raine the new

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The new entropy law and the economic process

Alan Raine *, John Foster, Jason Potts

School of Economics, University of Queensland, Brisbane 4072, Australia

1. Introduction

It is now commonplace among modern evolutionary econo-

mists to argue that the evolution of economic systems is a

process of increasing structural complexity driven by the

production of new knowledge. But much debate remains about

how and why this might be. For a long time, the microfounda-

tions of this approach have been soughtby way of analogy with

biological evolution (Nelson and Winter, 1982; Hodgson, 1993).

However, despite the intuitive neo-Darwinian appeal of that

approach, it remains problematic, and without going into

exactly why, it is fair to say that the appropriate foundations of

the theory of economic evolution remains an open question.

Many years ago, NicolasGeorgescu-Roegen (1971)argued

that the entropy lawwas the ultimate foundation of dynamic

economic analysis. In this paper, we continue along this line

to argue that the evolution of economic systems is intimately

connected to the second law of thermodynamics. However,

the central point we shall make is that the meaning of the

entropy law itself has not remained static, and that changes

in the concept of the entropy law imply changes in the

meaning of economic analysis in general, but especially in

evolutionary economic analysis. In fact, the application of a

reformulated second law presents an alternative interpreta-

tion without reference to the problematic concept of entropy

altogether.

e c o l o g i c a l c o m p l e x i t y 3 ( 2 0 0 6 ) 3 5 4 3 6 0

a r t i c l e i n f o

Published on line 8 March 2007

Keywords:

Thermodynamics

Evolution

Self-organization

Complexity

Knowledge

Economic development

a b s t r a c t

We argue that a reformulated second law of thermodynamics recently employed by

Schneider and Kay [Schneider, E., Kay, J., 1994. Life as a manifestation of the second law

of thermodynamics. Math. Comput. Model. 19, 2548] to conceptualize the relation between

evolution, complexity and ecosystems can also be applied to economic systems. Utilizing

thermoeconomic principles, this enables us to formalize the concept of economic evolution

as the development of structural complexity to harness available energy from the environ-

ment to avert degradation gradients. We conclude, speculatively, that as much as life is an

inevitable consequence of the reformulated entropy law [Kauffman, S., 1993. The Origins of

Order: Self Organization and Selection in Evolution. University of Oxford Press, New York;

Schneider, E., Kay, J., 1994. Life as a manifestation of the second law of thermodynamics.

Math. Comput. Model. 19, 2548], then this is also true of market economies for the same

equilibrium seeking reasons. Market economies have experimentally proven themselves,

more than any other known institutional arrangements, to abet the production of new

knowledge and structural complexity, and therefore energy degradation. As a direct exten-

sion of the Schneider and Kay hypothesis, market economies are evolutionary stable

because of their efficacy in growing knowledge and increasing structural complexity; a

consequence, we argue, that follows from thereformulated second lawof thermodynamics.

The enormous energy transformations typical of market economies, consequent on their

ability to induce and harness new transformations, are ultimately the reason they are

selected.

# 2007 Elsevier B.V. All rights reserved.

* Corresponding author. Tel.: +61 7 3365 6246; fax: +61 7 3365 7299.E-mail addresses:[email protected](A. Raine),[email protected](J. Foster),[email protected](J. Potts).

a v a i l a b l e a t w w w . s c i e n c e d i r e c t . c o m

j o u r n a l h o m e p a g e : h t t p : / / w w w . e l s e v i e r . c o m / l o c a t e / e c o c o m

1476-945X/$ see front matter # 2007 Elsevier B.V. All rights reserved.

doi:10.1016/j.ecocom.2007.02.009
mailto:[email protected]:[email protected]:[email protected]://dx.doi.org/10.1016/j.ecocom.2007.02.009http://dx.doi.org/10.1016/j.ecocom.2007.02.009mailto:[email protected]:[email protected]:[email protected]


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The Entropy Law and theEconomic Process (Georgescu-Roegen,

1971) began this mode of analysis by building upon classical

conceptions of the entropy law as applied to economic

analysis. To this day, this approach underpins aspects of

both evolutionary economics and ecological economics. While

the concept of entropy may be well suited to applications in

systems close to thermodynamic equilibrium, a more quali-

tative approach is required to analyze long-run developmentin those systems far from thermodynamic equilibrium (FFE).

