entropy

Review
Econophysics and the Entropic Foundations of Economics
J. Barkley Rosser, Jr.

Department of Economics, James Madison University, Harrisonburg, VA 22807, USA; [email protected]

Abstract: This paper examines relations between econophysics and the law of entropy as founda-
tions of economic phenomena. Ontological entropy, where actual thermodynamic processes are
involved in the flow of energy from the Sun through the biosphere and economy, is distinguished
from metaphorical entropy, where similar mathematics used for modeling entropy is employed to
model economic phenomena. Areas considered include general equilibrium theory, growth theory,
business cycles, ecological economics, urban–regional economics, income and wealth distribution,
and financial market dynamics. The power-law distributions studied by econophysicists can reflect
anti-entropic forces is emphasized to show how entropic and anti-entropic forces can interact to
drive economic dynamics, such as in the interaction between business cycles, financial markets, and
income distributions.

Keywords: econophysics; entropy; complex systems; ecological economics; urban–regional eco-

nomics; income distribution; financial market dynamics





 1. Where Econophysics Came From
Citation: Rosser, J.B., Jr. It has long been argued as for example by Mirowski [1] that economic theorists have
Econophysics and the Entropic drawn on ideas from physics, with an especially dramatic and influential example being
Foundations of Economics. Entropy Paul Samuelson’s Foundations of Economic Analysis [2] from 1947. However, while the
2021, 23, 1286. https://doi.org/ influence of physics concepts in Samuelson, as well as many economists much earlier, was
10.3390/e23101286 enormous and openly acknowledged, it was only much later that the term econophysics
would be coined, reportedly at a conference in 1995 Kolkata, India [3] by H. Eugene Stanley,
Academic Editors: Ryszard Kutner,
who as a longtime editor of Physica A has played a crucial role in publishing many papers
Christophe Schinckus and H.
that have been identified as representing and advancing this approach, with the term first
Eugene Stanley
appearing in print in 1996 [4]. Curiously when it came to define this multidisciplinary
neologism, the emphasis given by Mantegna and Stanley [5] was not upon the ideas or
Received: 5 June 2021
specific theoretical methods involved, but rather on the people doing it: “the activities of
Accepted: 16 September 2021
Published: 30 September 2021
physicists who are working on economics problems to test a variety of new conceptual
approaches deriving from the physical sciences”.
Publisher’s Note: MDPI stays neutral
This freshly defined approach involving physicists in particular, sometimes in con-
with regard to jurisdictional claims in
junction with economists, quickly became a self-conscious cottage industry, even though
published maps and institutional affil-
arguably similar efforts had been going on for a long time, if not specifically by self-
iations. identified physicists, although some econophysicists have argued that an early inspiration
for their work was Ettore Majorana in 1942 [6], whose untimely death gave him dramatic
attention as he argued for the profound identity of statistical methods used in social sci-
ences and physics. Important influences on the self-identified econophysicists included
statistical mechanics [7,8] and also self-organized criticality models derived from mod-
Copyright: © 2021 by the author.
els of avalanches [9] and earthquakes [10]. These approaches led to studies of many
Licensee MDPI, Basel, Switzerland.
This article is an open access article
subjects in the early days, generally finding distributions that did not follow Gaussian
distributed under the terms and
patterns characterizable solely by mean and variance. These subjects included financial
conditions of the Creative Commons market returns [11–18], economic shocks and growth rate variations [19,20], city size
Attribution (CC BY) license (https:// distributions [21,22], firms size and growth rate patterns [4,23,24], scientific discovery
creativecommons.org/licenses/by/ patterns [25,26], and the distribution of income and wealth [27–29].
4.0/).

Entropy 2021, 23, 1286. https://doi.org/10.3390/e23101286 https://www.mdpi.com/journal/entropy

Entropy 2021, 23, 1286 2 of 15

While the emerging econophysicists identified themselves as being physicists, an

important impetus to their activities came from the intense discussions between economists
and physicists at the Santa Fe Institute starting in the late 1980s [30,31]. While some of
the economists defended existing economic theory, these discussions often emphasized
dissatisfaction with its ability to explain empirical phenomena exhibiting non-Gaussian
distributions with skewness and “fat tails” leptokurtosis [32–34]. While indeed most of
the economists in these discussions disavowed some of the models developed by the
econophysicists, the irony is that some of these models introduced by the physicists
that could generate such higher moments as well as scaling properties were originally
developed by economists, with the most important example of this being the Pareto
distribution [35].

