Thermodynamics of Market and Kinetics of Change

As a chemical engineer who spent a large part of my career working in the chemical and energy industry, the relationship between thermodynamics and kinetics is not just theoretical for me—it’s practical and foundational to my work. Catalysts are essential in the chemical and energy industry, and catalysis is all about manipulating kinetics: changing the speed of a reaction without altering its thermodynamic equilibrium. This principle has been central to my professional life, and it has shaped my thinking.

It’s not a perfect analogy, but the concepts of kinetics and thermodynamics, though rooted in chemistry and physics, offer a framework for understanding broader societal dynamics, particularly when examining how markets operate and how governments intervene. Thermodynamics focuses on the equilibrium state, representing the most stable state a system can achieve, while kinetics deals with the speed and mechanisms by which a system reaches that state. This relationship mirrors how market forces and government policies shape economic and societal outcomes.

For the 373,000 subscribers to my newsletter with a technical background—many of whom work in the chemical or energy industries—the parallels between these scientific principles and the functioning of society and markets might be readily apparent. Just as catalysts accelerate reactions without changing the underlying equilibrium, government interventions can drive faster societal and economic changes without necessarily altering the long-term stability or natural equilibrium of the market.

Thermodynamics and Market Dynamics

In an ideal market economy, the invisible hand of the market guides the allocation of resources. Much like thermodynamics, the market tends to move toward an equilibrium—a stable state where resources are allocated efficiently based on supply and demand. The success of the U.S. economy is often cited as an example of the power of market dynamics in resource allocation. The U.S. economy thrives on market competition and continued innovation. Here, the thermodynamic principle applies: given enough time and the right conditions, the market will reach its most stable and efficient state, or the best product will, in most cases, eventually win in the marketplace through creative destruction.

However, thermodynamics says little about how long it will take to reach this equilibrium, just as the market economy does not guarantee the speed at which prosperity or innovation will arrive. The market may be efficient, but its mechanisms are sometimes slow to adapt to changes, crises, or emerging opportunities. Stability does not imply agility. In times of rapid technological change, external shocks, or exogenous factors, this slow march toward equilibrium can be a hindrance due to the long delay in the establishment of cause and effect.

Kinetics and Government Intervention

This is where the concept of kinetics becomes important. Kinetics is concerned with the speed of reaching equilibrium and the conditions under which that speed can be altered. A catalyst in a chemical reaction does not change the final equilibrium but dramatically accelerates the rate at which equilibrium is achieved. Similarly, government intervention, when properly applied, can act as a catalyst in an economy.

China’s development over the past forty years is an example of how interventionist policies can drive rapid economic change. While markets are efficient in the long term, government policies can expedite the process, fostering growth in sectors like electric vehicles (EVs) and renewable energy at a pace the free market might not achieve on its own. The key, however, is that these interventions are strategically aligned with long-term national goals and the needs of Chinese businesses. However, there’s a trade-off: just as a catalyst cannot change the final equilibrium, government interventions can lead to inefficiencies, such as overinvestment and resource misallocation. China’s current issue of overcapacity in some industries is a testament to this.

Despite these inefficiencies, the rapid economic growth China has experienced shows the power of kinetics. The Chinese government’s ability to mobilize resources quickly and align industries with national goals has created a form of kinetic advantage. Yet, it has also introduced challenges that emerge when the intervention creates imbalances that the market would have otherwise corrected.

U.S. Industrial Policy and the Kinetic Response

In facing increasing competitive pressures from China, the U.S. government, traditionally more hands-off, is now increasingly embracing industrial policy, as seen in the CHIPS Act and the Inflation Reduction Act. These policies are aimed at accelerating the growth of strategic sectors, such as semiconductors and renewable energy, through subsidies and incentives. However, the U.S. system lacks the centralized coordination that characterizes China’s approach.

For example, Congress, at the urging of the Biden administration, agreed in 2021 to spend $7.5 billion to build tens of thousands of electric vehicle chargers across the country, aiming to tackle climate change and ease consumer anxiety. Two years later, the program has yet to install a single charger. Meanwhile, Tesla disbanded its Supercharger team. A report this week highlights that the U.S. government is giving out $3.5 billion to 25 U.S. companies to boost lithium battery production to shift supply chains away from China. However, lithium carbonate price has plunged significantly—from a peak of $70,000 per metric ton to around $20,000. While companies are happy to accept government funds, it is unclear whether this new incentive will genuinely shift market dynamics.

The private sector in the U.S. works primarily for its own shareholders and stakeholders, whereas in China, the alignment between industry and national strategy is much tighter. There is no effective mechanism to ensure alignment in the U.S., unlike China’s centralized approach. The interplay between government intervention (kinetics) and the natural market forces (thermodynamics) is not unlike an orchestra where instruments must play together for the music to resonate.

A former colleague’s quote encapsulates this difference: "We work for our company, but in China, everyone works for China." This illustrates the divergence in how these two economies approach their kinetics—the speed and efficiency of achieving national goals.

The Balance of Thermodynamics and Kinetics in Economic Systems

Understanding the relationship between thermodynamics and kinetics helps us to appreciate the nuances of how economies evolve. Thermodynamics—market forces—provide long-term stability and efficiency but may lack responsiveness. Kinetics—government intervention—can accelerate progress but often introduces inefficiencies and imbalances.

The challenge for policymakers is to balance these forces. Too much focus on thermodynamics can sometimes lead to stagnation when change is needed, while an overemphasis on kinetics can result in unsustainable growth or misallocation of resources. The optimal solution often lies in knowing when to let the market find its equilibrium and when to intervene with catalytic policies that can accelerate progress without distorting the system.

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