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“Free energy” and economic resources

By “free energy” I don’t mean perpetual motion machines, cars that run on water and get 200 mpg, or the latest cold-fusion hype.

No, I’m referring to the term from physics. The free energy of a system is, roughly, the amount of energy that can be directly extracted from it. For example, a rock at room temperature is just full of energy—not just the energy locked in its nuclei, but basic thermal energy—but at room temperature you can’t extract any of it.

To the physicists in the audience: Yes, I realize that free energy has a technical meaning in statistical mechanics and that my above definition is sloppy. Please bear with me. And, to the non-physicists: feel free to head to Wikipedia or a physics textbook for a more careful treatment.

I was thinking about free energy the other day when hearing someone on the radio say something about China bailing out the E.U. I did a double-take. Huh? The E.U. is rich, China’s not so rich. How can a middle-income country bail out a bunch of rich countries? (According to the Wik, China’s per-capita GDP is $7,500. Portugal, the poorest country in western Europe, has a GDP of $23,000. Some countries in eastern Europe are poorer; the EU as a whole is a GDP of $30,000 per capita.)

Then I thought about free energy. Europeans, like Americans, have lots of stuff. (OK, I guess we have more stuff than they do. But they have more stuff than just about anybody else.) They’re rich, but their wealth is locked up. Their economy doesn’t have free energy.

In theory, Europeans and Americans could create all sorts of free energy just by consuming less for awhile: no more fancy vacations, new cars, i-pods, smart bombs, jet fighters, etc. But, as Galbraith discussed in The Affluent Society, it doesn’t seem to happen that way. (Galbraith was discussing the belief that a high GDP—even if it’s all being spent on civilian goods—is good for national defense because it represents economic capacity that could be transformed to military use if necessary. As Galbraith pointed out, there was no strong evidence that people would be willing to make such sacrifices. It happened in WW2, but then the economy was starting with a lot of underuse. If anything, one could argue that a depression is good for military capacity in that the unused resources can be directly shifted.)

So, China’s got that free energy—or at least some people thing they do. I’m still skeptical about the idea, but then again I don’t know anything about macroeconomics.

P.S. The idea of “free energy” and economic resources seems simple enough but I don’t know what it’s called by economists. I googled “free energy economics” and got things like this which really weren’t what I was looking for.

To put it another way, I’m pretty sure the answer to my question is, “Yes, economists talk about this concept all the time. Their word for it is X.” I just don’t know what X is.

27 Comments

  1. Redpeace says:

    fungibility?

  2. Mike says:

    liquidity?

  3. Landon says:

    Andrew,

    Your “free energy” idea maybe related to the concept of the long run aggregate supply curve, short run aggregate supply curve, and aggregate demand curve. The free energy in the economy would be something like the difference between where the aggregate demand curve and short run aggregate supply curves intersect (what the economy is producing) and where the short run aggregate supply curve intersects with the long run aggregate supply curve (how much the economy could be producing). You might want to double check that with someone else more versed in economics.

    Cheers,
    Landon

  4. Exergy says:

    This free energy – energy that can be usefully extracted from thermodynamical system untill it reaches equilibrium with environment is known as exergy

  5. Jonathan says:

    At last! An obscure part of my undergraduate training 35 years ago becomes helpful to somebody! http://en.wikipedia.org/wiki/Nicholas_Georgescu-Roegen

  6. Michael says:

    We don’t talk about this concept all the time. The closest you could get is “excess capacity”, which is a pathological symptom (of recession) and is not what the Chinese have in abundance.

    The problem in Europe is not about wealth that is tied up. It is not about wealth at all. It is partly about money — the European Central Bank could bail everyone out, but that would be inflationary. And it is a political impasse. The Germans (especially) don’t want to bail out the South without the South making great sacrifices, and Southerners are not convinced they need to accept the Northern terms. Why China thinks it can help is as much your (political) science as ours (economics). What they have that enables them to contemplate a role is simply money, accumulated over years of trade surplus in state coffers. The average income is irrelevant.

    • Jeremy says:

      Re: China’s reasons: It could be a way to try and garner support on their side against pressure for China to let its currency appreciate (what many politicians – especially in the US – generally refer to as China’s “predatory” trade/currency strategy). An IR realist interpretation would be China trying to play the US and EU against each other, in order to increase its own relative power in the IPE. There’s also some economic self-interest: China exports a lot to the EU (the main importer to the EU as of 2010: http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122529.pdf), so a cataclysmic eurozone melt-down could have significant impact on Chinese growth.

      But I agree with Prof. Gelman’s skepticism. I think it was some Brazilian official a few weeks ago who stated that if Germany isn’t willing to provide a “bazooka” to solve the crisis, why should other countries want to take the risk as well. I highly doubt China will offer anything substantive – certainly no more than Germany and the other northern member states are willing to offer.

  7. revo11 says:

    As an outsider, I’ve always wondered why statistical mechanical principles aren’t more often applied in macroeconomics. “Econophysics” seems to have a bad connotation, although I’m not sure why.

    • tc says:

      Economics as it is done today is all about utility maximization. Anything that isn’t the optimal result of some choice problem, preferably with forward-looking expectations, is considered unscientific. Statistical mechanics treats everything as a mindless particle, so that’s out.

      • Andrew says:

        Tc:

        As I’ve discussed elsewhere on this blog, I think utility theory is unscientific, in the sense that it represents a long-discredited model of psychology. Basing economics on utility makes about as much sense as basing medicine on the “four humours” or whatever they call that, or basing materials science on a pre-quantum theory of solids. It might work sometimes, but I wouldn’t call it science. A key aspect of scientific thinking is to use the most up-to-date knowledge when possible. Science isn’t just about internal logic, it’s also about mapping to reality.

