Economics and Nature’s Laws

Source details

Review of Entropy Economics: The Living Basis of Value and Production by James K. Galbraith and Jing Chen.
Publication details cited in the review: University of Chicago Press, Chicago, IL, 2025, 248 pp., $35.
Review author: VIVEK ARORA, deputy director in the IMF’s Middle East and Central Asia Department.
Review date: June 2025.
Review framing: presents the book as proposing a radically different approach to economic theory—“entropy economics”—grounded in the laws of thermodynamics and a biophysical view of economic activity.
Note: “Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.”

Core thesis: mainstream economic concepts (marginal utility theory of value, market equilibrium, steady state) are set aside in favor of “entropy economics.”
Entropy economics premise:
- Economic activities resemble biological and mechanical activities.
- The laws of thermodynamics are central: energy can never be created or destroyed, only transformed; entropy tends to increase unless regulated.
- Regulation functions analogously in economics as in mechanical and biological systems: to keep resource flows within a system’s capacity to handle them safely and sustainably.
No equilibrium in real life: systems, including economies, are constantly changing under physical and biological laws in a world of finite resources.
Role of technology: technology can improve only the way natural resources are combined; resources are the ultimate constraint on goods and services an economy can produce.
Structure of advanced systems: advanced societies and systems are costly to set up (high fixed costs) but can run relatively smoothly if established well (low variable costs).

Institutional and regulatory implications:
- A stable, effective financial system must be under the jurisdiction of an independent regulator to ensure each element is well managed.
- The international economic system, built with high fixed costs to run smoothly with low variable costs, would be costly to replace if it broke down.
Trade implications:
- Tariffs on products involving one big producer and one big consumer can shift wealth from producing countries to consuming countries and influence the distribution of jobs across borders.
Energy and technology implications:
- Skepticism of renewable energy based on natural resource requirements to deploy renewables.
- Example: electric cars emit no carbon in use, but producing their batteries involves enormous fixed costs, such as pollution and the depletion of natural resources.
Macro-social projections noted as the book’s conclusions:
- Human survival and prosperity depend entirely on the availability of natural resources (“low entropy” energy sources).
- Modern industrial economies make costly and heavy use of resources, contributing to waste, a warming climate, rising seas, and falling human fertility.
- Given limits on available resources, and mitigation potential of policies and new energy sources only “up to a point,” the future of human society is one of:
- smaller populations,
- shorter lifespans,
- lower fixed costs and higher variable costs,
- harsher inequalities.

Strengths highlighted:
- Provocative, biophysical perspective that connects economic dynamics to physical laws.
- Draws implications across growth, trade, development, finance, pensions, and climate with often startling results.
Limitations and cautions:
- Scientific terms are not always defined; meanings must be inferred from the text or found elsewhere.
- Intellectual framework can be sometimes puzzling.
Reader recommendation: despite difficulties, readers “should persevere” and will be enriched by the perspective.

Source: F&D Magazine book review “Economics and Nature’s Laws,” June 2025.

Economics and Nature's Laws
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