In the brilliant book by Eric Beinhocker of McKinsey Global Institute titled "The Origin of Wealth", there is a very powerful and dramatic statement which attempts to explain wealth creation, thus: "All wealth is created by thermodynamically irreversible, entropy-lowering processes". We could not agree more! If everything in this universe must subscribe to and abide by the laws of thermodynamics, so must the economy.
People usually glaze over when words like entropy are thrown around. Making conceptual connections between social phenomenon like the economy to a physical phenomenon like a steam engine might sound absurd. But hey, we didn't make the rules (of nature)! We simply have to follow them, if not there will be consequences to pay. That is the whole point. In the last several years, we have let entropy run amok in the US economy and we are now feeling the effects.
Business intelligence tools which can help with data mining for economists must be required to have means to compute the entropy of the economy. We believe that such tools can at least explain, if not predict the trajectory of the economy. What follows is a brief history of the entropic economy, from 2001 to present day.
But first the good news - if wealth is created by lowering entropy, we can pat ourselves on the back. Since 2001 Q1, the entropy of the US economy has reduced by nearly 20%! Indeed if we compare the US economy in current dollar terms, the economy has grown from $10T in 2001 to more than $14T today in market dollar terms. The only problem is that in between the economy has taken some nasty detours which have affected so many people adversely (and a few people very beneficially).
People usually glaze over when words like entropy are thrown around. Making conceptual connections between social phenomenon like the economy to a physical phenomenon like a steam engine might sound absurd. But hey, we didn't make the rules (of nature)! We simply have to follow them, if not there will be consequences to pay. That is the whole point. In the last several years, we have let entropy run amok in the US economy and we are now feeling the effects.
Business intelligence tools which can help with data mining for economists must be required to have means to compute the entropy of the economy. We believe that such tools can at least explain, if not predict the trajectory of the economy. What follows is a brief history of the entropic economy, from 2001 to present day.
But first the good news - if wealth is created by lowering entropy, we can pat ourselves on the back. Since 2001 Q1, the entropy of the US economy has reduced by nearly 20%! Indeed if we compare the US economy in current dollar terms, the economy has grown from $10T in 2001 to more than $14T today in market dollar terms. The only problem is that in between the economy has taken some nasty detours which have affected so many people adversely (and a few people very beneficially).
We have analyzed the data from http://www.bea.gov/ for the last 40 quarters. This data includes all major macroeconomic factors: Imports, exports, capital investments, government spending, personal consumption, unemployment, inflation, interest rates... the works.
There are essentially three states to the economy: bubble, normal activity, bust. We find that sustained changes in entropy over two quarters has a strong influence on which of these states the economy ends up in the following quarter. In case you are wondering whats happening right now: entropy has been dropping since 2009 Q4 up until the last quarter. BEA data states that GDP growth has been positive since then. So there seems to be some good news after all!Bala "BR" Deshpande, is the President of Ontonix USA, a boutique consulting firm with a unique technology to measure complexity and apply it in two main areas: innovative risk management and supply chain complexity reduction. Most businesses assume it is very difficult to measure something as intuitive or maybe as abstract as "Complexity". But it is actually quite practical and extremely valuable in providing early warnings to crises and giving managers a health-check of their business. Try a free evaluation of the tools using your own data here |
No comments:
Post a Comment