentially fatal public policy.

Once again, I'm rehashing Jed Harris. Cf http://jed.jive.com/?p=48