Econodynamics
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Econodynamics is an
empirical science In philosophy, empiricism is an epistemological theory that holds that knowledge or justification comes only or primarily from sensory experience. It is one of several views within epistemology, along with rationalism and skepticism. Empiri ...
that studies emergences, motion and disappearance of
value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
—a specific concept that is used for description of the processes of creation and distribution of
wealth Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
. Any economic theory deals with the interpretation of economic processes based on the law of production of value, and various scientific approaches differ in the choice of factors of production that determine, in the end, the creation of wealth. Marxists insist that only labor creates value, neoclassicists believe that, in addition to labor, capital must also be taken into account as the important source of value. Econodynamics demonstrates that the statement about the productive power of capital is a hoax that hides the real role of labor and energy in the production of value. Econodynamics offers a more adequate interpretation of economic growth and other phenomena.Econodynamics is based on the achievements of classical
political economy Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...
and neo-classical
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
and has been using the methods of phenomenological science to investigate evolution of
economic system An economic system, or economic order, is a system of Production (economics), production, resource allocation and Distribution (economics), distribution of goods and services within a society or a given geographic area. It includes the combinati ...
. Econodynamics has been proposing methods of analysis and forecasting of economic processes. The comprehensive review of the problems of econodynamics is given recently by
Vladimir Pokrovskii Vladimir Nikolajevich Pokrovskii (russian: Влад’имир Никол’аевич Покр’овский; born 11 May 1934) is a Russian scientist known for his original contributions to polymer physics and economic theory. He was the found ...
.


The Fundamentals


Value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
and
production factors In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rel ...

Economic events are considered as processes of creation, motion and distribution of
value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
that is firstly measured as
exchange value In political economy and especially Marxian economics, exchange value (German: ''Tauschwert'') refers to one of the four major attributes of a commodity, i.e., an item or service produced for, and sold on the market, the other three attributes be ...
. The factor interpretation of the exchange value, accepted by Econodynamics, is based on the Smith-Marx's
labour theory of value The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The LTV is usually associated with Marxian ...
, according to which efforts of workers L are the most essential production factor. The theory is completed by the law of substitution, which states that the workers efforts in production of value could be substituted by work of production equipment driven with outer sources of power. Econodynamics introduces a concept of substitutive work P, which is true work of production equipment, to characterize the functional role of machinery in production processes. The amount of production equipment is treated as physical capital K, measured by its value; the variable P can be considered as a
capital service Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capitals, List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the dura ...
, a concept that was discussed by
Robert Solow Robert Merton Solow, GCIH (; born August 23, 1924) is an American economist whose work on the theory of economic growth culminated in the exogenous growth model named after him. He is currently Emeritus Institute Professor of Economics at the Ma ...
.Solow, R. (1957). "Technical Change and the Aggregate Production Function." Review of Economic Studies, vol. 39 (Aug.), pp. 312-330. Production of value Y can be considered as a function of the three production factors Note that, in contrast to the conventional neoclassical theory, capital service P is considered to be an independent production factor, while labour efforts L are replaced with work of production equipment P, not with the passive production factor -- capital K. The technological description assumes that work P and labor L should be considered as substituting each other, and the amount of production equipment, universally measured by its value K, should be considered complementary to the work (L and P) of production equipment. Considering that the description should be valid for any starting point of time (the principle of universality), and assuming also that production is homogeneous, that is, the law of production of value does not change when the scale of production changes, we write the production function (1), which is the expression for production of value, in the form of two alternative relations where L_0 and P_0 factors. Time-dependent values of \alpha and \xi are interrelated internal characteristics of the production system. The function of production equipment K is to provide various means to attract labor L and substitutive work P to production. The characteristic of this ability of capital is the amount of labor and energy per unit (by value) of production equipment These quantities determine the necessary amounts, respectively, of labor and productive energy consumption per unit (in value measure) of the equipment introduced, and, therefore, are universal technological characteristics of the production equipment. Note that the combination of technological coefficients (3) (in dimensionless form) determines the index \alpha in the relations (2) . , The technological index \alpha in equation (2) appears to be connected with technological characteristics, which can be evaluated independently, and, therefore, in contrast to the neoclassical theory, the production function (2) does not contain arbitrary parameters. In is known that an increase in the main production capital leads to an increase in output, as it is reflected by the first line of the relations (2), and this gave rise to the myth of the productive power of capital in a broad sense. If you have production shares, you get dividends, if the money is in the bank, you get interest. However, money and stocks are only symbols that do not bring anything without a huge amount of work on the production of value within the framework of the capitalist organization of the national economy. The mystical power of capital to bring profit follows from the rules of distribution of the social product created by workers and substitute work. Only the efforts of people (taking into account the law of substitution) lead to the increase in value, that is, to the creation of wealth.


