Routledge Dictionary of Second edition

The most informative dictionary of economics available, the Routledge Dictionary of Economics avoids the tendency to indulge in long-winded definitions of the major concepts and provides students with a lucid, comprehensive and accurate guide to the discipline. Employing the key feature of further reading with many of the terms, the book uses the subject classification system defined by the Journal of Economic Literature and The Economic Journal.

There have been sweeping developments in economics in the decade since the appearance of the first edition of the dictionary and the new version reflects this by including a wealth of material on additional topics, including: . economic anthropology . . endogenous growth theory . French Circuit School . output floor regulation . predator–prey models. The dictionary has been compiled for the needs of students and teachers of economics, finance, accountancy and business studies and should prove to be an invaluable resource.

Donald Rutherford is Lecturer in Economics and Associate Dean of the Faculty of Social Sciences at the University of Edinburgh.

© 2002 Donald Rutherford Routledge Dictionary of Economics

Second edition

Donald Rutherford

London and New York

© 2002 Donald Rutherford First published in 1992 as the Dictionary of Economics Second edition published 2002 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group

This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” # 2002 Donald Rutherford All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book has been requested

ISBN 0-203-00054-4 Master e-book ISBN

ISBN 0–415–25090–0 (hbk) ISBN 0–415–25091–9 (pbk)

© 2002 Donald Rutherford Contents

Preface to the first edition Preface to the second edition List of abbreviations

DICTIONARY OF ECONOMICS

Appendices Subject classifications

© 2002 Donald Rutherford Preface to the first edition

Economics, the Queen of the Social Sciences, has now established itself as a major subject in dialogue with the physical sciences, law and the arts. There are few aspects of human behaviour that do not have an economic dimension and little of current affairs can be understood without a knowledge of economic principles. It is, therefore, not surprising that it is a major discipline in schools, colleges and universities throughout the world, studied by millions and the topic of conversation of millions more. The Routledge Dictionary of Economics has as its concerns as many issues as the subject Economics now covers. The breadth can be appreciated by considering the subject classifications used by the Journal of Economic Literature (USA) and The Economic Journal (UK). The related specialties of , commercial law, and econometric and statistical techniques are all within its ambit. However, to prevent a subject dictionary becoming encyclopedic, a lexicographer can follow the useful conventions of taking from sister disciplines only what is regularly used in mainstream economic literature. For example, from law, it is customary to emphasize , fiscal and banking law more than constitutional or criminal law. This interpretation of economics in the broad sense makes a dictionary of this kind more of a dictionary for , rather than a dictionary of economics with terms peculiar to the subject. Even if a dictionary takes a broad view of its subject matter, it is usually addressed to a particular audience, such as first-year undergraduates. This is an approach that I have wanted to avoid, as there is a substantial heterogeneity of economics courses and students often need to research some areas of the subject in more depth than others. Also, it can be patronizing to the general reader to regard all of his or her knowledge to date as rudimentary. Even the reader of the daily newspapers who never looks at an economics textbook will encounter the most complex of ideas, chaos theory for example. To produce a dictionary of this kind, I started with an assortment of basic textbooks and many current newspapers and journals. I soon discovered that about a thousand concepts are common to all the textbooks, for example notions of cost, economic systems and banking. From general textbooks I moved to a

© 2002 Donald Rutherford perusal of specialist books on the diverse divisions of the subject. The areas of economics encompassed obviously have to reflect current concerns; many environmental concepts are included and the ‘male’ character of many economics works has been partially avoided by including biographies of several leading female economists. Newspapers and journals provide a modern guide to current economic discourse. There is no foreseeable end to the creation of economic neologisms – major events such as the of financial markets and the political developments in Eastern Europe, which have changed the nature of many economies, have produced an expansion of new terms. Some terminology is ephemeral but many words that start as slang, such as ‘yuppy’, have a surprising longevity. I have taken the optimistic view that numerous catchwords and catchphrases will render linguistic for many years. The entries in this Dictionary are sequenced alphabetically letter by letter: for example, discounted share precedes discount house, which precede discounting. The standard form for each item included begins with a headword followed by one or more single letter and number codes to indicate the branch or branches of economics that most frequently use that term. As it is important to ensure that all entries are immediately comprehensible and independent of the others, the text of each entry begins with a short definition before any discussion is included. Where related entries can profitably be read in conjunction, reference is made to them. Standard diagrams are included in the entries that require them. For the longer or more difficult entries, references to other works that either indicate the original use of that idea or provide a modern discussion of it are given. A dictionary is a solace for the perplexed, a guide for the scholar and a map of a new terrain for the general reader. I hope that this Routledge Dictionary of Economics is all of these.

© 2002 Donald Rutherford Preface to the second edition

Ten years have elapsed since the first edition of this Dictionary. The vocabulary of economics in the broadest sense has considerably grown. Many neologisms have sprung from continued changes in national economies, not least the innovations in financial markets and growing concerns about the environment. Institutional changes, for example, the coming of the World Organisation, and new in economic thought, not least through the further awards of Nobel Prizes for Economics, have inspired new entries. Inevitably some terms in the first edition have not been as durable as others and recommended reading needed revision. Extensive reading of economics journals and monographs, as well as newspapers, has produced over a thousand new entries. The organisation of the Dictionary has also been changed. The newer version of the subject classification employed by the Journal of Economic Literature and The Economic Journal has been applied to previous and new entries. There is now a separate listing of abbreviations and acronyms, together with tables for and stock indexes. Without the resources of major libraries this new edition could not have been undertaken. I am grateful for having access to Edinburgh University Library, Cambridge University Library, and to the Economics Library and Bodleian Library of Oxford University. Colleagues and friends have been very supportive. In particular I would like to mention Graham Richardson, Stuart Sayer, John Gordon and Gillian Gordon.

© 2002 Donald Rutherford Abbreviations

AARCH augmented autoregressive conditional heteroscedasticity AC advanced country ACAS Advisory, Conciliation and Arbitration Service ACH automated clearinghouse ACM Andean Common Market; Arab Common Market ACP African, Caribbean and Pacific ACRS Accelerated Cost Recovery System ACT advanced corporation tax AD anti-dumping AD–AS –aggregate supply ADB Asian Development Bank ADR American Depository Receipt AEA American Economic Association AESOP all-employee share ownership plan (UK) AFBD Association of Futures Brokers and Dealers (London) AfDB African Development Bank AFDC Aid to Families with Dependent Children AFL–CIO American Federation of Labor and Congress of Industrial Organizations AG Aktiengesellschaft AGM Annual General Meeting AGNP augmented gross national product AIBD Association of International Bond Dealers AIM Alternative Investment Market (London) ALC Australian Loan Council ALM asset-liability management AMEX American Stock Exchange AMU Arab Maghreb Union ANOVA analysis of variance AOSIS Alliance of Small Island States APACS Association for Payment Clearing Services

© 2002 Donald Rutherford APB Accounting Principles Board (UK) APC average propensity to consume APCIMS Association of Private Client Investment Managers and Stock- brokers APR average percentage rate (of ) ARCH autoregressive conditional heteroscedasticity Ariel Automated Real-time Investment Exchange ARIMA autoregressive integrated moving average ARM adjustable rate mortgage ARMA autoregressive moving average ASEAN Association of South East Asian Nations ATM automated teller machine; air transport movement ATP Aid and Trade Provisions ATS automatic transfer from a account; automatic transfer service account

BACS Banks Automated Clearing System (UK) BAT best available technology BCEAO Banque Centrale des Etats de l’Afrique de l’Ouest ( of West African States) b/d barrels per day BDI Bundesverrand der deutschen Industrie BDR British Depository Receipt BEA Bureau of Economic Analysis (USA) BERD La banque europe´enne pour la reconstruction et la de´veloppe- ment (European Bank for Reconstruction and Development) BIDS British Institute of Dealers in Securities BIS Bank for International Settlements BNB basic needs budget BOF Balance for Official Financing BOY beginning of the year (or of an accounting period) bp base points (of an ) BP BRITE Basic research in industrial technologies for Europe

C aggregate consumption C-20 Committee of Twenty CA confluence analysis; chartered accountant CAC Central Arbitration Committee; Consumer Advisory Council (USA) CACM Central American Common Market CAP Common Agricultural Policy CAPM capital asset pricing model CAR compounded annual rate (of interest) CARICOM Caribbean Community

© 2002 Donald Rutherford CARIFTA Caribbean Free Trade Area CAT Charges, Access, Terms CATS Computer-assisted Trading System CBD central business district (of a city) CBI Caribbean Basin Initiative; Confederation of British Industry CBO Congressional Budget Office (USA) CBOE Chicago Board Options Exchange CC Competition Commission (UK) CCC Commodity Credit Corporation (USA); Competition and Credit Control (UK) CCT compensating common tariff; compulsory competitive tendering CD Certificate of Deposit CDB Caribbean Development Bank CEA Council of Economic Advisers CEAO Communaute´ Economique de l’Afrique de l’Ouest CEC Commission of the European Communities CENIS Centre for International Studies CEMAC Communaute´ Economique et Monetaire en Afrique Centrale (Central African Economic and Monetary Community) CEO Chief Executive Officer CEPAL Commisio´n Economica para Ame´rica Latina CEPGL Communite´ e´conomique des Pays des Grands Lacs CES constant of substitution CET common external tariff CETA Comprehensive Employment and Training Act CEV constant elasticity of variance CFA Communaute´ Financie`re Africaine; chartered financial analyst CFF compensatory financial facility CFTC Commodity Futures Trading Commission CGE computable general equilibrium CGT capital gains tax CHAPS Clearing House Automatic Payments System (UK) CHIPS Clearing House Interbank Payments System (New York) c.i.f. cost, insurance, freight CIR Commission on Industrial Relations (UK) CIS cash incentive scheme CITES Convention on International Trade in Endangered Species CMB Cash Management Bill CMEA Council for Mutual Economic Aid CMO collateralized mortgage obligation CMSA Consolidated Metropolitan Statistical Area CO Certification Officer COB Commission des Ope´rations de Bourse (the Stock Exchange Commission of France) COLA cost of living adjustment

© 2002 Donald Rutherford Comex Commodity Exchange of New York CONSOB Commissione nazionale per la societa` e la borsa (the Stock Exchange Commission of Italy, founded 1974) CPE centrally CPI consumer price index CPP current purchasing power CPR common pool resources CPS Centre for Policy Studies; current population survey CS cross-section data CSO Central Statistical Office CSR Comprehensive Spending Review CTD certificate of tax deposit CTN confectioner, tobacconist and newsagent CTT capital transfer tax CVD countervailing duty C’vr cover CW comparable worth d penny; denarius DAC Development Aid Committee (of the OECD) DC developed country DCE domestic credit expansion DCF discounted cash flow DEA Department of Economics (UK); econometric model DIDMCA Depository Institutions Deregulation and Monetary Control Act div net dividend net DLO direct labour organization DME decentralized DPP direct product profitability DRC direct resource cost DRY disposable real income DTB Deutsche Terminboerse DTC Design-to-cost DTP desktop publishing DTR double-taxation relief DUP directly unproductive seeking DW Durbin–Watson

EA Environmental Agency (UK) EAGGF European Agricultural Guidance and Guarantee Fund EAT Employment Appeal Tribunal EBIT earnings before interest and taxes EBITDA earnings before interest, tax, depreciation and amortization EBRD European Bank for Reconstruction and Development

© 2002 Donald Rutherford ECA Economic Commission for Africa; European Co-operation Administration ECB European Central Bank ECOWAS European Community of West African States ecu European unit EEA exchange equalization account EEC European Economic Community EFA expedited funds availability EFF extended fund facility EFT electronic funds transfer EFTA European Free Trade Association EGARCH exponential generalized autoregressive conditional heteroscedas- ticity EIB European Investment Bank EMCF European Monetary Co-operation Fund EMS European Monetary System EMU European Monetary Union EMV expected monetary EOC Equal Opportunities Commission EONIA Euro overnight index average EP export promotion EPA Environmental Protection Agency ERA effective rate of assistance; exchange rate agreement ERDF European Regional Development Fund ERM Exchange Rate Mechanism ERP European Recovery Program (‘Marshall Aid’) ESA European System of Accounts ESOP Employee Stock Ownership Plan ETAS Economic Trends Annual Survey (UK) EU expected ; European Union EUA European EURIBOR EuroInterBank offered rate Exim Export–Import Bank

FAO Food and Agricultural Organization FAS free alongside ship FCC Federal Communications Commission (USA) FCO Federal Cartel Office (USA) FDI foreign direct investment FDIC Federal Deposit Insurance Corporation Fed Federal Reserve System FES Family Expenditure Survey (UK) FIBS financial information and budgeting systems FIFG Financial Instrument for Fisheries Guidance (EU) FIFO first in, first out

© 2002 Donald Rutherford FIGARCH fractionally integrated generalized autoregressive conditional heteroscedasticity Fimbra Financial Intermediaries, Managers and Brokers Regulatory Association (London) FIML full information maximum likelihood FOB free on board FOMC Federal Open Market Committee FPE factor price equalization FRN floating rate note FSA Financial Services Act; Food Standards Agency (UK) FSB Federation of Small Businesses (UK) FSBR Financial Statement and Budget Report (UK) FSLIC Federal Savings and Loan Insurance Corporation FTC Federal Trade Corporation; Federal Trade Commission Act FTO foreign trade organization FTSE 100 Financial Times Stock Exchange 100 Share Index FTZ free trade zone FY fiscal year (USA)

G3 Group of Three (Germany, Japan, USA) G7 Group of Seven (Canada, France, Germany, Italy, Japan, UK, USA) G8 Group of Eight (G7 plus Russia) GAB General Agreement to Borrow GAO General Accounting Office (USA) GAR guaranteed annuity rate GARCH generalized autoregressive conditional heteroscedasticity GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GDP gross domestic product GE general equilibrium GHS General Household Survey Ginny Mae General National Mortgage Association (USA) GLAM grey, leisured, affluent, married GLS generalized least squares GmbH Gesellschaft mit beschkranter Haftung (German or Swiss private company) GNMA Government National Mortgage Association (US) GNP gross national product GSP generalized system of preferences; gross social product; gross state product GSPS generalized system of schemes

HA housing association HICP harmonized index of consumer

© 2002 Donald Rutherford HIPC heavily indebted poor countries HLT high-leveraged takeover HOBS home and office banking systems HR human resources HRM human resource management i rate of interest I net investment IAS International Accounting Standard IATA International Air Travel Association IBEC International Bank for European Co-operation IBEL interest-bearing eligible liability IBF International Banking Facility IBRD International Bank for Reconstruction and Development ICC income–consumption curve; Interstate Commerce Commission (USA) ICCH International Commodities Clearing House ICFC International and Commercial Finance Corporation ICOR incremental capital–output ratio ICSID International Centre for Settlement of Investment Disputes ICU International Clearing Union IDA International Development Association IDB Inter-American Development Bank; inter-dealer broker IEA Institute of Economic Affairs (UK); International Energy Agency IET interest equalization tax IFC International Finance Corporation IFS Institute for Fiscal Studies (UK) IGARCH integrated generalized autoregressive conditional heteroscedasti- city IIB International Investment Bank IIF Institute for International Finance ILO International Labour Office ILS indirect least squares IMF International Monetary Fund IMM International Monetary Market IMO International Miners’ Organization IMRO Investment Managers Regulatory Organization (London) INSEE Institut National de la Statistique et des Etudes Economiques IO IOB Insurance Ombudsman Bureau IP intellectual property IPC integrated pollution control IPE International Petroleum Exchange IPMA International Primary Markets Association

© 2002 Donald Rutherford IPO initial public offering IPR intellectual property rights IR individually rational IRA individual retirement account (USA) IRC Industrial Reorganization Corporation (UK) IRR internal rate of return IRS Internal Revenue Service (USA) IS investment ; import substitution ISCO-88 International Standard Classification of Occupations ISE International Stock Exchange ISRO International Securities Regulatory Organization IT information technology ITA International Trade Administration (USA) ITC International Trade Commission ITO International Trade Organization ITS Intermarket Trading System k a thousand K capital stock

L liquidity; a measure of the US supply LAFTA Latin American Free Trade Association LBO leveraged buyout lc local currency LCH life-cycle hypothesis LDC less developed country LDMA London Discount Market Association LEA Local Enterprise Agency LFA less favoured area LFPR labour force participation rate LGS liquid assets and government securities LIBOR London Inter-Bank Offered Rate LIFFE London International Financial Futures Exchange LIFO last in, first out LIML limited information maximum likelihood LLC limited liability company (USA) LMBO leveraged management buyout LPM linear probability model LRE likelihood ratio statistic LSE London Stock Exchange; London School of Economics Ltd private limited company (UK) Ltip long-term incentive package LTOM London Traded Options Market LTU long-term unemployed

© 2002 Donald Rutherford LTV labour theory of value

M ; imports M&A merger and acquisition MA moving average MABP monetarist approach to the balance of payments MAP market anti- plan MBO management by objectives; management buyout MCA of abatement; Monetary Compensation Amount MCT mainstream corporation tax MDP multidisciplinary practice (of lawyers, accountants, etc.) MERCOSUR Mercado Comun del Sur MES minimum efficient scale MEW measure of economic welfare MFA Multi-Fibre Arrangement MFC most favoured customer MFN most favoured nation MFR minimum funding requirement MIGA Multilateral Investment Guarantee Agency MIRAS Mortgage Interest Relief at Source (UK) MITI Ministry of International Trade and Industry (Japan) ML maximum likelihood MLE maximum likelihood estimator MLH minimum list heading MLM multi-level marketing MLR minimum lending rate MMC money market certificate MMDA money market deposit account MMMF money market mutual fund MNC multinational corporation MPA marginal principle of allocation MPC marginal propensity to consume; Committee, UK MPD marginal private damage MPM marginal propensity to import MPP marginal physical product MPS marginal propensity to save; (Soviet) Material Product System MRP marginal revenue product MRR minimum reserve requirements MRS minimum rate of substitution MSA Metropolitan Statistical Area MSD marginal social damage MTFS Medium-term Financial Strategy

N The quantity of employment

© 2002 Donald Rutherford NAFA net acquisition of financial assets NAFTA North American Free Trade Area NAIC National Association of Insurance Commissioners (USA) NAIRU non-accelerating inflation of NAMU North American Monetary Union NARCH non-linear autoregressive conditional heteroscedasticity NASDAQ National Association of Securities Dealers Automated Quotation System (USA) NASDIM National Association of Securities Dealers and Investment Managers NAV net asset value NBER National Bureau of Economic Research (USA) NBPI National Board for Prices and Incomes (UK) NDP net domestic product NEB National Enterprise Board (UK) NEDC National Economic Development Council (UK) NEDO National Economic Development Office (UK) NEP New (Soviet Union) NEW net economic welfare NIBM non-interest-bearing M1 NIC newly industrialized country NIE new NIEO New International Economic Order NIESR National Institute of Economic and Social Research (UK) NIF note issuance facility NIMBY ‘not in my backyard’ NIPA National Income and Product Accounts (USA) NOW negotiable order of withdrawal NPE non-profit enterprise NPV net present value NRV net realizable value NSA non-sterling area NTB non-tariff barrier NV Naamlose venootschap (Dutch public company) NYMEX New York Mercantile Exchange NYSE New York Stock Exchange

OASDHI Old Age, Survivors, Disability and Health Insurance (USA) OB organizational behaviour OBRA Omnibus Budget Reconciliation Act (USA) OCD other checkable deposits ODA official development assistance; Overseas Development Admin- istration OECD Organization for Economic Co-operation and Development OEEC Organization for European Economic Co-operation

© 2002 Donald Rutherford OF— Office of a UK regulator (e.g. OFGAS, of gas) OFT Office of Fair Trading (UK) OID original issue discount OLG overlapping generations model OLS ordinary least squares OM Options Model OMA orderly market agreement OMB Office of Management and Budget OMO open market operation ONS Office for National Statistics (UK) OPCS Office of Population Censuses and Surveys (UK) OPEC Organization of Petroleum Exporting Countries OSA overseas sterling area OTCM over-the-counter market

