ecological complexity 3 (2006) 354360

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The new entropy law and the economic process

Alan Raine *, John Foster, Jason Potts
School of Economics, University of Queensland, Brisbane 4072, Australia

article info

abstract

Published on line 8 March 2007

We argue that a reformulated second law of thermodynamics recently employed by

Schneider and Kay [Schneider, E., Kay, J., 1994. Life as a manifestation of the second law

Keywords:

of thermodynamics. Math. Comput. Model. 19, 2548] to conceptualize the relation between

Thermodynamics

evolution, complexity and ecosystems can also be applied to economic systems. Utilizing

Evolution

thermoeconomic principles, this enables us to formalize the concept of economic evolution

Self-organization

as the development of structural complexity to harness available energy from the environ-

Complexity

ment to avert degradation gradients. We conclude, speculatively, that as much as life is an

Knowledge

inevitable consequence of the reformulated entropy law [Kauffman, S., 1993. The Origins of

Economic development

Order: Self Organization and Selection in Evolution. University of Oxford Press, New York;
Schneider, E., Kay, J., 1994. Life as a manifestation of the second law of thermodynamics.
Math. Comput. Model. 19, 2548], then this is also true of market economies for the same
equilibrium seeking reasons. Market economies have experimentally proven themselves,
more than any other known institutional arrangements, to abet the production of new
knowledge and structural complexity, and therefore energy degradation. As a direct extension of the Schneider and Kay hypothesis, market economies are evolutionary stable
because of their efficacy in growing knowledge and increasing structural complexity; a
consequence, we argue, that follows from the reformulated second law of thermodynamics.
The enormous energy transformations typical of market economies, consequent on their
ability to induce and harness new transformations, are ultimately the reason they are
selected.
# 2007 Elsevier B.V. All rights reserved.

1.

Introduction

It is now commonplace among modern evolutionary economists to argue that the evolution of economic systems is a
process of increasing structural complexity driven by the
production of new knowledge. But much debate remains about
how and why this might be. For a long time, the microfoundations of this approach have been sought by way of analogy with
biological evolution (Nelson and Winter, 1982; Hodgson, 1993).
However, despite the intuitive neo-Darwinian appeal of that
approach, it remains problematic, and without going into
exactly why, it is fair to say that the appropriate foundations of
the theory of economic evolution remains an open question.

Many years ago, Nicolas Georgescu-Roegen (1971) argued

that the entropy law was the ultimate foundation of dynamic
economic analysis. In this paper, we continue along this line
to argue that the evolution of economic systems is intimately
connected to the second law of thermodynamics. However,
the central point we shall make is that the meaning of the
entropy law itself has not remained static, and that changes
in the concept of the entropy law imply changes in the
meaning of economic analysis in general, but especially in
evolutionary economic analysis. In fact, the application of a
reformulated second law presents an alternative interpretation without reference to the problematic concept of entropy
altogether.

* Corresponding author. Tel.: +61 7 3365 6246; fax: +61 7 3365 7299.
E-mail addresses: a.raine@uq.edu.au (A. Raine), j.foster@economics.uq.edu.au (J. Foster), j.potts@economics.uq.edu.au (J. Potts).
1476-945X/$ see front matter # 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecocom.2007.02.009