Georgescu-Roegen (1971, 294/307) utilized Schumpeters dis-

tinction between growth and development, and Lotkas endo-

and exo-somatic instruments, to suggest that evolutionary

developments in FFE economic systems might also be

considered as qualitative processes of structural change.

The notion that economic systems are dissipative struc-

tures has been extended through the addition of the

autocatalytics of self-organization (Foster, 1997; Witt, 1997).

The process of self-organization was first clearly elucidated by

Prigogine (1978) for chemical systems, by Haken (1978) for

lasers, and then extended to biological systems byBrooks and

Wiley(1986). Like these approaches, Foster andWitt argue thatself-organization is also the fundamental process at work in

complex economic systems far from thermodynamic equili-

brium.

In the biological context, self-organization is viewed as a

more fundamental explanation of the origins of order from

disorder than natural selection (Depew and Weber, 1995).

This is not an argument that neo-Darwinian evolutionary

theory is wrong, but rather that evolution is a process that

works upon the variety that is generated by processes of self-

organization. Thus, selectionis a secondorderprocess which

can only act upon the variety generated. This position has

beenmostclearlystatedbyKauffman(1993, 2000) andthereis

mounting evidence in biological research to support it. In theeconomic domain, the process of self-organization turns out

to be much more sophisticated and, in many respects, it is a

quite distinct process to that found in the biological domain

(Foster, 2005).

A basic puzzle remains: why do biological and socio-

economic systems expand their structure (and populations)

with the resultthat theyuse increasingamounts of free energy

(and associated materials)? Generally, they expand to what-

ever energetic limits exist and, as Malthus failed to perceive,

economic self-organization can keep on extending these

limits. The notions that biological populations will expand if

they can, and that economic progresswill continue are taken

for granted, but on reflection, it is not entirely obvious why. Ofcourse, it can be argued that we are genetically encoded to

survive and that survival, over any considerable period of

time, requires regular and reliable systems for thwarting the

immediateimpacts of the entropylaw. In a niche rich with free

energy, organisms over-perform and this is necessary to

survive whatever large exogenous shock comes along. As a

general rule, organisms do not just try to negate the entropy

law, they seem to try to maximize the throughput of free

energy.

This was observed by Hatsopoulos and Keenan (1965),

and more recently,Schneider and Kay (1994)in the context

of net ecosystem energy absorption of solar energy. Biomass

captures solar energy through the creation of more biomass

as evidenced by the different amount of solar energy

reflected by dense forest and deserts. This perspective

turned around conventional thinking: dissipative structures

do not just absorb free energy to fend off entropy; they exist

in the first place because of the presence of free (solar)

energy. They are structures that come into existence as

energy throughput devices and, if conditions are not right,

there will be no dissipative structures with autocatalyticproperties. Hence, without the availability of the appropriate

chemical building blocks and the correct ambience, there

will be no life.

It is argued that the self-organization of the biosphere is

concerned with the throughput of solar energy in a complex

adaptive system of dissipative structures with autocatalytic

properties. In turn, we can think of economic systems as

knowledge based structures that have the capacity to

throughput more energy than biological systems. Control

over fire, water and wind were traditionally used to comple-

ment human energy, while the modern economy has seen the

focus shift to fossil fuels and nuclear power, especially for the

provision of high quality electrical energy. Hence, the growthof structural complexity in economic systems is a conse-

quence of the production of new knowledge in market-

intermediated organizations. This could be seen as consistent

with the Schneider and Kays interpretation of the reformu-

lated second law of thermodynamics.

In an economic environment, it could be postulated that

there is an attractor, in the space of institutional arrange-

ments towards which the acquisition of knowledge drives

economic systems because the production of new knowledge

maximizes the throughput of energy. The central argument is

that, as economic systems grow and develop, we should

expect to observe the following:

(1) an increase in total energy throughput;

(2) the development of more complex structures;

(3) an increase in autocatalytic cycling activity and the

institutional embedding of these processes;

(4) the emergence of greater diversity;

(5) the generation of more hierarchic levels; and

(6) an increase in knowledge structures and their relative

importance.

We should expect all of these structural changes because

all of them aid and abet increases in energy utilization. In

this paper we shall not attempt to prove or test these

hypotheses but, rather, explain why they are plausible asstatements about the nature of market economies, and why

they are consistent with the second law of thermodynamics.