PAF percentage annual fixed (rate of interest) PAYE pay as you earn (UK) PCC price–consumption curve PCT primary care trust (UK) PDI personal disposable income PDV present discounted value P/E price–earnings ratio PEP personal equity plan (UK) PESC Public Expenditure Survey Committee (UK) PFI private finance initiative (UK) PIBOR Paris Inter-Bank Offered Rate PIK payment in kind PIN personal identification number; Philippine Investment Note plc public limited company (formerly Co. Ltd) (UK) PPB planning, programming, budgeting PPF production possibility frontier PPI producer price index PPP ; public–private partnership PQLI physical quality of life index PRF population regression function PRP performance-related pay; profit-related pay PRT petroleum revenue tax PSA public service agreement (UK) PSBR public sector borrowing requirement PSDR public sector debt repayment PSE public service employment PSL private sector liquidity (UK) PSNB public sector net borrowing PTA preferential trading arrangement; preferential trade agreement

© 2002 Donald Rutherford QALY quality-adjusted life years QARCH quadratic autoregressive conditional heteroscedasticity QR quantitative restrictions QTARCH qualitative threshold autoregressive conditional heteroscedasti- city r coefficient of correlation RBC real RD reserve deposits (of a bank) R&D research and development RDA Regional Development Agency (England) RD and D research, development and demonstration RE REP regional employment premium REPO repurchase agreement RER real exchange rate ROCE return on capital employed ROI return on investment ROW rest of the world RPB recognized professional body RPI retail price index (UK) RPM resale price maintenance RRR real rate of return RSA regional selective assistance RSG rate support grant RTB right to buy RTC Resolution Trust Corporation (USA) RTM rent to mortgage RUF revolving underwriting facility

SA Socie´te´ anonyme (French, Belgian, Luxemburgese or Swiss public company) SACU South African Customs Union SADCC South African Development Co-ordination Committee Sarl Socie´te´ a` responsabilite´ limite´ (French private limited company) SAYE save as you earn (UK scheme) SBA Small Business Administration (USA) SCOPE System Committee on Paperless Entry SCP structure–conduct–performance SDR special drawing rights SEAQ Stock Exchange Automated Quotation System (UK) SEC Securities and Exchange Commission (UK) SEM special employment measures SEPON Stock Exchange Pool Nominees (UK) SERPS State Earnings-related Pension Scheme

© 2002 Donald Rutherford SETS Stock Exchange Electronic Trading Service (UK) SFA Securities and Futures Authority (UK) SIB Securities and Investments Board (UK) SIBOR Singapore Inter-Bank Offered Rate SIC Standard Industrial Classification SIMEX Singapore International Monetary Exchange SIP state implementation plan (US pollution control) SITC Standard International Trade Classification SLM segmented labour market SME small and medium-sized enterprise SMSA Standard Metropolitan Statistical Area SNA System of (United Nations) SNB Swiss National Bank (Switzerland’s central bank) SNIG sustained non-inflationary growth SOE state-owned enterprise; small S&P 500 Standard & Poor 500 SRD Statutory Reserve Deposit SRF sample regression function SRO self-regulatory organization SSAP Statement of Standard Accounting Practice SWIFT Society for Worldwide Interbank Financial Telecommunications SWING sterling warrant into gilt-edged stock SWOT strengths, weaknesses, opportunities, threats ( business appraisal technique)

TAA trade adjustment assistance TAPS Transatlantic Payment System TARCH threshold autoregressive conditional heteroscedasticity Taurus Transfer and Automatic Registration of Unregistered Stock TDP tradable discharge permit TFR total fertility rate TIBOR Tokyo Inter-Bank Offered Rate TINA ‘there is no alternative’ TIP tax-based incomes policy TNC transnational corporation TOT terms of trade TQM total quality management TVA Tennessee Valley Authority; taxe sur la valeur ajoute´e (the French value-added tax) TWER trade-weighted exchange rate

UBR uniform business rate UDEAC Union Douanie`re et Economique des Etats de l’Afrique Centrale (Central African Customs and Economic Union)

© 2002 Donald Rutherford UEMOA Union e´conomique et mone´taire de l’Afrique de l’Ouest (West African Economic and Monetary Union) UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNFCCC United Nations Framework Convention on Climate Change UNIDO United Nations Industrial Development Organization UPF utility possibility frontier; Uniform Presentation Framework (Australia) USM Unlisted Securities Market UTV utility theory of value UVI unit value index

VAN value-added network VaR value at risk VAR vector autoregression VAT value-added tax VECM vector error correction model VER voluntary export restraint VIE voluntary import expansion

WIPO World Intellectual Property Organization

X exports XD ex-dividend xr ex rights

Y income – often real disposable income Y’ld Gr’s yield gross

ZBB zero-base budgeting ZIRP zero interest rate policy ZPG zero population growth

© 2002 Donald Rutherford A

AAA(G1) a NEGATIVE INCOME TAX, which would merge Thetopcreditratingofthesecurities benefits and taxation into a single system, issuedbycorporationsandcompanies,as attempt to ensure that benefits raise net judgedbytheUSratingagencyStandard income. &Poor.Thisratingisbasedontheview thatdefaultislikelytobeminimal. above the line (H5, M3) 1 A type of expenditure and revenue of a Seealso:BB;BBB;C;D;DDD;Prime-1 government. For UK budgets from 1947 to 1963, it referred to spending abatement(Q2)seemarginalcostof out of current tax revenue. abatement 2 A firm’s expenditure on direct advertis- ing. ability to pay (H2) 3 The items in the summary UK balance 1 The principle of taxation that persons of payments which are within the cur- with equal incomes and equal capacity rent and capital balances. to pay a tax should be taxed the same. This alternative to a BENEFIT TAX was Seealso:belowtheline suggested as early as the MERCANTILIST period because it appears to be a ‘just’ Abramovitz, Moses, 1912– (B3) approach. argued that Educated at Harvard and Columbia Uni- equality in taxation meant equality of versities. He was on the staff of the sacrifice: this is ambiguous as the sacri- National Bureau of Economic Research fice may be in absolute, proportional or from 1938 to 1942 and Director of Busi- marginal terms. As sacrifice means loss ness Cycles Study from 1946 to 1948; of utility, the theory can only work if principal of the War Production different persons’ can be com- Board in 1942 before serving in the US pared. Army; and professor at Columbia Univer- 2 An employer’s stance in bargain- sity, 1940–2 and 1946–8, and of Stanford ing of making offers according to a University, 1948–77. After early work on firm’s financial state. price theory, he turned to a study of inventories and business cycles. Later he abortive benefits (H2) examined determinants of long swings in Social benefits which fail to achieve their growth, considering changes in the supply purpose. There is no net increase in a of factors of production and the influence recipient’s income as the benefits are out- of an initial level of productivity on sub- weighed by income taxation. Proposals for sequent economic progress.

© 2002 Donald Rutherford References Abramovitz,M.(1950)Inventoriesand BusinessCycles,NewYork:National BureauofEconomicResearch. Abramovitz,M.(ed.)(1958)CapitalFor- mationandEconomicGrowth,Princeton, NJ:PrincetonUniversityPress. absenteeism(J2) Aformofindustrialunrestoftenused insteadofaSTRIKE.Workersdissatisfied withtheirconditionstakedaysoffwork withoutpay.Someindustrieshavebeen notedforthispractice,e.g.theUKcoal- miningindustry.Itisaformofexpressing agrievanceavailabletonon-unionized workers. absolutepoor(I3) Peoplewithincomebelowwhatisneeded Seealso:exit-voice tomaintainaminimumstandardofnutri- absoluteadvantage(F1) tion. Anearlytheoryoftradewhichstatesthat Seealso:poverty,subsistence onecountryentersintotradewithanother becauseithasagreaterproductivitythan absolutescarcity(Q3) thatcountryinaparticularindustryor Thelimitednon-renewablenatureofsome industries,e.g.itscottonindustryismore resources,notablymetalsandfossilfuels. productivethantheforeigncottonindus- absolutesurplusvalue(N5)seesurplus try.SMITHadvancedthisasthereasonfor value tradebecauseanation,likeahousehold, shouldspecialize. absolutetaxincidence(H2) Theburdenofaparticulartaxcompared Seealso:comparativeadvantage withasituationinwhichthereareno taxesorgovernmentalexpenditures. absoluteconcentration(L1)seeaggregate concentration Seealso:taxincidence absoluteincomehypothesis(E2) absorption approach (F4) AtheoryoftheCONSUMPTIONFUNCTION A method of analysing a country’s BALANCE statingthatconsumptionisafunctionof OF PAYMENTS by comparing its total output currentpersonaldisposableincome.This with its ‘absorption’, i.e. its domestic ex- wasKEYNES’soriginalview,laterrefinedby penditure on and services. There TOBINandSmithies.Theconsumption will only be an improvement in a country’s functionisnon-linearbecausetheMAR- balance of payments if its total output is GINALPROPENSITYTOCONSUMEdeclinesas greater than its absorption of its own nationalincomeincreases.Keynesasserted output. By the use of PRICE ELASTICITIES that‘menaredisposed,asaruleandon and a MULTIPLIER, it is possible to examine average,toincreasetheirconsumptionas the effects on output and absorption of theirincomeincreases,butnotbyasmuch the DEVALUATION of a currency. astheincreaseintheirincome’.Theearly References approachwassupersededbytheRELATIVE Kyle, J.F. (1976) The Balance of Payments INCOME,PERMANENTINCOMEandLIFE-CYCLE in a Monetary Economy, Princeton, NJ: HYPOTHESES. Princeton University Press.

© 2002 Donald Rutherford absorptivecapacity(E2) accelerated depreciation (H2) 1Thephysicallimittotheamountof An initial depreciation allowance greater investmentbecausePRODUCTIVITYde- than the annual wear and tear of a fixed clinesastherateofinvestmentin- capital asset. For an asset with an ex- creases. pected life of ten years, under the straight- 2Theextenttowhichacountrycan line method of depreciation the value of increaseinvestmentwithoutdepressing the asset would be deemed to depreciate returnstothatinvestment. by 10 per cent per year. But under accelerated depreciation, the value of the References asset could perhaps be depreciated by 20 Adler,J.(1965)AbsorptiveCapacity:the per cent in the first year. Governments ConceptanditsDeterminants,Washing- have used this fiscal device to encourage ton,DC:BrookingsInstitution. private sector investment. (D3) abstinence acceleration clause (G0) Ajustificationforthepaymentofinterest, A clause in many mortgage agreements firstadvancedbyNassauSENIOR.An making the PRINCIPAL and interest immedi- individualwhoabstainsfromcurrentcon- ately payable on the occurrence of an sumptionisrewardedwithinterestfor event such as failure to make payments addingtothecapitalstock.Abstinence on time or to keep a covenant. explainsthesupplyofsavings:thatsupply, togetherwiththedemandforcapital, accelerator principle (E2) formsatheoryoftheinterestrate. A major theory of investment which asserts that the amount of net investment References in a given time period will be equal to a Senior,N.W.(1836)AnOutlineofthe coefficient approximating to the amount ScienceofPoliticalEconomy.Reprinted of capital needed to produce another unit NewYork:AugustusM.Kelly,1965. of output multiplied by the change in abstractlabour(J0) income. An early writer using this princi- Labourwhichisabstractedfromexpendi- ple was Aftalion in Les Crises periodiques turesofhumanlabourpower.MARXre- de surproduction (1913); later Lundberg, gardedabstractlabourasthecreatorof HARROD, SAMUELSON, HICKS and Goodwin exchangevalues. included it in their investment equations. The basic principle, expressed in an equa- Seealso:concretelabour tion where I is net investment in year t, a is the accelerator coefficient and DY is the abundance (Q2) annual change in income, has been mod- The opposite of . Abundant cost nothing to produce and ified to take into account different reac- are made freely available. Principal exam- tion times to a change in income and the ples are some natural resources but in- existence of EXCESS CAPACITY: creasingly as population has grown their I ¼ aDY scarcity has been discovered. t1 D Accelerated Cost Recovery System (H2) where Yt1 is the change in income in US federal tax allowance introduced in the previous year; 1981 and subsequently modified. Most D capital goods were assumed to have a life I ¼ a Yt bKt of three, five or ten years; as many were more durable, this system was a means of where b is the proportion of the capital cutting corporate taxation. An example of stock which is excess capacity and K is the SUPPLY-SIDE ECONOMICS. capital stock in year t.

© 2002 Donald Rutherford In combination with the MULTIPLIER, Cambridge, MA: Harvard University CEILINGS and FLOORS, the accelerator plays Press. an important role in the explanation of accommodating credit (F3) BUSINESS CYCLES, and is prominent in HAR- A form of automatic credit, especially in ROD–DOMAR models. international trade, consisting of the seller References (exporter) financing the purchase by a Hicks, J.R. (1950) A Contribution to the buyer (importer). Theory of the Trade Cycle, Oxford: account (G2, M4) Clarendon Press (reprinted 1978). 1 A financial statement expressed in Knox, A. D. (1952) ‘The acceleration words and sums of money. principle and the theory of investment: a survey’, Economica, New Series 19: 2 A standard time period used on the 269–97. STOCK EXCHANGE for settling payments Lundberg, E. (1937) Studies in the Theory and delivering securities, referring to a of Economic Expansion, Oxford: Basil fortnight (or three weeks if there is a Blackwell (reprinted 1955). public holiday). During an account, stocks and shares can be bought and accepting house (G2) sold without any cash settlement. A UK merchant bank which, by approving a commercial bill of exchange, created a account days (G2) short-term marketable asset. In the past The days on which London STOCK EX- such accepting was the major activity of CHANGE transactions have to be settled, many of these banks but now they have usually the second Monday after the end diversified into other activities, including of an account. corporate finance and portfolio manage- Seealso:rollingsettlement ment. In 1981, the Bank of England ended their special status as endorsers of bills: accounting (M4) the Bank of England now regards other The recording of the economic activities COMMERCIAL PAPER as eligible for purchase. of firms and national economies. As early as 1494, double-entry bookkeeping, the access differential (J3) basis of modern accounting, was ex- A difference in access to goods and plained in Pacioli’s ‘The Method of Ve- services and to their producers. This addi- nice’, although civilizations as early as the tion to monetary rewards was used in the Babylonian practised intricate accounting. SOVIET-TYPE ECONOMY, so higher ranking In the nineteenth century, the develop- officials could use shops, schools and ment of joint stock companies and cor- clinics not open to the rest of society. porations necessitated auditing, greatly accession tax (D0, P2) expanding the role of the accountant. A tax on the gifts and bequests received by Accounting has moved from FINANCIAL AC- heirs. COUNTING (the historical recording of past activities) to MANAGEMENT ACCOUNTING (the access–space trade-off model (R1) frequent presentation of information to In this theory sought to managers to help them in current decision demonstrate that a household’s choice of making). location and amount of land depends on the trade-off between cheaper rent and a References longer trip to work. Bull, R.J. (1984) Accounting in Business, 5th edn, London: Butterworth. References Chatfield, M. (1977) A History of Account- Alonso, W. (1964) Location and Land Use: ing Thought, rev. edn, Huntington, NY: toward a general theory of land rent, Robert E. Krieger.

© 2002 Donald Rutherford accountingbalanceofpayments(F4) actuallypaid.Thisaccrualratecanbethe Arecordofallthefinancialtransactions currentmarketrateortheoriginalrate betweentheresidentsofonecountryand whentheloanwasmade. theresidentsofforeigncountriesina accruedexpense(M4) giventimeperiod(usuallyaquarterora Anexpenseincurredinaparticulartime wholeyear). periodbutnotyetpaid. accountingcosts(M4) accruedincome(M4) Allthecostsofproducingagoodor Incomeearnedinaparticulartimeperiod servicerecordedintheaccountsofafirm. butnotyetreceivedincash. Theseincludemosteconomiccostsbutare likelytoomitthecostoftheowner’stime accumulation(E2) andtheOPPORTUNITYCOSTofthefinancial TheincreaseinassetswhichcreatesCAPI- capitalusedinthefirm. TAL.Individualpersonsandbusinessesdo thisfortheirowngain;governmentsaccu- accountingcycle(M4) mulatewiththefuturewelfareofacoun- Theperiodfromthestarttofinishofan tryinview.SMITHandMARXwereearly operationalsequence.Accountantstypi- analystsofthisprocess. callyconsiderperiodsofamonth,three months,sixmonthsorayear. acid-testratio(M2,M4) Theratioofliquidassetssuchascash, accountingidentity(E0,M4) accountsreceivableandshort-termmar- Abalancewitheachsideofanequation ketablesecuritiestocurrentliabilities.Also equaltotheotherbecauseoftheaccounting knownasquickassetsratio. definitionsused.Ineconomicsthisidentity isusuallycontrastedwithequilibriumcon- activefiscalpolicy(H3,H5) ditions.Thus,inbasicmacroeconomics,the Frequentlyuseddiscretionaryfiscalpolicy. accountingequationsY=C+IandY=C Usingthis,agovernmentmakesmany +SentailthatI=S,butplannedsaving changesinitsspendingandtaxation, andinvestmentmaydiverge(Yisnational insteadofrelyingonautomaticstabilizers, income,Cisaggregateconsumption,Iis toachieveadesiredlevelofaggregate netinvestmentandSisaggregatesaving). demand. accountingprofit(M2,M4) activist(E6) Theexcessoftotalrevenueoverthecosts Aneconomicpolicyadviserwhobelieves andexpensesofaproductiveactivityina intheuseofdiscretionarymonetaryand giventimeperiod.ContrastwithECONOMIC fiscalinstrumentsforfine-tuningtheecon- PROFIT omy. accretionofadiscount(G1) activityanalysis(C6)seelinearprogram- TheaccumulationofcapitalgainsonDIS- ming COUNTBONDSanticipatingpaymentofthe bondatparwhenthebondmatures. activity rate (J2) Official UK term for the LABOUR FORCE accrualaccounting(M4) PARTICIPATION RATE. If the female population Accountsbasedontransactionswhenthey is 100 million and the female labour force occur,asopposedtowhenthecashis is 55 million, the female activity rate will receivedorpaid;notCASHFLOWACCOUNT- be 55 per cent. ING. activity ratio (M2, M4) accrualinterestrate(G0) 1 An accounting measure of the amount Therateatwhichinterestaccruesona of activity of a firm: (standard hours for loanasdistinctfromtherateatwhichitis actual output/standard hours for bud-

© 2002 Donald Rutherford getedoutput)100. adding-upcontroversy(D3) 2Netsalesdividedbytotalassetsornet Adisputeconcerning‘solutions’tothe fixedassets. problemofensuringthatthetotalamount 3Accountsreceivabledividedbydaily ofincomegoingtofactorsofproduction creditsales. isequaltothenationalincome.FromP.H. Wicksteed’sAnEssayintheCoordination actualbudget(H6) oftheLawsofDistribution(1894)on- Thenationaltaxationandexpenditure wards,manyattemptstosolvethepro- accountsofagovernment.Theycanbein blemhavebeenlimitedtothespecialcase balance,insurplusorindeficit;often ofalong-runperfectlycompetitiveequili- contrastedwithaFULL-EMPLOYMENTBUDGET. brium. actualdeficit(H6)seeprimarydeficit Seealso:Euler’stheorem;perfectcom- petition acyclical(E3) Notsubjecttofluctuationscausedby additional facilities (F3) varioustypesofbusinesscycle.Planned Extra credit arrangements of the INTERNA- economieswithlittleopennesstothe TIONAL MONETARY FUND to ease the balance internationaleconomy,suchastheformer of payments difficulties of member coun- USSR,hopedtoavoidthecyclicalin- tries. These include: stabilitywhichtheyclaimedtobean . 1963 Compensatory Financing Facility inherentfeatureofCAPITALISM. to provide compensation for a shortfall AdamSmithInstitute(E6) in export earnings; . Freemarketeconomicpolicyresearch 1969 Buffer Stock Financing Facility; . think-tankbasedinLondon,UK,and 1974–5 Oil Facility; . foundedin1977byagroupoflike-minded 1974 Extended Fund Facility; . graduatesofStAndrewsUniversity,Scot- 1974 Supplementary Financing Facility; . land.Ithaspublishedreportsoneconomic 1986 Structural Adjustment Facility. policiessince1979. additionality (H2) The imposition of an extra obligation. adaptiveexpectations(E0) This is also a financing principle of the Theexpectedvalueofaneconomicvari- EUROPEAN UNION in that some grants it ableatafuturedatemeasuredbythe makes have to be matched by a grant from weightedaverageofallpreviousvaluesof a member state set as a fixed proportion thevariable.Theconceptwasfirstap- of the EU grant. pliedtothestudyofinvestmentbeha- viourandtheCONSUMPTIONFUNCTIONand additional-worker hypothesis (J2) thenlatertoinflation.Thisapproachto The assertion that unemployment will expectations,firstadvancedbyCagan, encourage more labour force participation althougheasyforeconomicmodel- amongst SECONDARY WORKERS thus increas- builders,ignoresthefactthatforecasters ing the size of the labour force. This often oftentakeintoaccountmoreinformation occurs when there is a shift from heavy to thanthepastbehaviourofthevariable light industry. If those made redundant in beingstudied. the heavy industries are males but the jobs available in the light industries are predo- References minantly suitable for females, then male Cagan,P.(1956)‘Themonetarydynamics unemployment will coincide with women ofhyperinflation’,inM.Friedman(ed.) joining the labour force. StudiesintheQuantityTheoryof Money,Chicago:UniversityofChicago Seealso:discouragedworkerhypothesis; Press. labourforceparticipationrate