The absolute measure of value

The extension of the labour theory of value with the law of substitution allows us to generalize the Smith-Marx's
labour theory of value The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The LTV is usually associated with Marxian ...
.Beaudreau, B.C. & Pokrovski, V.N. (2010) On the energy content of a money unit. Physica A: Statistical Mechanics and its Applications, 389 (13), 2597–2606. and to provide a better correspondence with empirical evidence.Pokrovski, V.N. (2003). Energy in the theory of production. Energy 28, 769-788. In the Smith-Marx's theory of value, it is postulated that estimate of the efforts of workers L is an ultimate source of all created wealth (products), an absolute measure of value. When one accounts the effect of substitution of workers' efforts with the true work of the production equipment, one could expect, that the total amount of work on the production of value, which is the sum of properly accounted work of humans L and work of production equipment (substitutive work) P, both measured in power units, could be an absolute measure of value, and one can write This relation allows one to estimate the work needed for creation of wealth worth of one monetary units (energy content of monetary unit), which was done for different cases. For example, the mean value of 'energy content' of dollar of year 1996 in years 1960 - 2000 is 1.4\times 10^5 J. The values of the 'energy content' of monetary units that are used for accounting change during the time, which shows that the used units of money do not present constant amounts of 'true' value. The absolute measure of value can be introduced as some amount of energy. The direct methods of estimation of the substitutive work P are developing for both past and future situations. For example, it is found that the total amount of substitutive work in the U.S. economy in 1999 can be estimated as 10^ J per year. It is approximately one hundred times less than total (primary) consumption of energy, which was about 97\cdot10^ J in 1999. However, the amount of primary energy (energy carriers), which is needed to provide this amount of substitutive work, is about 25\cdot 10^ J. It is about 26% of total primary consumption of energy. Although one can easily find estimates of the total amount of primary energy carriers in the past, the biggest interest is caused by possible assessments of the future quantity of energy going to the substitution of workers' efforts in processes of the production. This is a problem, which has been considered specially.


Value, Utility and Entropy

Econodynamics establishes relationship between the real wealth and abstract concepts of
value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
,
utility As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
and
entropy Entropy is a scientific concept, as well as a measurable physical property, that is most commonly associated with a state of disorder, randomness, or uncertainty. The term and the concept are used in diverse fields, from classical thermodynam ...
. The artificial products created by humans: buildings, machines, vehicles, sanitation, clothes, home appliances and so on, can be sorted and counted, so that one consider the amounts of quantities in natural units of measurement Q_1, Q_2,..., Q_n and the prices of all products p_1, p_2,..., p_n to be given, so that one can define increase in value of a stock of products as Due to dependence of prices on the amounts of products p_i = p_i (Q_1, Q_2, ..., Q_n) , one can hardly expect that form (6) is a total differential of any function. In other words, one cannot say that W is a characteristic of the set of the products which is independent of the history of their creation. However, a function of a state, which is called
utility function As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
, can be introduced on the basis of relation (6). Indeed, the linear form (6) can be multiplied by a certain function, which is called integration factor \phi = \phi ( Q_1, Q_2,..., Q_n), so that, instead of form (6), one has a total differential of a new function The introduced function U is called
utility As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
function (objective), taking into account that the properties of function U coincide with those of the conventional
utility As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
function, which is introduced as utility function connected with sensation of preference of one aggregate of products as against another. The above transformation of value to utility reminds us transformation of heat to
entropy Entropy is a scientific concept, as well as a measurable physical property, that is most commonly associated with a state of disorder, randomness, or uncertainty. The term and the concept are used in diverse fields, from classical thermodynam ...
in thermodynamics. In other terms, analogy between theory of utility and theory of heat was discussed by von Neumann and Morgenstern (see item 3.2.1 of their work). The artificial objects can be considered, as it was explained by Prigogine with collaborators, as far-from-equilibrium objects (dissipative structures), and to create and maintain them, the fluxes of matter and energy are necessary to run through the system. In our case, energy comes in the form of human efforts L and work of external sources P that can be used by means of the appropriate equipment. The creation of dissipative structures leads to decrease in entropy, and utility U can be considered as a close relation to entropy S, though does not coincides with it. Considering that changes of internal energy in production of things can be neglected, one can write a thermodynamic relation Reconciliation of the two points of view on the phenomenon of production leads to a unified picture that enables us to relate some aspects of our observations of economic phenomena to physical principles. A flux of information and work eventually determines new organisation of matter, which acquires forms of different commodities (complexity), whereby the production process is considered as a process of materialisation of information. The cost of materialisation of information is the work of production system. To maintain complexity in a thermodynamic system, fluxes of matter and energy must flow through the system.


Innovation Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity ...
and
technological progress Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...