This has important implications for the relation between

economic systems and ecological systems, the nature and

meaning of economic growth, and the analytical founda-

tions of economics. Thus, the evolution of economic

systems that occurs because of the production of new

knowledge can be viewed as part of a natural process, and

indeed can be viewed as an outcome of a unified thermo-

dynamic principle.

Thispaper is setoutas follows. InSection 2, we shall review

the Schneider and Kay hypothesis about ecological systems

and provide support for our claim that this can be extended to

e c o l o g i c a l c o m p l e x i t y 3 ( 2 0 0 6 ) 3 5 4 3 6 0 355


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economic systems. In Section 3, we shall review the basic

principles of thermodynamics and attempt to elucidate the

nature of the reformulated second law. In Section4, we link

evolution and complexity from a thermodynamic perspective.

In Section 5, the economic implications of thermodynamic

evolution are considered before the concluding statement.

2. Schneider and Kay on thermodynamics andecology

Themodernreformulation of the relation between the entropy

law and evolution of complex systems has major implications

for economic theory, and particularly so in relation to the

evolutionof knowledge. Indeed,we shall eventuallyargue that

economic evolution is a natural consequence of thermody-

namic processes. Schneider and Kay (1994) view all of

evolution from such a perspective:

We examine the thermodynamic evolution of various

evolving systems. . .

We take the reformulated second law,where non-equilibrium is described in terms of gradients

maintaining systems at some distance away from equili-

brium. The reformulated second law suggests that as

systems are moved away from equilibrium they will take

advantage of all available means to resist externally

implied gradients . . . We argue that as ecosystems grow

and develop, they should increase their total dissipation,

develop more complex structures with more energy flow,

increase their cyclingactivity, develop greater diversity and

generate more hierarchic levels, all to abet energy

degradation. Species which survive in ecosystems are

those that funnel energy into their own production and

reproduction and contribute to autocatalytic processeswhich increase the total dissipation of the ecosystem. In

short, ecosystems develop in ways which systematically

increases their ability to degrade the incoming solar

energy. We believe that our thermodynamic paradigm

makes it possible for the study of ecosystems to be

developed from a descriptive science into a predictive

science founded on the most basic principles of physics.

(1994: 25)

Schneider and Kay applied the energy gradient dissipation

concept to the analysis of biological systemsby comparing the

maturity of various ecosystems. Their hypothesis suggests

that more mature ecosystems will re-radiate a lower amountof energy than less developed ecosystems by creating

dissipative structures that capture and utilize more of the

solar gradient. Theybase this upon an interpretation of input

output (IO) tables of re-radiant energy collected by indepen-

dent thermal imaging satellite data and collated byLuvall and

Holbo (1991).

Re-radiant energy compares the thermal heat expelled by

the ecosystem with the original energy gradient imposed by

the external environment. It is observed that more mature

ecosystems radiate significantly less thermal heat. For

example, clear-cut grassland was found to be comparable to

a quarry, re-radiating about 3540% of solar radiation. Natural

and plantation forests utilize around 85% of the incoming

energy while extremely well developed 400-year-old Douglas

fir forests harnessed greater than 90%. The results of these

investigations provide support for the hypothesis that more

highly self-organized ecosystems degrade more of the avail-

able energy through the development of sophisticated energy

harnessing mechanisms.

It seems to us that Schneider and Kays basic idea may also

apply to economic systems. By making a few elementarysubstitutions, this would seem to also be a provocative and

promising approach to evolutionary economic analysis.

Consider this:

We argue that as economic systems grow and develop,

they should increase their total dissipation, develop more

complex structures with more energy flow, increase their

cycling activity, develop greater diversity and generate

more hierarchiclevels, allto abet energy degradation. Rules

which survive in economic systems are those that funnel

energy into their own production and reproduction and

contribute to autocatalytic processes which increase the

total dissipation of the system. . .

We believe that ourthermodynamic paradigm makes it possible for the study

ofeconomic systems to be developed from a descriptive

science into a predictive science foundedon the most basic

principles of physics.