© 2002 Donald Rutherford References 1980s,theratiofortheEUROPEANCOMMU- Cann,G.G.(1967)‘Unemploymentand NITYwasaboutone-third. thelaborforceparticipationofsecond- aryworkers’,IndustrialandLaborRela- adjustmentspeed(D0) tionsReview20:275–97. Thetimeittakesapricetoadjustto EXCESSDEMANDorEXCESSSUPPLYinaparti- adjustablepeg(F3) cularmarket.Thisiscrucialtothestudy AFIXEDEXCHANGERATEwhichcanocca- ofmoneywagerates,productprices, sionallybealteredaccordingtocertain interestratesandnominalexchangerates. rules.ThebestexampleistheBRETTON administeredinflation(E3) WOODSAGREEMENTwhichpermittedrevalua- INFLATIONbroughtaboutbyfirmsincreas- tionsanddevaluationsofupto10percent ingtheprofitmark-upontheirproducts;a withoutthepermissionoftheINTERNATIONAL formofCOST-PUSHINFLATION. MONETARYFUND.Anadjustablepeghasthe disadvantageofrequiringthecostlyaccu- Seealso:mark-uppricing mulationofforeignexchangereservesand canbeunstableaseveryrumourabouta administered pricing (D4, M2) currencychangemayprovokespeculation The practice of setting prices according to necessitatinganadjustment.Acurrency a formula, irrespective of the short-run canbepeggedtoanothersinglecurrency forces of demand and supply. This is (oftentheUSdollar)ortoabasketof possible because of the market power of monopolistic and oligopolistic firms. As it currenciessuchasaSPECIALDRAWINGRIGHT orabasketchosentoreflectthetrade is expensive to change prices (e.g. new structureofthecountry. catalogues have to be printed) and as there is always the possibility of adverse con- Seealso:BrettonWoodsAgreement sumer reaction, there is a tendency for prices to be more rigid when administered. adjustableratemortgage(G3) As part of an anti-inflation programme, AMORTGAGEbearinganinterestratethat especially in wartime, governments will fluctuatesaccordingtomarketinterest administer major prices, the prices of rates.Thesearepopularwithsavings goods and services prominent in most institutionsastheyhavelessINTERESTRISK, consumers’ budgets; in these circum- andwithindividualsandhouseholdsbe- stances the rules for increasing prices are causetheyofferlowerinitialinterestrates. strictly laid down. Most administered prices are calculated by adding a profit adjustedclaim(G0)seenoteissuance margin to . facility Seealso:mark-uppricing adjustmentcost(D0) Thecosttoaneconomicagent,e.g.afirm References orahousehold,ofachangeinthevalueof Means, G.C. (1935) ‘Industrial prices and avariablecrucialtoitsdecisions.If,for their relative inflexibility’, Senate Docu- example,afirmweretochangeitscapital ment No. 13, Washington, DC: US stockbyembarkingonaninvestment Government Printing Office. programme,itwouldincurtheadjustment administration lag (H0) see costsofresearch,planning,installationof implementationlag equipmentandtrainingofworkers. administrative cost (H2, M2) adjustmentgap(Q1) 1 The personnel and equipment costs of Theratioofinternationaltodomestic collecting taxes (public finance). foodprices.Thegreatertheamountof 2 Costs incurred to manage an enterprise farmsupport,thegreaterthegap.Inthe (managerial economics).

© 2002 Donald Rutherford Seealso:transactioncost References administrative costs of regulation Wrigley, E.A. (1988) Continuity, Chance and Change, ch. 2, Cambridge: Cambridge (H1, L5) University Press. All the costs of employing officials and running the offices of regulatory agencies. adverse selection (D0, G2) These are contrasted with COMPLIANCE A problem of insurance arising when the COSTS. insurer does not know whether or not an insured person is at risk, with the conse- ad valorem tax (H2) quence that the same premium is charged, An INDIRECT TAX levied as a percentage of irrespective of whether that individual is the value of a transaction. SALES TAXES, likely to claim. This can occur, for exam- EXCISE DUTIES and VALUE-ADDED TAXES are ple, if applicants for life insurance do not major examples. In calculating such taxes, disclose all their health details. either the final price of the good or service or the value added at a particular stage of Seealso:asymmetricinformation production is the basis. This tax reduces the amount of revenue that a firm obtains adverse (E0) from the sale of a good or a service. A change in a factor price, e.g. of energy or labour, which reduces AGGREGATE SUPPLY Seealso:unittax at each . In the short term, the advance (G0) macroeconomic consequences of a shock A bank loan or an overdraft which has a are an increase in the price level and a fall term of less than three years, usually less in output. than one year. When a bank creates advertising (M3) money, it does so by allowing advances to A communication activity used to influ- its customers, i.e. permitting them to draw ence potential buyers, voters or others who on the extra bank deposits created for can help the advertiser to reach defined them. An overdraft is a permission to goals. For firms, it is a selling cost ‘overdraw’ up to a certain amount for a incurred with the hope of increasing sales. specified period, but a loan results in an Advertising increases the amount of infor- immediate crediting of the borrower’s ac- mation available in a market but also helps count. to create situations as it can be advance corporation tax (H2) a BARRIER TO ENTRY. The theory of MONOPO- An interim settlement of UK corporation LISTIC COMPETITION was the first major eco- tax. If a company makes a qualifying nomic theory to incorporate considerations of earnings, e.g. by distribut- of advertising. By advertising, OLIGOPOLISTS ing a dividend, during its accounting can create wants and markets, escaping the period, it pays a proportion of the amount strictures of CONSUMER SOVEREIGNTY. The of the dividend as an advanced payment annual amount of a firm’s advertising of tax which will later be deducted from its expenditure is often determined by an tax liability for that period. The propor- arbitrary ratio of advertising expenditure tion levied varies from year to year but has to sales revenue with the frequent effect of often been about 30 per cent. redistributing demand among the firms of an industry and adding to their costs, not advanced organic economy (P0) of enlarging total expenditure on a parti- An ECONOMY which reaches a considerable cular good or service. Although large level of real income by using agricultural advertising expenditures are associated products, especially wood, for energy and with MARKET ECONOMIES, advertising has a raw materials. A pre-industrial economy. role in COMMAND ECONOMIES, particularly to

© 2002 Donald Rutherford increaseconsumerdemandforproducts African–Americaneconomists (B2) newtothemarketorinEXCESSSUPPLY. TheearliestblackeconomistsintheUSA includeWilliamEdwardBurghardtDuBois References (1868–1963),SadieTannerMossell Alex- Carter,M.,Casson,M.andSuneja,V. ander(1898–1989),GeorgeEdmundHaynes (1998)Theeconomicsofmarketing, (1880–1960) and William Henry Dean Jr Cheltenham,UK,andNorthampton, MA:EdwardElgar. (1910–52).Theirworkhasincludedthe Reekie,W.D.(1981)TheEconomicsof studyofMIGRATION,DISCRIMINATIONandLO- Advertising,London:Macmillan. CATIONTHEORY. Schinalensee,R.(1972)TheEconomicsof Advertising,Amsterdam:North-Holland. AfricanDevelopmentBank(G2) Abankoperatingfrom1966:itfinances Advisory,ConciliationandArbitration investment projectsinAfricaandraises Service(J5) capitalthroughoutthe world. By 1985, it ThecentralUKbody,setupin1974 had fifty African and twenty-fivenon- undertheTRADEUNIONANDLABOURRELA- Africancountriesasmembers,including TIONSACT,topromoteanimprovementin theUK,theUSA,GermanyandJapan. industrialrelations,toencourageanexten- Seealso:developmentbank sionofcollectivebargaininganditsreform throughadvice,conciliation,enquiriesand after-hoursdealings(G2) arbitration,andtoruntheCENTRALARBI- Dealingsinstocksandsharesafterthe TRATIONCOMMITTEE.Animportantaspectof LondonSTOCKEXCHANGEclosesfortheday. itsactivitieshasbeenthepublicationof SuchBARGAINSarerecordedasthenext codesofpracticeinindustrialrelations. day’sbusiness.Inthe pastthesedealings wereatless attractivepricestobothbuyer affinitycard(G2) andsellerbecauseofthegreater risk of ACREDITCARDlinkedwithacharitythat trading when market opinion was un- receivesdonationsinproportiontothe known; now, long hours of electronic amountspentbytheuserofthatcard. dealing have removed this price differen- affirmativeaction(J7) tial. Aseriesofactionstakenbyanemployer Seealso:twenty-four-hourtrading orpublicauthoritytoadvancetheoppor- tunitiesofdisadvantagedgroups,espe- aftermarket (G2) ciallyethnicminorities,toincreasetheir The trading in securities immediately after representation,particularlyinemployment they have been issued. andotheractivities. age–earnings profile (J3) Seealso:reversediscrimination A graph plotting earnings against age. Such profiles are frequently used in HUMAN AFL–CIO(J5) CAPITAL analysis to show the financially AmericanFederationofLaborandCon- beneficial effects of education. More edu- gressofIndustrialOrganizations:amerger cation usually raises the profile to a new oftworivallabourfederationsoftheUSA plateau; rules for salary structures and in1955whichbroughtbackthebreakaway seniority can also affect the profile’s shape. industrialunionsthathadseparatedfrom The frequently used method of construct- theircolleaguesincraftunions.SomeUS ing a profile from cross-section data pro- labourunionsarenotaffiliatedtothe vides a poor estimate if age differentials in AFL–CIO. earnings change. LONGITUDINAL DATA pro- Seealso:craftunion;generalunion; vide a more accurate picture of life-time industrialunionearnings.

© 2002 Donald Rutherford Journal of Economic Literature 16 (September): 919–62. Lee, R.D., Arthur, W.B. and Rodgers, O. (eds) (1989) Economics of Changing Age Distributions in Developed Countries, Oxford: Oxford University Press. ageism (J7) Treating people who have reached a parti- cular age, the customary age of retirement in that society or even younger, as of little value so that they are excluded from employment and many other activities. This form of DISCRIMINATION is being fought by senior citizens’ lobbies in the USA and elsewhere. Increasing of young workers in developed countries in the late twentieth century have dimin- ished some of this discrimination. Also, firms which have waived age rules have ageingpopulation(J1) discovered that many older workers have 1populationwithanincreasingpropor- lower ABSENTEEISM, and higher numeracy tionofitspopulationinolderage and literacy than younger workers. groups,oftenbecausealargegroup borninaperiodofhighbirthrateis agency broker (G2) maturing. A stockbroker who buys and sells shares MARKET-MAKERS 2ApopulationwitharisingMEDIANage. of companies from .Itis Indevelopedcountries,adeclineinthe argued that agency brokers have the ad- birthratesincethe1960shasaddedto vantage of being able to find better prices thisdemographiceffect.Aslower than an individual market-maker can offer growthinGROSSNATIONALPRODUCTofa and of providing more confidentiality. nationcanencourageemigrationofthe agency cost (D0) young,withtheconsequencethatthe A cost arising from a contractual relation- remainingpopulation‘ages’.Atypical ship between a principal and an agent. patternofconsumptionandsavingis These costs include the expenses of draw- associatedwitheachagegroupand ing up and enforcing a contract, as well as hence,whenapopulation‘ages’,it TRANSACTION COSTS, MORAL HAZARD costs and changesitsdemandforparticulargoods INFORMATION COSTS. Agency costs are major andservicesintheprivateandpublic determinants of how firms are organized sectors;also,innovationmaybeaf- and how their staff are remunerated. fectedandthesizeoftheMULTIPLIERfor thewholeeconomymaychange. agency pass-through (G2) A MORTGAGE PASS-THROUGH SECURITY guaran- Seealso:greysociety;life-cyclehypothesis teed by a US agency such as the Govern- References ment National Mortgage Association so that there is no default on the principal Clark, R.L. and Spengler, J.J. (1980) The and interest payments. Economics of Individual and Population Ageing, Cambridge and New York: agencyrelationship(D0)seeagencytheory Cambridge University Press. Clark, R.L., Kreps, J. and Spengler, J.I. agency shop (J5) (1978) ‘Economics of ageing: a survey’, A voluntary UNION SHOP, extensively present

© 2002 Donald Rutherford in the US public sector, in which employ- likely it is to have a full range of transport, ees pay the equivalent of union dues in shopping, cultural and health facilities. return for that union acting as a bargain- ing agent. It is used to evade the ban on aggregate concentration (L1) CLOSED SHOPS in RIGHT-TO-WORK STATES. The CONCENTRATION of the economic activ- ity of a nation or an industry in the hands agency theory (L2) of a few giant firms. Also called absolute A which explores the concentration. relationships between PROPERTY RIGHTS and financial structures. The central concept Seealso:concentrationratio;relative used is the ‘agency relationship’, i.e. the concentration contractual relationship between a princi- aggregate demand (D1, E2, H6) pal person(s) and those who render services The total amount of national planned as agents, e.g. between the stockholders of expenditure by firms, households, govern- a corporation and the managers they ments and other sectors at each price or appoint to run that firm. The costs of the income level. agency include the costs to the principal of monitoring the agreement and any loss if the agent’s decisions fail to maximize his or her welfare; the agent often incurs the costs of putting up a bond as a guarantee of not harming the principal. This theory can be applied to many other aspects of co-operative behaviour. References Jensen, M.C. and Meckling, W.H. (1976) ‘Theory of the firm: managerial beha- vior, agency costs and ownership struc- ture’, Journal of 3: 305–60. agent bank (G2) A bank which arranges with a consortium of banks a credit facility for a borrower. agentdechange(G2)seespecialist agglomeration diseconomy (R1) An external DISECONOMY OF SCALE caused by the growth of a town or city. For example, the population growth of a city often aggregate output (E2) results in increased pollution and conges- An output measure of the NATIONAL INCOME tion. calculated by summing the amount of VA - LUE ADDED contributed by each industry. agglomeration economy (R1) This aggregate is measured at FACTOR COST. An external ECONOMY OF SCALE brought about by the massing of a population in aggregate supply (E2) one place. As the population of a town or 1 The total output which all the produ- city increases, a more complex infrastruc- cers of an economy are willing to ture is possible and a greater DIVISION OF supply at each price level. LABOUR achieved than in a smaller settle- 2 Total output as a function of the ment. The larger the settlement, the more amount of labour.

© 2002 Donald Rutherford ofGovernorstolimititsactivitiestothose permissibleundertheEDGEACT. agribusiness(Q1) Alargeorganizationwhichprocessesor distributesagriculturalproducts.Itbene- fitsfromECONOMIESOFSCALEandismana- gedasanindustrialfirm,separating personnel,marketing,financeandproduc- tionfunctions. References Davis,J.H.andGoldberg,R.A.(1957) AConceptofAgribusiness,Cambridge, MA:HarvardUniversityPress;Lon- don:Barley&Swinfen. AgriculturalAdjustmentAct1933(Q1) ThebasisofUSfederalsupporttofarmers whichhasprovidedpricesupporttomain- tainfarmincomes.ItcreatedtheCOMMOD- aggregationproblem(C3) ITYCREDITCORPORATIONtoexecuteitspolicy. Thechoiceofasuitableprocedurefor reducingnumerousanddetaileddatato agriculturalhousehold(N0) aggregatevariablesforuseinanecono- Afarmwithalabourforceprovidedby metricequation.Inparticular,microeco- residentsofahousehold.Thiseconomic nomicparametershavetobeexpressedin institution,analysedasbothafirmanda macroeconomicparameters.Thedifficult household,wasthebasiceconomicunitof taskistoeliminatebiassothatstable AncientGreeceandisextensivetodayin macroparametersareproducedforusein lessdevelopedcountries. forecastingmodels.Sometimesaggregation Seealso:AncientGreeks;villaeconomy isbasedonweightedaveragesofthe microparameters. agriculturalpolicy(Q1) Priceandincomesupportschemesde- References signedmainlytostabilizeorincrease Fisher,W.D.(1969)ClusteringandAggre- farmers’incomes.Althoughconsumersof gationinEconomics,Baltimore,MD: foodsufferthroughhavingtopayhigher JohnsHopkinsUniversityPress. pricesundermostagriculturalpolicies,it AggregationinEco- Gupta,K.L.(1969) isunlikelythatdevelopedcountrieswith nomics,Rotterdam:RotterdamUniver- sityPress. highlyproductiveagriculturalsectorswill allowamarketinunsubsidizedagricul- agiotheoryofinterest(E4) turalproductsasgovernmentsseekthe Anexplanationforinterestbeingpaid. votesoffarmerstobere-elected.Asthe Interestispaidtoallowmoneyorgoodsto GENERALAGREEMENTONTARIFFSANDTRADE beobtainednowbecausetheyaredesired hasbecomeincreasinglyconcernedwith moreinthepresentthaninthefuture. worldtradeinagriculturalproducts,na- ‘Agio’literallymeanseaseorconvenience. tionalagriculturalpoliciesmaybeharmo- nizedmoreinthefuture. agreementcorporation(G2) AstatecharteredUSbankingcorporation Seealso:AgriculturalAdjustmentAct engagedininternationalbankingunderan 1933,CommonAgriculturalPolicy,Uru- agreementwiththeFEDERALRESERVEBoard guayRound

© 2002 Donald Rutherford References nomics, the study of unemployment and Moyer, H.W. and Josling, T.E. (1990) and the economics of the family. Agricultural Policy Reform. Politics and From 1974 he has been a senior fellow of Process in the EC and USA, Hemel the Brookings Institution. Hempstead: Harvester Wheatsheaf. aleatory contract (K0) aid (H5, O0) see foreign aid An agreement under which the liabilities and benefits depend on chance. This is the Aid and Trade Provisions (H5, O0) basis of much gambling. UK governmental assistance to exporters to make their contractual terms more alienated work (J2) attractive. Some of the ‘aid’ goes to the Wage labour; work which is subject to the richer developing countries instead of the will of another. This kind of work is a poorest. This government financial help is non-fulfilling means to an end, often paid as a subsidy to companies and not because it is work performed out of directly to its ultimate beneficiaries. personal economic necessity. SMITH’s no- tion of labour as ‘toil and trouble’ explains Aid to Families with Dependent Chil- much of alienation. As professional jobs dren (I3) are often deeply satisfying they rarely The US federal welfare programme, ori- involve alienation. ginally ‘Aid to Dependent Children’, inau- gurated under Title IV of the 1935 Social alienation (J0) Security Act. It enabled states to provide Workers’ estrangement from their work financial assistance to needy dependent which they do not control, from their children: the states had the tasks of plan- products which are appropriated, from ning and supervising the use of these other men who are capitalists, and from federal grants. When it began in 1936, the human species as man becomes a mere there were about half a million recipients; animal, according to MARX. by 1987 the average number of monthly noted that increasing the subdivision of recipients was 11 million. Originally in- labour would unfortunately affect workers tended to enable female heads of house- as repetitive simple work dulls the brain holds to stay at home to rear their and causes a variety of occupational health children, in 1967, the scheme was problems. amended to encourage mothers to join (B3) the labour force: this was done by redu- Allais, Maurice, 1911– Educated at the Ecole Polytechnique and cing the implicit tax rate on earnings from the Ecole Supe´rieure des Mines before 100 per cent to 67 per cent. serving in the army from 1943 to 1948. Akerlof, George Arthur, 1940– (B3) Director of the Bureau of Mines Docu- Born in New Haven, Connecticut, and mentation and Statistics, Paris and profes- educated at Yale University and the Mas- sor of economic analysis at Ecole sachusetts Institute of Technology. A pro- Supe´rieure des Mines from 1944. Inspired fessor at the University of California, by WALRAS, PARETO and FISHER, he under- Berkeley, from 1968 to 1978, at the Lon- took the synthesis of real and monetary don School of Economics from 1978 to phenomena and the relationship between 1980 and again at Berkeley from 1980. economics and other social sciences in his Won the NOBEL PRIZE FOR ECONOMICS, with In Quest of an Economic Discipline, Part 1, STIGLITZ and SPENCE, in 2001. He became Pure Economics (1943) and subsequent famous in 1970 for raising the problem of five volumes. Later he studied the theory asymmetric information in an article on of choice under uncertainty (which in- the market for ‘lemons’. Also he has made cluded the use of surveys to investigate important contributions to monetary eco- CARDINAL UTILITY) and comparative interna-