2. The Important Role of the Pareto Distribution

This important distribution that shows so many characteristics interesting to econo-
physicists was initially developed by the socio-economist Vilfredo Pareto in 1897 [35].
If N is the number of observations of a variable exceeding x, and A and α are positive
constants, then
N = Ax−α . (1)
Scaling can be seen as:
ln(N) = lnA − αln(x), (2)
with it possible to stochastically generalize this by replacing N with the probability an
observation exceeds x. The log–log form of this is conveniently linear.
Much like the more recent econophysicists, Pareto’s original focus was on income
distribution, and he believed (inaccurately) that he had found the universally true value
of 1.5 for a. In 1931, Gibrat [36] countered Pareto’s argument with the idea that instead
income distribution followed the lognormal form of the Gaussian distribution that can arise
from a random walk, first studied by Bachelier in 1900 [37], with Einstein adopting it to
model Brownian motion [38]. However, further studies suggest that combining these two
provides a better description of income distribution, with the upper end of the distribution
showing a Pareto pattern and lower portions showing lognormal Gaussian forms [39–42].
As it was, the Gaussian random walk would come to dominate a great deal of the
modeling of price dynamics and financial market dynamics, including the widely used
Black–Scholes formula [43]. Ironically, this triumph of what became the standard economic
approach was engineered by the physicist M.F.M. Osborne in 1959 [44]. His model of
dynamic prices, with p as the price, R the price increase return, B as the debt, and σ as the
Gaussian standard deviation, is given by:

dp = Rpdt + σpdB. (3)

Nevertheless, parallel developments inspired by Pareto went on through the twen-

tieth century, with some using the stable Lévy distribution developed in 1925 [45] as a
generalization of Pareto’s distribution. Applications included looking at scientific discov-
ery patterns [46] and city sizes [47]. A singular figure later in the century would be the
father of fractal geometry, Benoit Mandelbrot [48,49], who directly posed the rival Pareto
distribution as being able to model price dynamics [50] in 1963, in contrast to Osborne’s
argument. In 1977, Iriji and Simon [51] applied this to firm size distributions, a finding
generally ignored until verified by Rob Axtell in 2001 [52].

3. The Influence of Statistical Mechanics

Arguably, the earliest influence of physics on economics was due to Canard in 1801 [53],
who posed supply and demand as being “forces” opposing each other in a physics sense.
However, a more specific influence on conventional economics would be statistical mechan-
ics, developed by J. Willard Gibbs in 1902 [7]. As noted earlier, Samuelson in 1947 [2], who
drew the influence from Irving Fisher [54], drew on Gibbs’s approach for his reformulation
Entropy 2021, 23, 1286 3 of 15

of standard economic theory, a development much criticized by Mirowski [1], who derided
all as economists exhibiting “physics envy”.
More recently, there have been a variety of economists using statistical mechanics
to develop stochastic models of various economic dynamics, including work by Hans
Föllmer in 1974 [55], and then in the 1990s, just as the econophysicists were getting
going by Blume [56], Durlauf [31] (pp. 83–104) and [57], Brock [58], Foley [59], and
Stutzer [60]. Stutzer applied the maximum entropy formulation of Gibbs with the conven-
tional Black–Scholes model [43], drawing on Arrow–Debreu contingent claims theory [61].
Brock and Durlauf [62] would formalize the general approach within the context of socially
interacting heterogeneous agents maximizing utility in a discrete choice setting.
To a substantial degree, most econophysicists were not aware of either the more
recent work along these lines, much less the deeper work further in the past, with this
leading to some of them making unfortunately exaggerated claims about the originality and
transformative nature of what they were doing. These problems were discussed in a critical
essay called “Worrying trends in econophysics” by Gallegati et al. in 2006 in Physica A [63].
They identified the following as problematic trends: missing knowledge of the existing
economics literature, a readiness to believe there may be universal empirical regularities in
economics not really there unlike in physics, much use of unrigorous statistical methods
sometimes just looking at figures, and relying on inappropriate theoretical foundations
such as invalid conservation principles. McCauley responded [64], taking a hard line, that
economic theory is so worthless that it should be totally replaced by ideas coming from
physics. Reviewing these arguments, Rosser [65,66] agreed that economists often make
vacuous assumptions, despite excessively unreal assumptions damaging usefulness of
models. One way to deal with this is to have more joint research between economists
and physicists.

4. Forms of Entropy
In the Gibbsian statistical mechanics, the question of maximizing entropy is a crucial
element, which leads us to the question of what entropy is. Its original formulation came
from Ludwig Boltzmann [67], although it was not as many thought the form that appeared
on his grave [68] that has long received a great deal of attention. The statistical mechanics
problems involve aggregating out of individual molecular interactions to observe systemic
averages, such as temperature out of such a motion in a space. Letting S be entropy, kB be
the Boltzmann constant, and W be the statistical weight of the system macroscopic state
(also known as the “thermodynamic probability”), then the following equation can be
written as:
S = kB ln W, (4)
where the configurational statistical weight of the macrostate of the system, W, defines the
number of ways (configurations) of the arrangement of N of the identicalideal classical gas
molecules in the microstates of the system (constituting a given macrostate), where Ni is
the number of the identical molecules in the microstate i. The author uses this physical
interpretation later in the work, given N is the sum of over the n available microstates of
the system each given by Ni . Then according to Chakrabarti and Chakraborty [69], this
implies that one is dealing with factorials multiplying each other as:

W = N!/ΠNi !. (5)

From this, Boltzmann entropy can be rewritten as:

S = kB ln (N!/ΠNi !). (6)

Moreover, the transition to the thermodynamics of an ideal classical gas at a tem-

perature of T > 0 requires additional conditions to be taken into account, concerning the
consistency of the total number of molecules of the gas, N, and the total energy, E, of
all molecules.
Entropy 2021, 23, 1286 4 of 15

Gibbs [7] famously declared that “mathematics is a language”, which indeed he

viewed as applying to his analysis of entropy within statistical mechanics. However, while
we can view the mathematical formulation of Boltzmann entropy as a linguistic matter,
it describes the real physical phenomenon of thermodynamics. Thus, it can be viewed
as being ontological entropy [70], as it can be applied to more abstract phenomena with
less linkage to definite physical processes, thus allowing them to be labeled metaphorical
entropy. The first application beyond thermodynamics was information patterns in the form
of Shannon entropy [71]. This describes H—the probability distribution of informational
uncertainty states for message i that reflects the whole set of information concerning the
relevant microstate, H(p1 . . . pn ). Therefore, informational entropy involves adding up the
individual log probabilities times their probabilities to give [71–73]:

H(p1 . . . pn ) = −kB Σpi lnpi . (7)

An obvious question arises as to how this widely used and influential metaphorical
entropy measure relates to the ontological one of Boltzmann. In fact, they are proportional
to each other as the number of possible states, N, approaches infinity, because pi = Ni /N,
resulting in [74,75]:
S = kBN Σpi lnpi . (8)

5. Ontological Entropy, Econophysics, and the Foundations of Growth

Ontological entropy lies at the heart of the econophysics foundation of economic
growth due to the profound importance of energy both through the role of steam engines
in industrial production and electricity and in agriculture through the thermodynamic
transmission of solar energy through the larger global biosphere. The origin of under-
standing thermodynamics came from Sadi Carnot [76] in 1828 and later more fully Rudolf
Clausius [77]. In 1971, Nicholas Georgescu-Roegen, [78] argued that the openness of the
global biosphere to the sun allows temporarily overcoming the law of entropy [79]. Even
so, there is a limit to solar energy, which implies limits for economic activity. However in an
open system, anti-entropic forces can operate to develop order in local areas, drawing on
the argument of Schrödinger [80] that life is ultimately an anti-entropic process involving
the drawing of energy and matter from outside the living organism until it dies. Georgescu-
Roegen also argued for this to extend to broader material resource inputs, subject to a form
of the law of entropy. More broadly for Georgescu-Roegen [78] (p. 281), “the economic
process consists of a continuous transformation of low entropy into high entropy, that is,
into irrevocable waste, or, with a topical term, into pollution”.
Many ecological economists [81,82] have supported the idea of entropy as an ontolog-
ical limit to growth. However, while this is clearly true, others have noted that the limit is
many orders of magnitude above other limits that are more immediate [83–85]. Drawing
down stored fossil fuel energy sources generates climate-changing pollution by releasing
CO2 and thus further limiting growth. Others note the unlimited ingenuity of the human
mind, with Julian Simon [86] (p. 347) arguing that “those who view the relevant universe
as unbounded view the second law of thermodynamics as irrelevant to the discussion”.

6. Ontological Entropy and Economic Value

Another argument has seen ontological entropy as the fundamental source of economic
value in a parallel to the labor theory of value. The earliest version of this dates to the
turn of the twentieth century in arguments by “energeticist” physicists [87–89]. Julius
Davidson [90] saw the economics law of diminishing returns based on the law of entropy,
with the law of diminishing marginal returns, probably the only “economic law” that has no
exception to it. Davis [91] claimed “economic entropy” underlies the utility of money, but
Lisman [92] argued this is not how thermodynamics operates in physics. Samuelson [93]
ridiculed such arguments as a “crackpot”, even as he drew on entropic ideas of Gibbs [7]
and Lotka [81].
Entropy 2021, 23, 1286 5 of 15

Lotka [81] (p. 355) himself noted limits to this argument: “The physical process is
a typical case of ‘trigger action’ in which the ratio of energy set free to energy applied is
subject to no restricting general law whatsoever (e.g., a touch of the finger upon a switch
may set off tons of dynamite). In contrast with the case of thermodynamics conversion fac-
tors, the proportionality factor is here determined by the particular mechanism employed”.
Georgescu-Roegen [78] saw value as ultimately coming from utility rather than entropy.
Thus, most people value the high-entropy beaten egg more highly than the low-entropy
raw egg, and nobody valuing low-entropy poisonous mushrooms, due to utility rather
than entropy.

