The Economists — Energy, Value, and the Commons

Every economic act is a thermodynamic act. When a farmer in Iowa plants 1,200 acres of corn in 2024, the tractor burns diesel at a rate of roughly 8 gallons per hour, releasing about 2.4 million joules per gallon through combustion. The laborer who picks coffee in Colombia expends about 2,500 kilocalories per day, converting glucose and oxygen into carbon dioxide, water, and mechanical work. The server farm in Northern Virginia that processes Amazon transactions in 2024 consumes approximately 1,350 megawatts of electricity, enough to power a city of one million people. These are not metaphors. They are measurements. The school of economics that treats them as measurements rather than metaphors is called thermoeconomics, and it emerged when a Romanian mathematician named Nicholas Georgescu-Roegen published The Entropy Law and the Economic Process in 1971. Georgescu-Roegen was fifty-five years old when the book appeared, and he had already spent decades at Harvard and Vanderbilt working through the mathematical foundations of utility theory. He reached a conclusion that his neoclassical colleagues rejected: the economic process is not a circular flow of goods and money, as the standard textbooks described it, but a linear throughput of matter and energy. What enters the economic system as concentrated resources exits as dissipated waste. The difference between the two states is measured by entropy, a concept coined in 1865 by the German physicist Rudolf Clausius. Entropy is a quantity from statistical mechanics that measures the number of microscopic configurations consistent with a given macroscopic state. When a lump of coal is burned, its carbon atoms are rearranged from an ordered crystal lattice into a dispersed cloud of carbon dioxide molecules. The number of possible arrangements increases, and so does the entropy. Georgescu-Roegen argued that economic value tracks the quality of energy, not the quantity. One joule of sunlight is not the same as one joule of refined gasoline. The sunlight is low-quality because it is diffuse and hard to concentrate; the gasoline is high-quality because it can be released in controlled bursts to do mechanical work. The economic process degrades high-quality energy into low-quality energy, and the process is irreversible. This is the second law of thermodynamics, first formulated in 1824 by the French engineer Sadi Carnot in his Reflections on the Motive Power of Fire. Carnot proved that no engine can convert heat into work with perfect efficiency, and that the maximum possible efficiency depends only on the temperature difference between the hot reservoir and the cold reservoir. For a coal-fired power plant operating at 600 degrees Celsius with a cooling tower at 25 degrees Celsius, the Carnot efficiency limit is about 66 percent, but real plants achieve only 35 to 45 percent because of mechanical friction, heat leakage, and other losses. Georgescu-Roegen applied this same logic to the entire economy. Wealth is not a stock of money or goods; it is a stock of low-entropy structures that can be maintained only by continuous energy throughput. The second law guarantees that every economic process leaves the world with less usable energy than it started with, and the economic process is therefore fundamentally entropic.

If Georgescu-Roegen asked what economics consumes, the American ecologist Howard T. Odum asked what it measures. In 1971, the same year Georgescu-Roegen's book appeared, Odum published Environment, Power, and Society, introducing a concept he called emergy, spelled with an extra m to distinguish it from ordinary energy. Emergy is the total energy required to produce a given good or service, measured in solar-equivalent joules. The unit is the solar emjoule, abbreviated seJ. For example, to produce one kilogram of wheat in a modern American farm in 2000 required roughly 2.8 trillion solar emjoules of emergy, counting the sunlight that grew the crop, the fossil fuels that powered the tractors and manufactured the fertilizer, the human labor that managed the field, and the embodied energy in the steel and concrete of the grain silos. Odum's method was to trace every input back to its ultimate source, which is sunlight, and to express each input as a solar-equivalent energy. This is not the same as market price. A kilogram of wheat in 2000 sold on the commodity market for about twenty cents, but its emergy cost was enormous. The discrepancy between emergy and price is not an error in Odum's method; it is the point. Market prices reflect marginal utility and scarcity, not physical cost. They fail to account for the depletion of fossil fuels, the erosion of topsoil, and the degradation of ecosystems because these costs are externalized, meaning they are borne by society or future generations rather than by the buyer and seller in the transaction. Odum's emergy analysis was a way to make the externalized costs visible. He applied it to entire nations, calculating the emergy-to-money ratio for the United States in 1983 as roughly 2.4 trillion solar emjoules per dollar. This ratio meant that for every dollar of GDP, the American economy consumed energy equivalent to roughly 2.4 trillion joules of sunlight. When Odum compared this to nations with less fossil fuel input, such as Brazil in 1983, he found an emergy-to-money ratio of about 7.5 trillion solar emjoules per dollar. The higher ratio meant that the Brazilian economy relied more on renewable energy and human labor, and less on the concentrated but depleting stocks of fossil fuels. The emergy method was controversial and never entered mainstream economics, but it provided a thermodynamic accounting framework that market prices alone could not.