ecological complexity 3 (2006) 354360

The Entropy Law and the Economic Process (Georgescu-Roegen,

1971) began this mode of analysis by building upon classical
conceptions of the entropy law as applied to economic
analysis. To this day, this approach underpins aspects of
both evolutionary economics and ecological economics. While
the concept of entropy may be well suited to applications in
systems close to thermodynamic equilibrium, a more qualitative approach is required to analyze long-run development
in those systems far from thermodynamic equilibrium (FFE).
Georgescu-Roegen (1971, 294/307) utilized Schumpeters distinction between growth and development, and Lotkas endoand exo-somatic instruments, to suggest that evolutionary
developments in FFE economic systems might also be
considered as qualitative processes of structural change.
The notion that economic systems are dissipative structures has been extended through the addition of the
autocatalytics of self-organization (Foster, 1997; Witt, 1997).
The process of self-organization was first clearly elucidated by
Prigogine (1978) for chemical systems, by Haken (1978) for
lasers, and then extended to biological systems by Brooks and
Wiley (1986). Like these approaches, Foster and Witt argue that
self-organization is also the fundamental process at work in
complex economic systems far from thermodynamic equilibrium.
In the biological context, self-organization is viewed as a
more fundamental explanation of the origins of order from
disorder than natural selection (Depew and Weber, 1995).
This is not an argument that neo-Darwinian evolutionary
theory is wrong, but rather that evolution is a process that
works upon the variety that is generated by processes of selforganization. Thus, selection is a second order process which
can only act upon the variety generated. This position has
been most clearly stated by Kauffman (1993, 2000) and there is
mounting evidence in biological research to support it. In the
economic domain, the process of self-organization turns out
to be much more sophisticated and, in many respects, it is a
quite distinct process to that found in the biological domain
(Foster, 2005).
A basic puzzle remains: why do biological and socioeconomic systems expand their structure (and populations)
with the result that they use increasing amounts of free energy
(and associated materials)? Generally, they expand to whatever energetic limits exist and, as Malthus failed to perceive,
economic self-organization can keep on extending these
limits. The notions that biological populations will expand if
they can, and that economic progress will continue are taken
for granted, but on reflection, it is not entirely obvious why. Of
course, it can be argued that we are genetically encoded to
survive and that survival, over any considerable period of
time, requires regular and reliable systems for thwarting the
immediate impacts of the entropy law. In a niche rich with free
energy, organisms over-perform and this is necessary to
survive whatever large exogenous shock comes along. As a
general rule, organisms do not just try to negate the entropy
law, they seem to try to maximize the throughput of free
energy.
This was observed by Hatsopoulos and Keenan (1965),
and more recently, Schneider and Kay (1994) in the context
of net ecosystem energy absorption of solar energy. Biomass
captures solar energy through the creation of more biomass

355

as evidenced by the different amount of solar energy

reflected by dense forest and deserts. This perspective
turned around conventional thinking: dissipative structures
do not just absorb free energy to fend off entropy; they exist
in the first place because of the presence of free (solar)
energy. They are structures that come into existence as
energy throughput devices and, if conditions are not right,
there will be no dissipative structures with autocatalytic
properties. Hence, without the availability of the appropriate
chemical building blocks and the correct ambience, there
will be no life.
It is argued that the self-organization of the biosphere is
concerned with the throughput of solar energy in a complex
adaptive system of dissipative structures with autocatalytic
properties. In turn, we can think of economic systems as
knowledge based structures that have the capacity to
throughput more energy than biological systems. Control
over fire, water and wind were traditionally used to complement human energy, while the modern economy has seen the
focus shift to fossil fuels and nuclear power, especially for the
provision of high quality electrical energy. Hence, the growth
of structural complexity in economic systems is a consequence of the production of new knowledge in marketintermediated organizations. This could be seen as consistent
with the Schneider and Kays interpretation of the reformulated second law of thermodynamics.
In an economic environment, it could be postulated that
there is an attractor, in the space of institutional arrangements towards which the acquisition of knowledge drives
economic systems because the production of new knowledge
maximizes the throughput of energy. The central argument is
that, as economic systems grow and develop, we should
expect to observe the following:
(1) an increase in total energy throughput;
(2) the development of more complex structures;
(3) an increase in autocatalytic cycling activity and the
institutional embedding of these processes;
(4) the emergence of greater diversity;
(5) the generation of more hierarchic levels; and
(6) an increase in knowledge structures and their relative
importance.
We should expect all of these structural changes because
all of them aid and abet increases in energy utilization. In
this paper we shall not attempt to prove or test these
hypotheses but, rather, explain why they are plausible as
statements about the nature of market economies, and why
they are consistent with the second law of thermodynamics.
This has important implications for the relation between
economic systems and ecological systems, the nature and
meaning of economic growth, and the analytical foundations of economics. Thus, the evolution of economic
systems that occurs because of the production of new
knowledge can be viewed as part of a natural process, and
indeed can be viewed as an outcome of a unified thermodynamic principle.
This paper is set out as follows. In Section 2, we shall review
the Schneider and Kay hypothesis about ecological systems
and provide support for our claim that this can be extended to

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ecological complexity 3 (2006) 354360

economic systems. In Section 3, we shall review the basic

principles of thermodynamics and attempt to elucidate the
nature of the reformulated second law. In Section 4, we link
evolution and complexity from a thermodynamic perspective.
In Section 5, the economic implications of thermodynamic
evolution are considered before the concluding statement.