7. Thermodynamic Sustainability of Urban–Regional Systems

The ontological entropic analysis of urban and regional systems sees them driven by
the second law of thermodynamics based on actual energy transfers as argued by Rees [94],
Balocco et al. [95], Zhang et al. [96], Marchinetti et al. [97], and Purvis et al. [98]. Alan
Wilson [99] reviews both ontological and metaphorical approaches to the entropic analysis
of urban and regional systems.
Considering urban–regional systems as open and dissipative systems, experiences
allows the analysis of sustainability, depending on their energy and material flows [81,100].
In open systems, entropy can rise or fall, as energy and materials flow into them, in contrast
to closed systems where entropy can only rise. This is the key to Schrödinger’s [80] that
life is an anti-entropic process with organisms drawing in energy-generating structure
and order while life lasts. Anti-entropy is also known exergy [101] and also negentropy or
“negative entropy”.
Three concepts to distinguish are Stotal as total entropy, Si as inside entropy, and So as
outside entropy. Assuming the statistical independence between both the internal states
and the external states, then their dynamic relationship can be written as:

dStotal /dt = dSi /dt + dSo /dt, with dSi /dt > 0. (9)

Given that dSo /dt can be either sign, when negative with an absolute value greater
than that of Si , then total entropy may fall as the system absorbs energy and materials
creating order, with entropy increasing outside as waste and disorder leave the system.
Wackernagel and Rees [102] state, “Cities are entropic black holes” implying, as they
produce large ecological footprints, their sustainability becomes impaired.
The maximum amount of the useful work possible to reach a maximum entropy
condition of zero has been called exergy by Rant [101] initially for chemical engineering.
This term is essentially identical to the term “chemical potential” and also “Gibbs-free
energy”. Rant’s original formulation holds, when B is the exergy, U is the internal energy,
P is the pressure, V is the volume, T is the temperature, S is the entropy, µi is the chemical
potential of component i, and Ni is the moles of component i, implying:

B = U + PV − TS + Σµi Ni . (10)

Recognizing that this is an isolated system implies:

dB/dt ≤ 0 ↔ dS/dt ≥ 0. (11)

The right-hand side of Equation (11) simply holds for an isolated system, from which
we see the anti-entropic nature of exergy, determining the irreversible spontaneous time
evolution (or “time arrow”).
Balocco et al. [95] consider exergy in construction and building depreciation in Castel-
nuovo Beardenga near Siena, Italy, relying on an adaptation by Moran and Sciubba [103]
of Rant’s model. Studying particularly the input–output of the construction industry, it is
seen that those built in 1946–1960 provide higher sustainability than newer ones.
Entropy 2021, 23, 1286 6 of 15

Zhang et al. [96] use entropy concepts to study sustainable development in Ningbo,
China, a city near Shanghai, relying on ideas in [95,102,104,105]. They examine both
ontological and metaphoric information entropy measures, as they consider four distinct
aspects. The first two are sustaining input entropy and imposed output energy, arising
from production. The second two constitute the urban system’s metabolic functions,
regenerative metabolism and destructive metabolism, which linked to pollution and its
cleanup, a measure of environmental harmony. These contrast developmental degree
and harmony degree, with the finding during the 1996–2003 period that these two went
in opposite directions, with the developmental degree rising (associated with declining
entropy) and the harmony degree falling (associated with rising entropy). Thus, we see
Chinese urban development sustainability issues clearly.
The dependence versus autonomy of systems on their environment, derived from
dissipative structures of open systems considered by Prigogine [100], was formulated by
Morin [106] and then used by Marchinetti et al. [97]. This finds urban systems development
between autarchy and globalization, either extreme unsustainable, advocating a balanced
path they see urban–regional systems as ecosystems operating on energy flows [107] based
on a complex wholes emerging out of interacting micro-level components [108].

8. An Anti-Entropic Econophysics Alternative in Urban–Regional Systems

Opposing this entropic version urban and regional systems structure is a power law
version. In higher-level distributional systems, entropy ceases to operate and become
irrelevant. This reflects a balance of entropic and exergetic forces operating in the relations
and distributions within urban–regional systems [109].
Power-law distributions of econophysics reflect dominant anti-entropic forces [70],
and urban size distributions seem to show these [22]. For the Pareto power-law distribution
of city sizes [35], P is the population, r is the rank, with A and α are constants, implying:

rPrα = P1 . (12)

For α = 1, the population of rank r is written as:

Pr = P1 /r. (13)

