A Natural Value Unit - Econophysics as Arbiter between Finance and Economics

Foreign exchange markets show that currency units (= accounting or nominal price units) are variables. Technical and economic progress evidence that the consumer baskets (= purchasing power units or real price units) are also variables. In contrast, all physical measurement units are constants and either defined in the SI (= metric) convention or based upon natural constants (= "natural" or Planck units). Econophysics can identify a constant natural value scale or vaue unit (natural numaraire) based upon Planck energy. In honour of the economist L. Walras, this "Planck value" could be called walras (Wal), thereby using the SI naming convention. One Wal can be shown to have a physiological and an economic interpretation in that it is equal to the annual minimal real cost of physiological life of a reference person at minimal activity. The price of one Wal in terms of any currency can be estimated by hedonic regression techniques used in inflation measurement (axiometry). This pilot research uses official disaggregated Swiss Producer and Consumer Price Index data and estimates the hedonic walras price (HWP), quoted in Swiss francs in 2003, and its inverse, the physical purchasing power (PhPP) of the Swiss franc in 2003.Comment: 19 pages, 1 table, Appendix with 2 tables, RevTex4, APFA5 200

Energy, Aesthetics and Knowledge in Complex Economic Systems

It is argued that the fact that economic systems are dissipative structures must be taken fully into account in economics if we are to understand the nature of the economic-ecological interface and how to deal with emergent environmental problems, such as global warming. Such problems are a product of economic growth, which is widely accepted to be the outcome of the acquisition and application of knowledge. Drawing upon disparate literatures within and outside economics, it is argued that economic growth should be more properly viewed as the outcome of a co-evolutionary process that involves the autocatalytic interaction of new knowledge and access of increasing amounts of free energy to do increasingly specialized forms of work. The conventional view is that energy is just a factor of production used increasingly as new knowledge is employed. The possibility of reverse causation is considered here. Specifically, the relevance of the ‘energy hypothesis,’ associated with Eric Schneider and his collaborators, is assessed. This hypothesis states that all dissipative structures have, as their primary objective, the reduction of accessible free energy gradients. It is concluded that such a hypothesis cannot be rejected in the context of economic behaviour and that this opens up an important research agenda for economists. It is argued that such research has to be interdisciplinary because our economic behaviour is driven by aspirational goals which are aesthetic constructions in the mind and strongly connected to our emotions. In this regard, recent neuropsychological literature, arguing that certain emotional dispositions are necessary before we can employ our cognitive capabilities effectively, is important to digest. Thus, the possibility exists that it is in the emotional domain of the mind that the energy hypothesis is operative. Aesthetic constructions are, thus, connecting agents in the knowledge-energy co-evolutionary process. Some of the macroeconomic evidence concerning the relationship between free energy use and economic growth is considered and it is found that the energy hypothesis cannot be rejected in the economic domain. However, considerably more research needs to be undertaken before any firm conclusions can be drawn

Adam Smith’s Green Thumb and Malthus’ Three Horsemen: Cautionary tales from classical political economy

This essay identifies a contradiction between the flourishing interest in the environmental economics of the classical period and a lack of critical parsing of the works of its leading representatives. Its focus is the work of Adam Smith and Thomas Malthus. It offers a critical analysis of their contribution to environmental thought and surveys the work of their contemporary devotees. It scrutinizes Smith's contribution to what Karl Polanyi termed the "economistic fallacy," as well as his defenses of class hierarchy, the "growth imperative" and consumerism. It subjects to critical appraisal Malthus's enthusiasm for private property and the market system, and his opposition to market regulation. While Malthus's principal attraction to ecological economists lies in his having allegedly broadened the scope of economics, and in his narrative of scarcity, this article shows that he, in fact, narrowed the scope of the discipline and conceptualized scarcity in a reified and pseudo-scientific way

Material implication of Chile’s economic growth: combining material flow accounting (MFA) and structural decomposition analysis

Over the last three decades, the economic integration of the Chilean economy into global markets has been taking place at a rapid pace. For example, in 1986, exports represented 29% of GDP while in 1996 they had increased to 38% of GDP. This period of time was characterized by strong economic growth with an average annual growth rate of about 10%. From a physical perspective, material requirements more than doubled from 220 to 500 million tons of direct material inputs (DMI) during the same decade (the rate of material growth requirements was around 13% per year). The main objective of this study is to explain the changes in DMI by using a structural decomposition analysis (SDA). The changes in material flow accounting (MFA) were broken down into the effects caused by changes in resource use per unit of output (material intensity effect), changes between and within sectors (structural change effect), changes in the composition of final demand (mix effect), changes due to shifting shares of domestic final demand and export categories (category effect) and finally changes in the overall level of economic activities (level effects). The results, as a percentage of the total level of DMI used in 1986, indicate that economic growth was the major source of material changes (109%). The material intensity and category effects explained 31% and 14% of the increase, respectively. The increase in the material intensity is mainly due to a declining quality of ores in copper production. However, these components were partly compensated by the structure (− 14%) and mix (− 13%) effects. Therefore, for a Southern American country such as Chile, the main causes of these changes in material consumption have been a combination of the nature of economic growth along with an increase in export production and material intensity of production

Thermodynamic entropy as an indicator for urban sustainability?

