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A New Framework
In this section I outline a new framework for thinking about the role of energy in the economy, based on research that I am conducting at the Chinese Academy of Sciences. This framework is based on the tested laws of natural science. It relies on a broader, more fundamental, notion of energy and on a new way of looking at the relationship between energy and economic activity.
To Democritus, writing 2500 years ago, the universe was comprised of “atoms and the void (7). ” To a modern physicist there is only matter and energy. In fact, as Einstein (1905) showed in his famous equation, E=mc2, matter and energy are interchangeable. In this view there can be no energy shortage; only a shortage of the knowledge we need to mine, through controllable transfers, the abundance of energy that surrounds us.
Mining energy, the domain of physics and engineering, starts with the law of conservation, as Richard Feynman (1989) writes,
There is a fact, or if you wish, a law, governing all natural phenomena that are known to date. There is no known exception to this law—it is exact as far as we know. The law is called the conservation of energy. It states that there is a certain quantity, which we call energy that does not change in the manifold changes which nature undergoes. That is a most abstract idea, because it is a mathematical principle; it says that there is a numerical quantity which does not change when something happens. It is not a description of a mechanism, or anything concrete; it is just a strange fact that we can calculate some number and when we finish watching nature go through her tricks and calculate the number again, it is the same. (p. 4-1)
…energy has a large number of forms…gravitational energy, kinetic energy, heat energy, elastic energy, electrical energy, chemical energy, radiant energy, nuclear energy, mass energy. (p. 4-2)
…it is important to realize that in physics today, we have no knowledge of what energy is. (p. 4-2)
…although we know for a fact that energy is conserved, the energy available for human utility is not conserved so easily. The laws which govern how much energy is available are called the laws of thermodynamics and involve a concept called entropy for irreversible thermodynamic processes. (p. 4-8)
…Finally, we must remark on the question of where we can get our supplies of energy today. Our supplies of energy are the sun, rain, coal, uranium, and hydrogen. The sun makes the rain and coal also, so that all these are from the sun. Although energy is conserved, nature does not seem to be interested in it; She liberates a lot of energy from the sun, but only one part in two billion falls on the earth. Nature has conservation of energy, but does not really care; she spends a lot of it in all directions. We have already obtained energy from uranium; we can also get energy from hydrogen, but at present only in an explosive and dangerous condition. If it can be controlled in thermonuclear reactions, it turns out that the energy that can be obtained from 10 quarts of water per second is equal to all of the electrical power generated the United States. With 150 gallons of running water a minute, you have enough fuel to supply all the energy that is used in the United States today! Therefore it is up to the physicist to figure out how to liberate us from the need for having energy. It can be done. (page 4-8)
In the next section we will describe the link between physical energy flow and economic activity.
Work, Coherent Energy, and Economic Activity
Orthodox macroeconomics, developed following last century’s Great Depression, is obsessed with total spending, or aggregate demand, and by analyzing who is doing the spending, as expressed in the well-known relation, Y = C+I+G.
More recently, supply-side economics, pioneered by 1999 Nobel-winner Robert Mundell, has focused attention on the resources available for production and on the incentives to use those resources productively.
To a physicist, there is only one resource—the energy from the sun—that drives all activity on earth.
Our purpose in macroeconomics is to measure how much work the people in an economy perform in a given time period. Work, after all, is what creates wealth and generates incomes. Work earns paychecks and generates profit.
Work is what physicists have been measuring since Galileo rolled a ball down an incline 500 years ago. Work, to a physicist, is a result of energy transfer. Physicists refer to work as coherent motion, and refer to incoherent motion as heat, as shown in the figures below.
Figure 3
Work vs. Heat
 
Figure 3(a): Figure 3(b)
Coherent Energy Incoherent Energy
(Work) (Heat)
As an example, think of two baseballs. Every particle in the baseball on the left, in Figure 1(a), is moving at 97 miles per hour on its way from Roger Clemens’s hand to the catcher’s mitt. This is an example of work, also known as kinetic energy, or coherent energy.
Every particle in the baseball on the right, in Figure 1(b), is moving at 97 miles per hour as well but the baseball itself, viewed as a macro object, or system of particles, is not moving. In this case, we have produced the motion not by throwing the baseball but by heating in an oven; the particles are moving in random directions, colliding with each other. This is an example of heat, thermal energy, or incoherent energy.
In macroeconomics, the picture on the left represents economic activity, where people are engaging in work to produce valuable goods and services. The picture on the right represents instability, wasted effort, inefficiency, or conflict.
In this framework, the objective of economic policy is to encourage people to do the things that result in the largest possible amount of work, or coherent energy. That policy will result in the highest national income and the highest living standard for the people. This suggests a simple litmus test for every new policy suggestion. Does it increase the amount of useful work people will do? If the answer is yes it is most likely a good policy. If the answer is no it is probably a bad, i.e., anti-growth, policy.
Everyone since Adam Smith agrees the government is well suited to providing certain services to its citizens. Most of them – laws, property rights, defense, common measures, and Interstate highways -- are work-increasing activities.
Unfortunately, however, there is no law of conservation of work to protect us from bad policies. Work can be destroyed by policies that blunt incentives or make it more difficult (require more energy) for people to create wealth. Subsidies, tariffs, quotas, price controls, excise taxes, and burdensome or unpredictable regulations are bad policy. Taxing an activity destroys work. A government that desires to increase incomes should collect tax revenues in the manner that destroys the least amount of work. Taxing work directly, by imposing taxes on income and profits, is an especially efficient way to destroy work.
Markets are information networks; they are extraordinarily efficient structures for processing information on wants and relative scarcities to help people create work out of available energy. In markets, work is created when people respond to arbitrage situations that signal profitable
opportunities to redeploy resources. In flow markets we call it supply and demand; in asset markets we call it portfolio balance. Both represent arbitrage behavior driven by the second law of thermodynamics. In summary, arbitrage behavior, fed by price and return differentials, is the only concept we need to build a macroeconomic theory of work.
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(7) I am only too aware that, writing as a non-specialist in thermodynamics, I am wading into difficult and dangerous waters. As Gustave Flaubert wrote in a letter to Louise Colet in 1854 during the writing of Madame Bovary, “One ought to know everything to write. We writers are monstrously ignorant. If only we weren’t so lacking in stamina, what a rich field of ideas and similes we could tap! Books that have been the source of entire literatures, like Homer and Rabelais, contain the sum of all the knowledge of their times. They knew everything, those fellows, and we know nothing. “ Alas, I am monstrously ignorant as well. My hope is that the insights gained by applying the metaphors of physics to the problems of economics makes the result worthwhile.
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