This is the rank-size rule of Auerbach [110] from 1913 and generalized in 1941 as Zipf’s
law, claimed to be applied to many distributions [47]. Since Auerbach [110] proposed it and
Lotka [81] challenged it, there has been much debate regarding the matter. Many urban
geographers [111] claim it is a universal law. Many economists have doubted this, saying
there is no reason for it, even as urban sizes may show power-law distributions [112,113].
However, Gabaix [22] says Zipf’s law holds in the limit if Gibrat’s law is true with growth
rates, independent of city sizes.
US city size distributions seem to have shown power-law distributions from 1790 to
the present, although not precisely following the rank-size rule (the size of Los Angeles
is now larger than half the size of New York), according to Batten [112]. A meta-study of
many empirical studies by Nitsch [114] finds widely varying estimates over these studies,
although showing an aggregate mean of α = 1.08, near Zipf’s value. Berry and Okulicz-
Kozaryn [111] say Zipf’s law strongly holds if one uses consistent measures for urban
regions across studies, especially the largest ones for megalopolises. Anyway, city size
distributions seem to be power-law-distributed, suggesting dominance by anti-entropic
econophysics forces in this matter.
Long viewed as foundational for economic complexity, increasing returns may pro-
vide a basis for power-law distributional outcomes [115]. Three different kinds of these
have been identified for urban systems: firm-level internal economies [116], external ag-
glomeration between firms in a single industry providing localization economies [117], and
external agglomeration economies across industries generating yet larger-scale urbaniza-
tion economies [118].
Entropy 2021, 23, 1286 7 of 15

Papageorgiou and Smith [119] and Weidlich and Haag [120] have shown that rising
agglomeration economies can overcome congestion costs to manifest urban concentration.
However, such models have been partially replaced by “new economic geography” ones
emphasizing economies of scale appearing in monopolistic competition studied by Dixit
and Stiglitz [121]. Fujita [122] first applied this approach to urban–regional systems,
although Krugman [123] received much more attention for his version [124].

9. General Equilibrium Value and Metaphorical Entropy

Metaphorical Shannon entropy offers a different approach than Arrow–Debreu general
equilibrium theory of value. Arrow and Debreu views equilibrium as a fixed point set
of steady prices. However, in the reality of a stochastic world, equilibrium may be a
probability distribution of prices that are constantly varying everywhere at any point in
time for any commodity that can be modeled entropically. The Arrow–Debreu solution
is a special case of Lebesgue measure in the space of outcomes. Initially conceived by
Föllmer [55], Foley [59] developed it, followed by Foley and Smith [125].
Foley [59] assumes all possible transactions within an economy have equal probability,
implying a statistical distribution of behaviors in the economy where a particular trans-
action is inversely proportional to the exponential of its equilibrium entropy price. This
is a shadow price derived from a Boltzmann–Gibbs maximum entropy set. The special
case when “temperature” is zero implies Walrasian general equilibrium. The solution is
not necessarily Pareto optimal, and it allows for possible negative prices as Herodotus ob-
served in ancient Babylonian bridal auctions, where they sold brides in descending prices
that started out positive but then would go negative [126]. Foley emphasizes the crucial
importance of constraints in this approach, as one finds in the Arrow–Debreu model.
If there are m commodities, n agents of type k who make a transaction x of which there
is hk [x] proportion of agents type k out of r, which make transaction x out of an offer set A, of
which there are mn, then multiplicity W of an assignment for n agents assigned to S actions,
each of them s, which gives the probabilistic states across these possible transactions as:

W[ns] ] = n!/(n1 ! . . . ns !...nS !). (14)

Shannon entropy of this multiplicity involves summing over these proportions simi-
larly to Equation (7) and is written as:

H{hk [x]} = −Σk=1 r Wk ΣxeA hk [x]. (15)

This formulation maximizes entropy subject to certain non-empty feasibility con-

straints, thus giving the Gibbs solution:

Hk [x] = exp[−Πx]/Σx exp[−Πx], (16)

with Π is the entropy shadow price vectors.

10. Metaphorical Entropic Financial Modeling

Schinkus [127] points out that econophysicists are more willing than most economists
to approach data open to more possible distributions or parameter values, while favor-
ing ideas from physics, including entropy for financial modeling. According to Dioni-
sio et al. [128] (p. 161):
“Entropy is a measure of dispersion, uncertainty, disorder and diversification
used in dynamic process, in statistics and information theory, and has been
increasingly adopted in financial theory”.
Using the entropy law with Shannon or Boltzmann–Gibbs distributions can model
distributions involving lognormality, both exhibiting normal Gaussian characteristics,
Michael J. Stutzer [60,129] has drawn on both types of entropy to model Black–Scholes [43]
formuli. In [129], he uses Shannon entropy, like Cozzolino and Zahner [130], allowing
Entropy 2021, 23, 1286 8 of 15

them to derive lognormal stock price distributions at the same time, similar to what Black
and Scholes [43] did in deriving their options formuli without using entropy measures.
Stutzer [129] considered a discrete form version modeling a stock market price dynamic by:
√
∆p/p = µ∆t + σ ∆t∆z, (17)

with p is the price, ∆p is the random shock, ∆t is the time interval, and the second term on
the right hand side is the random shock, distributed ~ N(0, σ2 ∆t).
The order-maximizing solution for the neutral density of relative entropy-minimizing
conditional risk given by the integral is written as:
Z
arg mindQ/dP log dq/dp dq, (18)

which satisfies a martingale restriction with q as a quantity:

r∆t − E[(∆p/p)(dq/dp)] = 0. (19)