Economic systemsare highlyevolved ecosystems that have

harnessed a new substrate knowledge that enables them to

extend their organized complexity and, correspondingly, their

dissipative potential (Miller, 1999; Potts, 2003). Economic

systems increase the complexity (structure of interactions),

cycling activity (habits, routines, competences and institu-

tions), and hierarchic depth (organization and modular

decomposition) of natural systems by accelerating, and beingaccelerated by, the production of new knowledge.

The immediate implication is that economic systems are

not outside Nature, and nor is Nature outside economic

systems. The human species is a significant component of the

ecosystem because our economic systems, made possible by

our biologically supported and socially evolved knowledge

systems, are highly effective means of doing what all other

species are also doing from the perspective of the second law.

Of all the species on this planet, Homo Sapiens is one of the

most effective species at degrading energy.

Knowledge that results in both creativity and productive

cooperation has grown and led to economic self-organization

(Foster, 1997). In turn, innovation has been subject to selectionmechanisms that have tended to enhance energy through-

put.1 However, this is a very recent phenomenon in evolu-

tionary time driven by the tremendous growth in knowledge

and human population in the past 200 years. This has been

facilitated by the spread of market economies based upon a

globally adopted set of institutions for developing the means

of creating, producing, distributing and consuming goods and

services.

1 We focus on the structural aspects of the adaptive process thatprecede selection by conscious choice in economic evolution,

rather than the role of human agency.



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3. Whats new in thermodynamics

The classical laws of thermodynamics, which were prompted

by investigations into the efficiency of heat engines and

formalized later in the 19th century, are approximately:

0th law of thermodynamics: there exists energy2

1st lawof thermodynamics: in an isolated system,energyisconstant

2nd law of thermodynamics: the total entropy of an

isolated system never decreases

The second law, also known as the entropy law, is a

statement about the quality of the energy conserved in

accordance with the first law. The traditional entropy law

states that anyreal processcan proceedonly in a direction that

results in an entropy increase, which is to say that the

extraction of work always involves a decrease in the quality of

the energy remaining in an isolated system. The traditional

interpretation stated what would not happenhigh quality

energy turns into low quality energy by the extraction of workand never the reverse. No work process is ever 100% efficient,

and so there exists a fundamental irreversibility in Nature.

That, in itself, was and still is a very big idea. There is an

arrow of time along the entropy gradient and this has all

manner of implications for the other laws of physics. But this

shall not be our concern. The issue here is whether entropy

increase, or the arrow of time, conveyed the meaning of the

second law appropriately. Long ago,Hatsopoulos and Keenan

(1965), andKestin (1966)argued that entropy increase is not

in fact the general meaning of the second law. In open

environments, Schneider and Kay propose the following

restatement:

Thethermodynamicprinciplewhichgovernsthebehaviour

ofsystemsis that,as they are movedawayfromequilibrium,

they will utilize all avenues to counter theappliedgradients.

Astheappliedgradientsincrease,sodoesthesystemsability

to oppose further degradation. (1994: 28)

This reformulation of the entropy law addresses what

happens in reality a system will attemptto reach equilibrium

and, in essence,the more pressure that is applied, the harder

it will resist. Although only mildlyinteresting forsystems at or

near equilibrium, as von Bertalanffy (1968), Prigogine (1978),

Brooks and Wiley (1986) and Prigogine and Stengers (1997)

have shown, it is a very interesting restatement for systemsthat are massively out of equilibrium. It is generally accepted

that all natural processes can be viewed in light of the entropy

law where global entropy increases may be partially offset by

local system development (von Bertalanffy, 1968).

This new interpretation argues that the essential meaning

of the second law is that all real processes are equilibrium

seeking, butthat does notthen imply that allreal processes are

in equilibrium, which is a common misperception, at least

among orthodox theoretical economists. Rather, all real

processes are equilibrium seeking because many of them

aremassivelyout of equilibrium as a consequence of gradients

applied. Hence, life is an emergent phenomena created by the

constant influx of solar radiation which maintains living

systems in a non-equilibrium state.

The reformulated second law is appropriate for the analysis

of spatially fixed and open systems such as plants and forests.

Such systems are subject to two opposing gradients: the

thermodynamic degradation gradient and the incoming solarradiation gradient. Solar radiation provides the energy neces-

sary for these systems to oppose thermodynamic degradation

as implied by the entropy law. Schneider and Kay argue that

this principle applies to all chemical and biological systems. To

support thisargument, theyutilizethe workofLuvall andHolbo

(1991)who found that more mature and complex ecosystems

(e.g. rainforests) were more effective at dissipating energy

gradients than less mature ecosystems (e.g. rock quarries), by

the measure of re-radiant energy from each.