2.
Schneider and Kay on thermodynamics and
ecology
The modern reformulation of the relation between the entropy
law and evolution of complex systems has major implications
for economic theory, and particularly so in relation to the
evolution of knowledge. Indeed, we shall eventually argue that
economic evolution is a natural consequence of thermodynamic processes. Schneider and Kay (1994) view all of
evolution from such a perspective:
We examine the thermodynamic evolution of various
evolving systems . . . We take the reformulated second law,
where non-equilibrium is described in terms of gradients
maintaining systems at some distance away from equilibrium. The reformulated second law suggests that as
systems are moved away from equilibrium they will take
advantage of all available means to resist externally
implied gradients . . . We argue that as ecosystems grow
and develop, they should increase their total dissipation,
develop more complex structures with more energy flow,
increase their cycling activity, develop greater diversity and
generate more hierarchic levels, all to abet energy
degradation. Species which survive in ecosystems are
those that funnel energy into their own production and
reproduction and contribute to autocatalytic processes
which increase the total dissipation of the ecosystem. In
short, ecosystems develop in ways which systematically
increases their ability to degrade the incoming solar
energy. We believe that our thermodynamic paradigm
makes it possible for the study of ecosystems to be
developed from a descriptive science into a predictive
science founded on the most basic principles of physics.
(1994: 25)
Schneider and Kay applied the energy gradient dissipation
concept to the analysis of biological systems by comparing the
maturity of various ecosystems. Their hypothesis suggests
that more mature ecosystems will re-radiate a lower amount
of energy than less developed ecosystems by creating
dissipative structures that capture and utilize more of the
solar gradient. They base this upon an interpretation of input
output (IO) tables of re-radiant energy collected by independent thermal imaging satellite data and collated by Luvall and
Holbo (1991).
Re-radiant energy compares the thermal heat expelled by
the ecosystem with the original energy gradient imposed by
the external environment. It is observed that more mature
ecosystems radiate significantly less thermal heat. For
example, clear-cut grassland was found to be comparable to
a quarry, re-radiating about 3540% of solar radiation. Natural
and plantation forests utilize around 85% of the incoming

energy while extremely well developed 400-year-old Douglas

fir forests harnessed greater than 90%. The results of these
investigations provide support for the hypothesis that more
highly self-organized ecosystems degrade more of the available energy through the development of sophisticated energy
harnessing mechanisms.
It seems to us that Schneider and Kays basic idea may also
apply to economic systems. By making a few elementary
substitutions, this would seem to also be a provocative and
promising approach to evolutionary economic analysis.
Consider this:
We argue that as economic systems grow and develop,
they should increase their total dissipation, develop more
complex structures with more energy flow, increase their
cycling activity, develop greater diversity and generate
more hierarchic levels, all to abet energy degradation. Rules
which survive in economic systems are those that funnel
energy into their own production and reproduction and
contribute to autocatalytic processes which increase the
total dissipation of the system. . . We believe that our
thermodynamic paradigm makes it possible for the study
of economic systems to be developed from a descriptive
science into a predictive science founded on the most basic
principles of physics.
Economic systems are highly evolved ecosystems that have
harnessed a new substrate knowledge that enables them to
extend their organized complexity and, correspondingly, their
dissipative potential (Miller, 1999; Potts, 2003). Economic
systems increase the complexity (structure of interactions),
cycling activity (habits, routines, competences and institutions), and hierarchic depth (organization and modular
decomposition) of natural systems by accelerating, and being
accelerated by, the production of new knowledge.
The immediate implication is that economic systems are
not outside Nature, and nor is Nature outside economic
systems. The human species is a significant component of the
ecosystem because our economic systems, made possible by
our biologically supported and socially evolved knowledge
systems, are highly effective means of doing what all other
species are also doing from the perspective of the second law.
Of all the species on this planet, Homo Sapiens is one of the
most effective species at degrading energy.
Knowledge that results in both creativity and productive
cooperation has grown and led to economic self-organization
(Foster, 1997). In turn, innovation has been subject to selection
mechanisms that have tended to enhance energy throughput.1 However, this is a very recent phenomenon in evolutionary time driven by the tremendous growth in knowledge
and human population in the past 200 years. This has been
facilitated by the spread of market economies based upon a
globally adopted set of institutions for developing the means
of creating, producing, distributing and consuming goods and
services.

