The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

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Sunday, April 16, 2017

Entropy | Free Full-Text | Fairness Is an Emergent Self-Organized Property of the Free Market for Labor | HTML



The excessive compensation packages of CEOs of U.S. corporations in recent years have brought to the foreground the issue of fairness in economics. The conventional wisdom is that the free market for labor, which determines the pay packages, cares only about efficiency and not fairness. We present an alternative theory that shows that an ideal free market environment also promotes fairness, as an emergent property resulting from the self-organizing market dynamics. Even though an individual employee may care only about his or her salary and no one else’s, the collective actions of all the employees, combined with the profit maximizing actions of all the companies, in a free market environment under budgetary constraints, lead towards a more fair allocation of wages, guided by Adam Smith’s invisible hand of self-organization. By exploring deep connections with statistical thermodynamics, we show that entropy is the appropriate measure of fairness in a free market environment which is maximized at equilibrium to yield the lognormal distribution of salaries as the fairest inequality of pay in an organization under ideal conditions.



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"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices" said Smith.

He was far too intelligent, realistic, and practical to believe claims defending CEO rip-off pay. He'd have seen right through it as just another conspiracy, this one aimed at the shareholders.

Posted by: dearieme | Apr 16, 2017 3:47:39 PM

My own theorem: rent-seeking is not a blemish on the fair face of capitalism, it is the reason capitalism exists. If people did not have a sporting chance of getting rent, they would get rid of capitalism and replace it with a system that legalized and justified anti-competitive government action.

Posted by: Lewis wetzel | Apr 16, 2017 8:18:43 PM

Mr. Wetzel - I believe the replacement process you describe is underway and underlies much of current politics.

Posted by: Greg | Apr 18, 2017 4:18:26 PM