production processes and here we turn to the model of an entire economic system. It
consists of two main actor groups, producers or firms and consumers or households.
The resulting image is that of a circular flow of goods and services and factors of
production (labor, land and capital) in a closed loop, guided by price signals
(Fig. 3.3).
In his discussion of how complexity economics diverges from this paradigm,
Beinhocker returned to his “half-baked physics” analogy, which rests on the First
Law of Thermodynamics, also called the Conservation of Energy Principle. It was
developed in the late eighteenth century and explains that in isolated or closed
systems energy is neither created nor destroyed but merely changes its forms. You
always have the same total: if net energy or heat is supplied to a system it equals the
net work done by the system. Energy in economics is capital. Similar to utility it
needs some measurement unit and this is once again money. The value of pieces of
capital is expressed in market prices, so what counts is their “exchange value.”
The Second Law of Thermodynamics followed midway through the nineteenth
century and refers to the irreversibility of natural processes. It states that every time
energy changes its form there is an increase in entropy, a measure of disorder or
randomness. This means that continued activity will eventually make any closed or
isolated system decay into disorder. Only open systems, using energy and matter
Fig. 3.3 Mainstream economics model of the economy. Source Daly/Farley (2010: 25)
82
3 Why the Mainstream Economic Paradigm Cannot Inform …
consists of two main actor groups, producers or firms and consumers or households.
The resulting image is that of a circular flow of goods and services and factors of
production (labor, land and capital) in a closed loop, guided by price signals
(Fig. 3.3).
In his discussion of how complexity economics diverges from this paradigm,
Beinhocker returned to his “half-baked physics” analogy, which rests on the First
Law of Thermodynamics, also called the Conservation of Energy Principle. It was
developed in the late eighteenth century and explains that in isolated or closed
systems energy is neither created nor destroyed but merely changes its forms. You
always have the same total: if net energy or heat is supplied to a system it equals the
net work done by the system. Energy in economics is capital. Similar to utility it
needs some measurement unit and this is once again money. The value of pieces of
capital is expressed in market prices, so what counts is their “exchange value.”
The Second Law of Thermodynamics followed midway through the nineteenth
century and refers to the irreversibility of natural processes. It states that every time
energy changes its form there is an increase in entropy, a measure of disorder or
randomness. This means that continued activity will eventually make any closed or
isolated system decay into disorder. Only open systems, using energy and matter
Fig. 3.3 Mainstream economics model of the economy. Source Daly/Farley (2010: 25)
82
3 Why the Mainstream Economic Paradigm Cannot Inform …