Application of the Concept of Entropy to Equilibrium in Macroeconomics

Author Name AOYAMA Hideaki (Faculty Fellow, RIETI) / IYETOMI Hiroshi (Niigata University) / SOUMA Wataru (Nihon University) / YOSHIKAWA Hiroshi (Faculty Fellow, RIETI)
Creation Date/NO. June 2015 15-E-070
Research Project Price Network and Dynamics of Small and Medium Enterprises
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Entropic consideration plays the essential role in understanding equilibrium in the macroeconomy comprising heterogeneous agents. Curiously, it has been long ignored in economics. In fact, the idea of entropy is completely opposite to that of mainstream macroeconomics which is founded on representative agent models. Macroeconomics is meant to analyze the macroeconomy which consists of 10 million households and one million firms. Despite a large number of micro agents, the standard model focuses on the behavior of the representative micro agent. We show that entropy serves as a key concept in economics as well as in physics by taking the distribution of labor productivity in Japan as an illustrative example. Negative temperature, which is abnormal in nature, turns out to be normal to explain the distribution of workers on the low-to-medium productivity side. Also, the empirical result on the high productivity side indicates limited capacities of leading firms for workers. We construct a statistical physics model that is valid in the whole range of productivity.