TITLE:
A Thermodynamic Model for the Global Economy and Its Implications for Macroeconomic Theory and Policy Formulation
AUTHORS:
Stephen J. Palmer, Harriet Alford
KEYWORDS:
Thermodynamic Model, Global Economy, Macroeconomic Theory, Policy Formulation
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.12,
September
29,
2018
ABSTRACT: Over recent decades the share of income produced by
global the economy has increased for capital and decreased for labour.
Picketty’s analysis of wealth and income data implies that there is increasing
inequality in income share developing in economies including advanced
economies. Further investigation by the International Monetary Fund (IMF), International
Labour Organization (ILO) and the Organization for Economic Cooperation and
Development (OECD) confirms that capital’s share of income is increasing versus
labour’s share but the data does not fit with Picketty’s r > g growth model,
instead indicating that technology is involved. This paper presents a physical
model concept for an economy and the global economy that explains how and why
capital’s share of income is increasing at the expense of labour and what policymakers
need to do to adjust this trend. The macroeconomic policies that correct this
trend have also significant concomitant benefits—they
address strategic risks such as global warming which are physically linked by
the way the economy currently functions through technology. Current policy is
driving and increasing income inequality. Physical evidence based macroeconomic
policymaking such as that advocated in this paper, can manage these long term
risks.