However, Schneider and Kayare not alone in developing an

alternative approach for analyzing thermodynamic develop-

ment.Fath et al. (2001)reviewed 10 different thermodynamic

principles used in environ network analysis in ecology andfound that they were differentiated by the primary focus of

study (e.g. specific heat dissipation or total throughput), and

not by alternative applications of the entropy law. Of the 10

principles, the minimum specific dissipation principle (MSDP)

is most applicable to the investigation of complex adaptive

systems and implies that living systems will maximize energy

flux but minimize the amount of specific dissipation as heat.

The MSDP is a generic form of the Schneider and Kay

hypothesis that is consistent with the principles outlined by

Lotka (1922a, 1922b). It is more applicable to mobile open

systems (e.g. animals), which do not derive significant energy

from environmental gradients directly. In fact, these systems

must harness chemical energy from matter in the environ-ment to avert the gradient imposed by the second law.

Essentially, this principle indicates that those FFE systems

facing resource constraints will preferentially convert energy

to structure, due to the efficiency gains of reusing structure in

cyclic mechanisms.

4. Thermodynamics, complex systems, andevolution

Previous work on complex adaptive systems by Prigogine

(1978),Brooks and Wiley (1986), andAllen (1998), recognized

that biological, ecological and economic systems are nevernear classical thermodynamic equilibrium. Self-organization

provides structures that throughput free energy in a way that

resists the thermodynamic gradient and fuels maintenance,

regeneration, and structural development. Biological, ecolo-

gical andeconomic systemsare characterizedin terms of their

local environment of interaction. These systems, in their

different ways, can alter their local environments in order to

exploit energy gradients.

Simple open systems can be understood in terms of energy

and entropy gradients. In cases where energy is imposed

directly, usually heat and solar energy, dissipation is the

expectedsystemresponse,as found in Bernardcells andsimilar

systems close to thermodynamic equilibrium. In morecomplex

2 All matter is ultimately energy as matter is a meta-stable

energy structure.



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biological systems (e.g. plants and animals) a direct energy

gradient is not available, but energy is still required for system

maintenance and structural development. These systems

harness energy indirectly from complex transformations of

energetic radiation, consumption of organic matter and the

liberation of chemical energy. The formation of structural

complexity enables the utilization of energy to counter the

degradation gradient implied by the reformulated second law.Complex systems emerge and adapt through the creation

of endogenous feedback processes, or subsystems, in order to

solve energy problems. These self-organized processes create

internal energy gradients that work synergistically within the

context of a larger system to help resist thermodynamic

degradation through the creation of new structure. The

success of a new self-organized energy-utilization process

is determined by its capacity to develop structure that can

increase the energy available to resist the degradation

gradient. In this context, evolution is a process that is

accelerated when limitations upon current energy resources

and processing mechanisms are reached.

All forms of the entropy law imply that eventually physicalsystems wear out, so for a system to maintain itself over time,

some type of regeneration mechanism is required.Cycling and

autocatalysis perform a fundamental role in the maintenance

processes of non-equilibrium systems (Kauffman, 2000;

Christensen and Hooker, 1997). Autocatalytic processes are

energetically efficient because the structure in which energy

utilization occurs is retained for future use. Thus, these

mechanisms are an important way of increasing dissipation

and degradation.3 The notion of self-organized gradient

dissipater activity within complex systems holds for non-

equilibrium physical and chemical systems, and describes the

process of their emergence and development (Prigogine and

Stengers, 1997). Furthermore, the thermodynamic lawssuggest these processes will exist wherever there are energy

gradients available to open systems. Schneider and Kay

recognized, in the ecosystem context, that individuals actively

seek to remove free energy from the environment, where:

The origin of life should not be seen as an isolated event.

