Thermal Macroeconomics: An axiomatic theory of aggregate economic phenomena

Abstract

An axiomatic approach to macroeconomics based on the mathematical structure of thermodynamics is presented. It 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. 1) it provides a new and solid foundation for aspects of standard macroeconomic theory such as the existence of market prices, the value of money, the meaning of inflation, the symmetry and negative-definiteness of the macro-Slutsky matrix, and the Le Chatelier-Samuelson principle, without relying on implausibly strong rationality assumptions over individual microeconomic agents. 2) 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. Some of these are related to standard economic concepts (eg 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. Others of the concepts, such as economic entropy and temperature, have no direct counterparts in standard economics, but they have important economic interpretations and implications, as aggregate utility and the inverse marginal aggregate utility of money, respectively. 3) this analysis promises to open up new frontiers in macroeconomics by building a bridge to ideas from non-equilibrium thermodynamics. 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.