Economic and Biological Evolution: A Real Option Approach

Abstract

Economic and biological systems, as open dissipative systems, need to extract negative entropy from the environment to compensate for continuous dissipation. This process can be modeled by lognormal processes, which in turn can be represented by the Black-Scholes equation and option theory. Since the Black-Scholes equation and all other thermodynamic equations are of first order in temporal dimension, economic and biological systems as thermodynamic systems are intrinsically evolutionary. With option theory as its analytical foundation, the non-equilibrium thermodynamic theory gives more accurate and simpler descriptions of economic activities than the Newtonian mechanics based general equilibrium theory.

Keywords: option theory, evolution, analytical framework, thermodynamic foundation of economics, non-equilibrium

JEL Classification: A10, B41, N30