As foci of economic activity, resource consumption, and the production of material waste and pollution, cities represent both a major hurdle and yet also a source of great potential for achieving the goal of sustainability. Motivated by the desire to better understand and measure sustainability in quantitative terms we explore the applicability of thermodynamic entropy to urban systems as a tool for evaluating sustainability. Having comprehensively reviewed the application of thermodynamic entropy to urban systems we argue that the role it can hope to play in characterising sustainability is limited. We show that thermodynamic entropy may be considered as a measure of energy efficiency, but must be complimented by other indices to form part of a broader measure of urban sustainability

Tail risk constraints and maximal entropy

Portfolio selection in the financial literature has essentially been analyzed under two central assumptions: full knowledge of the joint probability distribution of the returns of the securities that will comprise the target portfolio; and investors’ preferences are expressed through a utility function. In the real world, operators build portfolios under risk constraints which are expressed both by their clients and regulators and which bear on the maximal loss that may be generated over a given time period at a given confidence level (the so-called Value at Risk of the position). Interestingly, in the finance literature, a serious discussion of how much or little is known from a probabilistic standpoint about the multi-dimensional density of the assets’ returns seems to be of limited relevance. Our approach in contrast is to highlight these issues and then adopt throughout a framework of entropy maximization to represent the real world ignorance of the “true” probability distributions, both univariate and multivariate, of traded securities’ returns. In this setting, we identify the optimal portfolio under a number of downside risk constraints. Two interesting results are exhibited: (i) the left- tail constraints are sufficiently powerful to override all other considerations in the conventional theory; (ii) the “barbell portfolio” (maximal certainty/ low risk in one set of holdings, maximal uncertainty in another), which is quite familiar to traders, naturally emerges in our construction

Structural Learning: Embedding discoveries and the dynamics of production

Production and learning of productive knowledge are profoundly intertwined processes as the activation of either process triggers the other, very often implying interdependent transformations. The paper aims to open the ‘production black box’ by proposing the analytical map of production as a tool for disentangling the set of interdependent relationships among capabilities, tasks and materials. The concept of structural learning is introduced to identify the continuous process of structural adjustment triggered and oriented by existing productive structures at each point in time. Structural learning trajectories allow for the transformation of structural constraints such as bottlenecks and technical imbalances into structural opportunities. Complementarities, similarities and indivisibilities are essential focusing devices for activating compulsive sequences of technological change as well as discovering structurally embedded opportunities. The paper then investigates the tension between structure and agency present in structural learning trajectories, and examines the form it takes in different productive organisations

Powering production. The case of the sisal fibre production in the Tanga region, Tanzania

Energy plays a crucial role in economic development. The article presents a framework for the analysis of alternative energy technology mixes in agricultural production and applies it in the context of sisal production in the Tanga region, Tanzania. Through scenario analysis, the paper presents both case-specific and generalizable insights. Case-specific insights show the key role that modern uses of energy and modern agricultural technologies could play in increasing productivity and revenues, in minimizing environmental degradation, and in promoting local development. Generalizable insights demonstrate the value of using sector-specific micro-structural frameworks and scenario analysis for assessing different technologies mixes in the energy and agriculture planning process

A statistical equilibrium approach to the distribution of profit rates

Motivated by classical political economy we detail a probabilistic, “statis- tical equilibrium” approach to explaining why even in equilibrium, the equal- ization of profit rates leads to a non-degenerate distribution. Based on this approach we investigate the empirical content of the profit rate distribution for previously unexamined annual firm level data comprising over 24,000 publicly listed North American firms for the period 1962-2014. We find strong evidence for a structural organization and equalization of profit rates on a relatively short time scale both at the economy wide and one- and two-digit SIC industry levels into a Laplace or double exponential distribution. We show that the statistical equilibrium approach is consistent with economic theorizing about profit rates and discuss research questions emerging from this novel look at profit rate distributions. We also highlight the applicability of the underlying principle of maximum entropy for inference in a wide range of economic topics

The BRICS in the Global Order: A New Political Agenda?

Regarding the BRICS (Brazil, Russia, India, China and South Africa) it’s important to analyze comparatively the new power cycle in order to understand not only the impact of the world crisis as well as the relationship between the official political discourses and the economic instability. Actually, the trade liberalization and economic interdependence accompanied with an uncertain international system are putting pressure to the BRICS with their own agendas for global order in seeking for a balance and also to regain a new political and economical dynamic for the promotion of new strategies