        • Jonathan says:

          OK… I’ll try again. For “utility theory” substitute: (a) People strive to do as well as they can; (b) What they can do is make choices; (c) They are capable of evaluating how well off they are in one set of circumstances vis-a-vis another. None of these three principles violates any current model of psychology so far as I know. (If you want to get fancy you can modify (a) to fall short of maximization (“satisficing”), modify (b) with uncertainty and processing deficits (“bounded rationality”) and modify (c) with various modifications of preference relationships. But that’s all detail. Isn’t (a)-(c) isomorphic with utility theory? Again, to me economics is mostly normative… what principles should people use to achieve (a)-(c)? That’s reality, even if it’s not how some people behave.

          • revo11 says:

            maybe there are some phenomena for which this works well, but it’s hard to imagine this principle capturing phenomena all the time.

            It’s probably the exception rather than the rule that one’s model of people’s utility is even remotely meaningful. I would imagine it works well in situations where the “rules” are very well defined (maybe auctions, casinos, …. ). And yet economists tend to want to tackle every corner of social science. It’s hard to imagine more than a few isolated problems in development economics where utility theory would be truly predictive, but I’m just speaking as a perplexed outsider.

            The issue of free energy actually can be pretty relevant here as well. In systems with many degrees of freedom, the optimal configuration (the lowest potential energy state) is not what’s observed in because the probability of the optimal configuration is miniscule. Generally what describes the observable phenomena is a macrostate with the lowest free energy.

            Anyway, it’s hard to get too far debating these things in the abstract, but I remain perplexed

          • revo11 says:

            What does (a) mean? Is doing well necessarily 1 dimensional? I don’t know if I could rank all my past states in terms of how well I was.

            (c) strikes me as impossible. Evaluating causal effects is hard enough for researchers who do it for a living. How could you expect a population to behave in a way as if they could compute this?

  8. Sean Matthews says:

    Ha, and here we have an example of why physics metaphors are bad in economics – as well as a standard illustration of ‘common-sense’ fallacies in macroeconomics.

    ‘In theory, Europeans and Americans could create all sorts of free energy just by consuming less for awhile’

    You do not create any metaphorical ‘free energy’ by consuming less for a while – all you get is a depression.

    • That just means the depression is the metaphorical high-potential state. Which intuitively seems right. At the depth of a depression, labor costs are low. Social unrest is high, creating potential for social change. Opportunity cost is low for much of the population, leading to migration and small business creation.

      And indeed, it’s even conceivable (though certainly not definite) that the “free energy” created in a depression would alleviate debt burdens in the West. Labor costs go down, the currency weakens, suddenly the West is an attractive place to build factories to ship goods to Asia (assuming the West doesn’t take everyone with it).

      • Sean Matthews says:

        Nice try, but I don’t think it works. It is a (fairly) well-known observation that growth out of a (depr/rece)ession tends to be higher, but all you are doing at best is climbing back to the trend growth (and in the interval until you do, you have lost production), and more likely (if you are really aggressive about cutting down on consumption), you might permanently damage productive capacity to some extent, so you will return to the same slope, but shifted down (not to mention that you have introduced a volatility that will, by itself, have negative effects).

  9. Paul says:

    Andrew: You write “OK, I guess we have more stuff than they do”. What do you mean by stuff?

    • Andrew says:

      Paul:

      I’m talkin bout cars, fridges, i-pods, meat, and trips to exotic destinations.

      • yop says:

        Hello Andrew,

        The economy of the EU-27 is larger than that of the US-50. At least in terms of GDP (stuff). However it is true that Americans have more stuff per person.

  10. Entsophy says:

    […] but no one’s able to make the notion specific, true, and useful. The latest effort comes from Andrew Gelman , who speculates on “Free Energy” in Economics. Ironically, “Free Energy” […]

  11. Joseph says:

    “Free Energy” actually occurs naturally in statistics. Once this point is seen, it gives a much better idea of what ways it might arise in Economics. I wrote a short post detailing these connections here:

    http://www.entsophy.net/blog/?p=50#more-50

  12. ymb says:

    I think already Paul Samuelson complained about overuse of thermodynamic concepts in economics, with all the superficial similarities and overblown conclusions… The meme does have quite some pedigree.

  13. Jim S says:

    Andrew,

    When I get around to going up to NY, I will email you beforehand and offer to teach you third year undergrad macro over a longish coffee.

  14. Sylvia says:

    Last week, after attending a lecture on the philosophy of thermodynamics and statistical physics, I was talking to my flat mate, who is an economist. During our conversation, I came up with this analogy between national debts and the second law of thermodynamics:

    An individual needs pocket money to buy a train ticket, but nations need big amounts of money to build e.g. a full railway system. The idea is that the money on individual bank accounts is like thermal energy, which will not spontaneously transform into a more useful form of energy. Whereas (small) debts of individuals or companies may be reversible, the build-up of (huge) national debts is irreversible.

    My post about this is here: http://www.sylviawenmackers.be/blog/2011/11/fysica-van-de-staatsschuld/ (in Dutch).

  15. […] tussen thermodynamica en economie blijkt thermoeconomics te heten. Ook Andrew Gelman heeft zopas een blogpost geschreven met een idee in die richting, terwijl Joseph Wilson op zijn blog Entsophy analyseert […]