Rather, it represents the emergence of yet another class of

processes whose goal is the dissipation of thermodynamic

gradients. (1994: 37)

The evolutionary process describes the arrow of time while

the laws of thermodynamics provide natural bounds andrules

that determine each systems existence. The emergence of lifemaybe explained a consequence of thermodynamic laws that

are consistent with evolutionary theories of system develop-

ment. Self-organization is an important process in the

evolution of biological systems that adapt in response to

changesin the local environment. It would appearthat, given

the self-organizational tendencies of thermodynamic sys-

tems, more complex structures will be favored in evolution

because they are more effective at degrading energy.

What Corning (2002) refers to as thermoeconomic

principles following Lotka (1922a, 1922b), and echoed by

Georgescu-Roegen (1971),Boulding (1978),Schneider and Kay

(1994), andBuensdorf (2000), characterize living systems as

seeking to increase access to energy sources, and/or increase

the efficiency of currently employed energy transformation

processes. The development of technological and organiza-

tional structures represents investments in organized com-

plexity. Technological structures determine the necessary

physical foundations for future energy transformation whilethe coordination of specialized elements within the context of

a larger network structure is achieved through organizational

rules. Complex adaptive systems emerge from the interaction

of energetic and informational flows but such a process is not

without limitboundaries exist and, when these are

approached, structural discontinuities occur (Tainter, 1990).

5. Applications to economic systems

We now wish to go beyond the Schneider and Kay framework,

principally in the direction laid out already by Foster (1997,

2000). Self-organizational processes implied by thermody-namics, mean that natural selection analogies, drawn from

evolutionary biology, are inadequate to understand economic

evolution (Foster, 1995; Witt, 1999; Buensdorf, 2000; Prigogine,

2005). Economic systemsare highly evolved biological systems

where the acquisition of knowledge yields much greater

transformation potential.

The evolution of economic systems is the result of the co-

evolution of knowledge and energy transforming structures.

However, the introduction of knowledge as a complement to

energy in economic evolution implies that the traditional

thermodynamic ontology is not sufficient for economic

analysis. Socio-economic systems seek out and utilize knowl-

edge to acquire novel solutions to energy transformationproblems. This quest to transform energy has led to the

economic self-organization through the increasing utilization

of knowledge.4

The emergence of socio-economic complexity is highly

correlated with the development of cognition and the creation

of abstract representations of reality which are shared

between individuals (Foster, 2005). So, economic systems

are differentiated by the explicit role of knowledge in the

development of structural complexity. Even though knowl-

edge is created within the individual, the coordination of

social communities requires that economic agents share a

common understanding of their socio-economic environ-

ment. The success of livingsystems in these contexts hasbeendetermined by their ability to develop andretain their physical

capacity to transform energy and maintain stocks of useful

knowledge for further transformation. Knowledge is useful

3 Dissipation refers to the creation of heat while this is not

necessarily so of degradation mechanisms.

4 Archeological evidence of primitive tool complexity suggeststhat this evolutionary progression began about 4 million yearsago, facilitated by an enlarged cranium and the development ofgeneralized intelligence. It is postulated that the development anduse of knowledge was restricted to isolated contexts, until thebrain developed the ability to integrate general, social, technicaland natural history intelligences (Mithen, 1996). Major develop-ment advances in thelast 10 millenniaare attributed to this abilityto create, utilize, and evolve knowledge through abstract repre-

sentation and experimentation.



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not just in transforming energy but also through the creation

of socio-economic environments (system boundaries) which

can enable new transformations not previously accessible.

It is the role of knowledge that differentiates economic

evolution from its ecological counterparts in the following

ways.

Sharing knowledge creates unique socio-political environ-ments, both within the individual mind and between

individuals. Shared social institutions determine the rules

for organization and a basis for the interaction of consti-

tuent agents.

Knowledge interactions imply that evolution may occur not

just from experience but also experimental mechanisms

(Potts, 2001; Mokyr, 2002; Foster, 2005).

Economic systems do not reach growth limits as easily as in

ecology, because of the continual innovation facilitated by

new knowledge. This is true of all forms of economic

organization but is relatively more successful in market

economies where incentives are created to reward the

development of new knowledge and its incorporation intoeconomic activities.

The resource constraints of market economies appear

unlimited due to their ability to induce and harness new

knowledge developments (Dopfer et al., 2004). As these

systems approach boundary limits, knowledge extends the

boundaries themselves by introducing new sources or

processing mechanisms. Long-term sustainability issues,

inherent in market economies and economic growth, require

recognition of not just thermodynamic and biophysical

principles, but also the role of the production of new

knowledge (Peet, 1994; Dyke, 1990).

