The Economy As A Materials Processor

The economy has been interpreted as a self-organized system, far from thermodynamic equilibrium (Jantsch 1975, 1980; Prigogine 1976; Ayres 1994a). It converts low entropy-low information materials into high entropy wastes and high information products and services. Another way of putting it is to say that the economy creates useful order from natural disorder, and embodies this useful order (mostly) in material form, using large quantities of exergy from biomass (that is, the sun) or from fossil fuels.

Energy (exergy) flux, is transformed into an intermediate service ('useful work'), driving machines and substituting for human and animal labor. By driving down the cost of other products, and thus increasing demand and production, this long-term substitution has been the dominant driver of economic growth in the past two centuries. In this context, exergy or exergy services (useful work) can be regarded as a factor of production, playing a role complementary to capital services and labor services.

This interpretation explains the close observed correlation between exergy input and economic output (Cleveland et al. 1984) without any necessary implication that energy (exergy) content of physical products is proportional to value. It also allows us to interpret technological progress on a macro-level in terms of the efficiency of conversion of exergy inputs-to-service (= work) outputs (Ayres and Warr 2003).

From an evolutionary perspective, the economic system can be viewed as an open system that extracts and converts raw materials into products and useful services. The economy consists of a sequence of processing stages, starting with extraction, conversion, production of finished goods and services, final consumption, and disposal of wastes. Most of the non-structural materials are discarded in degraded form. These conversion processes correspond to exergy flows, subject to constraints, including the laws of thermodynamics. The objective of economic activity can be interpreted as a constrained value-maximization problem or its dual, a cost-minimization problem. Value is conventionally defined in terms of preferences for consumption goods, or services.

The simplest 'model' representation of the economy consists of a single sector producing a single all-purpose product that is both a capital good and a consumption good. This simplification is widely accepted in undergraduate textbooks, despite its unrealism, because two or three sector models are far more difficult to analyse mathematically, yet not much more realistic. For example, one might consider a model of two sectors with a single intermediate product. The first sector would include extraction and primary processing, for example, to finished materials. The second sector would include manufacturing and service activities. Three or more sectors would obviously add a little more to the realism of the scheme, but the mathematics for a three-sector model is almost impenetrable. Of course, the more stages in the sequence, the more it is necessary to take into account feedbacks, for example, from finished goods to extraction of primary processing sectors. The N-sector version would be an input-output model of the Leontief type in which the sequential structure tends to be obscured.

An adequate description of a materials-processing system, must include materials and energy flows as well as money flows. These flows and conversion processes are governed by the laws of thermodynamics, as well as accounting balances. At each stage, until the last, mass flows are split by technological means into 'useful' and 'waste' categories. Value (and information) are added to the useful flows, reducing their entropy content and increasing their exergy content per unit mass (thanks to exogenous inputs of exergy), while the high entropy wastes are returned to the environment.

The conceptualization of the economy as a materials processor is further developed in Chapter 6.

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