Natural resource economics is the discipline that deals with the use of the resources that humans can extract from nature and their environment for consumption and capital creation. Most research on this subject focuses on problems of population growth, economic growth, and efficient extraction of natural resources across time.
Thermodynamics is the science of matter and energy transformation and by consequence the essential tool for understanding their link. As economists, can we learn something from thermodynamics and could we interpret this science’s results in economic terms?
Thermodynamics has been in economists’ minds since the post Great Depression period. Paul Samuelson’s Principles of Economic Analysis was greatly influenced by the author’s educational background in physics, and particularly thermodynamics. This book was at the forefront of treating economics as a quantitative discipline among social sciences.
The starting point of all thermodynamics textbooks is the distinction between the system and its environment. The system is the basic object of study, and the environment is what surrounds it. The combination of the system and the environment is called the universe. There are three different types of systems distinguished by their relationship to their environment. An isolated system lacks any exchange with its environment, a closed system exchanges only energy, and an open system can exchange energy and matter with the environment. By definition the only example known of an isolated system would be the universe itself. An economy can be seen as an open system; the economy extracts energy and inputs from nature (e.g. sun, crops, etc.) and produces waste that heads back to our environment.
In economics we are not used to having general laws, but in hard sciences this is common and researchers struggle to condense their findings in the slickest equations possible. The first principle of thermodynamics is called the law of conservation of energy. It states that the energy in an isolated system is conserved; it is nor destroyed nor created.
This statement has important economic implications. First energy is not created, all types of energy that we use in our daily lives come from other forms of energy. Electricity is just a transformation of whatever source of energy we are extracting (e.g. coal, natural gas, solar, wind, etc.). An interesting deduction of this law can be drawn. When people use the term renewable energy what they really mean is that the particular source of energy is renewable relative to our life-time span. For example, sun rays arriving to the Earth are a renewable source of energy because we are not exhausting the sun rays as we extract electricity from them. Furthermore, the first principle can be related to the mass-balance principle, which states that all mass inputs imply an equal amount of mass outputs. Hence, all natural resource inputs extracted from the environment will eventually produce an equal amount of waste that has to be managed. We will see that the same kind of balance is not true for energy because transformation implies a degradation of energy.
The second principle of thermodynamics requires the notion of entropy. It is a state function of the system that binds heat and temperature. It can be understood as the level of disorder at the microscopic scale in a system. An ice cube melting in a table top is an example of increased entropy because the water molecules are disorganizing from the solid to liquid state. Examples of entropy can be found in almost all fields. From the second principle of thermodynamics it can be deduced that there is a creation of entropy whenever there is an irreversible change in a system.
The second principle has economic implications at microeconomic level; entropy becomes a constraint on the amount of energy that can be extracted from the environment. For example, when there is a transformation of energy from a low entropy source (sun rays) to a high entropy energy (mechanical work), there is necessarily dissipation. Therefore, we can deduce that substitutability between different types of energy is limited. Economic models should include an entropy related constraint to account for the degradation of energy in the extraction process.
From a macroeconomic perspective, entropy can be used by economists to measure the level of quality, in some sense, of natural resources. Exergy is a term used in engineering to account for the “useful” work potential of energy. Also, we know that not all sources of energy perform equally in terms of energy that we can extract from them. For example, the cost of extracting a standard amount of oil from bituminous sands is incredibly high compared to pumping a barrel of oil in Qatar.
It is important that natural resource economists have an initiation to thermodynamics because many might forget that the economy is not an isolated system. The complex interactions of the economy with the environment go beyond pollution and resource extraction. The need for interdisciplinarity in the natural resource branch of economics is pressing. Thermodynamics has many more analogies with economics than the ones presented here. The interested economist will find lots of applications that will satisfy his or her curiosity.
By Felipe Ramírez Goñi