No escape from thermodynamic limits

HOW do you explain what Charles Dickens called “The best of times, and the worst of times?”

We live today with massive social inequalities, the rich never had it so good, the middle class never so discontented, consecutive years of heat waves, wars in two continents, stock markets at record highs and bond markets suffering from four-decade high interest rates.

Are we going through imperial over-stretch or simply overstretched asset valuations?

Across centuries and civilisations, macro-historians of war and empires shared a remarkably similar view: societies thrive when their values, economies, and institutions remain anchored to physical reality but decay when elites drift into self-referential systems of paper wealth, prestige and power.

Climate change, fossil fuels, water, food and energy are anchored physically to the laws of thermodynamics, whereas human perception and agency (the willingness to intervene in human affairs and nature) can be detached from reality by ego, hubris and euphoria.

The three laws of thermodynamics, which proved universal for all systems, comprise the first on energy conservation: energy cannot be created or destroyed, only transformed from one form to another.

Second on entropy and irreversibility: in any spontaneous process, the total entropy (disorder) of the universe always increases.

Third on absolute zero: as the temperature of a system approaches absolute zero, the entropy of the system approaches a minimum constant value. This means that absolute zero cannot be reached.

Strictly speaking, the laws of thermodynamics do not apply to human social systems, since human perceptions or valuations can be inflated or understated, somewhat detached from reality, whilst human agency changes the game.

Just as artificial intelligence models hallucinate, humans’ perception or valuation of assets go from mild inflation to periodic hallucination with great crashes, the last in October 1929 that led to the Great Depression and ultimately the Second World War.

The view that the Soviet system collapsed because it violated the “hard budget constraint” was originated by Hungarian economist Janos Kornai (1928-2021).

He saw market economy firms that go bankrupt when they consistently lose money as a hard budget constraint. This imposes discipline and drives efficiency.

In the Soviet socialist system, state-owned enterprises and governments operated under soft budget constraints because the state would bail out losers until the state itself became bankrupt, default or collapse.

Hard-budget constraints are thermodynamic limits on fiscal excesses.

Cambridge political economist Helen Thompson was the first to draw parallels between the geopolitics of war and energy, highlighting that the Ukraine war was really about food, energy (and also rare minerals).

Political, military, money and social power run on energy. No more energy or money, the system stops or declines.

Western macro-historians like Arnold Toynbee or Yale University’s Paul Kennedy argued that empires rise through creative adaptation and shared purpose, then rot as elites become self-serving, overextending militarily while their economic core hollows out.

As complexity increases, new laws and bigger bureaucracies cost more money, resources or energy than the system can bear.

When elites fail to respond to crises with no more surplus left, the system collapses.

These insights are not uniquely Western. The 14th-century Arab scholar Ibn Khaldun captured the full lifecycle in a single concept: “asabiyyah” – shared cohesion and purpose.

Empires rise lean, grow fat on luxury and bureaucracy, then starve as taxes crush the productive base and elites lose the will to adapt.

Ancient India’s Kautilya put it bluntly: wealth is the foundation of power. Surplus comes first; everything else follows. Paper prestige cannot feed an army or sustain an empire.

Chinese traditions, meanwhile, frame the challenge as alignment with nature. Do not force what cannot succeed – act with reality, not against it.

With experience of the numerous rise and fall of dynasties, pragmatism, not ideology, becomes the survival strategy: test small, adjust, scale, and never mistake names for substance.

Across all these traditions, one lesson remains: moral order and physical order are one.

Hard budget constraints, justice and shared purpose are not luxuries; they lower enforcement costs, sustain trust, and conserve energy. When the moral anchor fails, the thermodynamic collapse follows.

Today, as fund manager Ray Dalio sees it, the global order displays late-stage symptoms.

All governments are running debt burdens faster than real output; financial engineering outpaces productive engineering; reserve currency privilege lets consumption run ahead of natural resources.

Narratives and memes amplify faster than facts; markets value acceleration over substance.

We are not witnessing the “end of history”. We are essentially watching the thermodynamic bill come due.

Every financial transaction, every institution, every army runs on real energy and resources.

Dickens’ novel “David Copperfield” (1850) summed it up best: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Humans prosper when we stay grounded in reality. We fall when we believe hubris can rewrite the laws of nature.

Markets that are concentrated and over-stretched in valuation are fragile, whose bursting will have systemic implications.

Facing such a reality is not a policy choice, but admitting the hard knocks of life.