© 2002 Donald Rutherford tionalstudiesofrealincome.Awardedthe alternativeeconomicstrategy(E6)see NOBELPRIZEFORECONOMICSin1988. NewCambridgeEconomics alleviation(O2) altruism(D0,L3,P0) Seekingthegoodofothers.Thisalterna- ADEVELOPMENTstrategyofsofteningPOV- tivetoSELF-INTERESTcanbeamajormotive ERTY,noteliminatingit;forexample,by givingeverychildprimaryeducationand foreconomicactivity.Manyschemesof everymotherhealthcare. idealisticsocialismrestonthisprinciple. AdamSMITHusedtheconceptoftheINVI- allocativeefficiency(M2) SIBLEHANDtoshowthatunconsciousaltru- Theselectionoffactorinputswhichmini- ismcanoccurinaneconomybasedonthe misesthecostofproducinggoodsand principleofself-interest. servicestosatisfygivenwants,subjectto Seealso:non-profitenterprise;utopia resourceandtechnologicalconstraints. Thisallocationincludesefficiencyofboth References productionanddistribution.Settingout Collard,D.A.(1978)AltruismandEcon- theconditionsforefficiency,includingthe omy,Oxford:MartinRobertson;New appropriatesetofprices,hasbeenthe York:OxfordUniversityPress. concernofWELFAREECONOMICS.Recognition ambientstandard(Q2) oftheexistenceofINDIVISIBILITIESandEX- AstandardforairqualitysetintheUSA TERNALITIEShasnecessitateddepartures bytheENVIRONMENTALPROTECTIONAGENCY. fromtheapproachofNEOCLASSICALECO- NOMICS. Seealso:primarystandard;secondary standard Seealso:Paretooptimality American Depository Receipt (G2) allotmentletter(G2) A share certificate or bearer security Aletterconfirmingthepurchaseofnewly entitling the holder to shares of a non-US issuedshares. company which have been deposited in a bank located outside the USA. This US all-payauction(D0) financial instrument, originally devised in ApublicsalewhichtakestheformofRENT 1927, is now traded on both US and UK SEEKING.Theprizeisalwaysawardedto stock exchanges. thecompetitorexertingthehighesteffort. American Economic Association (A1) Thismeansthatinanauctionsetting, The leading US professional association of eachbidderhasanincentivetobidjust academic and other economists, founded in abovethehighestbidder,providingthereis 1885 and based at Evanston, Illinois (now at apositivepay-off. Nashville,Tennessee).Fromitsearliestyearsit has sought to promote economic research, alphastock(G2) particularly by publishing its prestigious Oneofthemostactivelytradedstocksof American Economic Review, a core journal theLondonSTOCKEXCHANGEwhichisal- of economics, from 1911 and Journal of waysquotedontheSTOCKEXCHANGEAUTO- Economic Literature from 1963. The AEA MATEDQUOTATIONSYSTEM.Thereareusually currently has over 25,000 members. tenormoremarket-makersforeachof suchshares.In1990,theISEhadabout References 110suchstocks. Coats, A.W. (1985) ‘The American Eco- nomic Association and the economics Seealso:betastock;deltastock;gamma profession’, Journal of Economic Litera- stock ture 23: 1697–1727.

© 2002 Donald Rutherford AmericanFederationofLabor(J5)see subject to any governmental control. The AFL–CIO leading early exponents of this view were Pierre Proudhon (1809–65) and Mikhail Americanoption(G1) Bakunin (1815–76). In practice, anarchism AnOPTIONthatcanbeactivatedbeforeits has been applied to industrial organization expirydate. in the form of workers’ syndicates, but AmericanStockExchange(G2) experiments of this nature in France and PreviouslytheNewYorkCurbMarket Spain in the early twentieth century were andthentheNewYorkCurbExchange, short lived. Although anarchists share tracingitsancestrybacktotradingcon- with socialists a dislike of , with ductedinthestreetsoflowerManhattan LAISSEZ-FAIRE economists a mistrust of the in1793.Itacquireditscurrentnamein state and with members of the co-opera- 1953andwasincorporatedin1971;by tive movement a belief that firms should 1987ithad661regularmemberswith60 be managed by labour, they are more percentofitsbusinesswithprivateclients extreme, especially in wanting the aboli- and40percentwithinstitutionalinves- tion of and being pre- tors.Itendedfixedcommissionsondeal- pared to risk the abandonment of systems ingsin1975andfrom1985hasbeen of law and order. linkedtotheTorontoStockExchange. References Seealso:NewYorkStockExchange Ritter, A. (1980) Anarchism: A Theoretical Analysis, Cambridge: Cambridge Uni- AmericaWorks(I3) versity Press. USprivatecompanyfoundedin1984.It seekstogetpeopleoffwelfareintoem- anchor tenant (R0) ployment.Thisprivatizationofwelfareto The leading commercial tenant of an workprogrammesisbaseduponcontracts office block which influences its design betweenthecompanyandastateorcity. and has its logo on the fac¸ade in return Abountyispaidtothecompanyforeach for leasing a large portion of the building, personplacedinajobforatleastseven thereby making the return on the property months.Jobsearchandinterviewskillsare developer’s investment more secure. Some- taughtandtheworker’sperformanceis times the anchor tenant is given a market- monitoredforfourmonths. able share in the equity of the building. amortization(G0) Ancient Greeks (B1) Graduallyextinguishingaliabilityordebt One of the earliest groups of writers on byallocatingthecostofittoanumberof economic problems who, despite living in timeperiods.MajorexamplesaretheDE- an underdeveloped economy mainly agrar- PRECIATIONofanassetandtherepayment ian in character, discussed value, money, ofaloanbyregularinstalmentstocover comparative property systems, the division theamountadvancedandtheinterest. of labour, exchange controls and public finance. analysisofvariance(C1) Thedecompositionofthevarianceina Seealso:Aristotle;Plato;villaeconomy; dependentvariableintothevarianceex- Xenophon plainedbytheregressionandtheresidual References variance. Finley, M.I. (1985) The Ancient Economy, Seealso:linearregression 2nd edn, London: Hogarth. Gordon, B. (1975) Economic Analysis be- anarchism (B0, P0) fore Adam Smith, London: Macmillan. The political doctrine which asserts that Laistner, M.L.W. (1923) Greek Economics, economic and social life should not be London: Dent; New York: Dutton.

© 2002 Donald Rutherford Lowry, S.T. (1979) ‘Recent literature on An- industrial structure and rapid growth cient Greekeconomic thought’, Journal of based on rapid diffusion of technology. Economic Literature 17(March): 65–86. Both the US and UK economies attempt Andean Common Market (F0) to follow these principles. An association of Bolivia, Chile, Colom- animal spirits (E2) bia, Ecuador and Peru set up in 1969 to KEYNES’s description of the whimsical in- co-ordinate responses to overseas investors vestment attitudes of entrepreneurs, some- and to organize a common market. times optimistic, sometimes pessimistic; an Anderson, James, 1739–1808 (B3) approach much emphasized by Joan ROBIN- Scottish farmer and agricultural econo- SON. mist who was probably the first to announcement burden of a tax (H2) expound a clear theory of DIFFERENTIAL The loss of PRODUCER’S and CONSUMER’S SUR- RENT in his An Inquiry into the Nature of PLUSES as a consequence of a tax change. the Corn Laws (Edinburgh, 1777), regard- The announcement has the effect of ad- ing rent as a payment for using land justing taxpayers’ behaviour, e.g. in sup- superior in fertility. This was to inspire plying labour. MALTHUS and RICARDO. His other major References work of economic interest was Observa- tions on the National Industry of Scotland Pigou,A.C.(1928)AStudy inPublicFinance, (1775). In addition, he proposed schemes Part 11, ch. 5, London: Macmillan. for developing the Scottish Highlands and announcement effect (E6) edited The Bee, a weekly journal with The immediate effect on households and articles on literature and current affairs, firms of a government’s publication of a from 1790 to 1794. As his professional change in monetary or . Unlike papers are reputed to have been used by the other effects of policy changes, there is his widow to scorch chickens, research on no time lag. The first effects are felt in his work is difficult. financial markets as security prices can be Seealso:differentialtheoryofrent adjusted immediately. References annualized-hours system (J2, J3) A form of labour contract under which a Mullet, C.F. (1968) ‘A village Aristotle and worker agrees to work for a year of work- the harmony of interests: James Ander- son of Monks Hill’, Journal of British ing weeks; an alternative to the standard Studies 8: 94–118. working week. The annual number of hours is calculated by aggregating the angel (M2) previous weekly hours, less leave. It is a An investor in a stage production or useful system for avoiding substantial new business venture. The risk and overtime and other premium payments. returns to this kind of investment can Continuous-process industries were among be very high. In London, for example, the first to use this system. there are several hundred ‘angelic’ inves- tors in the theatre. annual percentage rate (of interest) (E4, G0) Anglo-Saxon capitalism (P1) Actual annual cost of borrowing. The An based on private Truth in Lending Act (USA, 1968) and enterprise, highly flexible labour practices, the Consumer Credit Act (UK, 1974) have disproportionately large remuneration for required all lenders to state the true cost top executives, a fast responsiveness of of borrowing. This annual rate, expressed firms to economic conditions, a major role as a percentage, is calculated by using the for financial markets in determining the formula

© 2002 Donald Rutherford 8 9 power,e.g.licensingagreements,special >1+totalchargeforcredit> APR=100: ;1=t sellingconditionsandothermeasuresless amountofcredit seriousthanmonopolizationorcarteliza- tion. wheretisthenumberofyearsoftheloan. Seealso:antitrust;competitionpolicy annuity(G0) Anamountofmoneypaidannuallyorat otherregularintervals.Majorexamples Anti-injunctionAct(J5)seeNorris–La includelifeassurancepremiums,pensions, GuardiaAct rentpaymentsandinstalmentpayments. antitrust (L4) Anannuitycertainhasafixedterm,unlike US policy to prevent monopolistic prac- aperpetuitywhosepaymentscontinue tices in interstate commerce. It started indefinitely(e.g.anunredeemablegovern- with the Sherman Act 1890; the states mentstock).Anannuitycontingentde- have similar legislation applicable to pro- pendsonanuncertainevent,e.g.thedeath duction industries. Although national ofaperson.Thepurchaseprice,orpresent competition policies are common in valueV,ofanannuitydependsontherate OECD countries, few are as tough, with ofinterestusedinthecalculation criminal sanctions, as the US antitrust legislation administered by the Depart- 1ð1þiÞn V=A ment of Justice and the Federal Trade i Commission. The chief federal antitrust statutes are: SHERMAN ACT 1890; CLAYTON ACT whereiistherateofinterest(expressedas 1914; FEDERAL TRADE COMMISSION ACT 1914; RO- adecimal)andnisthenumberofperiods BINSON PATMAN ACT 1936 and CELLER KEFAUVER thattheannuityispaid. ANTIMERGER ACT 1950. antagonisticgrowth(O4) References 1Tensions,oftenofasocialnature,inthe Blair, R.D. and Kaserman, D.L. (1985) growthprocessbecauseofthetrade-offs Antitrust Economics, Homewood, IL: betweengrowth,stabilityandequity. Richard D. Irwin. 2Thedeliberatecreationofdisequilibria Kwoka, J.E. and White, L.J. (eds) (1999) tobringaboutneweconomicactivities, The antitrust revolution. Economics, e.g.aninfrastructuredeficiencywhich competition and policy, 3rd edn, New stimulatesthegrowthofatransport York and Oxford: Oxford University industry. Press. Neale, A.D. and Goyder, D.G. (1980) The anthropogenicclimateimpact(Q0) Antitrust Laws of the USA, 3rd edn, Aclimatechangebroughtaboutbyhu- Cambridge: Cambridge University mans,ratherthanbyNature. Press. Shepherd, W.G. (2000) ‘In perspective: the anticipatorypricing(D4,L1) role of economics at the Antitrust Divi- Thepracticeofincludingexpectedcost sion since 1974’, Review of Industrial increasesinthemake-upofprices.Firms Organization 16: 107–11. adoptingthispolicyhopethatitwill Viscusi, W.K., Vernon, J.M. and Harring- stabilizetheirpricesaspriceswillnothave ton, J.E. (1995) Economics of regulation tofluctuatewitheverychangeincosts. and antitrust, 2nd edn, Cambridge, MA, ThistypeofpricingreducestheMENUCOSTS and London: MIT Press. OFINFLATION. apprenticeship (J2) anti-competitivepractices(L4) A period of training in a firm which Corporatebehaviourinamarketwhich enables a trainee to learn a craft under attemptstoincreaseafirm’smarket the supervision of a skilled worker. The

© 2002 Donald Rutherford length of the apprenticeship varies from thinker and theologian, the most promi- trade to trade and country to country. nent of the Schoolmen. His interpretation Adam SMITH noted that in ancient times of the teaching of ARISTOTLE and the early the period was commonly seven years, Christian Fathers is set out in his massive even in universities for studying for a Summa Theologica. He expounded the Master of Arts degree. Apprenticeships doctrine of the JUST PRICE, permitted the have long provided technological educa- charging of interest (when there was a risk tion and transmitted sophisticated manual that the lender would not be paid on time) skills from one generation to another. But and supported the institutions of private critics have viewed them as a union property and trade (if the is restrictive practice for they have been used promoted). to limit the number in a trade, and hence References to increase average earnings. Recurrent skilled labour shortages in engineering Baldwin, J.W. (1959) The Mediaeval The- ories of the Just Price, Philadelphia: have been attributed to the system. American Philosophical Society. appropriate technology (O3) Gordon, B. (1975) Economic Analysis be- Labour-intensive small-scale methods of fore Adam Smith, London: Macmillan. production using renewable energy. A Worland, S.T. (1967) Scholasticism and , Notre Dame, IN: technology advocated for Third World University of Notre Dame Press. countries. Arab Common Market (F0) Seealso:Schumacher A COMMON MARKET set up in 1964 with the References aims of free movement of labour and Dunn, P. (1978) Appropriate Technology: capital, free trade and unimpeded trans- Technology with a Human Face, London: port access among the member countries Macmillan. which, originally, were Jordan, Kuwait, Jequier, N. (ed.) (1976) Appropriate Tech- Morocco, Syria and the United Arab nology: Problems and Promises, Paris: Republic (Egypt and Syria). Development Centre of the Organization for Economic Co-operation and Devel- Arab Maghreb Union (F0) opment. An economic union of Morocco, Algeria, Tunisia, Mauritania and Libya set up in Appropriation Bill (H5) 1989. Progress towards free mobility of A US federal legislative bill authorising labour and capital and the creation of a expenditure for a particular purpose, e.g. common or single currency has been slow. defence, which has to be passed by both the US House of Representatives and the arb (G1) Senate. Annually all the bills are expected Arbitrageur, especially a speculator in the to be reconciled by a Reconciliation Bill stocks of companies likely to be taken over by the end of June; if reconciliation is by others. impossible, a continuing resolution is arbitrage (F0, G0) passed which permits departments to con- An investment strategy taking the form of tinue at their current expenditure levels. a simultaneous purchase of an item in one approximate equilibrium (D5) market and sale of it in another with the expectation of a positive return. Profits A DISEQUILIBRIUM price, usually manifest in can often be made from small differences the existence of EXCESS DEMAND. This is close in price. This is common in currency and to an EQUILIBRIUM PRICE. commodity markets and is a force produ- Aquinas, St Thomas, 1225–74 (B3) cing price equalization, after allowing for The leading medieval economic and social transport and transaction costs and risk.

© 2002 Donald Rutherford Inthecaseofacurrencymarket,arbitrage Aristotle,384–22BC(B3) continuesuntilthecrossexchangerates Oneoftheearliestwritersoneconomics areconsistent.Forexample,ifinitially whoanticipatedmanylaterdebateson US$1=DM4,DM1=2guildersand value,moneyandeconomicsystems.In US$1=6guilders,thecorrectcross-rate theNichomacheanEthics,BookV,he shouldbeDM1=1.5guilders.The discussedthenatureofvalueinthecon- arbitrageurssellspotandbuyforwardif textofadiscussionofjustice;inTopica,he theybelievethatthevalueofacurrencyis anticipatedsubsequentideasofvalue falling:theybenefitfromthedifference basedonutility.Hesupportedtheideaof betweentwoprices,withtheforward privatepropertyonthegroundsthatit contractprotectingthemfromafallin leadstoincreasedproductionandclearly theexchangerate. sawthatmoneyhastheimportantfunc- tionsofservingasaunitofaccount,a arbitration(J5) mediumofexchangeandastoreofvalue. Settlementofadisputebyreferraltoa thirdparty,usedinindustrialrelationsand References inmanycommercialdisagreements.The Gordon,B.(1975)EconomicAnalysisbe- arbitratormaybeacourtoflaw,an foreAdamSmith,London:Macmillan. independentarbitratorchosenbythepar- Soudek,J.(1952)‘Aristotle’stheoryofex- tiesindisputeorapermanentgovernment change:aninquiryintotheoriginofeco- body,e.g.theADVISORY,CONCILIATIONAND nomicanalysis’,ProceedingsoftheAmer- icanPhilosophicalSociety96:45–75. ARBITRATIONSERVICE(UK).Asarbitration iseithervoluntaryorimposed,itcanbe arithmeticmean(C1) binding,compulsory,mandatoryoruni- Thesumofasetofvaluesdividedbythe lateral.Landlordandtenant,shippingand numberofvaluesinthatset. buildingcontractsoftenusethismethod ofresolvingconflicts.Privatearbitration, Seealso:geometricmean;harmonicmean whichmaybeinstitutedinadvancebya arithmeticprogression(C6) contractualterm,ischeaperandquicker Aseriesofnumbersincreasingbyacon- thanresorttolitigation. stantincrementcalledacommondiffer- Seealso:pendulumarbitration ence,e.g.2,4,6,8.MALTHUSassertedthat themeansofsubsistenceincreasesarith- arcelasticity(C1,D0,D1) metically. Theelasticityofdemandoveraportionof ademandcurveortheelasticityofsupply Seealso:geometricprogression overasectionofasupplycurve.Itis ARMA (C5) calculatedfromthemidpointbetweenold Autoregressive moving-average model. andnewpricesandquantitiesonthe This model of a stationary random pro- curve,usingtheratioofthepercentage cess, i.e. a process whose mean is constant changeinquantitytothepercentage over time, recognizes that a combination changeinprice,i.e. of moving-average and autoregressive models is necessary. DQ=ðQ1þQ2Þ elasticity= References DP=ðP1þP2Þ Box, G.E.P. and Jenkins, G.M. (1970) Time Series Analysis: Forecasting and Control, whereP andQ arethepriceandquan- 1 1 San Francisco: Holden-Day. tityoriginallyandP2andQ2aretheprice andquantityafterthechange.Itprovides Armington assumption (F1) anaverageofPOINTELASTICITIES. The supposition that internationally traded