Thus, the Black–Scholes option-pricing formula can be derived from a martingale

product density arising from relative entropy minimizing conditional risk for an asset
subject to IID normally distributed shocks. Stutzer understood this does not generate non-
Gaussian distributions such as econophysics power law ones. He poses using Generalized
Auto Regressive Conditional Heteroskedastic (GARCH) processes as an alternative.
More recent studies have expanded the forms of entropy used in studying financial
market dynamics. Thus, transfer entropy has been used by Jizba et al. [131] to study differ-
ences in related financial times series focusing on spike events by Dimpli and Peter [132]
to study cryptocurrency dynamics and by Kim et al. [133] for directional stock market
forecasting. In addition, permutation entropy has been used in a variety of financial market
econophysics applications [134].

11. Using Statistical Mechanics to Model Income and Wealth Distributions

Income and wealth dynamical systems can be driven by interactions between power-
law distributions and non-power-law ones. Wealth dynamics apparently exhibit power-
law distributions, while income distribution dynamics look to consist of entropy-related
Boltzmann–Gibbs distributions. The former seem to drive the top 2–3 percent of income
distributions, while the latter seem to drive income distributions below that level in the
UK and US [28,40].
Entropy came to be used in generalizations of various income distribution measures as
early as 1981, when Cowell and Kuga [135] presented a generalized axiomatic formulation
for additive measures of income distribution. Adding two axioms to the standard model
allowed a generalized entropy approach to subsume the well-known Atkinson [136] and
Theil measures [137]. The former can distinguish the skewness of tails, while latter has more
generality, with Bourgignon [137] showing the Theil to be the only zero-homogeneous
decomposable “income-weighted” inequality measure. Adding a sensitivity axiom to
others, Cowell and Kuga [135] argued a generalized entropy concept implies the Theil index,
even as some argued that this linking was a challenge, with Montroll and Schlesinger [138]
(p. 209) declaring
“The derivation of distributions with inverse power tails from maximum entropy
formalism would be a consequence only of an unconventional auxiliary condition that
involves the specification of the average of a complicated logarithmic function”.
It is unsurprising that both wealth and financial market distribution dynamics exhibit
power-law distributions taking into account their close link, given Vilfredo Pareto’s [35] role
in discovering them. Initially trained to be an engineer, Pareto came to study the dynamic
social classes relations manifested by income distribution. He claimed a universally true
pattern that held throughout “the circulation of elites” he studied, but he was wrong, with
ironically his method superior for the study of wealth distributions. He claimed incorrectly
Entropy 2021, 23, 1286 9 of 15

that because of the constancy of the income distribution pattern, little can be performed to
equalize income, because changes in political leadership simply substitutes one power elite
by another with no income distribution change. However, large changes occurred, so his
approach went “underground”, reappearing for other uses such as for urban metropolitan
size distributions [111].
The sociologist, John Angle [139], revived using Pareto’s power-law distribution for
studying income and wealth distribution dynamics starting in 1986. Then, econophysicists
followed up with this, with their finding that wealth distributions follow Pareto’s power
law view well [27,140,141].
The question arises as to whether we are dealing with ontological or “merely” metaphor-
ical models in studying wealth and income distributional dynamics. Some see the stochastic
elements in these distributions associated with thermodynamical processes fundamentally
driving the distributional dynamics of income and wealth. However, these do not appear
to be direct ontological processes as with Carnot’s steam engines. More likely, these reflect
dynamics associated with no substantial changes in public distributional policies.
Yakovenko and Rosser [40] show a model with an entropic Boltzmann–Gibbs dynam-
ics for lower-income distribution and a Paretian power-law distributions for higher-level
income dynamics. There is an assumption of the conservation of money or income or
wealth, which has not held in recent years as top-level incomes have exploded although it
did much more so in earlier decades. This is consistent with lognormal entropic dynamics
appropriate for the majority of the population below a certain level where wage dynamics
predominate, while a Pareto power law is more appropriate for the top level whose income
is more determined by wealth dynamics.
Assuming money conservation, m, the Boltzmann–Gibbs entropic equilibrium distri-
bution has probability, P, with m seen as:

P(m) = ce−m/Tm , (20)

with c is a normalizing constant, and Tm is the “money temperature” thermodynamically,

equaling the money supply per capita. The portion of the income distribution below about
97–98 percent seems to be well modeled by this formulation.
If there is a fixed rate of proportional money transfers equaling γ, then the Gamma
distribution rather than the Boltzmann–Gibbs distribution better describes the stationary
money distribution with a power-law prefactor, mβ , such that:

β = −1 − ln2/ln(1 − γ). (21)

This Boltzmann–Gibbs version more simply relates to a power law equivalent than
that posed by Montrell and Schlesinger [138]. The connection between the models of wealth
and income distributions is described as:

P(m) = cmβ e−m/T . (22)

Letting m grow stochastically disconnects this outcome from the maximum entropy
solution [142], so the stationary distribution becomes Fokker–Planck equation-driven mean
field situation, not Boltzmann–Gibbs distribution, although inverse Gamma in [27,142] is
a Lotka–Volterra form showing w as the wealth per person and J as the average transfer
between agents, with σ being the standard deviation:

P(w) = c[(e−J/σσw )/(w2+J/σσ )]. (23)

This model provides an empirical explanation of income distribution consistent with

Marxist and other classical economic views of socio-economic class dynamics [41,42,143].
Figure 1 exhibits this in the log–log form for the 1997 US income distribution, with the
Boltzmann–Gibbs section for the lower 97 percent of the distribution being nonlinear on
 age transfer between agents, with σ being the standard deviation:
P(w) = c[(e−J/σσw)/(w2+J/σσ)]. (23)
This model provides an empirical explanation of income distribution consistent
with Marxist and other classical economic views of socio-economic class dynamics
Entropy 2021, 23, 1286 10 of 15
[41,42,143].
Figure 1 exhibits this in the log–log form for the 1997 US income distribution, with
the Boltzmann–Gibbs section for the lower 97 percent of the distribution being nonlinear
on left-hand
the the left-hand
side, side,
whilewhile the Pareto
the Pareto sectionsection
is linearisinlinear in the
logs on logsright-hand
on the right-hand side
side showing
showing
the the top of
top 3 percent 3 percent of the
the income income distribution
distribution (Figure 4.5(Figure 4.5 of [144]).
of [144]).

Figure1.1.Log–log
Figure Log–logUnited
United States
States Income
Income Distribution,
Distribution, Boltzmann–Gibbs,
Boltzmann–Gibbs, and and Pareto
Pareto Sections
Sections in
in 1997
1997 from Yakovenko (Figure 4.6)
from Yakovenko (Figure 4.6) [144]. [144].

There has
There has been
been further
further use
use of
of variations
variations onon the
the Gamma
Gamma distribution
distribution in
in studying
studying
marketdynamics,
market dynamics,with
withMoghaddim
Moghaddim et [145]
et al. al. [145] using
using the Prime
the Beta Beta Prime distribution
distribution to
to study
study housing
housing marketmarket inequality
inequality dynamics.
dynamics.

