How Much Inequality Is Fair? ─ Mathematical Principles of a Moral, Optimal, and Stable Capitalist Society

Many in the United States feel that the nation's current level of economic inequality is unfair and that capitalism is not working for 90% of the population. Yet some inequality is inevitable. The question is: What level of inequality is fair? Mainstream economics has offered little guidance on reasonable fairness and the ideal distribution of income. Political theory, meanwhile, has much to say about fairness yet relies on qualitative theories that cannot be verified by empirical data. As we take steps to address inequality, we need to know what the goal is and for this, we need a quantitative, testable theory of fairness for free market capitalism.

How Much Inequality is Fair? synthesizes ideas from economics, political theory, game theory, information theory, statistical mechanics, and systems engineering into a mathematical framework of a fair free market society. The key to this framework is the insight that maximizing fairness means maximizing entropy, which allows one to determine the fairest possible level of inequality in pay. This framework provides a moral justification for capitalism in mathematical terms. After outlining this framework, Venkat Venkatasubramanian compares his theory's predictions to the actual inequality data of different countries—showing, for instance, that Scandinavia has near-ideal fairness, while the United States is markedly unfair—and discusses the theory's implications for tax policy, social programs, and executive compensation.