© 2002 Donald Rutherford productsaredifferentiatedaccordingto In1972,hesharedtheNOBELPRIZEFOR countryoforigin. ECONOMICSwithHICKS.Therangeofhis contributiontoeconomictheoryandhis References interestinthefunctioningofaGENERAL Armington,PaulS.(1969)‘Atheoryof EQUILIBRIUMsystemareevidentinhis demandforproductsdistinguishedby CollectedPapers.Heshowshowhedevel- placeofproduction’,IMFStaffPapers opedtheideasinHicks’sValueandCapital 16(March):159–78. toexplainwhatitmeanstobebetteroff. Arrow–Debreumodel(D5) HisanalysisofVOTINGPROCEDURESad- Aneconomictheoryconcernedwith vancedthestudyofsocialchoice.Also,he establishingtheexistenceofanequili- haswrittenmuchontheeconomicsof briumforanintegratedmodelofpro- information. duction,exchangeandconsumption.The twotheoremsproducedbytheauthors Seealso:socialchoicetheory werethat(1)acompetitiveequilibrium References existsifeveryindividualhasinitially Leadingworksincludethefollowing: somepositivequantityofeverycommod- Arrow,K.J.(1966)SocialChoiceand ityavailableforsaleand(2)thereare IndividualValues,NewYork:Wiley. individualscapableofsupplyingaposi- ——(1984–5)CollectedPapersofKenneth tiveamountofatleastonetypeof J.Arrow,VolsI–V,Oxford:BasilBlack- labourwithpositiveusefulnessinthe well. productionofdesiredcommodities. Arrow,K.J.andHahm,F.(1971)General CompetitiveAnalysis,SanFrancisco: Seealso:generalequilibrium Holden-Day;Edinburgh:Oliver&Boyd. References Feiwel,G.R.(ed.)(1987)Arrowandthe AscentofModernEconomicTheory, Arrow,K.J.andDebreu,G.(1954)‘The BasingstokeandLondon:Macmillan. existenceofanequilibriumforacompe- titiveeconomy’,Econometrica22:265–90. artificialbarriertoentry(L1) Arrow–Debreusecurity(G1) ABARRIERTOENTRYoffirmsintoamarket Afinancialinstrument,orcombination orindustryerectedbyagovernmentorthe ofsecurities,withafixedpaymentof existingfirmsandnotbynaturalmarket oneunitonlyaccordingtoaspecified forces.Governmentsmayinsistonlicen- contingency. singnewentrants;firmsmayrefuseto provideaccesstoexistingtechnology. Arrow,KennethJoseph,1921–(B3) USeconomist,educatedatCityCollege, artificialcurrency(F3) NewYork,andColumbiaUniversity; Acurrencyunitusedeitherasa professoratStanfordUniversityfrom commonunitofaccountforinterna- 1953to1968,andfrom1979,withan tionaltransactionsorasaninterna- interludeatHarvardfrom1968to1979. tionalreserveasset.Principalexamples Hisstudyofsocialchoiceledhimto oftheseareSPECIALDRAWINGRIGHTS,EUR- formulatetheIMPOSSIBILITYTHEOREM,his OPEANCURRENCYUNITS,EUROPEANUNITSOF mostfamouscontributiontoeconomics. ACCOUNTand,ingeneral,basketsofcur- Also,heandDEBREUprovedinanEcono- rencies.Suchcurrenciesareveryusefulfor metricaarticleof1954thatamultimarket internationalaccountingintimesofvola- equilibriumunderperfectcompetitionre- tileexchangerates. quiredtheexistenceofforwardmarkets Seealso:goldfranc forallgoodsandservices.Hisworkon riskaversionandongrowththeory(parti- A share (G1, G2) cularlyLEARNING-BY-DOING)isalsonotable. 1 A Chinese stock market share payable

© 2002 Donald Rutherford intheChinesecurrency,therenminbi. tionandtheformationofclassesin 2Usuallyanon-votingshareofthe primitivecommunities. equitycapitalofaUKcompany.These References shareshavebeencreatedtoenablethe foundersofacompanytoretaincon- Krader,L.(1975)TheAsiaticModeof Production,Assen,TheNetherlands: trol.Asharestradeatlowerpricesthan VanGorcum. Bsharesastheyareuselesstoother Marx,K.(1964)Pre-capitalistEconomic companiesattemptingtogaincontrolof Formations,ed.E.Hobsbawm,London: thecompany.Graduallytheseshares Lawrence&Wishart. havebeenaccordedvotingrightsasthe O’Leary,B.(1989)TheAsiaticModeof LondonStockExchangeregardsthem Production:OrientalDespotism,Histor- asunfair. icalMaterialismandIndianHistory, Oxford:BasilBlackwell. AsianDevelopmentBank(G2) askprice(G0) Bankfoundedin1966withcapital ThesellingpriceofaSECURITYsetbya providedbyAsiancountries,theUSA, financialinstitution. Canada,theUKandWestGermany ontherecommendationoftheUnited Seealso:bidprice NationsEconomicCommissionfor asset(D0,G0) AsiaandtheFarEast.Itcovershalf 1Aresourcewithamarketvalue. oftheworld’spopulation.Itisbased 2Aunitofwealthcapableofearningan inManilla,thePhilippines,andis income. dominatedbytheJapanese,thelargest 3Alargeenoughestatetodischargethe contributorofitscapital.Itsconserva- burdenonanheirorexecutor. tivelendingpolicyhaschieflyfavoured loansforspecificprojects,e.g.tobuild Real(ortangible)assetsincludelandand ports,roadsandbridges,ratherthan machinery;intangibleassetsincludegood- sectorallendingtorestructuretroubled willandpatents;financialassetsinclude economies.Ithasincreaseditslending cashandstockmarketsecurities. totheprivatesectorandhasajoint venturewithcommercialbanks,the Seealso:nationalwealth;wealth AsianFinanceandInvestmentCor- poration(AFIC). assetcard(G1) ADEBITCARD.

Asianoption(G1) assetmotive(E4) ADERIVATIVEsettledincashwhosepay-off Amotiveforholdingmoney.Toavoid isrelatedtotheaveragepriceofthe riskyinvestments,peoplearepreparedto underlyingassetinacertaintimeperiod. sacrificehighreturnsbykeepingtheir Alsoknownasanaverageoption. portfoliosinaliquidornear-liquidform.

Asiaticmodeofproduction(P0) Seealso:speculativedemandformoney Themostprimitiveformofproduction, assetspecificity(G0) accordingtoMARX,inwhichself-sufficient Theuniquecharacterofadurableasset, agriculturalcommunitiesaredespotically e.g.amachine,askilledworkerora governed.Thestate,throughtaxation, productionsite,whichmeansthatithasa appropriatestheeconomicsurplusofthe lowreturninotheruses.Formanyspecific agriculturalsectortofinancethebuilding assetsthecostofemployingthemisinthe ofthecountry’sinfrastructure.Thecon- natureofaSUNKCOST. ceptwasdevelopedinthe1950sand1960s toexaminemoreaspectsofstateforma- Seealso:economicrent;transferearnings

© 2002 Donald Rutherford asset stripping (M2) Although 19,000 products are given The sale of parts of a company which, in preference, they have little impact on many cases, has recently been taken over freeing trade as the major items (about by another company. Large holding com- 95 per cent of trade) are excluded panies have been built up in the past this from the list. ASEAN hopes by the way as each stripping provides resources year 2000 to free most of the intra- for another company acquisition. By sell- association trade and be more than an ing off parts of a company previously association representing this area in undervalued, finance for further acquisi- international negotiations. Industrial tions is obtained. JOINT VENTURES with non-Asian countries, a new insurance company and improved asset sweating (M2) transportation arrangements are likely to Raising bank finance on the security of promote further economic integration. It the property owned by a company. Sweat- was agreed in 1987 that goods at present ing can also be effected by SECURITIZATION enjoying preferential tariffs should have of the property. the preference increased to 50 per cent of assistance-in-kind (H2) the tariff and goods enjoying preference A grant expressed in goods and services; for the first time should have 25 per cent an alternative to a cash gift. of the tariff. assisted area (R5) asymmetric information (D0, L1) A region or smaller area of a country Information possessed by one side of a eligible for grants and SOFT LOANS under the market only. If, for example, buyers but regional policy of a national government not sellers have relevant information, they or the EUROPEAN UNION. The criteria for will be at an advantage. In labour markets, assistance to a region include its rate of employers usually know more about the unemployment, the decay of its infrastruc- present and future financial state of their ture and its participation in a larger plan firms than trade unions and thereby have to achieve interregional balance. a bargaining advantage in wage negotia- tions. This view of information has also Association of International Bond Deal- been incorporated into models of indus- ers (G2) trial organization and of the valuation of An association of 850 dealing firms mainly PUBLIC GOODS. outside the UK. Under new rules in force from 1987, interdealer brokers are only Seealso:lemonsmarket able to deal with reporting dealers. Every atomistic competition (L1) evening there is electronic reporting of Similar to in that there closing bids, offered quotations and that are a large number of buyers and sellers, day’s highest and lowest prices for each each with no significant influence on the bond in which the association . In market, behaving like atoms – very small January 1992 became the International but with a joint importance. This view of Securities Market Association. competition is based on an individualistic Association of South East Asian Na- view of economic activity. tions (F0) at the money (G1) The trading association of Brunei, Indo- The state of an OPTION where its UNDERLIER nesia, Malaysia, the Philippines, Singapore equals its STRIKE PRICE. and Thailand founded in 1967. Its princi- pal task has been to arrange preferential at-will employment contract (J5) import tariff rates on trade between its A labour contract under which an em- members. ployer can lawfully dismiss or retain an

© 2002 Donald Rutherford employee whether the reason is good or Australian Industries Preservation not. Acts 1906–50 (L4) Commonwealth of Australia statutes mod- auction (D0, D4) elled on the SHERMAN ACT of the USA: these A type of selling in which a system of bid- have created a COMPETITION POLICY for ding determines the price and the success- Australia. The difficulty of successfully ful buyer. WALRAS showed the crucial role prosecuting firms under them has caused of auction models in his discussion of antitrust actions to be more a concern of taˆtonnement, using the idea of crying out the individual Australian states. prices to describe the movement of a Australian Loan Council (H5) market to equilibrium with supply equal An agency of federal government, founded to demand. in 1928, to raise loans for state govern- Seealso:Dutchauction;Englishauction; ments and for public utilities. firstpriceauction;secondpriceauction; (B1, B2) hybridauction A prominent school of economics which has References provided an opposing view to much of Engelbrecht-Wiggans, R., Shubik, M. and since it was founded Stark, R. M. (eds) (1983) Auctions, by Carl MENGER in the 1870s. At its incep- Bidding and Contracting: Uses and The- tion, the school shared with JEVONS and ory, New York: New York University WALRAS an interest in expounding a sub- Press. jective theory of value based on MARGINAL McAfee, R.F. and McMillan, J. (1987) UTILITY but it did not use a mathematical ‘Auctions and bidding’, Journal of Eco- approach as it sought to deal with essences nomic Literature 25(June): 699–738. and not quantities. The ‘Austrians’ op- Smith, C.M. (1989) Auctions: The Social posed the popular contemporary GERMAN Construction of Value, Hemel Hemp- HISTORICAL SCHOOL partly because they took stead: Harvester Wheatsheaf. the view that economic laws are based on simple elements such as needs and satis- audit market (M4) faction expressed as invariable sequences The accounting firms and their clients not influenced by time and space. concerned with the checking of company MENGER’s leadership of the school was accounts to ensure that legal requirements taken over by BOEHM-BAWERK and WIESER. are met and that financial transactions are Boehm-Bawerk extended the analysis of accurately recorded. A free audit market is consumer valuation to explain costs, proposed for the EUROPEAN UNION so that prices, interest rates and . the same auditors could examine the However, he is chiefly known for his time accounts of all of a firm’s European analysis of capital as a ROUNDABOUT METHOD subsidiaries. OF PRODUCTION and his interest rate theory. Wieser used his broad knowledge as an augmented GNP (E2) economist, sociologist and historian to GROSS NATIONAL PRODUCT plus the value of examine all social phenomena with an public goods and services of all kinds, attitude to economic POLICY which trans- whether marketed or not. This measure cended both laissez-faire and intervention- takes into account the criteria for a good ist approaches. His idea that the chief environment by measuring ‘goods’ net of importance of prices is to provide infor- ‘bads’. mation on all economic conditions was to Seealso:measureofeconomicwelfare; inspire both MISES and HAYEK; his concept publicgood of entrepreneurial leadership was followed

© 2002 Donald Rutherford bySCHUMPETERinthelatter’stheoryof autocorrelation(C1) development.BothMisesandSchumpeter Thestateofaneconometricrelationsuch weremembersofBoehm-Bawerk’scele- thatsomeoralloftheexplanatoryvari- bratedseminar. ablesarehighlycorrelatedwitheachother. AfterthecollapseoftheAustro-Hun- Poorspecificationoftherelationshipbe- garianEmpireattheendoftheFirst tweenvariablesintheregressionequation WorldWar,themembersoftheschool isoftenthecause. dispersedtotheUK,USAandGermany. auto-economy(G0) Prominentnewmembersofitincluded Thatpartofaneconomy,accordingto HABERLERandMACHLUP.Inthelatetwenti- HICKS,whichfinancesitselffromitsown ethcenturyHAYEKandLudwigLACHMANN stockofliquidassets. wereleaders.LaterAustrianshaveat- temptedtousethebasicconceptsof References radicalsubjectivism,humanpurposeand Hicks,J.(1974)TheCrisisinKeynesian aspontaneousmarketordertocontribute Economics,ch.2,Oxford:BasilBlackwell. tomoderndebatesaboutexpectations, competitionandeconomicwelfare.Their autogestion(J5) policyconcernshaveincludedtherelation- AFrenchapproachtoWORKERS’PARTICIPA- shipbetweenMONETARYPOLICYandthe TIONintherunningofenterprises,pro- TRADECYCLE,FREEBANKINGandcriticismof posedafterthe1968uprisingsinFrance. . Thisphilosophyofmanagementholdsthat enterprisesshouldbelesshierarchical, References withallemployeesparticipatingdirectly Grassl,W.andSmith,B.(1986)Austrian indecisionmaking,especiallyaboutwork Economics,London:CroomHelm. organization,promotionandotherem- Hicks,J.R.andWeber,W.(eds)(1973) ploymentrules,technologyandmethods CarlMengerandtheAustrianSchoolof ofproduction.Thisdemocratization Economics,Oxford:OxfordUniversity wouldincludeanewframeworkfordis- Press. cussionsbetweenenterprises. Lachmann,L.(1976)‘FromMisesto Shackle:anessayonAustrianeconom- Seealso: icsandtheKaleidicSociety’,Journalof EconomicLiterature14:54–62. References Littlechild,S.(1990)AustrianEconomics,3 Chauvey,D.(1970)Autogestion,Paris: vols,Aldershot:EdwardElgar. EditionsduSeuil. (P0) automatedclearinghouse(G2) 1Self-sufficiency. Anorganizationfortheelectronicmatch- ingofchequesdrawnondifferentbanksso 2Acompletelyclosedeconomywhich thatinterbankindebtednesscanbesettled. doesnotengageininternationaltrade. Althoughmanyeconomieshavewanted Seealso:CHAPS;CHIPS suchindependencefromtherestofthe worldtoincreaseemployment,their Automated Real-time Investment Ex- enthusiasmhasbeentemperedbyan change (G1) examinationoftheothereffectsof A computerized arrangement for dealing protection. in shares set up by MERCHANT BANKS in the City of London in 1974 to bypass the Seealso:utopia INTERNATIONAL STOCK EXCHANGE and thus save brokers’ commission. It never at- authoritativecontracting(J2,J3)see tracted a high proportion of the London employmentcontract trading volume.

© 2002 Donald Rutherford automated teller machine (G2) financed by borrowing and the liquida- A cash-dispensing machine of a bank or tion of assets. other deposit-taking institution. The ma- chine allows customers continuous access to their bank deposits. Other services provided by automated teller machines include the production of bank statements. automatic neural network modelling (C8) A method of data analysis using the analogy of the neural networks in the brain. A‘training set’ of data based on input–output relationships for different cases is used to compute patterns. Auto- mation of these procedures reduces the complexity of network construction. This analytical approach is used in financial . automatic stabilizer (E3, H3) A built-in feature of tax structures and autonomous expenditure (E2) public expenditure programmes. It re- Expenditure independent of the level of duces fluctuations in an economy, mak- income, often because of its necessary ing it respond more easily to shocks. character. Prominent examples of stabilizers in- clude PROGRESSIVE TAXES (which prevent autonomous investment (E2) post-tax income rising at the same rate as Investment independent of the level of pre-tax income) and unemployment insur- income. It can be affected by changes in ance (which prevents personal income interest rates and in the ‘ANIMAL SPIRITS’ of from falling below a predefined ‘floor’). entrepreneurs. It is shown by a parallel The GOLD STANDARD was a major type of shift in the aggregate demand schedule. automatic stabilizer. All these stabilizers have the characteristic of preventing the rise or fall of national income, and conse- quently employment, being as great as it would be in the absence of a government with an ACTIVE FISCAL POLICY. It is the experience of most countries that as these stabilizers are insufficient in themselves to remove fluctuations they need to be com- bined with discretionary changes in taxa- tion and public expenditure. Seealso:fine-tuning autonomous consumption (E2) Consumption unrelated to the level of income. At zero income, in the short run, there can be autonomous consump- tion to maintain physical existence. It is

© 2002 Donald Rutherford Autumn Statement (H5) averageoption(G1)seeAsianoption UK statement on public expenditure pro- average propensity to consume (E2) duced separately from the March budget until the budget date was changed to The ratio of a consumer’s total consump- November in 1994. tion to his or her total income. For low- income groups the average propensity to availability thesis (F1) consume is unity, or close to unity, as The proposition that a high proportion of there is no surplus over expenditure avail- international trade is an exchange between able for saving. As income rises and basic goods which are only available in one or a consumer goods have been purchased, this few countries. ELASTICITY OF SUPPLY in one propensity declines; also it varies over the country and inelasticity of supply in an- lifecycle(seeLIFE-CYCLEHYPOTHESIS).Ifa other give rise to trade. Some new pro- graph of the CONSUMPTION FUNCTION passes ducts are only available in some countries, through the origin, the average propensity partly because of the nature of their patent to consume (C/Y) equals the MARGINAL protection. PROPENSITY TO CONSUME (DC/DY) at all levels of income and is unity; a consumption References function with a constant slope has the Kravis, I.B. (1956) ‘Availability and other same MARGINAL PROPENSITY TO CONSUME at all influences on the commodity composi- income levels. tion of international trade’, Journal of 64: 143–55. average (C1) A value showing the central tendency of a set of data and often used to compare that set with others; for example, the average age of the Finnish population is compared with the average age of the Romanian population. Seealso:mean;median;mode averagedeviation(C1)seemean deviation average incremental cost (D0) Change in total cost divided by change in output; an approximation to MARGINAL COST necessary because marginal cost re- fers to such small quantity changes that in practice it is difficult to measure it. In the 1978 guidelines for UK NATIONALIZED IN- DUSTRIES it was used as a measurable alternative to marginal cost. Because it is a rough approximation, it fails to give precise guidance for the expansion of integrated systems. References HMSO (1978) White Paper on Nationa- lised Industries, Cmnd 7131.

© 2002 Donald Rutherford average propensity to save (E2) Total savings as a proportion of total income. This proportion is likely to be negative at low levels of income as poor households often need to borrow to fi- nance basic consumption; at higher in- come levels, households can afford to save because their consumption needs have been met. The average propensity to save for a national economy will depend on its income distribution and average level of income. Seealso:savings;savingsratio

Averch–Johnson effect (L5) The misallocation in resources resulting from regulatory agencies relating price levels to a ‘fair’ rate of return. Averch and Johnson asserted that REGULATION of this kind would fail to minimize :a firm would not equate marginal rates of factor substitution to the ratio of factor costs. Firms would have an incentive to move into other regulated markets where they would be able to operate at a loss and average tax rate (H2) drive out the lowest cost producers. The fraction of a person’s total income which is paid in taxes. A person with a References gross income of £50,000 per year, paying Averch, H.A. and Johnson, L.L. (1962) £10,000 in tax, will have an average tax ‘Behavior of the firm under regulatory rate of 20 per cent. This tax rate is usually constraint’, American Economic Review contrasted with the MARGINAL TAX RATE and 52: 1052–69. is calculated for some or all of the taxes paid by a person. axioms of preference (D1) The assumptions necessary for consumer average total cost (D0) rationality. They are completeness (that a Total costs of a firm divided by its output. consumer can order all available combina- Sub-components of average total cost are tions preferred), transitivity (if A is pre- average fixed cost (fixed cost divided by ferred to B and B to C, then A is preferred output) and average variable cost (total to C), selection (the consumer chooses the variable cost divided by output). The most preferred state), non-satiation (the average total cost curve will fall if there consumer prefers more to less of a good) are and rise if there are and continuity (there is a boundary in the DISECONOMIES. In the short run, such curves form of an separating are typically U-shaped; in the long run, L- preferred from non-preferred combina- shaped. tions of goods).