Odum's work built on an earlier insight from the American mathematical biologist Alfred J. Lotka, who published a paper in 1922 called Contribution to the Energetics of Evolution. Lotka proposed what he called the maximum power principle, which states that systems that maximize their energy throughput tend to persist and expand. The principle is not a law of physics in the same sense as the second law; it is an evolutionary principle about selection. Imagine two plant species competing for sunlight in a forest. One species grows broad leaves that capture more photons but are fragile and expensive to maintain. The other grows small, tough leaves that capture fewer photons but survive longer. The species that maximizes the total energy captured over its lifetime, not just the instantaneous rate, will dominate the canopy. Lotka argued that natural selection favors organisms, ecosystems, and even human societies that maximize their power intake, power transformation, and power use. In 1971, Odum applied this principle to ecosystems, showing that food webs evolve toward configurations that maximize energy flow through the system. The maximum power principle predicts that a mature ecosystem, such as a tropical rainforest, does not maximize biomass or diversity but rather the total energy throughput. Odum measured this in field studies of Silver Springs, Florida, in 1957, where he found that the gross primary productivity of the spring ecosystem was approximately 20,000 kilocalories per square meter per year, and that the net energy flow through the food web was optimized by a particular arrangement of species that balanced energy capture against maintenance cost. The human economy follows the same logic. A corporation that expands its energy throughput faster than its competitors, for example ExxonMobil processing 3.9 million barrels of oil per day in 2023, tends to persist and grow. The maximum power principle is morally neutral. It does not say that maximizing energy throughput is good. It says that systems that do so tend to survive, which is why thermoeconomics treats the economy as an ecosystem rather than as a machine for maximizing human welfare.

In 1998, the American economist Robert U. Ayres published a paper called Eco-thermodynamics: Economics and the Second Law, in which he proposed that the physical basis of economic production functions is exergy, not energy. Exergy is the maximum useful work obtainable from a system as it comes to equilibrium with its environment. A kilogram of coal at room temperature has high chemical exergy because it can be burned to produce heat and mechanical work. A kilogram of coal ash at the same temperature has zero chemical exergy because it has already been oxidized and cannot react further. The exergy content of a resource is what the economy actually consumes. Ayres measured the exergy efficiency of the American economy from 1900 to 1990 and found that it improved from roughly 5 percent to about 13 percent, meaning that the economy was converting a larger fraction of the exergy in its inputs into useful work rather than waste heat. However, he also found that the total exergy consumption increased by a factor of about thirty over the same period, from roughly 5 exajoules per year in 1900 to about 150 exajoules per year in 1990. An exajoule is 10 to the 18th power joules, roughly the energy content of 160 million barrels of oil. The net result was that total waste exergy, which is the exergy consumed minus the useful work extracted, increased even as efficiency improved. This is a counterintuitive result from the standard neoclassical framework, which treats efficiency as the goal. In thermoeconomics, efficiency is only one variable. The other variable is scale, and the maximum power principle predicts that the economy will tend to expand its total throughput even as it becomes more efficient. Ayres's work showed that the Cobb-Douglas production function, which is the standard tool in economics for relating output to inputs of capital and labor, is physically incomplete because it omits the exergy input. He proposed a revised production function in which output is a function of capital, labor, and exergy, with the exergy coefficient capturing the physical constraint that no economic activity can occur without energy throughput. This revision has been adopted in some ecological economics textbooks but remains outside the mainstream curriculum.