1
We focus on the structural aspects of the adaptive process that
precede selection by conscious choice in economic evolution,
rather than the role of human agency.

ecological complexity 3 (2006) 354360

3.

Whats new in thermodynamics

The classical laws of thermodynamics, which were prompted

by investigations into the efficiency of heat engines and
formalized later in the 19th century, are approximately:
0th law of thermodynamics: there exists energy2
1st law of thermodynamics: in an isolated system, energy is
constant
2nd law of thermodynamics: the total entropy of an
isolated system never decreases
The second law, also known as the entropy law, is a
statement about the quality of the energy conserved in
accordance with the first law. The traditional entropy law
states that any real process can proceed only in a direction that
results in an entropy increase, which is to say that the
extraction of work always involves a decrease in the quality of
the energy remaining in an isolated system. The traditional
interpretation stated what would not happenhigh quality
energy turns into low quality energy by the extraction of work
and never the reverse. No work process is ever 100% efficient,
and so there exists a fundamental irreversibility in Nature.
That, in itself, was and still is a very big idea. There is an
arrow of time along the entropy gradient and this has all
manner of implications for the other laws of physics. But this
shall not be our concern. The issue here is whether entropy
increase, or the arrow of time, conveyed the meaning of the
second law appropriately. Long ago, Hatsopoulos and Keenan
(1965), and Kestin (1966) argued that entropy increase is not
in fact the general meaning of the second law. In open
environments, Schneider and Kay propose the following
restatement:
The thermodynamic principle which governs the behaviour
of systems is that, as they are moved away from equilibrium,
they will utilize all avenues to counter the applied gradients.
As the applied gradients increase, so does the systems ability
to oppose further degradation. (1994: 28)
This reformulation of the entropy law addresses what
happens in reality a system will attempt to reach equilibrium
and, in essence, the more pressure that is applied, the harder
it will resist. Although only mildly interesting for systems at or
near equilibrium, as von Bertalanffy (1968), Prigogine (1978),
Brooks and Wiley (1986) and Prigogine and Stengers (1997)
have shown, it is a very interesting restatement for systems
that are massively out of equilibrium. It is generally accepted
that all natural processes can be viewed in light of the entropy
law where global entropy increases may be partially offset by
local system development (von Bertalanffy, 1968).
This new interpretation argues that the essential meaning
of the second law is that all real processes are equilibrium
seeking, but that does not then imply that all real processes are
in equilibrium, which is a common misperception, at least
among orthodox theoretical economists. Rather, all real
processes are equilibrium seeking because many of them
2

All matter is ultimately energy as matter is a meta-stable

energy structure.