© 2002 Donald Rutherford Ayres, Clarence Edwin, 1891–1972 (B3) ogyessentialtoindustrializationisconstantly A leading US INSTITUTIONALIST economist in conflict with established institutions who was educated at Brown and Chicago which approve of ceremony to protect Universities. He taught philosophy at Chi- vested interests. Ayres’s work has made a cago, Amherst and Reed Universities from great impact on . 1917 to 1930 and was Professor of Eco- nomics, University of Texas, from 1930 to References 1968. VEBLEN and the philosopher John Breit, W. and Culbertson, W.P., Jr (1976) Dewey (1859–1952) were major influences Science and Ceremony: The Institutional upon him. His powerful analysis of eco- Economics of C.E. Ayres, Austin, TX: nomic progress asserted that the technol- University of Texas Press.

© 2002 Donald Rutherford B

baby-boom period (J1) effect (the effect of an increased wage rate The 1970s when persons who were born in that a given income is reached with fewer the high-birth-rate period following the hours of work – in the figure, beyond Second World War became adults. point A higher real wage discourages workers from supplying more hours of baby-bust generation (J1) work). A negative income effect greater The 1990s and later when there were fewer than zero or a positive substitution effect young adults. will produce the backward bend in the backtesting (C1, G1) labour supply curve. A simulation of actual trading in SECURI- TIES using past data. backwardation (G1) 1 The charge made on a stock exchange for carrying the settlement of a BARGAIN into the next accounting period. 2 In commodity markets, it is the amount by which a SPOT PRICE and the cost of carrying a commodity over time exceeds the forward price. The opposite is CON- TANGO. backward-bending labour supply curve (J3) A curve plotting the supply of labour against wage rates which becomes nega- tively sloped at higher wage rates as proportionately less labour is supplied. This phenomenon is caused by the relative size of the INCOME and SUBSTITUTION EFFECTS of the wage rate change. As an increase in the wage rate also represents an increase in References the price of leisure, this price effect can be Buchanan, J.M. (1971) ‘The back-bending divided into a substitution effect (the effect supply curve of labour: an example of on the number of hours of leisure chosen doctrinal retrogression’, History of Poli- of an increase in its price) and an income tical Economy 3: 383–90.

© 2002 Donald Rutherford backwardlinkage(L0)seelinkage role of the Bank of England and the importance of confidence as the basis of backwardshifting(H2)seeshiftingoftaxes credit. backwasheffect(R5) References Theunfavourableeffectofeconomic growthinaregiononotherregionsinthe Bagehot, W. (1965–78) The Collected samenationaleconomy.Thegrowingre- Works of Walter Bagehot, ed. N. St gionattractscapitalandlabourfromother John-Stevas, London: The Economist. regions,bringingaboutaconcentrationin Bailey, Samuel, 1791–1870 (B3) economicactivityandregionaleconomic A major opponent of the Ricardian theory differentials.Thiseffecthasbeennotedin of value, mainly known for his A Critical thecontextofthestudyoftheCOREand Dissertation on the Nature, Measures and PERIPHERYofacountry. Causes of Value: Chiefly in Reference to the Seealso:spreadeffect Writings of Mr Ricardo and his Followers (1825) in which he equated value with bad (D6) ‘esteem’ and emphasized its essentially An output from economic activity which relative nature. In his attack on intrinsic does not benefit consumers. Most bads are and labour theories of value, he stressed external costs associated with production, the importance of the forces of supply and e.g. pollution and other health hazards. demand as determinants of relative value. Bads must be taken into account when His entire career was spent on the Shef- measuring the welfare conferred by a field Town Trust (a quasi-governmental particular level of the national income. agency), although he stood for election to Seealso:economicwelfare;; parliament in 1832 and 1835. good;illth;measureofeconomicwelfare References bad equilibrium (E0) Bailey, S. (1825, reprinted 1931) Critical A balance in an ECONOMY at a low level of Dissertation on the Nature, Measures, activity, e.g. low per capita income, a and Causes of Value: Chiefly in Refer- structural imbalance in the balance of ence to the Writings of Mr Ricardo and payment and unequal income distribution. his Followers, London: Series of Scarce Tracts in Economic and Political badge engineering (L6) Science, No. 7. Production of a range of automobile/car Rauner, R.M. (1961) Samuel Bailey and models with similar characteristics to cre- the Classical Theory of Value, London: ate a number of distinct brands. G. Bell. Seligman, E.R.A. (1905) ‘On some ne- Bagehot, Walter, 1826–77 (B3) glected British economists’, Economic Nineteenth-century economic and political Journal 13: 335–63, 511–35. journalist who was the most famous editor of The Economist (1861–77) and inventor Bain, Joe Staten, 1912– (B3) of the TREASURY BILL, still used by the UK An American economist educated at the Treasury as a source of short-term finance. University of California at Los Angeles After his de´but as an economics writer and Harvard, and a professor of econom- with a review of John Stuart MILL’s Princi- ics for thirty years at Berkeley, California, ples of Political Economy (first published until his retirement in 1975. He is particu- in 1848) he quickly showed his ability to larly famous for his study of BARRIERS TO distil economic truth from a mass of ENTRY as a cause of MONOPOLY POWER. Also, evidence. In Lombard Street (1873) he he has provided a detailed examination of acutely analysed the UK banking system the relationship between CONCENTRATION and money market showing the crucial RATIOS and profitability.

© 2002 Donald Rutherford References and unemployment. A government surplus Bain, J.S. (1956) Barriers to Entry, Cam- will increase public sector saving; a gov- bridge, MA: Harvard University Press. ernment deficit will require borrowing. —— (1972) Essays on Price Theory and However, unbalanced budgets could result Industrial Organisation, Boston: Little, in CROWDING OUT or long-term insolvency of Brown. a country (if the national debt is financed at a rate of interest in excess of the Baker plan (F3) country’s rate of growth) or inflation (if a US plan for easing the Third World debt country increases its money supply to problem, proposed by US Secretary for finance its borrowing). the Treasury James Baker at the annual meeting of the and the INTER- Balanced Budget and Emergency NATIONAL MONETARY FUND in Seoul, South Deficit Control Act 1985 (H6) see Korea, October 1985. It proposed that Gramm–Rudman–HollingsAct once the debtor countries put together balanced budget multiplier (E2, E6) ‘supply-side packages’ (trade A measure of the expansion or contraction and more reliance on the price mechanism of NATIONAL INCOME which occurs despite to allocate resources) and serviced their an equal change in the revenue and debts on time, money would be available expenditure of a government. An expan- in the form of loans from the World Bank, sion in national income is possible where the IMF and commercial banks. It was not the PROPENSITY TO CONSUME of a government enthusiastically received among debtor is greater than the private sector’s. If the countries (except for Mexico which government taxed £100 million of personal reached a preliminary agreement in July income at 30 per cent, it would receive 1986 to obtain US$7 billion of money as a revenue of £30 million which, if spent in loan). The plan has been criticized because its entirety, would be a greater addition to it tries to solve a debt problem by creating total demand than if the tax was not more debt; gives time for procrastination raised but was left with persons who and fails to deal with the root problem – habitually saved 20 per cent of their that the rate of growth of Third World incomes. exports has been slower than the rate of interest on dollar loans since 1981. balanced growth (O4) It was proposed in 1986 that the World 1 Growth of different sectors of an econ- Bank would lend a net US$20 billion over omy at the same rate. This has been three years to a selected group of fifteen advocated by many development econ- countries with a combined foreign debt of omists as a strategy. Ragnar Nurske US$430 billion; it was difficult to persuade propounded the view that growth the commercial banks, who are lending should take the form of the co-ordi- less to these countries, to match the nated and simultaneous application of generosity of the World Bank. capital to a wide range of industries so that the national economy would not be Seealso :worlddebtproblem a mixture of expanding, declining and stationary sectors. balanced budget (H6) 2 Steady state growth such that the real A government budget which equates rev- variables of the economy, including out- enue with expenditure. This prudent ap- put and employment, grow at the same proach to fiscal policy long advocated by positive rates. conservative finance ministers has fre- quently been attacked by KEYNESIANS who References regard it as an inflexible rule which Rosenstein-Rodan, P.N. (1943) ‘Problems ignores the levels of aggregate demand of industrialization of Eastern and

© 2002 Donald Rutherford south-easternEurope’,EconomicJour- mouscapitalflows+ nal53:202–11. balancingitem BalanceforOfficialFinancing(F4) =totalcurrencyflow+ allocationofspecial ThecurrentbalanceoftheBALANCEOFPAY- drawingrights–gold MENTS+capitaltransfers+investment subscriptiontothe transactions+BALANCINGITEM. IMF+totalofficial balanceofpayments(F4) financing 1Creditsanddebitsininternational =0 transactions. 2Therecordofthetransactionsbetween After1980,ithasbeen theresidentsofonecountryandtherest oftheworldinagiventimeperiod.The visible+invisible balanceofpaymentsisdividedintoa balance=currentbalance+ currentaccountwhichrecordstradein totalinvestmentand goodsandservicesandacapitalac- othercapitaltransac- count.Inaccountingtermsthebalance tions+balancing ofpaymentsalways‘balances’,asa item+allocationof surplusordeficithastobeoffsetby specialdrawingrights loansgrantedorreceived,butthebal- –goldsubscriptionto ancedoesnotindicatewhetherthereis theIMF anequilibriumbetweenadomestic =totalofficialfinan- economyandrestoftheworlddemand. cing+methodsof Abalanceofpaymentsmaybeindeficit financing inthe‘STOCK’senseofacountryswitch- =0 ingfromcashbalancesintostocksof TheUSbalanceofpaymentsconsistsof: commodities,orinthe‘FLOW’senseofa countryspendingmorethanitsincome, amoreserioustypeofdeficit.There exportsofgoodsandservices+transferof havebeenchangesinthepresentation goodsandservicesunderUSmilitary oftheUKbalanceofpaymentsac- grantsnet counts.Before1970,theequationused importsofgoodsandservices was USmilitarygrantsofgoodsandservices net visible+invisible unilateraltransfers(excludingmilitary balance=currentbalance+ grants)net balanceoflong-term USassetsabroadnet(increase/capital capital outflow)+ =basicbalance+ foreignassetsintheUSAnet(increase/ balancingitem+ capitalinflow)+ balanceofmonetary allocationsofspecialdrawingrights+ movements balancesoftheabovesubaccounts. =0 Seealso:accountingbalanceofpayments; balanceofpaymentsequilibrium;funda- From1970to1980,itwas mentalequilibrium;marketbalanceof visible+invisible payments balance=currentbalance+ References balanceofprivate Central Statistical Office (annual) UK andotherautono- Balance of Payments, London: HMSO.

© 2002 Donald Rutherford Stern,R.M.(1973)TheBalanceofPay- bancor(F3) ments,London:Macmillan. Aninternationalcurrencyproposedby Thirlwall,A.P.(1986)BalanceofPayments KEYNESatBRETTONWOODSaspartofhis TheoryandtheUnitedKingdomExperi- INTERNATIONALCLEARINGUNIONscheme.It ence,London:Macmillan. washopedthatthisnewcurrencywould balanceofpaymentsequilibrium(F4) bethemediumforsettlingintercountry AbalancewithintheoverallACCOUNTING indebtedness.AsKeynes’srecommenda- BALANCEOFPAYMENTS.Theequilibriamost tionwasnotaccepted,theUSdollar frequentlyexaminedareinthecurrent assumedtheroledesignedforbancor. account,inthevisibletradeaccountorin banditproblem(C9) thecurrentandlong-termcapitalaccounts Alearningproblem.Repeatedlyachoiceis combined.Thebalancechosenforexam- madefromafixednumberofoptionsin inationdependsonthepurposeofthe ordertomaximizethetotalrewardovera analysis.Iftheperformanceofindustryis particulartimeperiod.Theone-armed beingconsidered,thenthebalanceof banditisafamiliarslotmachinegame. tradewillbeexamined,butthecapital accountsmeritattentionifaforeignex- References changemarketisunderscrutiny. Berry,D.A.andFristedt,B.(1985)Bandit Problems:SequentialAllocationofEx- balanceoftrade(F4)seetradebalance periments,London:ChapmanandHall. balancesheet(M4) bankadvance(G2)seeadvance Astatementoftheassetsandliabilitiesof bankcapital(G2) afirmorotherorganizationwhichpos- Assetsofabankwhichconstituteits sessesproperty.Theassetsshowwhatthe ultimatemeansofmeetingthedemands firmowns,andwhatthefirmowesis ofitscreditors.Itconsistsofboththe indicatedbyitsliabilities.Forabank,the stockholders’equityinabankandfunds managementofitsbalancesheetfromday obtainedbysellingbondsandnoteswitha todayisacentralpartofitsbusiness maturityofmorethansevenyearson tasks. average.Thiscapitalisnecessarytoreduce balancingitem(F4) thedemandsmadeonDEPOSITINSURANCE FEDERALDEPOSITIN- PartoftheBALANCEFOROFFICIALFINANCING organizations,e.g.the whichtakesintoaccountstatisticaldiscre- SURANCECORPORATION,andonuninsured pancies. depositholders.Asdefinitionsofthis capital(e.g.whethertoincludebothstock Baldwinenvelope(F1) andequity)varyfromcountrytocountry, AsdefinedbyBaldwin:‘Theconsumption inJanuary1987theBankofEnglandand possibilityfrontierforalargecountry theUSbankingauthoritiescreateda constructedastheenvelopeformedby commonsystemformeasuringthecapital movingtheforeignoffercurvealongthe strengthofUKandUSbanks.Thesystem country’stransformationcurve.’ introducedtheconceptofPRIMARYCAPITAL andassignedaweighttoeachassetoroff- References balance-sheetitemsothatarisk–asset Baldwin,R.E.(1948)‘Equilibriumininter- ratiocouldbecalculated. nationaltrade:adiagrammaticanaly- sis’,QuarterlyJournalofEconomics67: Seealso:risk–assetsystem 748–62. bank charges (G2) balloonpayment(G0) The charges that retail banks make to Anadditionalandlargechargeleviedat their customers for bank advances or for theendofaleaseorloan. various transactions, including the transfer

© 2002 Donald Rutherford offunds,thepurchaseofforeigncurrency Seealso:currentaccount;demanddeposit; andaccountingfacilities.Thesetendtobe NOWaccount;sightdeposit greatestincountrieswithhighinflation bankefficiency(G2) andconsequentlyhighandvariablenom- Ameasureofabank’seffectivenessin inalinterestrates,andalsowherethereare usingthemoneyavailabletoit.Thiscan manyregulationsrestrictingthetypesof beassessedbythe‘mark-up’between financialmediation.AsboththeUKand interestrates,i.e.eithertheninety-day theUSeconomieshavehadthesecharac- banktimedepositdayrateminusthe teristics,therehasbeengreatscopeintheir PRIMERATEOFINTEREST,orthebankdemand bankingsectorsforareductionincharges. depositrateminusthebankprimerate. Seealso:Islamicbanking Mark-upsaresimilarwithinonecountry butdifferbetweencountries. BankCharterAct1844(E5,N2) UKstatutewhichwasthelastmajor banker’sturn(G2) nineteenth-centuryattempttoregulatethe Themarginbetweentherateofinteresta UKbankingsystembythecreationof bankpaystodepositorsandtherateit newrulesfortheoperationoftheBankof receivesformoneylentout. England,particularlythroughcontrolof Seealso:endowmenteffect thenoteissue.TheBankwasdividedinto anIssueDepartmentresponsibleforthe Bank for International Settlements (F3) noteissueandaBankingDepartment Founded in Basle, Switzerland, in 1930 by engagedinotherbankactivities.The Belgium, Germany, Italy, Japan and the Bank’snoteissuewaslimitedtoa‘fidu- UK. Since 1945 it has continued to ciaryissue’of£14million(backedby arrange currency swaps between European governmentsecurities)andtheremainder central banks. It is also the agent for the wasbackedbygoldwhichroseandfellin EUROPEAN MONETARY CO-OPERATION FUND and amountaccordingtointernationaltrans- other European institutions. actions.TheActalsoregulatedthese- bank holding company (G2) venty-twocountrybankswhichhadrights A company which owns one or more banks ofnoteissue:notuntil1921didtheBank and, often, firms engaged in non-banking haveamonopolyofnoteissueinEngland activities. The development of such com- andWales(Scotlandretaineditsseparate panies in the USA in the twentieth century bankingsystemwithanumberofbanks made the expansion of banking possible, havingthepowertoissuebanknotesafter despite the existence of UNIT BANKING. theActofUnionin1707).Therigidityof theActnecessitateditssuspensionduring Bank Holding Company Act 1956 severaltradedepressions.However,itdid (E5, G2) representatriumphforthethinkingofthe US federal statute which defined a bank CURRENCYSCHOOL. holding company as one which directly or indirectly owns or holds power to vote 25 bankdeposits(G2) per cent or more of the shares of two or Theliabilitiesofbankswhichconstitute more major banks. Previously, bank hold- themajorpartofthemoneysupplyof ing companies were only mildly controlled modernnationaleconomies.Theyareli- by the BANKING ACT 1933 if they were abilitiesbecauseabankcantransferits member banks of the Federal Reserve depositsbychequetootherbankswho System. In 1966, the Act was amended to thenhaveaclaimonit.Suchdepositsare apply ANTITRUST law to the chartering and createdbyanindividualorfirmgivingan acquisitions of these companies. The 1956 assettoabank,e.g.coinandbanknotes,or Act prohibited the companies from parti- apromisetorepayaloanatafuturedate. cipation in non-banking activities; amend-

© 2002 Donald Rutherford mentstotheActin1970permittedthe capitalorinterestreceivedbywayof BoardofGovernorsoftheFederalRe- deposit.TheActalsosetupaDeposit serveSystemtoauthorizemanynon-bank- ProtectionBoardtomanageadeposit ingactivities,whichhaveincludedleasing, protectionfund. insurance,mortgagebanking,community Seealso:FinancialServicesAct developmentanddataprocessing. BankingAct1987(E5,G2) banking(G2) ThisUKstatuteextendedtheamountof Moneychangingoriginally;afterthe regulationofdeposit-takingbusinessun- Churchpermittedthechargingofinterest, dertheBANKINGACT1979,gavetheBankof primarilymoneylending.Banksbegan Englandexclusivepowerstoauthorizethe producingmoneybyissuingbanknotes businessofdeposittakingandtorevoke andthenexpandedcreditbycreatingbank suchpowers,instructedtheBankofEng- deposits,whichbecamethemajorpartof landtoestablishaBoardofBanking thebroadlydefinedmoneysupply.The Supervisionandregulatedfinancialadver- powertocreatecreditmadebankskey tisements. institutionsinmoderneconomies,influen- cingthelevelofeconomicactivity. BankingSchool(N2) Inthetwentiethcenturybanksin- AgroupofUKeconomists,ledbyTho- creasedinsizethroughmergersandjoint masTookeandJohnStuartMILL,who operations(e.g.intheUKthroughmer- arguedthattherecouldneverbeanexcess gersinthe1920sand1960s,andinthe noteissueasnoteswereonlyissuedto USAthroughthegrowthofbankholding coverrealtransactions.Also,theywanted companies),throughinternationalization theBankofEnglandtohavehigher oftheiroperationsandbyanextensionof reservesandthegrowingimportanceof therangeoftheirservices.Inasense, bankdepositstobeincorporatedinto everymajorcommercialbankoftoday monetarytheory. aimstobeafinancialconglomeratesup- Seealso:BankCharterAct1844;Currency plyingeveryformofcredit,financial School;FreeBankingSchool;realbills adviceandservice. doctrine Seealso:branchbanking;domesticban- bank margin (G2) kingsystem;fractionalreservebanking; The operating margin of a bank. freebanking;investmentbanking;Islamic banking;laserbanking;merchantbank; banknote (G2) offshorebanking;unitbanking;usury Paper CURRENCY issued by a bank. Although the first known notes were References issued by Chinese banks in the eleventh Lewis,M.K.andDavis,K.T.(1987)Do- century, it was not until the eighteenth and mesticandInternationalBanking,Ded- nineteenth centuries that they substantially dington:PhilipAllan. replaced coinage and BILLS OF EXCHANGE.In BankingAct1933(E5,G2)seeGlass– London, banknotes originally took the SteagallAct form of receipts for bullion stored with goldsmiths and then became a form of BankingAct1979(E5,G2) bank advance when banks discovered their TheaimsofthisUKstatutewereto power to create money. When countries regulatedeposit-takingbusinessunderthe were on the GOLD STANDARD, it was possible controloftheBankofEngland.Itdefined to convert banknotes into bullion; since ‘deposit-takingbusiness’asthereceiving 1931 notes have been FIAT MONEY. In most ofdepositsofmoneyandthenlendingto countries the only note issue today is that others,orasbeingfinancedoutofthe of the CENTRAL BANK (the limited power of

© 2002 Donald Rutherford Scottishbankstoissuenotesisexcep- banks.Itwasgranteditsindependence tional). fromtheItaliangovernmentin1993.

