“My basic premise is that economic activity is a transformation of current or vintage thermal energy into kinetic, or coherent motion, which we call work or GDP. Energy is stored in vessels (batteries)–natural resources, plants, animals, people, technology, and capital goods. As economic agents, we are gradient-seeking systems, transforming energy into work (GDP) and cost or waste (entropy). Differing endowments of the various forms of stored energy lead to differing relative prices in different closed systems (countries, markets). International trade creates an open system in which the second law (arbitrage) drives relative prices (temperatures, pressures) together.

Boltzmann’s distribution gives a useful way to think about the impact of relative price differentials and transactions costs (Boltzmann’s constant) on the speed of convergence toward thermal equilibrium. When the differential is small the adjustment is smooth. When the differential is great or the bandwidth connecting the closed systems is high relative to both systems (fiber optic cable connecting service sectors with effectively infinite capacity) the adjustment can be abrupt, discontinuous, and chaotic, leading to potentially violent trade wars and other frictions, as shown in the literature on non-equilibrium thermodynamics. Relative price differentials between China and America, together with massive optical fiber capacity connecting the systems, is a potentially volatile situation. Both countries should give serious consideration to stability when setting policies, giving high priority to a stable currency regime.”