357

are massively out of equilibrium as a consequence of gradients

applied. Hence, life is an emergent phenomena created by the
constant influx of solar radiation which maintains living
systems in a non-equilibrium state.
The reformulated second law is appropriate for the analysis
of spatially fixed and open systems such as plants and forests.
Such systems are subject to two opposing gradients: the
thermodynamic degradation gradient and the incoming solar
radiation gradient. Solar radiation provides the energy necessary for these systems to oppose thermodynamic degradation
as implied by the entropy law. Schneider and Kay argue that
this principle applies to all chemical and biological systems. To
support this argument, they utilize the work of Luvall and Holbo
(1991) who found that more mature and complex ecosystems
(e.g. rainforests) were more effective at dissipating energy
gradients than less mature ecosystems (e.g. rock quarries), by
the measure of re-radiant energy from each.
However, Schneider and Kay are not alone in developing an
alternative approach for analyzing thermodynamic development. Fath et al. (2001) reviewed 10 different thermodynamic
principles used in environ network analysis in ecology and
found that they were differentiated by the primary focus of
study (e.g. specific heat dissipation or total throughput), and
not by alternative applications of the entropy law. Of the 10
principles, the minimum specific dissipation principle (MSDP)
is most applicable to the investigation of complex adaptive
systems and implies that living systems will maximize energy
flux but minimize the amount of specific dissipation as heat.
The MSDP is a generic form of the Schneider and Kay
hypothesis that is consistent with the principles outlined by
Lotka (1922a, 1922b). It is more applicable to mobile open
systems (e.g. animals), which do not derive significant energy
from environmental gradients directly. In fact, these systems
must harness chemical energy from matter in the environment to avert the gradient imposed by the second law.
Essentially, this principle indicates that those FFE systems
facing resource constraints will preferentially convert energy
to structure, due to the efficiency gains of reusing structure in
cyclic mechanisms.

4.
Thermodynamics, complex systems, and
evolution
Previous work on complex adaptive systems by Prigogine
(1978), Brooks and Wiley (1986), and Allen (1998), recognized
that biological, ecological and economic systems are never
near classical thermodynamic equilibrium. Self-organization
provides structures that throughput free energy in a way that
resists the thermodynamic gradient and fuels maintenance,
regeneration, and structural development. Biological, ecological and economic systems are characterized in terms of their
local environment of interaction. These systems, in their
different ways, can alter their local environments in order to
exploit energy gradients.
Simple open systems can be understood in terms of energy
and entropy gradients. In cases where energy is imposed
directly, usually heat and solar energy, dissipation is the
expected system response, as found in Bernard cells and similar
systems close to thermodynamic equilibrium. In more complex

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ecological complexity 3 (2006) 354360

biological systems (e.g. plants and animals) a direct energy

gradient is not available, but energy is still required for system
maintenance and structural development. These systems
harness energy indirectly from complex transformations of
energetic radiation, consumption of organic matter and the
liberation of chemical energy. The formation of structural
complexity enables the utilization of energy to counter the
degradation gradient implied by the reformulated second law.
Complex systems emerge and adapt through the creation
of endogenous feedback processes, or subsystems, in order to
solve energy problems. These self-organized processes create
internal energy gradients that work synergistically within the
context of a larger system to help resist thermodynamic
degradation through the creation of new structure. The
success of a new self-organized energy-utilization process
is determined by its capacity to develop structure that can
increase the energy available to resist the degradation
gradient. In this context, evolution is a process that is
accelerated when limitations upon current energy resources
and processing mechanisms are reached.
All forms of the entropy law imply that eventually physical
systems wear out, so for a system to maintain itself over time,
some type of regeneration mechanism is required. Cycling and
autocatalysis perform a fundamental role in the maintenance
processes of non-equilibrium systems (Kauffman, 2000;
Christensen and Hooker, 1997). Autocatalytic processes are
energetically efficient because the structure in which energy
utilization occurs is retained for future use. Thus, these
mechanisms are an important way of increasing dissipation
and degradation.3 The notion of self-organized gradient
dissipater activity within complex systems holds for nonequilibrium physical and chemical systems, and describes the
process of their emergence and development (Prigogine and
Stengers, 1997). Furthermore, the thermodynamic laws
suggest these processes will exist wherever there are energy
gradients available to open systems. Schneider and Kay
recognized, in the ecosystem context, that individuals actively
seek to remove free energy from the environment, where:
The origin of life should not be seen as an isolated event.
Rather, it represents the emergence of yet another class of
processes whose goal is the dissipation of thermodynamic
gradients. (1994: 37)
The evolutionary process describes the arrow of time while
the laws of thermodynamics provide natural bounds and rules
that determine each systems existence. The emergence of life
maybe explained a consequence of thermodynamic laws that
are consistent with evolutionary theories of system development. Self-organization is an important process in the
evolution of biological systems that adapt in response to
changes in the local environment. It would appear that, given
the self-organizational tendencies of thermodynamic systems, more complex structures will be favored in evolution
because they are more effective at degrading energy.
What Corning (2002) refers to as thermoeconomic
principles following Lotka (1922a, 1922b), and echoed by
3

Dissipation refers to the creation of heat while this is not

necessarily so of degradation mechanisms.