Economic growth results from the co-evolution of knowl-edge andthe physical means to process energy. The accumula-

tion of knowledge is an evolutionary process, which may

improve the degradation of energy by direct or indirect means,

thereby increasing the production of useful energy. Tradition-

ally, the focus of analysis in mainstream economics has been

the utility maximizing microeconomic agent, who has no direct

relation to energy or the second law of thermodynamics.

However, knowledge augments physical structure through the

provision of rules that facilitate ever-increasing processes of

energy transformation, subject to stability in the social and

natural environment. The self-organized accumulation of

knowledge stocks may not only be the cause of economic

growth, but the consequence of adaptive development accord-ing to the second law of thermodynamics.

The evolution of social institutions is dependent upon

available knowledge and energetic technologies. In the

development of market economies, the emergence of new

technologies has often been accompanied by institutional

change, which facilitates technological incorporation into

economic processes. Market economies are characterized by

two essential institutions (access to free-markets and capital).

These create an interaction environment in which individual

self-organization is feasible, facilitating the flow of energy and

matter. Adam Smith (1950) and Sadi Carnot (1824), both

respective fathers of their disciplines, understood that the

application of technological and organizational innovations to

production and consumption processes ultimately deter-

mined the rate of economic growth.

Market economies have proven to be more successful than

other socio-political organizational systems in creating stable

but flexible institutional environments for the production of

new knowledge. Modern economic systems have been

transformed into growth machines by the application of

knowledge to solve economic problems by increasing thestructural complexity of the economy, resulting in a higher

energy through-put than previously (Huber and Mills, 2005).5

Furthermore, there has been a laudable movement toward

increased energy conservation in economic activities in order

to create sustainable growth. This does not contradict our

thesis, as efficiency increases are invariably achieved with

higher knowledge complexity or new technologies to isolate

systems more effectively. Greater efficiency in energy use

simply makes more energy available for the creation and

development of new energy transformation structures.

6. Conclusion

The emergence of thermodynamic systems that sponta-

neously self-organize is characterized by the formation of

physical structures. These structures enable the system to

harness the energy and materials necessary for maintenance

and survival, and we associate these with the growth of

knowledge in economic systems. Complexity emerges from

hierarchical interactions that coordinate specialized sub-

systems in an efficient manner, where the formation of

internal structures and autocatalytic processes attain the

energy necessary for maintenance, growth and development.

TheworkofSchneiderandKayillustratestheeffectofenergy

gradients upon system development and is most applicable tothe study of ecosystems and other spatially fixed, open system

environments.The evidence suggests moremature ecosystems

develop highly specialized mechanisms to harness as much

energy as possible. Evolution tends to favour more complex

structures because they are more effective at utilizing free

energy, which is a consequence of the second law of thermo-

dynamics. Ecological studies suggest that thermodynamic

systems facing resource limits will invest in new structures

that most efficiently harness the available resources.

Economic systems are characterized by the explicit use of

knowledge in harnessing energy, and consequently creating

value. Traditional economic analysis has been reserved in its

incorporation of energy, usually only as a factor of production.The reformulated second law suggests that knowledge

structures be considered as unique complements that allow

socio-economic systems to utilize more energy than other

biological and ecological species. Knowledge coevolves with

energy using structures, facilitating economic growth through

the use of functional and organizational rules under the

governance of social institutions.

5 From an analytical perspective, log scales are usually requiredto plot human populations, energy usage, or wealth, when thetime scale extends beyond about 10 generations (Smil, 2003). Forevery other species on the planet, that is only true when we are

talking about at least thousands of generations.



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Evolutionary economists often speak of the production of

newknowledge as being thecentralorganizing principle in their

framework.Theyalsojustas often speakof complexsystems as

being the central organizing principle in theirframework. Here,

we have argued that the growth of knowledge as a process of

increasing structural complexity in economic systems may be

an outcome of the second law of thermodynamics. This idea

may have potentially profound implications for the analysis ofeconomicgrowth andtransformation by fundamentally linking

the throughput of energy to the emergence of ever more

complex structures. Among other things, this may help explain

the continual growth of the service sector as a proportion of

economic activity as well as the increased scope of specializa-

tion and inter-sector trade.

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