Fairness is an Emergent Self-Organized Property of the Free Market for Labor

Entropy, Vol. 12, pp. 1514-1531, June 2010

18 Pages Posted: 16 Jun 2010 Last revised: 24 Jun 2010

Date Written: June 14, 2010


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.

Keywords: CEO pay, fairness, entropy, wage distribution, income distribution, equilibrium, statistical mechanics, executive compensation, fair pay, justice, income inequality, excessive pay, econophysics, emergent property, Adam Smith, invisible hand, statistical teleodynamics, corporate governance, excessiv

Suggested Citation

Venkatasubramanian, Venkat, Fairness is an Emergent Self-Organized Property of the Free Market for Labor (June 14, 2010). Entropy, Vol. 12, pp. 1514-1531, June 2010 , Available at SSRN: https://ssrn.com/abstract=1625606

Venkat Venkatasubramanian (Contact Author)

Purdue University ( email )

School of Chemical Engineering
West Lafayette, IN 47907
United States
7654940734 (Phone)
7654940805 (Fax)

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