Georgescu-Roegen (1971), Boulding (1978), Schneider and Kay

(1994), and Buensdorf (2000), characterize living systems as
seeking to increase access to energy sources, and/or increase
the efficiency of currently employed energy transformation
processes. The development of technological and organizational structures represents investments in organized complexity. Technological structures determine the necessary
physical foundations for future energy transformation while
the coordination of specialized elements within the context of
a larger network structure is achieved through organizational
rules. Complex adaptive systems emerge from the interaction
of energetic and informational flows but such a process is not
without limitboundaries exist and, when these are
approached, structural discontinuities occur (Tainter, 1990).

5.

Applications to economic systems

We now wish to go beyond the Schneider and Kay framework,

principally in the direction laid out already by Foster (1997,
2000). Self-organizational processes implied by thermodynamics, mean that natural selection analogies, drawn from
evolutionary biology, are inadequate to understand economic
evolution (Foster, 1995; Witt, 1999; Buensdorf, 2000; Prigogine,
2005). Economic systems are highly evolved biological systems
where the acquisition of knowledge yields much greater
transformation potential.
The evolution of economic systems is the result of the coevolution of knowledge and energy transforming structures.
However, the introduction of knowledge as a complement to
energy in economic evolution implies that the traditional
thermodynamic ontology is not sufficient for economic
analysis. Socio-economic systems seek out and utilize knowledge to acquire novel solutions to energy transformation
problems. This quest to transform energy has led to the
economic self-organization through the increasing utilization
of knowledge.4
The emergence of socio-economic complexity is highly
correlated with the development of cognition and the creation
of abstract representations of reality which are shared
between individuals (Foster, 2005). So, economic systems
are differentiated by the explicit role of knowledge in the
development of structural complexity. Even though knowledge is created within the individual, the coordination of
social communities requires that economic agents share a
common understanding of their socio-economic environment. The success of living systems in these contexts has been
determined by their ability to develop and retain their physical
capacity to transform energy and maintain stocks of useful
knowledge for further transformation. Knowledge is useful
4

Archeological evidence of primitive tool complexity suggests

that this evolutionary progression began about 4 million years
ago, facilitated by an enlarged cranium and the development of
generalized intelligence. It is postulated that the development and
use of knowledge was restricted to isolated contexts, until the
brain developed the ability to integrate general, social, technical
and natural history intelligences (Mithen, 1996). Major development advances in the last 10 millennia are attributed to this ability
to create, utilize, and evolve knowledge through abstract representation and experimentation.

ecological complexity 3 (2006) 354360

not just in transforming energy but also through the creation

of socio-economic environments (system boundaries) which
can enable new transformations not previously accessible.
It is the role of knowledge that differentiates economic
evolution from its ecological counterparts in the following
ways.
 Sharing knowledge creates unique socio-political environments, both within the individual mind and between
individuals. Shared social institutions determine the rules
for organization and a basis for the interaction of constituent agents.
 Knowledge interactions imply that evolution may occur not
just from experience but also experimental mechanisms
(Potts, 2001; Mokyr, 2002; Foster, 2005).
 Economic systems do not reach growth limits as easily as in
ecology, because of the continual innovation facilitated by
new knowledge. This is true of all forms of economic
organization but is relatively more successful in market
economies where incentives are created to reward the
development of new knowledge and its incorporation into
economic activities.
The resource constraints of market economies appear
unlimited due to their ability to induce and harness new
knowledge developments (Dopfer et al., 2004). As these
systems approach boundary limits, knowledge extends the
boundaries themselves by introducing new sources or
processing mechanisms. Long-term sustainability issues,
inherent in market economies and economic growth, require
recognition of not just thermodynamic and biophysical
principles, but also the role of the production of new
knowledge (Peet, 1994; Dyke, 1990).
Economic growth results from the co-evolution of knowledge and the physical means to process energy. The accumulation of knowledge is an evolutionary process, which may
improve the degradation of energy by direct or indirect means,
thereby increasing the production of useful energy. Traditionally, the focus of analysis in mainstream economics has been
the utility maximizing microeconomic agent, who has no direct
relation to energy or the second law of thermodynamics.
However, knowledge augments physical structure through the
provision of rules that facilitate ever-increasing processes of
energy transformation, subject to stability in the social and
natural environment. The self-organized accumulation of
knowledge stocks may not only be the cause of economic
growth, but the consequence of adaptive development according to the second law of thermodynamics.
The evolution of social institutions is dependent upon
available knowledge and energetic technologies. In the
development of market economies, the emergence of new
technologies has often been accompanied by institutional
change, which facilitates technological incorporation into
economic processes. Market economies are characterized by
two essential institutions (access to free-markets and capital).
These create an interaction environment in which individual
self-organization is feasible, facilitating the flow of energy and
matter. Adam Smith (1950) and Sadi Carnot (1824), both
respective fathers of their disciplines, understood that the
application of technological and organizational innovations to

