Free Market Economics supported by physics theory applied to economics

GHN Ed - West Lafayette, Ind - Physics applied to economics?  Most folks wouldn't have a clue about that, but one Purdue University researcher, applying physics, has come up with econophysics that demonstrates true free markets promote fairness for workers and don't exaggerate salaries.

This is how he came up with this idea, as Venkat Venkatasubramanian, a professor of chemical engineering, takes a different look at Adam Smith's concept that an "invisible hand" is involved in driving a free market economy to a collective good.

While liberals may moan, it turns out in some ways that the public good is served by applying some conservative principles with a balance, and the goal is the welfare of the whole.

"It is generally believed that the free market cares only about efficiency and not fairness. However, my theory shows that even though companies focus primarily on making profits and individuals are only looking out for themselves, the collective self-organizing free market dynamics, under ideal conditions, leads to fairness as an emergent property," said  Venkatasubramanian.

Exactly how does this work.  Venkatasubramanian explains. "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."

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. "We are generalizing concepts from statistical thermodynamics - the branch of physics that describes the behavior of gases, liquids and solids under heat - to analyze how free markets should perform ideally."

 Venkatasubramanian previously used the approach to determine the 2008 salaries of the top 35 CEOs in the United States were about 129 times their ideal fair salaries, and CEOs in the Standard & Poor's 500 averaged about 50 times their fair pay.  This has raised questions about the effectiveness of the free market to properly determine CEO pay.  It is part of the discussion about how specifically to regulate financial markets and the underlying reasons for the financial meltdown.

In the new work, the researcher has determined that fairness is integral to a normally functioning free market economy.

The specific scientific details are available in a research paper that appeared in June in the online journal Entropy and is available at http://www.mdpi.com/1099-4300/12/6/1514/

A key idea in Venkatasubramanian's theory is a new interpretation of entropy, used in science to measure disorder in thermodynamics and uncertainty in information theory. He shows, however, that entropy also is a measure of fairness, an insight that seems to have been largely missed over the years, he said.

Venkatasubramanian refers to his new theory as "statistical teleodynamics," from the Greek telos, which means goal-driven.

"In statistical thermodynamics, we study the movement of large numbers of molecules," Venkatasubramanian said. "In economic systems, we have a large number of people moving around in a free market system, but instead of thermal energy driving the movement people are motivated by goals."

His theory describes how goal-driven "rational agents," or people, will behave in a free market economic environment under ideal conditions.

"The bottom line is that the free market does care about fairness," he said. "Clearly, the next step is to conduct more comprehensive studies of salary distributions in various organizations and sectors in order to understand in greater detail the deviations in the real world from the ideal, fairness maximizing, free market for labor."