Prof Jing Chen developed a unified economic theory of life and human societies from the physical laws. A systematic introduction of the theory can be found in his 2005 book, The Physical Foundation of Economics: An Analytical Thermodynamic Theory. This new economic theory consists of three parts: Theory of production, theory of mind and theory of value. He holds a PhD degree in mathematics and is teaching finance at University of Northern British Columbia.
It was after many years before I bumped into the Black-Scholes equation. The Black-Scholes equation was originated in financial economics. But from my perspective, this equation is a mapping from lognormal processes, which can be understood as the representation of extracting low entropy to compensate for dissipation. Immediately, I realized the Black-Scholes theory is exactly what I was looking for. Although I started to think about it in 1995, shortly after I went to Hong Kong, it was not until 2000, while I was in Singapore, I worked out an analytical thermodynamic theory of economics based on option theory. It took me two more years to develop a new version directly from the thermodynamic theory, without depending on the analogy to the option theory.
Since human activities are mainly measured by economic values, we need to answer how thermodynamic value is related to economic value. I took a trip from Singapore to Vancouver in August, 2000. On the plane I read Shannon’s classical paper that established information theory. Soon I realized that value can be defined exactly the same way as information: the reduction of entropy. I wrote down the draft on the plane. But it took me two years before I finally wrote the paper. I shall briefly compare our theory of value with the mainstream theory of value. There are two versions of theory of value. The first one is the popular version taught in classrooms, which defines value as scarce resources. The second one is the formal version represented by Debreu’s Theory of Value, which does not provide a measurable quantity of value. The popular version and the formal version are disconnected. Our theory defines value as a function of scarcity and provides a rigorous and easy to apply mathematical theory of value. The entropy theory of value offers a unified understanding of physical entropy, information and economic value. It provides a quantitative measure of value that is highly consistent with our intuitive understanding.
Many people do not agree that theories of social sciences should be derived from physical laws. They argue that physical laws are fixed while the human mind is free. So I was driven to better understand mind. The mind of animals, just like the bodies of animals, is shaped by natural selection to best adapt to environment. Specifically, the mind is evolved to search for natural resources at low cost. Since entropy provides a universal measure of resources, it is inevitable that information, which we collect for our survival, is represented by the entropy function mathematically. When observing the problems of the mind from the lens of physical laws, many complex and confusing problems become simple and clear. The entropy theory of mind provides a simple and unified understanding of many patterns in human psychology and market patterns documented in the literature of behavioral finance. This shows that research on mind, just like research on matter, can be carried out in an analytical, quantitative and systematic way from the foundation of physical laws.
From the information theory, the amount of information an audience can receive is the amount of information sent minus equivocation, which is a function of correlation between the sender and receivers of information. For a new theory, the equivocation is extremely high. After I established the theoretical foundation, I write about the applications in different fields to make it easier for other researchers to apply to their own works.
Most of the new theories are first circulated through informal channels. My papers have generated over eleven thousand downloads on Social Science Research Network. I also receive generous help from many people, such as Professor James Galbraith, who introduced me to Professor Philip Arestis. I am very grateful that the conference organizers give me a precious opportunity to present my ideas.
Link to Prof Jing Chen’s book, The Physical Foundation of Economics, An Analytical Thermodynamic Theory.