The Three Laws of Thermodynamics and the Theory of Production
Khalil, Elias L., Journal of Economic Issues
The paper takes issue with Nicholas Georgescu-Roegen's interpretation of the second law of thermodynamics (entropy law) and its relevance to the economics of production. The paper concurs with experts on thermodynamics that Georgescu-Roegen has committed a major error. Namely, Georgescu-Roegen's notion of "material entropy," which he christened as the "fourth law of thermodynamics," is unfounded. Of more importance, Georgescu-Roegen's purported law, as the application of the second law to the realm of matter, is a grave conceptual blunder.
The paper argues that the first law (conservation law) is the more relevant law of thermodynamics if one wants to account for production costs. Interestingly, the much neglected third law of thermodynamics, rather than the second, should be the one to act as the proper analogy to the nature of production.
Despite the shortcoming of Georgescu-Roegen's concept of material entropy, his distinction between funds and stocks is useful. Stocks--such as oil or mineral deposits--provide flows which necessarily entail the diminishing of the stocks. Funds--such as lakes and forests--provide services which are renewable if the funds are exploited at sustainable rates. With the help of the concepts of production cost and funds, Georgescu-Roegen's thesis about the impossibility of full recycling can be affirmed--but without reference to the entropy law or Georgescu-Roegen's version of that law, what he calls the "fourth law of thermodynamics." In the end, the paper shows that the impossibility of full recycling of matter parallels the basic insight of the third law with regard to energy.
To show this, the paper advances the centrality of institutions and technology, what is coined here the "technological/institutional regime of production" or, in short, the regime of production. The regime is a more-or-less coherent bundle of fundamental institutions and basic technologies that inform everyday productive activities (see Khalil 1995a and 1997). The paper is critical of Georgescu-Roegen's "material entropy" on the basis that it defines resources independently of the regime of production. As Clarence Ayres (1941), Wesley Mitchell (1941), and Erich Zimmermann (1951) argued, resources are not given but rather created by active agents. John Dewey and Arthur Bentley (1973; see Khalil 2003) provided a philosophical framework, the "transactional view," which substantiates the Ayres/Mitchell/Zimmermann thesis. Namely, resources do not exist independently of the active knower. What is a resource depends on the transaction between the knower and the object of knowing, the environment.
However, regimes of production are never static. While they are capable of creating more resources with innovations, there is no guarantee that innovations and the creation of resources will continue at a steady rate. A regime of production, which acts as a fund, may face increasing costs of production as the flow of innovations falls behind the rate of exhaustion of stocks. Any particular regime is highly entrenched either because of high transaction costs or because of the path-dependent (inertia) character of innovations. The inflexibility of regimes of production in the face of declining resource stocks and innovation rates allows pressures to build up. Such a scenario may provide an endogenous account of the discontinuous development of technological/institutional regimes--whose investigation is left for further research.
The second law of thermodynamics is deceptively an attractive tool to discuss the hypothesis of degradation of the environment. The second law seems pliable enough to be stretched in different directions to dress up some divergent approaches to the economics of environmental resources. (1) The entropy law simply states that an isolated system, consisting of segmented but connected domains, tends toward equilibrium. (2) The domains can be made up of different kinds of gases or consist of the same kind of gas but with temperature or pressure differences. …