Written by Amer Goel
Ceteris Paribus, or “All Else Equal” in English, has been a pivotal principle in modern economic thought for over fifty years, offering simplicity to otherwise complex models and theories (Ceteris Paribus vs. Mutatis Mutandis, n.d.). This foundational assumption allows economists to scrutinize the impact of a specific variable while maintaining the constancy of others, thereby mitigating the influence of external disruptions in their system of interest. It aids in pinpointing the influence of a particular variable, obviating the need to account for a multitude of external complexities. For a significant number of economists, ceteris paribus is an essential tool for charting a course through the labyrinthine world of social science, which would risk stagnation without setting aside some variables (Ceteris Paribus Explained: 5 Economic Uses for Ceteris Paribus – 2023 – MasterClass, n.d.). However, this concept, while useful, encounters limitations (Challenges of Complexity Economics | World Economics Association, n.d.), especially when confronted with a crucial element inherent in real economic systems: entropy.
The transition from ceteris paribus to entropy marks a critical shift in economic thinking. While ceteris paribus offers clarity and simplicity by isolating variables, it sometimes overlooks the dynamic and often chaotic reality of economic systems. This is where entropy enters the picture, challenging the notion that economic systems can be fully understood through simplification alone. Entropy, a concept borrowed from physics and representing quantifiable disorder, introduces a layer of complexity that ceteris paribus tends to overlook (Street, 2018).
Entropy, primarily associated with physics, measures the inherent chaos of a system (Street, 2018). It’s so crucial that its behavior is encapsulated in the Second Law of Thermodynamics, stating that entropy invariably increases (What Is the Second Law of Thermodynamics? | Live Science, n.d.). This law implies that systems naturally gravitate towards disorder. While typically applied to physical systems, entropy can be extended to any system, including economic ones. This broad application is part of a growing trend known as econophysics, which adapts tools like entropy from mathematical physics to address systemic social issues. Entropy has gained traction in academia for providing insightful analogies and tools to depict the inherent disorder and complexity in many economic systems.
To account for systemic entropy in social systems, economists have developed two significant approaches. The first, closely linked to entropy, is Thermoeconomics, paying homage to thermodynamics in physics (Overview – Rule of Law | United States Courts, n.d.). Thermoeconomists adopt well-founded physical theories to characterize the flow and distribution of scarce resources, akin to how physicists might describe heat or work. They model cost and economic potential using differential equations inspired by energy and exergy studies. In doing so, they have integrated a fundamental aspect of entropy into the fabric of thermodynamic principles adapted for economic analysis.
Although Thermoeconomists have aptly used analogies to depict economic entropy, drawing from its physical origins, they haven’t yet fully developed an independent concept of economic entropy (Jakimowicz, 2020). Clearly, the entropy associated with particle systems, sometimes encompassing comprehensive information on relevant variables, falls short in capturing the complexities of social systems, which often neglect impactful factors under ceteris paribus. To adequately represent the chaos that complicates economic theorization, one must delve into the intricate details of decision-making, strategy, and group dynamics. This gap has paved the way for the emergence of Complexity Economics.
Complexity Economics, a relatively nascent field, gained formal recognition in 2014 with Brian W. Arthur’s groundbreaking book “Complexity and the Economy” (Arthur, 2015). Arthur posits the economy as a complex system (What Are Complex Systems? | Waterloo Institute for Complexity & Innovation, n.d.), an elaborate network of interdependent components functioning in unison. This perspective introduces a level of dynamism often overlooked by economists, addressing intricate layers of complexity from evolving states of disequilibrium and strategic interactions in the variable universe that ceteris paribus would deem constant (Hicks, 1987). It challenges traditional assumptions of rationality, initially adopted more for mathematical expediency than theoretical rigor (Arthur, 2021). Instead, it views the economy through the lens of individual agents with varying preferences, rather than as homogenous entities with predictable patterns. These refinements more accurately reflect real human behaviors than classical economic methodologies (Jakimowicz, 2020).
Promisingly, Complexity Economics has demonstrated potential in integrating entropy into theoretical frameworks. It offers researchers the latitude to model individual actors more realistically, allowing for unforeseen interactions. By explicitly acknowledging the disorder in economic systems, many scholars are optimistic about its modeling capabilities (Jakimowicz, 2020). They believe the mathematical and computational tools of complexity theory in economics enable the modeling of any conceivable number of players, factors, or capacities, potentially accounting for all participants in an economic system. While not all variables can escape the confines of ceteris paribus, even in such a robust theoretical structure, it represents a substantial advancement over older models that often assumed linearity, rationality, and stasis. It marks a step towards a more descriptive and accurate economic theory.
Fittingly, entropy, embodying physical chaos, has disrupted the traditional order of economics. It highlighted a fundamental flaw in the framework of economic theory, prompting economists to seek insights from other academic disciplines. Its physical manifestation has provided useful analogies for social systems, and thermodynamic principles of heat and work have offered valuable structures for explaining cost, exchange, and potential. Entropy has motivated economists to explore differential systems and complexity theory to accommodate its presence, adding a layer of realism to economic models. Eventually, economists might fully comprehend entropy, without the need to control or ignore certain variables or phenomena. Then, the complexity of the economy could be thoroughly described, and the quest for perfect information might be fulfilled. Until that time, however, entropy will remain a subject of study, design, and theoretical exploration, ceteris paribus.
References
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Arthur, W. B. (2015). Complexity and the economy. Oxford University Press.
Arthur, W. B. (2021). Foundations of complexity economics. Nature Reviews Physics, 3(2), 136–145. https://doi.org/10.1038/s42254-020-00273-3
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