The writing of this book takes place in the year in which we celebrate the 150th anniversary of Darwin's theory of evolution. This theory revolutionized the understanding of evolution as a key principle underlying the development of biological species. It largely displaced the creationist view on the origin of life. Some 50 years earlier Sadi Carnot published a remarkable paper that made him one of the founders of thermodynamics; the science that allows understanding of transformations of energy and matter. Carnot's work on the heat engine led to the discovery of the second law of thermodynamics. The second law of thermodynamics provides an arrow of time to the direction in which spontaneous processes evolve. It has been formulated in a variety of ways in the years after its discovery by Carnot. One of the popular formulations is that systems that are left alone develop in the direction of increasing disorder. Buildings that are left alone develop into ruins; the reverse process requires the input of solid and skilled labor.
The combination of the theory of evolution and the second law of thermodynamics has puzzled many early investigators. Evolution clearly proceeds in the direction of increasing complexity, ordered systems, such as human kind, evolved apparently spontaneously out of an initially unordered state. Fortunately, developments in the 20th century led to a reconciliation of thermodynamics and evolution. Prigogine and his coworkers formulated what could be called a general systems theory of evolution. It became clear that the evolution of “Order out of Chaos” is a necessary consequence of the second law of thermodynamics if we consider complex systems that operate in an environment that is not in thermodynamic equilibrium. The discovery of DNA and RNA as the basis of life led to the understanding that biological evolution is of an informational nature. In biology the storage and processing of information forms the basis of the evolution of increasingly complex organism.
Evolution in biology was for an extensive period of the history of life on earth based on the further refinement of the immortal coils that characterize the double helix of DNA macromolecules. Later on in evolution other ways of developing and transferring information emerged when the brain appeared and evolved to sophistication when the humanoids and later on Homo sapiens appeared on the stage. This triggered the so-called exogenic evolution; evolution based on transferring and developing information beyond the information carrier DNA. This led to the development of the socioeconomic system, with its institutions such as universities, economies, markets and firms. It is the ambition of this book to investigate the relation between the theories mentioned above and the storage, processing and transfer of information to grasp the dynamics of economies, markets and industries.
Most of the systems that are of interest to physicists, chemists and biologist are far too complex to be modeled in all detail. This certainly also holds for systems such as industries, economies and markets. In physics this leads to the widespread use of macroscopic models in which only part of the microscopic details of the system is taken into account. A reduced information picture of the system is developed. This approach leads to limitations to the predictability of the future behavior and to limitations to the extent to which potential value can be made free from the sources of value in the system. The extent of this loss is characterized by the statistical entropy of the macroscopic description.
The ambition of the author is to develop a consistent theory of evolving systems with special reference to industries, markets and economies. We show that the basic driving force behind the transactions that take place in our markets, industries and economies rest on the creation and maintenance of asymmetries in information. Furthermore, the value (and the cost) of the information is quantitatively defined in terms of the concept of statistical entropy. This results in a general value transaction theory to be applied to socioeconomic systems.
This basic formalism is applied to systems in which asymmetries in information exist and develop. The theory is analyzed in terms of accepted economic theories such as the perfect competition model, transaction costs economics, the concept of dynamic capabilities and the evolutionary approaches to organizations. Particularly evolutionary approaches are seen as promising and the theories of evolution and complexity are analyzed from the perspective of physical, chemical and biological systems. It is then argued that these approaches can be generalized, evolution is, as said, a general feature of complex systems of which we can only have a limited information picture. This leads to the conclusion that the application of evolutionary approaches to markets, industries and economies does not have to be understood in terms of an analogy with biological evolution but as a reflection of a general evolution theory of complex systems. We argue that there are both similarities and differences between biological and socioeconomic evolution. In the last chapter of the book the theory is analyzed in terms of a number of characteristics of industries and markets. The theories underlying the approach (thermodynamics of complexity, information theory, statistical thermodynamics, theory of evolution,) are not free from mathematical intricacies. This book tries to avoid mathematical intricacy as much as possible without sacrificing rigor. Most of the concepts are discussed in a verbal way to explain the mathematical formalism to a multidisciplinary community of readers.
The main distinguishing feature of this book is that it develops a conceptually and mathematically consistent framework for the existing concepts used in organizational economics in a way that should be accessible to readers that are not familiar with modeling approaches in physics, chemistry and biology. Some parts of the present literature in “econophysics” lack that consistency and accessibility. The author hopes that this book will thus augment on and complement existing approaches in the literature on organizational economics and evolutionary approaches to organizations.