The economist Vilfredo Pareto, born in Paris in 1848 to an Italian exiled nobleman, published his Manual of Political Economy in 1906. In it he introduced a concept that now carries his name: Pareto optimality. A state of the economy is Pareto optimal if no individual can be made better off without making at least one other individual worse off. The concept is not about fairness or equality. It is about feasibility. If one person has all the food and another has none, that distribution might be Pareto optimal if redistributing food would harm the first person, for example by making them unhappy or less productive. In 1951, the Dutch-American economist Tjalling Koopmans formalized Pareto's idea in a paper called Analysis of Production as an Efficient Combination of Activities, introducing the mathematical tools of linear programming and activity analysis. Koopmans proved that the set of Pareto optimal allocations forms a frontier, called the Pareto frontier, in the space of possible outcomes. Any point inside the frontier is inefficient, meaning that at least one objective can be improved without harming another. Any point on the frontier requires a tradeoff. The Pareto frontier is not unique to economics. In evolutionary biology, the American biologist Stephen C. Stearns showed in 1992 that life-history traits such as age at first reproduction, number of offspring, and lifespan are subject to tradeoffs that form Pareto fronts. An organism that invests heavily in reproduction early in life, such as a Pacific salmon that produces 4,000 eggs and dies within weeks of spawning, sacrifices longevity. An organism that invests in long-term survival, such a Galapagos tortoise that lives over 150 years but produces only a few dozen eggs per year, sacrifices early reproductive output. Natural selection pushes populations toward the Pareto frontier, not toward any single optimal point. The frontier itself is determined by the physical and biological constraints of the environment. In thermodynamics, the Carnot efficiency limit is a Pareto frontier between work output and heat rejection. For a given temperature difference, any engine that produces more work must also reject more heat, and vice versa. The Pareto concept is therefore a general mathematical structure that applies to economics, biology, and physics, with the common feature that every frontier is defined by a set of constraints that cannot be violated.

In 1968, the American biologist Garrett Hardin published an essay in the journal Science called The Tragedy of the Commons. He asked the reader to imagine a pasture open to all herders. Each herder receives the full benefit of adding one more animal, but the cost of overgrazing is shared by all. The rational individual herder therefore adds animals until the pasture is destroyed. Hardin concluded that the commons could be saved only by either private ownership or government regulation. The essay was enormously influential, cited over 12,000 times by 2020, and it shaped environmental policy for decades. It was also wrong in its conclusion. In 1990, the American political scientist Elinor Ostrom published Governing the Commons, based on her field studies of irrigation systems in Spain, mountain pastures in Switzerland, and fishing grounds in Indonesia and Maine. She found that communities have managed shared resources sustainably for centuries without either private property or state coercion. Ostrom identified eight design principles that distinguish successful commons from failed ones. The first principle is clear boundaries, meaning that the community must know who has rights to use the resource and what the resource is. The second is proportional costs and benefits, meaning that users who extract more must also contribute more to maintenance. The third is collective choice, meaning that the rules are made by the users themselves, not imposed from outside. The fourth is monitoring, meaning that the condition of the resource and the behavior of users are observed by other users or by accountable agents. The fifth is graduated sanctions, meaning that rule violations are punished with penalties that increase with the severity or frequency of the offense. The sixth is conflict-resolution mechanisms, meaning that disputes are resolved quickly and at low cost. The seventh is minimal recognition of rights to organize, meaning that external authorities do not challenge the legitimacy of the community's own governance. The eighth is nested enterprises, meaning that larger commons are managed through federated structures rather than central control. Ostrom's work was recognized with the Nobel Prize in Economic Sciences in 2009, making her the first woman to win the prize. She had shown that the tragedy of the commons is not inevitable, but it is also not automatic. Sustainable commons require specific institutional designs that align individual incentives with collective outcomes.

