Viewing 34 posts - 1 through 34 (of 34 total)
  • Esoteric question about money and thermodynamics
  • webwonkmtber
    Free Member

    I believe (please correct me if wrong) that it’s thermodynamics laws that state that energy isn’t destroyed, it’s just converted into a different state.

    So, I’m wondering if there are other areas of life where the same principles apply. What about money and the stock markets – is there any research to show that the laws of thermodynamics apply there?

    If you accept that money is a form of energy (I did say it was esoteric), then when money is being made and lost through technical trading and derivatives, is there a meaningful energy transfer taking place.

    Does that make any sense to anyone?

    coffeeking
    Free Member

    Plenty of engineering laws and principles pass over to the financial world, this is why plenty of financial-sector workers are ex engineers who found a quicker way to make money. The problem is that unlike with the real world, the financial world creates and destroys money/energy left right and centre. You can’t just write off a debt in thermodynamics.

    “need some heat to warm that house? Here – we’ll lend you some, we don’t have it either but assuming the sun comes up tomorrow we’ll get some then so we can pretend we do, and you can give it back over the next few nights”

    jon1973
    Free Member

    Except with money the government can add ‘energy’ by printing money / quantative Easing.

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    bencooper
    Free Member

    Money perhaps used to be a form of energy (you work down t’pit for 12 hours, shifting 10 tonnes of coal, you get a farthing) – now money bears no relation to the effort (energy) required to make it.

    As a physicist, I think any attempt to transfer physical principles to economics are bound to fail, and smack of people using cool buzzwords which they don’t know the meaning of.

    gearfreak
    Free Member

    Except with money the government can add ‘energy’ by printing money / quantative Easing.

    That doesn’t actually add ‘energy’ it merely revalues everyones energy tokens so that they are worth less.

    coffeeking
    Free Member

    As a physicist, I think any attempt to transfer physical principles to economics are bound to fail, and smack of people using cool buzzwords which they don’t know the meaning of.

    Fortunately for some you’re wrong, as they’re now quite rich, but that’s not to say it’s not a flawed concept.

    That doesn’t actually add ‘energy’ it merely revalues everyones energy tokes so that they are worth less.

    But in a thermodynamic sense there’s no way of re-valuing energy, it either exists or it doesn’t.

    bencooper
    Free Member

    That just proves you can get rich by talking convincingly about concepts you don’t understand 🙂

    I can’t be bothered looking for specific examples, but I definitely remember seeing one economics commentator talking about an event horizon, for example…

    Junkyard
    Free Member

    I think any attempt to transfer physical principles to economics are bound to fail, and smack of people using cool buzzwords which they don’t know the meaning of.

    This
    Economists – like many social scientists – like to think they have laws like physics or other laws of natures – they dont they have vague rules but they are not inviolable however much they wish to tell us they are.

    It may have principles and good methods of operation but that is all

    One thing I don’t understand, and I suspect I’m not going to understand the answer either, is how is the total amount of money in the country set, if the question even makes sense.

    I sort of understand quantative easing, the idea of printing more money.
    If I lend someone £10 on the condition that they pay me back £12 in a year, then they have to actually have £12 in notes or coins to pay me back.
    If I invest £10 in a bank on condition that I get £2 interest in a year, all they do is add £2 to my bank account. Where has that money come from ? It doesn’t physically exist in the real world, so how does it tie in with the amount of real money that’s been printed & minted ?

    miketually
    Free Member

    There are five of us on a desert island. We each have £1.

    I decide to be a bank, so you all give me your £1 to look after.

    I lend one of you a fiver. There is now £10 on the island.

    bencooper
    Free Member

    It doesn’t. Me talking about economics is like an economist talking about physics, but as I understand it the banks hope that not too many people want to take their money out at the same time. So, theoretically, if only 10% of people want to take their money out, the bank can pretend that they have 10x as much money as they actually do.

    You can see how this could go pear-shaped.

    julesf7
    Free Member

    As an economics lecturer (please don’t hate me..well, not until you meet me, at least), I’d argue that this question falls into the trap of the difference between money and wealth.

    Money is a physical medium of exchange, the availability of which can be set by the relevant monetary authority such as the ECB, Federal Reserve, Bank of England. This can be destroyed, in its physical form, through use, for instance in the way in which five pound notes become tatty and are replaced. It can also be created, through printing, but the balance between these two processes is important, particularly if you agree with Friedman and the monetarists, such as Thatcher.

    Wealth is held, generally speaking, in a form other than money. Ones and zeros in your bank account, real estate, works of art and great bikes.

    Junkyard
    Free Member

    you are correct and this is the basic fault of the system the money does not actually exist and it works only as long as we all have faith we will get our money

    He lends you the fiver assuming they will get it back – you buy goods from one of the people on the island and they then put that £5 in the bank and now w ehave £15 and it gets lent out again so now we have £20 – the speed of how quickly it goe sbcak to the bank is called the speed of money and held [ BS IMHO] to be a constant.

    It works as long as everyone has faith they will get their money back and very few [10%] actually ask for it. If too many ask fo rit back or losse faith that they will get it back then we are screwed like now…capitlaism is the cycle of boom and bust as the confidence/faith in the system will always break at some point

    Miketually, I was thinking of scaling it down like that to try to understand it.
    In your example, there is still only £5 on the island though, it’s just been lent and borrowed between individuals. As long as the other three don’t want their £1 back while one has got £5, there’s not a problem.
    What if you, as banker, offer interest though ?
    After a year everyone wants £1.02 back. You can tell them they’ve got £1.02 in their account, but what if they want real money they can hold ?

    gonefishin
    Free Member

    What about money and the stock markets – is there any research to show that the laws of thermodynamics apply there?

