Towards macroeconomic analysis without microfoundations: measuring the entropy of simulated exchange economies

TL;DR

This paper demonstrates that the entropy of simulated exchange economies can be empirically measured using a thermodynamics-inspired approach, validating the theory's predictions even without microfoundational assumptions.

Contribution

It introduces a method to measure the entropy of exchange economies empirically, enabling macroeconomic analysis without microfoundations, validated through computer simulations.

Findings

Measured entropy agrees with analytical calculations where available

Entropy exhibits path independence in complex economies

Entropy is consistently concave across tested systems

Abstract

The theory of thermal macroeconomics (TM) analyses economic phenomena within the mathematical framework of classical thermodynamics, using a set of axioms that apply to the purely macroscopic aspects of an economy [CM]. The theory shows that the possible macro-behaviours are governed by an entropy function. In simple idealised cases, the entropy function can be calculated from the rules governing the interactions of individual agents. But where this is not possible, TM predicts that the entropy can nonetheless be measured empirically through an economic analogue of calorimetry in physics. We show using computer simulations the in-principle feasibility of this approach: an entropy function can successfully be measured for a range of simulated economies that we tested. In cases where entropy can be calculated analytically from microfoundational assumptions, the measured entropy agrees well. In more complex cases, where microfoundational analysis is infeasible, our method of measuring entropy still applies and is validated by demonstrations that entropy is a state function of an economic system, i.e., exhibits path independence. This appears to hold even for some systems to which we don't have a proof that the Axioms of TM apply. Furthermore, in all cases tested, entropy is concave, as predicted by TM. As shown in [CM], once the entropy function is established for a simulated exchange economy, it is possible to derive prices, the value of money and various other quantities, and make predictions about the effects of putting two or more economies in contact.