When ice cubes in a glass of water slowly melt, and the temperature of the liquid water decreases, where does the limited ability of an observer come into play?
It seems to me that two things in this scenario are true:
1) The fundamental physical interactions (i.e. particle collisions) are all time-reversible, and no observer of any one such interaction would be able to tell which directly time is flowing.
2) The states of the overall system are not time-reversible.