The earlier version of neoclassical production functionCobb, G.W. and Douglas, P.N. (1928). "A Theory of Production." American Economic Review, Suppl. (March), pp. 139-165. ignores the technological progress at all. It was introduced later into neo-classical theory by hand, as a time-dependent factor A(t) (
growth accounting Growth accounting is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy. Growth accounting decomposes ...
). In contrast to this, the technological progress appears to be an internal property of the theory of ecodynamics. It is understood, first of all, as a progress in substitution of labour with work of production equipment in technological processes; the theory gives the expression The exogenous, according to the neo-classical theory, technological progress A(t) appears to be connected with the ratio of substitutive work to stock of capital P/K, which can be considered as a measure of technological progress itself, independent on the assumption made in the neo-classical theory. Sometimes it is convenient to use the non-dimensional ratio of substitutive work to labour efforts P/L as a characteristic of technological progress; this quantity can be interpreted as the number of 'mechanical workers', operating in the production processes, in line with an 'alive worker'. To the end of the last century, this ratio reaches, for example, 12 for the USA. Apart of this, equation (9) contains the technological index \alpha, which, due to relation (2), determines effectiveness of usage of production factors L and P.


Dynamics of development


Equations of evolution

Production of value (for year, for example) Y is a money estimate of 'useful' changes in our environment (in the form of useful consumer goods and services), which can be connected with production factors. To formulate the system of evolution equations of the production system, function (1) ought to be specified and dynamic equations for production factors L, P and K to be formulated, while nessasery technological characteristics of production equipment to be introduced. In result, it came to the set of equations of
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
—the theory of evolution, dubbed as the
technological theory of social production In the technological theory of social production, the growth of output, measured in money units, is related to achievements in technological consumption of labour and energy. This theory is based on concepts of classical political economy and ...
. The theory is formulated both in one-sector, and, using the
Wassily Leontief Wassily Wassilyevich Leontief (russian: Васи́лий Васи́льевич Лео́нтьев; August 5, 1905 – February 5, 1999), was a Soviet-American economist known for his research on input–output analysis and how changes in one ec ...
's
input-output model In computing, input/output (I/O, or informally io or IO) is the communication between an information processing system, such as a computer, and the outside world, possibly a human or another information processing system. Inputs are the signals ...
, in multi-sector approximations. The data for the U.S. economy in the last century was used to justify the specification of the theory. It was demonstrated that the substitution of worker's efforts with work of the production equipment appears to be more adequate idea than the substitution of worker's efforts with the amount of production equipment (capital in the neo-classical theory of economic growth); work can be replaced only with work, not with capital. The theory demonstrates that the growth of production is caused by achievements in technological consumption of labour and energy. The set of equations determines three modes of economic development, depending on deficit of one of the factors: investment, labour or substitutive work. The changing of modes during the development reveals as short cycles in growth—the business cycles.


Applications

The theory can be applied to any national economy; principles of consistent analysis and forecast are considered. As an example, dynamics of Russian economy for years 1960 - 2060 is considered in one-sector and three-sector approximations(see. Chapter 8 and 9). The elementary, three-branch model is used (see. Section 2.2.2, Table 2.2 in Chapter 2 and Section 9.5 in Chapter 9) for the description of dynamics of production (the expanded reproduction, in Marx's terms). The theory allows, being based on the
Angus Maddison Angus Maddison (6 December 1926 – 24 April 2010) was a distinguished British economist specialising in quantitative macro economic history, including the measurement and analysis of economic growth and development. Maddison lectured at sev ...
"s estimates of the
Gross World Product The gross world product (GWP) is the combined gross national income of all the countries in the world. Because imports and exports balance exactly when considering the whole world, this also equals the total global gross domestic product (GDP).Se ...
and
World population In demographics, the world population is the total number of humans currently living. It was estimated by the United Nations to have exceeded 8 billion in November 2022. It took over 200,000 years of human prehistory and history for the ...
, to restore the picture of development of mankind in the previous centuries. It was shown (see, Chapter 12). that one need the theory, based on the effect of substitution of worker's efforts with work of external power (two-factor theory), for the description of the evolution of production activity from approximately year 1000 of our era. Before this time the substitution of human's efforts for outer work practically was not noticeable, and one can use one-factor theory that is taking into account only one production factor—efforts of workers. The theory is stated (see. section 1.3.1, the formula 1.1 in chapter 1 and section 12.3 in chapter 12).


The principle of evolution

The human population, as any biological population obeys energy principle of evolution, which states that those populations and their associations (ecosystems) which can use the greater amount of energy from their environment have an advantage for survival.Odum, H.T. Environmental Accounting. Energy and Environmental Decision Making, John Wiley \& Sons, New York , 1996. One can see that the social production system tries to swallow all available resources, productive energy included. This sentence can be considered as the principle of development of the production system and the human population itself, that has been developing as a self-organising system, trying to catch as much energy as possible. A lot of energy is used by a human population through improvements of technology, and the managing huge amount of energy allows the human population to survive in every climate zone of the Earth and expand itself in great measure. The enlargement of the human population from a very small group a million years ago till about 7 billion in year 2012 ought to be apparently connected with enhancement of the living conditions. Apparently, it is impossible to explain growth of number of human population, not referring on social production system—the means of adopting the human to conditions of existence.V.N. Pokrovski, Physical Principles in the Theory of Economic Growth, Ashgate Publishing, Aldershot, 1999. A revised and extended version of the monograph is published by Springer (2011) a
''Econodynamics. The Theory of Social Production''


References

{{reflist Labor Theory of value (economics) Empiricism