Seealso:Bradbury BankofJapan(BOJ)(E5) ThecentralbankofJapancontrolledby BankofCanada(E5) thePolicyBoardwhosemembersare ThecentralbankofCanadafoundedin chosenbytheCabinetandapprovedby 1934andtakenintogovernmentowner- theDiet. shipin1938.Ithasthetaskofformulating andexecutingmonetarypolicy. bankrate(E5) The lowest rate charged by the Bank of BankofEngland(E5) England prior to September 1971 for TheUK’sCENTRALBANKwhichreceivedits discounting high-quality short-term BILLS firstcharterin1694.Althoughoriginallya presented by financial institutions to pre- privatelyownedbank,itadministeredthe serve their liquidity. It was replaced by the nationaldebtfrom1752.Inaseriesof MINIMUM LENDING RATE. statutesculminatingintheBANKCHARTER bankrun(G2)seerunonabank ACT1844,itwasincreasinglysubjectedto governmentregulation,particularlyinits bankruptcy (K2) note-issuingpowers.Afterthecollapseof A legal action which leads to the control theGOLDSTANDARDin1931,itoperated of the property of an insolvent debtor for EXCHANGECONTROLSfrom1939to1979and the benefit of creditors. After the court has from1945wasmoreandmoreinvolvedin appointed a receiver, the debtor can make supervisingtheUKbankingsector.Itwas an offer to his or her creditors. nationalizedin1946.ItconductsMONETARY bank settlement system (G2) POLICYthroughOPENMARKETOPERATIONS An electronic means of transferring de- andbyinfluencingmarketinterestrates. posits between banks to settle their ThenoteissueisnowentirelyFIDUCIARY, mutual indebtedness. In the USA, Fed butthemonetaryassetsbackingthenote Wire is the Federal Reserve’s system, issueareusedforthebank’sdailyinter- Bank Wire is a system for domestic ventionsingovernmentsecurityand payments and CHIPS is a system for pay- moneymarkets.Also,thebankholds ments between New York banks. Japan accountsforabout130overseascentral has the Zenyin system for interbank trans- banks,theINTERNATIONALMONETARYFUND fers. The UK has CHAPS for the clearing andsomeprivateandpublicsectorclients. banks, as well as BACS. Itacts,too,astheregistrarofgovernment stocksoftheUK,severalCommonwealth bank underwriting (G2) countriesandUKlocalauthorities. The underwriting by banks, especially the subsidiaries of US bank holding compa- Seealso:bankrate;CompetitionandCre- nies, of the DEBT SECURITIES of low-credit- ditControl;corset;minimumlendingrate rated firms. This practice has enhanced the References credit of many small firms. Geddes,P.(1987)InsidetheBankof Banque de France (E5) England,London:Boxtree. The central bank of France founded in Sayers,R.S.(1976)TheBankofEngland, 1800 by Napoleon I and nationalized in 1891–1944,Cambridge:Cambridge 1946. It was granted independence to UniversityPress. formulate monetary policy in 1994. BankofItaly(BOI)(E5) Baran, Paul, 1910–64 (B3) ThecentralbankofItalyfoundedin1883 Leading US Marxist economist of Russian throughthemergeroffournote-issuing descent who was educated at the Univer-

© 2002 Donald Rutherford sities of Berlin and Harvard. During bargaining (D7, J5) 1940–7, he worked in the US Office of Negotiation between parties with opposing Strategic Services, and was Professor of interests. They hope to reach an agreement Economics at Stanford University from in the form of a compromise or a victory 1948 to 1964. His exposition of Marxist for one of them. If there is a failure to economics included theories of MONOPOLY agree, conflict might ensue. From earliest CAPITAL and DEPENDENCY. times, bargaining has been a major activity of markets as it can reconcile the opposing References interests of buyers for low prices and of Baran, P. (1957) The Political Economy of sellers for high prices. As a method of co- Growth, New York: Monthly Review ordinating an economy bargaining is the Press. Baran, P. and Sweezy, P.M. (1966) Mono- alternative to PLANNING, although even poly Capital: An Essay on the American under central planning the managers of Economic and Social Order,NewYork: different enterprises bargain with govern- Monthly Review Press. ment officials to bring about the allocation of goods and services. In the labour barbell (G1) market, the advent of trade unions has A stock market investment strategy of transformed individual bargaining into investing in bonds with mainly very short- COLLECTIVE BARGAINING. or long-term maturities. Seealso:arbitration;gametheory;Nash Barber boom (E3, N1) bargaining The 1971–4 period in the UK when Anthony Barber as Chancellor of the bargaining theory of wages (J3) Exchequer over-stimulated the economy An attempt to show how wages are deter- with inevitable inflationary consequences. mined by modelling the wage negotiating In the property market, in particular, there process. HICKS was a pioneer with his wage was appreciable inflation, e.g. between bargaining model. In Hicks’s diagram, OZ 1970 and 1973 commercial property prices is the wage rate an employer would have almost tripled. paid if unconstrained by a and OA is the highest wage union negotiators Barbon, Nicholas, c.1640–98 (B3) can obtain from the employer. The union, Born in London and then a student of as shown by the downward-sloping resis- medicine in Leyden, and Utrecht. He tance curve, will begin by asking a high established the first fire insurance office in London 1681, was elected Member of Parliament for Bramber in 1690 and 1695; founder of a LAND BANK in 1698. In A Discourse of Trade (1690), his principal work, he discusses trade, value and money and distances himself from MERCANTILISTS who considered the TRADE BALANCE to be the central concern of economic policy. bargain (D4, G2) 1 A good or service supplied at a lower than expected price. 2 A sale or purchase of stocks or shares on the London STOCK EXCHANGE at the price agreed, not necessarily at a low price as would be the case outside that stock exchange.

© 2002 Donald Rutherford wagerateknowinglittleoftheemployer’s tohappenwhenUKclearingbankschan- position;theemployerwillgraduallyin- gedtheirbankcharges. creasehisorheroffertoavoidacostly strike. barrieroption(G1) AnOPTIONwithapay-offdependingonthe References underlyingassetreachingorexceedinga Hicks,J.R.(1963)TheTheoryofWages, predeterminedprice.Adoublebarrier ch.7,London:Macmillan;NewYork: optionhastwotriggerprices. StMartin’sPress. barriertoentry(L1) bargainingunit(J5) Aprincipalmethodofcreatingorpreser- ThegroupofUSworkersrepresentedbya vingamonopolyposition.Suchbarriers labourunion.Therulesfortheboundaries canbelegal(governmentsonlypermit oftheunithavebeendevisedbytheNA- certainqualifiedpersonstoenterthe TIONALLABORRELATIONSBOARDunderthe market),technological(onlylarge-scale provisionoftheWAGNERandTAFT–HARTLEY productionispossible,asisthecasewith ACTSwithaviewtomakingthemhomo- steelmillsandthemassproductionof geneousunitswhichreflectlocalneedsand consumerdurables),financial(alarge furtherCOLLECTIVEBARGAINING. amountofcapitalisrequiredtosetupa business)orbasedoncustomers’loyalty BaringsBankcollapse(G2) (throughPRODUCTDIFFERENTIATION).Inthe Thefailureofthelong-establishedUK labourmarket,tradeunionsandprofes- MERCHANTBANKinFebruary1995caused sionalassociations(e.g.medicalassocia- byovertradinginSingaporebyNick tions)limitthenumberofentrantstoan Leeson,itsseniorSingaporetrader.This occupationtopreservetheincomeand gamblinginFUTURESandOPTIONSofthe employmentoftheirmembers. Nikkei225indexoftheJapanesestock marketresultedinalossof$1.3billion Seealso:artificialbarriertoentry;barrier whenthestockmarketbegantofalland toexit MARGINCALLScouldnotbecovered.The References lossesabsorbedalltheEQUITYofthebank. TheINGGroupacquiredthebank.Ina Bain, J.S. (1956) Barriers to New Competi- tion, Cambridge, MA: Harvard Univer- previousBaringscrisisin1890theBANKOF sity Press. ENGLANDrescuedthebankbyraising£17 million. barrier to exit (L1) Barnettformula(H7) The costs or forgone profits of a firm which will occur if it leaves an industry. AmethodofcalculatingUKpublicex- Barriers to exit are less common than penditureforthecomponentcountriesof barriers to entry, excepting where a gov- theUKintroducedbyJoelBarnett,Chief ernment, to prevent increased unemploy- SecretarytotheTreasury,in1978.Itwas ment, keeps in existence a large intendedtobringaboutconvergencein organization threatened with financial col- percapitaspendingbutwhenitfailedto lapse; specialized assets may also deter a dosowascriticizedforbeingtoogenerous firm from leaving an industry. toScotland. See also: barrier to entry barometricfirmleadership(L1) Theleadershipofanoligopolisticfirm References whichfirstmakespricechangestoactas Caves, R.E. and Porter, M.E. (1977) ‘From a‘barometer’totestthemarket.Oftena entry barriers to mobility barriers: con- smallfirmischosenforthisrole,asused jectural decisions and contrived deter-

© 2002 Donald Rutherford rencetonewcompetition’,Quarterly closetothebaserate.Baseratescameinto JournalofEconomics91:241–62. forcein1971.Despitetheabolitionof (D4,F1) theirinterestratecartel,fewclearing Themostprimitiveformofexchangein bankshavebaseratesoutoflinewith whichcommoditiesaredirectlyexchanged theircompetitors. foreachother.Anexchangeispossible basiccommodity(D0) whentwopersonsmutuallydesireeach Agoodwhichdirectlyorindirectlyenters other’sproduction.Barterismorecumber- intotheproductionofallcommodities.A somethanusingmoneyasamediumof conceptintroducedbySRAFFA. exchangebecausethebarteringparties usuallyhavetosearchforeachother References withouttheadvantageofanintermediary. Sraffa,P.(1960)ProductionofCommod- Nevertheless,inmoderntimescountries itiesbyMeansofCommodities:Prelude shortofforeignexchange,e.g.theformer toaCritiqueofEconomicTheory,Cam- bridge:CambridgeUniversityPress. USSR,haveusedthisformoftrade.If tradebarteringisused,therecanbea basicincome(I3) balanceatapointoftimeoroverafew Anunconditionalincomesufficientfor years,e.g.inthiswayFinlandandthe basicneeds.Earningsbeyondthisallow- formerUSSRbalancedtheirbilateral ancewouldbeprogressivelytaxedeven- tradeoverafive-yearperiod. tuallyreachingtheincomelevelatwhich thepersonwouldbeanetcontributorto Seealso:countertrade thescheme.Thedisabledandtheelderly bartereconomy(P0) wouldgetmorethanthebasicincome.A Oneoftheearliestformsofaneconomyin governmentusingthisapproachwould whichgoodsaredirectlychangedforother ensurethatallcitizensreceivedashareof goodswithoutusingmoneyasamedium theNATIONALINCOME. ofexchange.Pricesareexpressedinrela- Seealso:negativeincometax tiveterms,e.g.XamountofA=Y amountofB.Transactionscanbeexpen- basicindustry(L0) siveashighsearchcostscanbeincurredin Anindustrywhichexportsitsproductsto thepursuitoftradingpartners.However, otherregions,thusbeingamajordetermi- toavoidtaxationandcreateemployment, nantofitsownregionalprosperity. insomeareasof,forexample,Canadaand theUK,theexchangeofserviceshas Seealso:non-basicindustry replacedtheusualmarket. References basecapital(G2) Alexander,J.(1954)‘Thebasic-non-basic conceptofurbaneconomicfunctions’, Thecapitalofasecuritieshouserequired EconomicGeography30:246–61. toprotectitagainstafallinitsprofit- ability. basicneedsbudget(I3) AmethodofcalculatingPOVERTYrates basecurrency(F3) whichassumesthatfamilieswithlimited TheCURRENCYusedtoquantifyaRISK. incomessurvivebyconsuminginferior baserate(E5,G2) goods.Thecostofthisbundleofgoods TherateofinterestthataUKclearing canriseatadifferentratefromthebasket bankusesasthebasisofitsstructureof usedtocalculateapriceindex. interestratesforlendingandreceiving Seealso:subsistence deposits.Lendingratesareabove,and ratesondepositsbelow,baserate.Only basic relief (H2) largeandcreditworthyinstitutionsborrow Income tax relief for all taxpayers

© 2002 Donald Rutherford irrespectiveoftheirmaritalandother and that there was less concern for the personalcharacteristics. meaning of capital than for its measure- ment. In particular, she was angry that basicwage(J3) modern theorists had distorted Keynes by Thecommonandfundamentalelementin stating that, given a level of savings, the allAustralianwagestowhichMARGINSare government ensures that there is enough addedtoproduceadifferentiatedwage investment, a view little different from the structure.Thebasicwageisnotmerelya classical assertion that savings determine nationalwagebutageneralcomponentof investment, ignoring the effect of DISTRIBU- allwageswhichcaninitselfbealtered.An TION on consumption and investment. increaseinthebasicwagewillbeawarded HICKS with his IS–LM analysis, PATINKIN and onlyiftheeconomyhastheeconomic her US opponents in the CAMBRIDGE CON- capacitytopayforit. TROVERSIES were included in the ranks of Seealso:over-awardpayment the illegitimate. basingpointpricing(L2) References Asystemofuniformpricingwhichin- Robinson, J. (1979) ‘What has become of cludesatransportchargefordeliveryfrom the Keynesian revolution?’, in Collected anarbitrarilychosengeographicalbase.In Economic Papers, Vol. V, pp. 168–77, theUSA,itwasfirstusedtosellsteelat Oxford: Basil Blackwell. Pittsburghpricesplusfreightchargesfrom batch production (L6) Pittsburghtoconsumers(hencethename The production of a limited quantity of a ‘Pittsburgh-Plus’forthesystem).Thesys- particular product, rather than continuous temhasalsobeenusedinEurope,includ- mass production. ingtheUKcementindustry.ANTITRUSTand COMPETITIONPOLICIEShavelongcondemned Bauer, Peter Thomas, 1915– (B3) thisdeparturefrompricecompetition. A prominent development economist born Thispracticedistortsthelocationchoices in Budapest, Hungary, and professor at offirmsastheyarechargedlessthan the London School of Economics 1960– actualfreightchargesinsomeplacesbut 83. He was created a life peer on retire- inothershavetopayforphantomjour- ment. After early field work in Malaysia neys. and West Africa, he progressed to a general study of economic development, Seealso:Robinson–PatmanAct1936 emphasizing the superiority of markets as basis point (G0) a method of allocation: he has long been a The smallest measure of the yield on a trenchant critic of many forms of eco- bond or a note. This point is 0.01 per cent nomic aid and central of a yield. and is therefore opposed to barriers to trade, investment and migration. Basle Concordat on Banking Supervi- sion (G2) References An international pact, drawn up in 1975 Bauer, P.T. (1948) The Rubber Industry, by the BANK FOR INTERNATIONAL SETTLEMENTS, Cambridge, MA: Harvard University to supervise banking activities. Press. —— (1954) West African Trade, Cam- bastard Keynesianism (E6) bridge: Cambridge University Press. This expression was invented by JOAN —— (1957) Economic Analysis and Policy ROBINSON to describe the imposition of in Underdeveloped Countries, Durham, NEOCLASSICAL thinking on the theories of NC: Duke University Press. KEYNES. She complained that the concept —— (1971) Dissent on Development Stu- of had been abandoned dies and Debates in Development Eco-

© 2002 Donald Rutherford nomics, London: Weidenfeld & Nicol- edn, Cambridge: Cambridge University son. Press. —— (1984) Reality and Rhetoric: Studies in the Economics of Development, Lon- Bayesian equilibrium (C7) don: Weidenfeld & Nicolson; Cam- A NASH EQUILIBRIUM in which the players in bridge, MA: Harvard University Press. a game with incomplete information value their expected utility using subjective Baumol, William Jack, 1922– (B3) probabilities; the local best response at US economist, educated at City College, each information set. New York, and London University and a professor at Princeton University from References 1954 to 1971. He is famous for his Harsanyi, J. (1967–8) ‘Games with incom- economic analysis of management science, plete information played by Bayesian particularly his research conclusion that players, I–III’, Management Science 14: businesses set out to maximize their sales 159–82, 320–34, 486–502. subject to minimum profit targets. Also, Bayesian method (C1) his ‘unbalanced growth’ model demon- A method of revising the probability of an strates that the different opportunities for event occurring by taking into account technical progress in the various sectors of experimental evidence. The usefulness of an economy lead to chronic problems in this approach depends on the size of the the financing of cities, medical care, edu- sample used in an experiment. Bayes’s cational systems and the performing arts. theorem of 1763 originally stated that the Recently he has been concerned with the probability of q conditional on H (prior environmental implications of welfare eco- information) and p (some further event) nomics and CONTESTABLE MARKETS. varies as the probability of q on H times References the probability of p, given q and H. Baumol, W.J. (1966) Performing Arts, the References Economic Dilemma: a Study of Problems Cyert, R.M. (1987) Bayesian Analyses and Common to Theatre, Opera, Music and Uncertainty in Economic Theory, Lon- Dance, New York: Twentieth Century don: Chapman and Hall. Fund. —— (1977) Economic Theory and Opera- Bayes, Thomas, 1702–61 (B3) tions Analysis, 4th edn, Englewood Born in London. A Presbyterian minister Cliffs, NJ: Prentice Hall. in Holborn, London and Tunbridge Wells, Baumol, W.J. and Oates, W.E. (1975) The Theory of Environmental Policy, Engle- Kent; admitted to the Royal Society in wood Cliffs, NJ; London: Prentice Hall. 1742. He used an inductive approach to Baumol, W.J., Willig, R.D. and Panzar, establish a mathematical basis for prob- L.S. (1982) Contestable Markets and the ability in his posthumous ‘Essay towards Theory of Industry Structure, New York: Solving a Problem in the Doctrine of Harcourt Brace Jovanovich. Chances’, Transactions of the Royal So- ciety of London (1763). This inspired an Bayesian econometrics (C5) approach to the calculation of probabil- This is founded on Bayes’s theorem, or the ities and the foundation of a new branch principle of inverse probability: that the in- of ECONOMETRICS. formation in given data can be used to infer the random processes generating them. Both BB (G2) sample and a priori information are used. STANDARD & POOR credit rating of securities References which designates them as speculative. Jeffreys, H. (1957) Scientific Inference, 2nd Seealso:AAA;BBB;C;D;DDD

