Conservation laws, financial entropy and the Eurozone crisis

TL;DR

This paper applies econophysics principles to analyze the Eurozone crisis, proposing conservation laws and financial entropy concepts to explain economic dynamics and the limitations of stability policies.

Contribution

It introduces a novel application of conservation laws and entropy measures to understand financial crises and debt dynamics in the Eurozone context.

Findings

Financial entropy tends to increase during crises

Conservation laws challenge the effectiveness of stability policies

A stochastic model explains interest rate formation

Abstract

The report attempts of apply econophysics concepts to the Eurozone crisis. It starts by examining the idea of conservation laws as applied to market economies. It formulates a measure of financial entropy and gives numerical simulations indicating that this tends to rise. We discuss an analogue for free energy released during this process. The concepts of real and symbolic appropriation are introduced as a means to analyse debt and taxation. We then examine the conflict between the conservation laws that apply to commodity exchange with the exponential growth implied by capital accumulation and how these have necessitated a sequence of evolutionary forms for money, and go on to present a simple stochastic model for the formation of rates of interest and a model for the time evolution of the rate of profit. Finally we apply the conservation law model to examining the Euro Crisis and the European Stability pact, arguing that if the laws we hypothesise actually hold, then the goals of the stability pact are unobtainable.