Under ideal circumstances, a free market promotes fair salaries for workers and does not support fat pay packets for top honchos.
A research by Venkat Venkatasubramanian, Purdue University professor of chemical engineering, presents a new perspective on 18th century economist Adam Smith’s concept that an “invisible hand” drives a free market economy to a collective good.
“It is generally believed that the free market cares only about efficiency and not fairness,” said Venkatasubramanian, who holds a B.Tech from the University of Madras, India, 1977.
“However, my theory shows that…the collective self-organising free market dynamics, under ideal conditions, leads to fairness as an emergent property,” said Venkatasubramanian.
“In reality, the self-correcting free market mechanisms have broken down for CEOs and other top executives in the market, but they seem to be working fine for the remaining 95 percent of employees,” said Venkatasubramanian, according to a Purdue release.
Venkatasubramanian is proposing the use of statistical mechanics and econophysics concepts to gain some insights into the problem. “This is at the intersection of physics and economics,” he said, reports the journal Entropy, online.
“We are generalizing concepts from statistical thermodynamics – the branch of physics that describes the behaviour of gases, liquids and solids under heat – to analyse how free markets should perform ideally,” he said.
In previous work, Venkatasubramanian used the approach to determine that the 2008 salaries of the top 35 CEOs in the US were about 129 times their ideal fair salaries.
CEOs in the Standard & Poor’s 500 averaged about 50 times their fair pay – raising questions about the effectiveness of the free market to properly determine CEO pay.
In the new work, he has determined that fairness is integral to a normally functioning free market economy. Venkatasubramanian calls his new theory, “statistical teleodynamics”, from the Greek term telos, which means goal-driven.