Thermoeconomics

By Marcus Wilson 08/09/2011 2


I’ve been following with a bit of interest the "slow-motion crisis" of the European debt.  One of its consequences is some unhealthy shifts in exchange rates – for example the soaring Swiss Franc. That hurts Swiss exporters. 

In the last couple of days, Switzerland has decided that this isn’t acceptable and is taking drastic measures to reduce the value of its currency, by selling it in "unlimited amounts". Basically, they’ll flog off as many Swiss francs as it takes for the rate to get back to 1.2 francs to a Euro.

With economics, there are some obvious (that is, if you are a physicist) links to thermodynamics. There’s a branch of economics called ‘thermoeconomics’ which overlaps the two ideas.  For example, if you pump heat into a object it increases its temperature. That’s a bit like what is happening to Switzerland – people are wanting swiss francs rather than euros so money (heat) gets pushed its way and its exchange rate (temperature) therefore shifts.  Now, it’s difficult to get heat to flow naturally to a hot body.  To do that, you need a hotter body. (Second law of thermodynamics). Likewise, it’s difficult to get people to buy swiss products, because they are now very expensive. What happens is that people in Switzerland, with their ‘hot’ francs, will find it easy to import stuff from overseas. So money leaves the Swiss economy which doesn’t do their industry much good.

What the Swiss National Bank is doing with its policy is similar to throwing all the doors and windows of a house open to reduce its temperature. You could think of the situation as a house with heat pumps going full blast (investors converting their euros into ‘safe’ swiss francs) with all the doors and windows open (the national bank trying to get rid of swiss francs to make them cheaper).  Doesn’t sound very clever, does it? One would think, in these terms, the best thing to do would be to turn the heat pumps off and close the doors, but it’s probably not as easy as that.

I may have got the economics a bit wrong – I’m not an economist, but the physics is certaintly right.

 

 

 

 


2 Responses to “Thermoeconomics”

  • In that analogy, surely they would have no control over the heat pump (that would be whatever is happening in Europe to drive teh process in the first place) Which leaves opening the doors the only option available to them. I think.

  • Yes – you’re right. The Swiss National Bank doesn’t have the heat-pump remote in its hands, which doesn’t leave it a lot of options. Perhaps a more accurate analogy is that they’ve decided they’ll not only open the doors and windows (like the NZ reserve bank has does very occasionally to cool its currency off a bit) , but take the roof off too!

Site Meter