12.
12. The
The Revenge
Revenge of of Metaphorical
Metaphorical Entropy
Entropy as as Bubbles
Bubbles CrashCrash
Financial
Financial market
market dynamics
dynamics interact
interact with
with income
incomeand andwealth
wealthdistribution
distributiondynamics
dynamics
during speculative bubbles following a Minsky process [146–148].
during speculative bubbles following a Minsky process [146–148]. During major During major bubbles,
bub-
the top portion of the income and wealth distributions rises noticeably
bles, the top portion of the income and wealth distributions rises noticeably relative relative to theto
lower portion.
the lower Anti-entropic
portion. dynamics
Anti-entropic drive drive
dynamics this process and itsand
this process reversal, when the
its reversal, bubble
when the
crashes, hence thehence
bubble crashes, “revenge
the of entropy”.
“revenge of Thus, during
entropy”. a bubble,
Thus, thisaupward
during bubble,movement
this upward of
the Paretian of
movement portion also moves
the Paretian its boundary
portion also moves withitsthe Boltzmann–Gibbs
boundary portion leftward.
with the Boltzmann–Gibbs
Theleftward.
portion Great Depression brought the end of the “Gilded Age” after a major financial
crashThe
thatGreat
appears to have lowered
Depression brought thethe top
endend of the
of the income
“Gilded distribution,
Age” as noted
after a major by
financial
Smeeding [149]. The 2007–2009 Great Recession had several different bubbles
crash that appears to have lowered the top end of the income distribution, as noted by happening,
leading
Smeeding to a[149].
moreThecomplex outcome,
2007–2009 Greatwith the housing
Recession bubbledifferent
had several crash badly hurting
bubbles the
happen-
middle class, while crashes of the stock market and derivatives markets
ing, leading to a more complex outcome, with the housing bubble crash badly hurting predominantly
hurt the wealthy.
the middle class, The
whileUScrashes
stock market fell from
of the stock marketmore andthan half its value
derivatives to itspredomi-
markets bottom
in 2009, with total wealth declining by 50 percent. Top 10 percent wealth declined by
13 percent, while top 1 percent wealth declined by 20 percent [149]. However, the stock
market quickly turned around, rising more rapidly than in the 1930s or after 2000, while
the US housing market grew more slowly. Thus, wealth inequality declined for a while
during 2008–2009. It increased again after that as the rising stock market aided those at the
top, while the continuing problems of the US housing market held back the middle class.
This was the Minsky dynamic at work in a more complex form than seen at other times.
Support for this can be seen looking at the end of the dotcom bubble in 2000, even
though somewhat weak, as indicated in Figure 2 (Figure 4.7) [144] showing the log–log
relation for the US income distribution for the years 1983–2001, with further discussion
in [150] and extension to a sample of 67 nations in [151]. Mostly, the Boltzmann–Gibbs
 for a while during 2008–2009. It increased again after that as the rising stock market
aided those at the top, while the continuing problems of the US housing market held
back the middle class. This was the Minsky dynamic at work in a more complex form
than seen at other times.
Support for this can be seen looking at the end of the dotcom bubble in 2000, even
Entropy 2021, 23, 1286 11 of 15
though somewhat weak, as indicated in Figure 2 (Figure 4.7) [144] showing the log–log
relation for the US income distribution for the years 1983–2001, with further discussion
in [150] and extension to a sample of 67 nations in [151]. Mostly, the Boltzmann–Gibbs
section barely
section barelymoved,
moved,but but there
there were
were small
small annual
annual changes
changes in theinParetian
the Paretian part, mani-
part, manifesting
festing gradually
gradually increasing
increasing inequalityinequality
over time.over time. However,
However, there is anthere is anhere,
exception exception here,
the change
between
the change2000 and 2001,
between 2000with
and2000 being
2001, withthe endbeing
2000 of thethe
dotcom
end ofbubble. This time
the dotcom interval
bubble. This
exhibited a reversal,
time interval with
exhibited a the 2001 Paretian
reversal, with theportion lying below
2001 Paretian thelying
portion 2000 portion. This
below the 2000is
consistent with a revenge of entropy following the dotcom bubble crash, as the
portion. This is consistent with a revenge of entropy following the dotcom bubble crash, 1990s came
to
as an
theend.
1990s came to an end.

Figure 2.2.Log–log
Figure US Annual
Log–log IncomeIncome
US Annual Distribution during 1983–2001
Distribution from Yakovenko
during 1983–2001 from (Figure 4.7)
Yakovenko
[144].
(Figure 4.7) [144].

13. Conclusions
term“econophysics”
The term “econophysics”is isof of recent
recent vintage,
vintage, barely
barely a quarter
a quarter of a century
of a century old.
old. How-
ever, the idea
However, the behind it thatit ideas
idea behind and even
that ideas laws of
and even lawsphysics have have
of physics strongly influenced
strongly influ-
economicss
enced economicssin a variety of ways
in a variety of isways
certainly correct.correct.
is certainly One ofOnesuch
of ideas
such that
ideashasthatdeep
has
connections with the newer econophysics is the concept of entropy, which
deep connections with the newer econophysics is the concept of entropy, which has been has been applied
to many to
applied parts
many of economics, including general
parts of economics, including equilibrium theory, growth
general equilibrium theory,
theory, business
growth the-
cycles, ecological
ory, business economics,
cycles, ecologicalurban and regional
economics, urbaneconomics,
and regionalincome and wealth
economics, distribu-
income and
tion patterns,
wealth and financial
distribution market
patterns, dynamics.market
and financial Some of these applications
dynamics. are ontological
Some of these applicationsin
the
are sense of drawing
ontological in thedirectly
sense ofon the second
drawing law of
directly onthermodynamics
the second law of asthermodynamics
the actual physical as
driving force involved, such as understanding energy flows through
the actual physical driving force involved, such as understanding energy flows through the biosphere and the
economy fromand
the biosphere the Sun. Others are
the economy from metaphorical, as they
the Sun. Others aredraw on modelsasofthey
metaphorical, information
draw on
theory or other non-specifically physical models using the mathematics of entropy theory.
Econophysics has also long emphasized the ubiquity of power-law distributions for many
economic phenomena, which in some areas arise from anti-entropic processes that conflict
with entropic tendencies. This can generate an underlying dynamic, with an especially
dramatic example involving the dynamics of income distribution interacting with business
cycles and related financial market dynamics.

Funding: The APC was funded by James Madison University.

Conflicts of Interest: The authors declare no conflict of interest.
Entropy 2021, 23, 1286 12 of 15

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