Thermal macroeconomics: an axiomatic theory of aggregate economic phenomena

Abstract Thermal macroeconomics (TM), an axiomatic approach to macroeconomics based on the mathematical structure of thermodynamics, is presented. Within the domain of exchange economies, TM deduces relations between aggregate properties of an economy, concerning quantities and flows of goods and money, without recourse to microeconomic foundations concerning individual economic agents. Despite the restricted scope of this initial treatment, TM has three important payoffs. 1) It provides a new and solid foundation for aspects of standard macroeconomics: the existence of market prices, the value of money, the meaning of inflation, the symmetry and negative-definiteness of the macro-Slutsky matrix, and the Le Chatelier–Samuelson principle, without relying on implausibly strong rationality assumptions over individual microeconomic agents. 2) It generates new results, including implications for money flow and trade when two or more economies are put in contact, using new concepts such as economic entropy and temperature; these concepts can be given economic interpretations as aggregate utility and the inverse marginal aggregate utility of money, respectively. 3) It holds the prospect for extensions of economic interest, such as to include production and consumption, via connection to non-equilibrium thermodynamics. More broadly, we hope that the economic analogue of entropy (governing the possible transitions between states of economic systems) may prove to be as fruitful for the social sciences as entropy has been in the natural sciences.