Do Free Markets Lead to Fairer Wages?


The financial crisis appears to have awoken a host of Bolsheviks from their post-cold war slumber. Free markets and deregulation have been blamed for everything from the housing bubble to the Gulf oil spill.

This is, of course, nothing new. Check out the December 1975 issue of Reason, where Charles G. Koch wrote: "Anti-capitalist feelings in the United States are probably more virulent today than ever before." But there's mounting evidence that free markets aren't just more efficient than more controlled economies, they're fairer too.

In March, Reason's Ronald Bailey wrote about a study from the University of British Columbia, which shows a direct correlation between market institutions and how fairly people treat one another.

Now, a new study from Purdue University suggests that free markets may also produce fairer wages:

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.

From the press release:

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

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."

More on how free markets make people more generous and a new report that shows Americans are more giving than Canadians thanks, in part, to the Canadian welfare state.