Information, entropy, value, and price formation: An econophysical perspective

From an econophysical point of view, this paper deals with a pivotal old topic that still remains paradoxically unsolved in economics: the relationship between labor and value under the influence of the second law of thermodynamics, in parallel to the relationship between value and price under the influence of market. With this aim, economic systems are considered to be far-from-equilibrium open systems pervaded by thermodynamic irreversibility in which human action is embedded. Economic value -the most primordial concept of economic science- is defined as embodied information: ideas, with anti-entropic capability for consumers, productively embodied as intrinsic value in the production of goods and services. During this process, there is also a lot of labor effort disconnected from direct information embodiment that is dissipated as production disutility (production entropy). This means that, in the production of goods and services, labor is partially disconnected from the direct transfer of value to them due to losses by fruitless effort because of the effect of the second law of thermodynamics. Nevertheless, workers expect their wages to remunerate the total effort performed (i.e., embodied information plus production entropy), whereas the price they expect to pay as consumers for such goods is statistically related only to its intrinsic value. This leads to an underlying wage/price expectation difference called Janus effect in this article. Given the opposite relationship between information and entropy, the diversity of socioeconomic structure (information in its aggregate way: H) reduces internal socioeconomic entropy to promote economic development by means of non-equilibrium market exchanges in which every price is a mix of information and entropy. Their respective proportions depend on disparities between supply (s(p)) and demand (d(m)) that fluctuate over space and time: a higher proportion of superfluously valued entropy is included in price formation when d(m) > s(p) and vice versa, even reaching a price below the intrinsic value. Given the anti-entropic, and therefore anti-thermic, influence of the increase of H in the internal scale in society, the net flow of value goes from low-development areas (low H values) to high-development areas (high H values), compensating in such a way for the Janus effect under general conditions of non-equilibrium, in the Walrasian sense of the term. On the contrary, general economic equilibrium would result in zero net flows between systems, leading to an unredeemed general Janus effect (economic paralysis and social stagnation). This simple but reliable physical mechanism has been ruling market performance since the dawn of economic activity, and it acts regardless our will and ideological preferences. In such a sense, this article establishes a theoretical foundation to develop future quantitative models based on extrapolations of the principles of conventional physics to the real productive economy, far beyond the fruitful and well-known interdisciplinary analogies proposed in this field so far. (C) 2018 Elsevier B.V. All rights reserved.