359

production and consumption processes ultimately determined the rate of economic growth.
Market economies have proven to be more successful than
other socio-political organizational systems in creating stable
but flexible institutional environments for the production of
new knowledge. Modern economic systems have been
transformed into growth machines by the application of
knowledge to solve economic problems by increasing the
structural complexity of the economy, resulting in a higher
energy through-put than previously (Huber and Mills, 2005).5
Furthermore, there has been a laudable movement toward
increased energy conservation in economic activities in order
to create sustainable growth. This does not contradict our
thesis, as efficiency increases are invariably achieved with
higher knowledge complexity or new technologies to isolate
systems more effectively. Greater efficiency in energy use
simply makes more energy available for the creation and
development of new energy transformation structures.

6.

Conclusion

The emergence of thermodynamic systems that spontaneously self-organize is characterized by the formation of
physical structures. These structures enable the system to
harness the energy and materials necessary for maintenance
and survival, and we associate these with the growth of
knowledge in economic systems. Complexity emerges from
hierarchical interactions that coordinate specialized subsystems in an efficient manner, where the formation of
internal structures and autocatalytic processes attain the
energy necessary for maintenance, growth and development.
The work of Schneider and Kay illustrates the effect of energy
gradients upon system development and is most applicable to
the study of ecosystems and other spatially fixed, open system
environments. The evidence suggests more mature ecosystems
develop highly specialized mechanisms to harness as much
energy as possible. Evolution tends to favour more complex
structures because they are more effective at utilizing free
energy, which is a consequence of the second law of thermodynamics. Ecological studies suggest that thermodynamic
systems facing resource limits will invest in new structures
that most efficiently harness the available resources.
Economic systems are characterized by the explicit use of
knowledge in harnessing energy, and consequently creating
value. Traditional economic analysis has been reserved in its
incorporation of energy, usually only as a factor of production.
The reformulated second law suggests that knowledge
structures be considered as unique complements that allow
socio-economic systems to utilize more energy than other
biological and ecological species. Knowledge coevolves with
energy using structures, facilitating economic growth through
the use of functional and organizational rules under the
governance of social institutions.
5
From an analytical perspective, log scales are usually required
to plot human populations, energy usage, or wealth, when the
time scale extends beyond about 10 generations (Smil, 2003). For
every other species on the planet, that is only true when we are
talking about at least thousands of generations.

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ecological complexity 3 (2006) 354360

Evolutionary economists often speak of the production of

new knowledge as being the central organizing principle in their
framework. They also just as often speak of complex systems as
being the central organizing principle in their framework. Here,
we have argued that the growth of knowledge as a process of
increasing structural complexity in economic systems may be
an outcome of the second law of thermodynamics. This idea
may have potentially profound implications for the analysis of
economic growth and transformation by fundamentally linking
the throughput of energy to the emergence of ever more
complex structures. Among other things, this may help explain
the continual growth of the service sector as a proportion of
economic activity as well as the increased scope of specialization and inter-sector trade.

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