Economic Engineering & Statistical Physics

Abstract

Economic engineering models individual agents as inertia elements and can be viewed as a microeconomic theory based on analogs with classical mechanics. In this thesis the economic engineering concept of modeling individual agents is used to model economic systems consisting of many agents, e.g. an entire country. This is done using classical statistical physics. In statistical physics the microscopic movement of individual gas particles as described by classical mechanics and the macroscopic properties of gases as described by thermodynamics are linked. Using this insight, microeconomics and macroeconomics are linked within the economic engineering framework.

The critical contribution of this thesis is finding the analog of Gibbs' interpretation of entropy, calling it the amount of diversification. This is done as follows. A thermodynamic system in equilibrium is seen as the analog of a Pareto optimal economy or macroeconomic equilibrium. The 2nd law of thermodynamics guarantees the existence of thermodynamic equilibrium and it follows that the entropy is maximized in equilibrium. Clausius interpreted the entropy as an "arrow of time" that pushes the system towards equilibrium. In this thesis Adam Smith's invisible hand is then viewed as an economic analog of Clausius' entropy. Gibbs gives a statistical interpretation to entropy. By calling the amount of diversification the analog of the Gibbs entropy, it follows that a Pareto optimal economy is fully diversified. The amount of diversification contains both the distribution of economic rent over agents and the portfolio diversification of agents for different goods.

Based on the diversification analog, the thesis develops several further analogs. The analog of the partition function is called the opportunity function and gives the opportunities for extracting profits from an economic system by trading. From this the economic engineering analog of the free energy follows. The temperature and chemical potential are given economic engineering analogs as well, namely the level of welfare and the disposable income per capita respectively. The thesis is finalized with applications of the theory developed.