A Thermodynamic Model for the Global Economy and Its Implications for Macroeconomic Theory and Policy Formulation

Abstract

Over recent decades the share of income produced by global the economy has increased for capital and decreased for labour. Picketty’s analysis of wealth and income data implies that there is increasing inequality in income share developing in economies including advanced economies. Further investigation by the International Monetary Fund (IMF), International Labour Organization (ILO) and the Organization for Economic Cooperation and Development (OECD) confirms that capital’s share of income is increasing versus labour’s share but the data does not fit with Picketty’s r > g growth model, instead indicating that technology is involved. This paper presents a physical model concept for an economy and the global economy that explains how and why capital’s share of income is increasing at the expense of labour and what policymakers need to do to adjust this trend. The macroeconomic policies that correct this trend have also significant concomitant benefits —they address strategic risks such as global warming which are physically linked by the way the economy currently functions through technology. Current policy is driving and increasing income inequality. Physical evidence based macroeconomic policymaking such as that advocated in this paper, can manage these long term risks.