    Putting it in terms of game theory, Thermodynamics is essentially a zero sum game, i.e. the total amount of energy is constant and cannot be changes. Economics isn’t a zero sum game so the same rules cannot apply universally.

    D0NK
    Full Member

    Ooh junkyard you sound so jaded.

    For some reason I can imagine you having a right grimace on your face as you say “social scientists” with obvious distaste 🙂

    miketually
    Free Member

    What if you, as banker, offer interest though ?

    As long as I charge 2.1% on the £5 loan I offered, I’ll be fine.

    simonralli2
    Free Member

    There are five of us on a desert island. We each have £1.

    I decide to be a bank, so you all give me your £1 to look after.

    I lend one of you a fiver. There is now £10 on the island.

    This is a great example but for me it helps to distinguish between money and debt. In this example, the opening balance already consisted of “money” but in reality what it that?

    Another way to look at it is to say that £5 is deposited in the bank. The £5 that get’s “lent” is not actually the same as that money in the bank’s deposits. In this system there is £5 in the bank and a “£5 debt. But the bank is going to ask for interest too, say another £1 which does not exist. More debt needs to be created in the form of money lent to ensure that the first debt can be paid off. This is where we are at with the current banking crisis. There is not enough “money” in the system to pay off all the “debt” hence a crash. Banking is just a ponzai scheme that will always crash 🙂

    elliptic
    Free Member

    In your example, there is still only £5 on the island though, it’s just been lent and borrowed between individuals.

    Which is why economists use several different definitions of “money supply” starting with actual physical cash in circulation (M0) then adding currency in bank vaults (MB) short term quick-access deposits (M1) longer term savings accounts etc. (M2)

    So on the island MB is fixed at £5, but M1/M2 go up each time the physical cash is lent out and re-deposited through the bank.

    scuzz
    Free Member

    But in a thermodynamic sense there’s no way of re-valuing energy, it either exists or it doesn’t.

    High quality money is in a system that denotes it as high value. Energy that has high value is in a system with low entropy.

    Although that doesn’t help the other flaws.

    mogrim
    Full Member

    Thermodynamics is essentially a zero sum game, i.e. the total amount of energy is constant and cannot be changes

    Only in a closed system.

    The island example is (obviously) a bit false: no bank would lend out 100% of its capital, a more realistic example would be if the banker lent out 10p to one of the other islanders, having (hopefully correctly) judged that sometime in the near future that 10p(+interest) would be paid back, and that not all the other islanders want all their money back at the same time.

    As long as I charge 2.1% on the £5 loan I offered, I’ll be fine.

    Until the point where you demand repayment of the loan and the £5.10.5 doesn’t exist. 😛

    To use a real world example;
    Lots of people have got a £100 000 mortgage paying 5% interest.
    A lot fewer people have got £10 000 in the bank gaining 2% interest.
    The banks appear to be creating money independently of what the government is printing, so the total “wealth” far exceeds the current “money”.

    miketually
    Free Member

    Lots of people have got a £100 000 mortgage paying 5% interest.

    If you like I can sell you a bunch of these mortgages, whilst betting someone else that they’ll not be paid off. But it’s okay, because you can repackage them and sell them back to me, while also betting that they’ll not be paid off.

    🙂

    konabunny
    Free Member

    So, theoretically, if only 10% of people want to take their money out, the bank can pretend that they have 10x as much money as they actually do. You can see how this could go pear-shaped.

    We’ve all seen It’s a Wonderful Life, I take it?

    CharlieMungus
    Free Member

    As a physicist, I think any attempt to transfer physical principles to economics are bound to fail, and smack of people using cool buzzwords which they don’t know the meaning of.

    And that’s why you’re a physicist, talking about stuff, rather than an engineer, getting it done. Good luck with the spherical chickens.

    Junkyard
    Free Member

    The island example is (obviously) a bit false: no bank would lend out 100% of its capital, a more realistic example would be if the banker lent out 10p to one of the other islanders, having (hopefully correctly) judged that sometime in the near future that 10p(+interest) would be paid back, and that not all the other islanders want all their money back at the same time.

    they keep 10% in the bank[ minimum learning rate] so they would lend more than 10 p

    For some reason I can imagine you having a right grimace on your face as you say “social scientists” with obvious distaste

    I am one and they all talk shite and know nothing – shall i tell you some “psychology” laws?

    molgrips
    Free Member

    You know how they say ‘the economy grew by 1%’ or whatever? That growth does NOT require someone else’s economy to shrink…

    bencooper
    Free Member

    And that’s why you’re a physicist, talking about stuff, rather than an engineer, getting it done. Good luck with the spherical chickens.

    Touché, though do I get any points for shunning the glamorous world of physics in favour of running a bike shop?

    molgrips
    Free Member

    Engineers do the stuff that physicists talked about 100 years ago. Keep up!

    And mechanics keep the stuff that engineers design working in the real world.

    D0NK
    Full Member

    I am one

    oh yeah 😳

    gonefishin
    Free Member

    And mechanics keep the stuff that engineers design working in the real world.

    … and quite right too, afterall I don’t want to get dirty. 😉

    molgrips
    Free Member

    Without engineers and physicists mechanics would have nothing to do 🙂

    CharlieMungus
    Free Member

    Without engineers and physicists mechanics would have nothing to do

    Exactly! That would make about 1 in 3 of them unemployed. The other two of course, would just carry on as normal.

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