The American political scientist Robert Axelrod provided a complementary mechanism in 1984 with his book The Evolution of Cooperation. Axelrod organized a tournament of computer programs playing the iterated prisoner's dilemma, a game in which two players must choose between cooperation and defection. If both cooperate, each receives a moderate reward. If both defect, each receives a small punishment. If one cooperates and the other defects, the defector receives a large reward and the cooperator receives a large punishment. In a single round, the rational strategy is to defect. But when the game is repeated, a strategy called tit-for-tat emerged as the winner in Axelrod's tournament. Tit-for-tat begins by cooperating and then copies the opponent's previous move. If the opponent cooperated, tit-for-tat cooperates. If the opponent defected, tit-for-tat defects. The strategy was submitted by the Canadian mathematician Anatol Rapaport and it beat sixty-two other entries, including programs with complex algorithms for predicting opponent behavior. Axelrod explained its success with three properties: it is nice, meaning it never defects first; it is retaliatory, meaning it punishes defection immediately; and it is forgiving, meaning it returns to cooperation as soon as the opponent does. The iterated prisoner's dilemma is a mathematical model, but it captures the logic of real commons management. A herder who always overgrazes is punished by the community's refusal to cooperate in other domains, such as mutual aid or shared labor. A herder who overgrazes once but returns to cooperation is forgiven, preserving the social relationship. Axelrod's work showed that cooperation can evolve without central enforcement when the future is sufficiently important, meaning when the probability of continued interaction is high enough that the long-term cost of defection exceeds the short-term gain. In Ostrom's field studies, the successful commons were always communities with long-term interdependence and dense social networks, exactly the conditions under which tit-for-tat is effective.

The thermodynamic foundation of economics can be summarized as a chain of three concepts: gradient, structure, and value. A gradient is a difference in some physical quantity across space or time. A temperature difference is a thermal gradient. A concentration difference is a chemical gradient. A height difference is a gravitational gradient. The second law of thermodynamics says that gradients tend to dissipate, meaning that differences smooth out over time. A hot cup of coffee left on a table in a room at 20 degrees Celsius will cool to 20 degrees Celsius, dissipating its thermal gradient into the surrounding air. A structure is a local region where gradients have been captured and organized into a stable form. A living cell is a structure that maintains chemical gradients across its membrane, using energy from food to pump ions against their natural diffusion. An economy is a structure that maintains material and energy gradients by converting concentrated resources into organized goods and services. Value is the measure of a structure's capacity to capture and direct gradients. A diamond has high economic value not because it is rare but because its crystalline structure is a low-entropy arrangement of carbon atoms that can be used to cut other materials, directing mechanical energy into precise work. A forest has ecological value because its canopy structure captures solar gradients and converts them into chemical energy stored in wood and leaves. The thermoeconomic school argues that economic value is ultimately a measure of gradient-capturing capacity, and that any economic theory that ignores the physical gradient is describing a world that does not exist.

The connection between these ideas is stronger than analogy. The maximum power principle predicts that structures evolve to maximize energy throughput, which means they evolve to maximize gradient dissipation. The economy is a structure that has evolved to dissipate the gradient between the concentrated energy in fossil fuels and the dispersed energy in waste heat. The Pareto frontier defines the limits of what structures can achieve given the constraints of thermodynamic efficiency and resource availability. The commons design principles define the social institutions that allow structures to persist without collapsing from internal defection. The evolution of cooperation shows that the social institutions themselves are subject to the same selective pressures as biological structures. The result is a unified picture of economics as a physical science, where value is measured in joules and solar emjoules, where optimality is defined by thermodynamic constraints, and where sustainability depends on institutional design that aligns individual incentives with the collective imperative of gradient management. The standard economics curriculum still treats energy as a detail, to be mentioned in a chapter on natural resources and then forgotten. The thermoeconomic school treats it as the foundation. The difference is not a matter of emphasis. It is a matter of whether the theory is consistent with the laws of physics. A theory that assumes infinite substitutability between capital and energy, as the Cobb-Douglas function does, is not wrong in the sense of a mathematical error. It is wrong in the sense that it describes a world where perpetual motion is possible. The thermoeconomic school begins from the premise that perpetual motion is impossible, and asks what economic theory looks like when that premise is taken seriously.

Sources

• Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Harvard.
• Odum, H.T. (1971). Environment, Power, and Society. Wiley.
• Lotka, A.J. (1922). 'Contribution to the Energetics of Evolution.' Proc. Natl. Acad. Sci. USA, 8(6), 147-151.
• Ayres, R.U. (1998). 'Eco-thermodynamics: Economics and the Second Law.' Ecol. Econ., 26, 189-209.
• Ostrom, E. (1990). Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge.
• Ostrom, E. (2009). 'Beyond Markets and States: Polycentric Governance of Complex Economic Systems.' Nobel Lecture.
• Axelrod, R. (1984). The Evolution of Cooperation. Basic Books.
• Hardin, G. (1968). 'The Tragedy of the Commons.' Science, 162, 1243-1248. [The problem statement.]