Economics Questions

Re: 'Econophysics' points way to fair salaries in free market

thelion — Wed, 14 Jul 2010 19:50:23 GMT

"As the salaries of the employees increase and decrease, as discussed in Section 2, the company adapts, evolves, and wanders stochastically through the phase space."

But salaries are based on marginal value product, and are not random (stochastic). This is critical error. I agree with Clayton.

Kirzner reccomended a really good book by Henry Manne, Insider Trading and the Stock Market, which solves the problem of executive salaries very elegantly: they should be allowed to inside trade on GOOD NEWS that they generate. This will raise price of stock they buy and stock held by all other shareholders', sharing the profit, if it due to idea of executives outside their capacity as managers.

Re: 'Econophysics' points way to fair salaries in free market

Clayton — Wed, 14 Jul 2010 19:38:44 GMT

This is related to the emerging field of "complexity economics" or computational economics, cf Eric Beinhocker's Origin of Wealth. The nit I have to pick with the paper is the underlying assumption that wages are different from other prices. I also take strong exception to the implication by one of the author's peers at Purdue (quoted in the article) that this represents a "new interpretation" of entropy. Entropy is what it is (average log-probability) and is really nothing more than a formalism that is widely applicable for reasons that we do not yet fully understand. The author's analysis of wage distribution could be applied to any good (not just labor) and it would have been more general and useful if the author had followed this approach. The "social justice" debate is whether labor should be thought of and treated as "just another good" or whether state violence ought to be applied to cause market participants to treat labor differently than they treat other goods and services. Trying to recast entropy as a measure of "fairness" is voodoo science, voodoo ethics and utterly useless to answering the social justice argument against treating labor as just another good.

In summary, I think Mr. Venkatasubramanian's article is a genuine contribution to economics but not the contribution he intended. He should apply his theory to prices in general and leave the social justice argument where it belongs, in the realm of ethics. State violence is not justified in prohibiting people from buying and selling labor between $0 and a minimum wage. The results of such violence are amply demonstrated both theoretically and empirically and they are disastrous. We don't need to borrow entropy from statistical physics to provide a scientistic moral justification for a non-communist definition of "fairness" in wages in order to see that state manipulation of wages is grotesque both in principle and in consequence.

Edited to add: Mr Venkatasubramanian's approach to answering the social justice argument is not just deficient, it is actually very dangerous. The opening paragraphs of his paper espouse exactly the sort of collectivist thinking ("people as particles") that results from a denial of human action and the right of humans to act. If fairness can be judged by a simple physical equation, then society can be reduced to a beehive. This is not only morally repugnant, but there are strong mathematical reasons* why such a "beehive social order" is unattainable.

Clayton -

*A more powerful sort of entropy - Kolmogorov complexity - can be invoked to explain the limitations of statistical entropy in modeling the behavior of human beings whose brains are computationally universal, that is, capable of simulating any Turing machine (up to a finite limit) while point particles are in no wise computationally universal.

Re: 'Econophysics' points way to fair salaries in free market

Mises Pieces — Wed, 14 Jul 2010 19:19:10 GMT

It's not too suprising that employees tend to receive a salary commensurate to the value they produce (or DMVP). If they received less, than another employer would hire them away. If they received more, their employer would cease to be profitable and would close, downsize, or lose market share.

Re: 'Econophysics' points way to fair salaries in free market

E. R. Olovetto — Wed, 14 Jul 2010 19:16:01 GMT

I didn't feel like reading it, but the full PDF of his theory is here.

Re: 'Econophysics' points way to fair salaries in free market

nirgrahamUK — Wed, 14 Jul 2010 19:12:51 GMT

the rather short descriptions make it seem absolutely barmy.

'Econophysics' points way to fair salaries in free market

Buckley — Wed, 14 Jul 2010 19:07:26 GMT

http://www.physorg.com/news198239413.html

What are people's opinion on this? I'm rather skeptical, but then I'm no physicist so I am not really sure about some of the concepts in this article. Nonetheless, it is at least interesting that scientists want to support the free market with theories.