© 2002 Donald Rutherford BBB(G2) sis of racial and sexual DISCRIMINATION in STANDARD&POORcreditratingofsecurities labour markets using the utility functions whichstatesthattheyareofmedium of employers and employees to demon- grade. strate a ‘taste for discrimination’; the formalisation of the study of HUMAN CAPI- Seealso:AAA;BB;QD;DDD TAL by an examination of the investment- BDI(J5) like nature of schooling and on-the-job BundesverrandderdeutchenIndustrie. training; the analysis of crime as an Amajoremployers’associationinGer- occupation with expected benefits and manyfoundedin1949byanamalgama- expected costs (if caught); and a new tionofthirty-ninenationalindustrial economics of the family as a multi-person federations.BDInowhasseparatesections production unit practising division of la- forthesectorsoftheeconomy. bour amongst its members. His work has extended economic study into areas pre- bear(G1) viously the preserve of sociologists, psy- Amarketspeculatorwho,believingthat chologists and anthropologists. He was priceswillfall,sellssecurities(forexam- awarded the Nobel Prize for Economics ple)nowandpurchasesthemlaterto in 1992. effectdeliveryofthem.Aprofitismade bythedifferencebetweenthesellingand References buyingprices.Thisreversalofthenormal Becker, G.S. (1968) ‘Crime and punish- sequenceoftransactionsispossibleon ment: an economic approach’, Journal stockexchangesassecuritiesdonothave of Political Economy 76: 169–217. tobeimmediatelydelivered.Also,thereis —— (1971) Economies of Discrimination, speculationofthisnatureincurrencyand 2nd edn, Chicago: University of Chi- commoditymarketswherethereisa cago Press. choicebetweenspotandfuturetransac- —— (1975) Human Capital: A Theoretical and Empirical Analysis, with Special tions.Ifthebearalreadypossesseswhatis Reference to Education, New York: Co- beingsold,heorsheis‘protected’or lumbia University Press. ‘covered’;ifnot,heorsheissellingshort. —— (1977) The Economic Approach to Seealso:bull;stag Human Behaviour, Chicago and Lon- don: University of Chicago Press. bearerbond(G1) —— (1981) Treatise on the Family, Cam- Abondownedbythepersoncurrently bridge, MA: Harvard University Press. holdingit.Asnoendorsementisneededto Shackleton, J.R. (1981) ‘Gary S. Becker: transfersuchbonds,thereisnocentral the economist as empire-builder’, in J.R. registeroftheownersofanyparticular Shackleton and G. Locksley (eds) Twelve Contemporary Economists, Lon- bearerbondissue.TheEUROBONDisa don and Basingstoke: Macmillan. majorexampleofbearerbonds. bed and breakfast (G1, L8) bearersecurity(G1)seebearerbond; 1 A sale and purchase of securities within bearershare twenty-four hours to accumulate tax- bearer share (G1) deductible losses. A company share owned by the person 2 Tourist accommodation for one night holding it at a particular time. with a breakfast included in the TARIFF. Becker, Gary Stanley, 1930– (B3) beggar-my-neighbour policy (F1) US economist, educated at Princeton and A PROTECTIONIST foreign trade policy which Chicago, who was a professor at Columbia attempts to improve the domestic econ- University from 1960 to 1970 and then at omy at the expense of foreign countries. Chicago from 1970. Famous for his analy- This policy was at the heart of much of

© 2002 Donald Rutherford MERCANTILISTthinkingandwaslaterprac- LIMITEDARBITRAGE.Researchofthiskind tisedinthe1930sbymanycountries.First examinesirrationalityinmarkets. predominantlyagriculturaleconomies References adoptedit;lateritwasadoptedbythe UK,USA,France,theNetherlandsand Shleifer,A.(2000)Inefficientmarkets, Oxford:OxfordUniversityPress. Switzerland.After1945,currencydevalua- tionshaveembodiedthisprinciple.A behaviourline(D0) policyofthistypehasalwaysbeencriti- AnINDIFFERENCECURVE. cizedbecauseofitsself-defeatingcharac- ter:domesticindustriescanignoreforeign BeigeBook(E6) competitionsobecomemoreinefficient AreportofUSregionaleconomiccondi- andexportindustriesfacingretaliation tionspublishedbytheFEDERALRESERVE haveareducedoutputandconsequentially eighttimesayear.Itisbasedonanecdotal higherunitcostswhichmakethemeven evidencecollectedbyeachofthetwelve moreuncompetitiveinworldmarkets. FederalDistrictBanks.Theeconomic stateofdifferentindustriesandofthe Seealso:GeneralAgreementonTariffs labourmarketisdescribed. andTrade;Smoot–HawleyTariffAct1930 Bellman’sequation(C8) behaviouraleconomics(D1,L2) Thisassertsthatthevalueofastateina Thevariedapproachestothestudyof probabilitydistributionequalstheex- economicbehaviour,includingdecision pectedvalueofsuccessorstates.This makinginfirmsandotherorganizations,a equationisusedindynamicprogramming psychologicalapproachtothestudyof toestablishthegreatestreturnoverthe consumersandamultidisciplinary‘techno- longrun. logicaleconomics’withsomeoftheassump- tionsofthePOST-KEYNESIANS.Thisschoolof bell-wetheroftheeconomy(E3) economics,mainlyconcernedwithmicro- Asectorthatindicatesthefutureofa economicissues,alsoconsidersmacroeco- wholenationalECONOMY.Theadvertising nomicmatterssuchasinflationand industryisofteninthisroleaschangesin unemployment.Thespecialistjournalsof advertisingexpenditureprecedeanupturn thisbranchofeconomicsaretheJournal ordownturnintheeconomy. ofBehavioralEconomicsandtheJournalof bell-wetherstock(G1) EconomicBehaviorandEconomics. Astockexchangesecurityregardedas Seealso:economicsandpsychology;evo- representativeofthestateofthestock lutionarytheoryofthefirm marketasawhole.Itisusuallythestock ofoneofthelargestcompanies. References Earl,P.E.(ed.)(1988)BehavioralEconom- belowtheline(F4,H6,M3) ics,2vols,Aldershot:EdwardElgar. 1IntheUKbudgetsof1947–63receipts Gilad,B.andKaish,S.(eds)(1986)Hand- andexpenditurerelatingtoborrowed bookofBehavioralEconomics,VolsA fundsortheservicingofthenational andB,Greenwich,CT:JAIPress. debt. Loasby,B.(1976)Choice,Complexityand 2Forafirm,expenditureonsalespromo- Ignorance:AnInquiryintoEconomic tionotherthanondirectadvertising. TheoryandthePracticeofDecision- 3IntheUKbalanceofpayments,official Making,Cambridge:CambridgeUni- financing. versityPress. Seealso:abovetheline behaviouralfinance(G1) Thestudyoffinancialmarketsmakinguse benefit approach to taxation (H2) oftheideasofINVESTORSENTIMENTand The levying of taxation so that the burden

© 2002 Donald Rutherford of taxation matches the amount of PUBLIC he read for the English Bar. He is most GOODS received by each taxpayer. The famous for his exposition of UTILITARIAN- principle was first enunciated by Thomas ISM, the principle that there should be a Hobbes (1588–1679), Hugo Grotius ‘felicific calculus’, to see if a course of (1583–1645) and John Locke (1632–1704). action promotes the greatest happiness for In essence taxpayers and a government the greatest number. This inspired JEVONS exchange taxes for services. Since public in his subjective value theory of exchange. goods are collectively provided and taxes John Stuart MILL, who was much under are individually paid, a taxation system on Bentham’s influence in his youth, rebelled this basis will always be criticized. For against the cold rationality of utilitarian- example, it would be difficult to allocate ism. charges for the maintenance of external Bentham studied political economy defence to individuals in proportion to from 1786 to 1804, between the ages of their consumption. Until governments 38 and 56, when he was at his intellectual know more of the preferences of taxpayers peak. A reading of SMITH’s The Wealth of it will be impossible to apply the principle Nations was decisive for his economic exactly. thinking, although he had an earlier inter- est in unemployment, With an atomistic benefit tax (H2) view of social life, it was not surprising A tax linked to a service provided by that he used induction as his principal government, e.g. a bridge toll, or a leisure approach and only resorted to mathe- centre admission charge. The principle matics as a convenient method of expres- followed is ‘he who benefits should pay’. sion. His first work on economics, Defence Seealso:abilitytopay;usercharge of Usury (1787), was inspired by a rumour that the legal maximum for interest was to Benelux (F0) fall from 5 per cent to 4 per cent: Bentham Customs union of Belgium, the Nether- recommended that there should be free lands and Luxembourg. In 1943, the three determination of interest rates. Although countries signed a monetary convention the work did not advance a theory of the for controlling payments between them rate of interest, it was nevertheless widely after the Second World War. In 1944, they praised in the UK, France and the USA. agreed to a customs union to come into He was against artificial attempts to force in 1948: this abolished tariffs within increase trade, e.g. by having colonies, Benelux and set a COMMON EXTERNAL TARIFF. because he believed that trade is limited The aims of Benelux include the free by capital. His Manual of Political Econ- movement of goods and factors of produc- omy (1793–5) dealt with international tion, the co-ordination of economic, finan- trade. He took to public finance in Supply cial and social policies to attain a without Burthen (1795) in which he com- satisfactory employment level and the bined a minimal view of the state with a highest standard of living, and a joint new proposal to raise the small amount of trade policy. taxation still necessary – the public auc- Bentham, Jeremy, 1748–1832 (B3) tion of all properties in vacant possession Legal philosopher and writer on many because no relatives were alive to inherit. economic, constitutional and prison re- Further, in A Plan for Augmentation of the form issues; founder of the UK utilitarian Revenue (1794–5), he proposed a reduction school of philosophy. Educated at West- in the national debt by the use of govern- minster School, Queen’s College, Oxford ment-run lotteries and government deal- (which he hated, leading him to inspire the ings in life annuities. His Proposal for the opening of University College London in Circulation of a New Species of Paper 1828), and Lincoln’s Inn, London, where Currency (1795–6) argued that a govern-

© 2002 Donald Rutherford ment monopoly on the issue of paper —— (1966) Essays in Normative Econom- currency is a cheaper form of government ics, Cambridge, MA: Harvard Univer- borrowing than the issue of interest-bear- sity Press. ing bills. Circulating Annuities (1800) also —— (1982) Welfare Planning and Employ- ment: Selected Essays in Economic The- suggested a new type of paper currency, ory, Cambridge, MA: MIT Press. and in True Alarm (1801) he contributed to the raging BULLIONIST CONTROVERSY of the Bergson social welfare function (D6) period by tracing the effects of excessive The welfare of a community in a given country bank issues on prices, as well as time period expressed as a function of the enunciating a theory of value based on amounts of consumer goods produced, the utility. Of the Balance of Trade (1801) amounts of labour and non-labour factor attacked , Defence of a Max- inputs and the production unit for which imum (1801) advocated price controls for the work is performed. BERGSON, in his grain and Institute of Political Economy approach, intended to challenge the view (1801–4) set out his views on the role and that a community’s welfare is the sum of limits of government policy, as well as individuals’ welfare. discussing whether political economy is References an art or a science. Bergson, A. (1938) ‘A reformulation of cer- References tain aspects of welfare economics’, Dinwoody, J. (1989) Bentham, Oxford: Quarterly Journal of Economics 52: Oxford University Press. 310–34. Stark,W.(1955)JeremyBentham’sEconomic Bernoulli hypothesis (D0) Writings, London: Allen & Unwin. The hypothesis, named after Daniel Ber- noulli (1700–82), that in a gamble an Bergson, Abram, 1914– (B3) individual will participate according to US economist educated at Johns Hopkins the personal UTILITIES he or she attaches and Harvard Universities. After wartime to the probabilities. This approach is experience from 1942 to 1945 as chief of prominent in the economics of RISK and the Russian Economic Subdivision of the UNCERTAINTY. US Office of Strategic Services, he re- turned to academic life and has been a References professor at Harvard since 1956. In 1938, Pearson, K. (1978) The History of Statis- he created the new welfare economics by tics in the 17th and 18th Centuries,New asserting that a social welfare function can York: Macmillan. be established by attaching weights to each Bertrand duopoly model (L1) individual’s welfare function: this rejected A development of COURNOT’S DUOPOLY the earlier CARDINAL UTILITY approach. MODEL which uses price adjustments to Also, he introduced the distinction be- bring about an equilibrium. At equili- tween ‘efficiency’ and ‘equity’, applying it brium, neither firm would benefit from to an analysis of the individual income charging a different price so the price effects of economic change. He has ap- becomes zero. plied his welfare analysis to many areas of economics, including and best available technology (O3) monopoly. Also, he became a leading US A technique of production which reduces authority on the Soviet economy. pollution levels by using the cleanest available method. References Bergson, A. (1964) Economics of Soviet beta (G1) Planning, New Haven, CT: Yale Univer- The ratio of a change in the return on a sity Press. security to a change in the returns on all

© 2002 Donald Rutherford securitiesofaparticularstockmarket. Williams,K.andWilliams,J.(eds)(1987) Betaisunityifthechangesintheindivi- ABeveridgeReader,London:Unwin dualshareandinthewholeofthemarket Hyman. arethesame.Betasarepositiveifthe bid(D0) individualandmarketreturnsmoveinthe AnofferofapriceasinanAUCTIONorina samedirection,andnegativeiftheymove TENDER. inoppositedirections. Seealso:designatedcompetitivebidding; Seealso:alpha;Sharpe generalcompetitivebidding;limitedgen- betastock(G1) eralcompetitivebidding Fivehundredorsostocksandshares biddingtechnique(C8) whicharethemostactivelytradedonthe Estimationofconsumers’valuationof STOCKEXCHANGEAUTOMATEDQUOTATION benefitsusingquestionnaires. systemafteralphastocks. Seealso:contingentvaluation Seealso:alphastock;deltastock;gamma stock bid price (G1) The selling price for UNIT TRUST units or Beveridge,WilliamHenry,1879–1963 shares of companies. (B3) Inmanysenses,thefounderoftheUK bid rent (Q2) WELFARESTATE.AfteraneducationatBal- The amount of money a household will liolCollege,Oxford,hewasalawFellow offer a landowner for space to provide a atUniversityCollege,Oxfordfrom1902 particular level of UTILITY. to1909,aswellasSub-wardenofToynbee References Hall,London,from1903to1905,where heinvestigatedcasuallabourandunem- Wheaton, W. (1977) ‘A bid rent approach to housing demand’, Journal of Urban ploymentintheLondondocks.AsDirec- Economics 4: 200–17. torofLabourExchangesattheUKBoard ofTradein1909–15hecreatedanational bid vehicle (Q2) systemofemploymentexchanges.In1919 A proposed means of payment based on asPermanentSecretaryoftheMinistryof surveys to make a CONTINGENT VALUATION, Foodhedevisedanationalfoodrationing e.g. the amount of cash charged to obtain scheme.From1919to1937asDirectorof a permit to hunt wildlife. theLondonSchoolofEconomicshe (G1) expandedtherangeofitsactivities,at- Big Bang The DEREGULATION of the London Stock tractingscholarssuchasHAYEKandHICKS, aswellasencouragingempiricalstudies. Exchange on 27 October 1986 which SubsequentlyhewasmasterofUniversity involved the ending of minimum dealing College,Oxford,from1937to1944,and commissions and the distinction between chairmanofthecommitteewhichdrewup dealers and jobbers. Under the fierce gale theBeveridgeReportonsocialsecurityin of competition, smaller firms found it 1942,whichwasexpandedintothecele- difficult to survive and even the larger bratedFullEmploymentinaFreeSociety firms withdrew from market-making by (1944),areportwhichlaidtheintellectual 1990. Firms anxious to be ahead of their foundationsformanypost-warUKwel- rivals offered grossly inflated salaries to farepolicies. prospective staff and the best of existing staff, making the volume of consequent References redundancies greater. Harris,J.(1977)WilliamBeveridge:a The seeds of the recent changes were Biography,Oxford:ClarendonPress. sown in the early 1970s when UK COMPETI-

© 2002 Donald Rutherford TIONPOLICYwasextendedtocoverthe centofworld tradingand85per centof provisionofservicesaswellasgoods.The UStrades. presentchangeswereforcedontheLon- BigMacindex(F3) donStockExchangewhen,toavoidin- Ameasureof thepurchasingpowerof vestigationundertherestrictivetrade differentcurrenciesusingthepricesof practiceslegislation,itagreedin1983to hamburgers soldbytheinternationalfood abolishminimumcommissionswithinthree chainMcDonald’s.Thiswasdevisedby years.TheabolitionofUKEXCHANGECON- TheEconomistofLondonandhasbeen TROLSin1979madeinternationalizationof calculated since1986.Thisindex,basedon theLondonmarketinevitable.Thefirst thetheoryofPURCHASINGPOWERPARITY,is stageofthesechangeswason1March calculated bydividingthepriceofa 1986whenfinancialinstitutionssuchas hamburger inthelocalcurrencyby its banksandinsurancecompanieswereal- priceinUSdollars.Thisratio,the implied lowedtoacquireholdingsinfirmsof PPP,iscomparedwiththeactualexchange stockbrokersandstockjobbers.Inthe ratetodeterminetheextentof acurrency’s USAtheequivalentsetofchangestook over-orundervaluationrelativetotheUS placeon1May1975andtheconse- dollar. TheBigMacwas chosenforcom- quencesofthoseweretheformationof parative purposesasitisapopularfast manynewfinancialconglomerates. fooditemproducedeverywheretothe Threeyearsofpreparationenabled same recipe. Londontoadjustquicklytothenew regime.Thehighvolumeoftradinginthe bigpush(O4) earlymonthsmadeiteasierforfirmsto Atheoryofsimultaneouseconomicdevel- adjusttolowercommissionsandtocope opmentin several sectors. Rosenstein- withthehugecostsofsettingupnew Rodan asserted that for economic devel- dealingsystems.Insteadoftheoldpractice opment to succeed there should be, as a ofchargingclientsonthebasisofprice minimum, several large investment pro- pluscommission,themajorityofdealsare jects in different industries in order to quotedatpricesnetofcommission.The secure INCREASING from nextstepwillbetousetheLondonsystem INDIVISIBILITIES in production. It was hoped toenablebrokersthroughouttheworldto that the scale of such development would quotepricestoeachother.Intheperiod reduce divergences between private and 1986–9,thevolumeofstockstradedin social products. However, the lack of Londonfellbyathirdandthenumberof resources of many Third World countries jobsfellby35,000,butmuchofthis made it unlikely that so ambitious a declinewastheconsequenceoftheBLACK scheme would be implemented. MONDAYstockmarketcrash. References Seealso:Mayday Rosenstein-Rodan, P. (1943) ‘Problems of industrialization in Eastern and south- References eastern Europe’, Economic Journal 53: Thomas,W.A.(1986)TheBig Bang,Ded- 202–11. dington:PhilipAllan. ——(1989) TheSecurities Market,Lon- bilateral aid (F4, O1) don:PhilipAllan. Aid flowing between a particular donor country and a particular recipient; often ‘BigBoard’(G1) TIED AID. The nicknamefortheNewYorkStock Seealso:foreignaid;multilateralaid Exchangesituatedat11WallStreetand establishedin1792.Itdominatesworld (L1) securitiesmarketsbyconducting60 perA market consisting of a MONOPOLIST and a

© 2002 Donald Rutherford MONOPSONIST. In many national economies Germany’s conversion from a silver to a there are examples of this form of mono- gold standard). poly in the public sector, e.g. when a state bimodal frequency curve (C1) education employer faces a single teachers’ A FREQUENCY CURVE with two maxima. UNION in the labour market. To analyse bilateral monopoly, as is the case with DUOPOLY, the interaction of both sides, buyer and seller, has to be considered. bill (G1, M2) 1 A short-term monetary asset. 2 An invoice stating the amount owed for the supply of goods or services. Seealso:billofexchange;commercial bill;tradebill;treasurybill bill of exchange (F1, G1) A short-term financial instrument, usually with a life of ninety days, which is used to finance foreign trade; in the nineteenth century it was widely used for short-term domestic borrowing. The Bills of Ex- change Act (UK) 1882 defined it as ‘an binary economy (P0) unconditional order in writing, addressed An ECONOMY with many personal incomes by one person to another, signed by the arising from both labour and capital. This person giving it, requiring the person to occurs because of widespread ownership whom it is addressed to pay on demand or of financial capital. Despite economies at a fixed or determinable future time a becoming capital intensive, this form of sum certain in money to or to the order of organization enables a high proportion of a specified person, or to bearer’. a population to share in rising incomes. Wider dispersion of wealth could promote bimetallism (E5, N2) social justice, democracy, efficiency and The use of two metals, usually gold and economic growth. silver, in a fixed ratio as the standard of value and ultimate means of payment. References This currency system met with the ap- Ashford, R. (1996) ‘Louis Kelso’s binary proval of Adam SMITH. The arguments for economy’, Journal of Socio-Economics bimetallism were that each metal would be 25: 1–53. more stable in value if connected with the Kelso, L.O. and Adler, M.J. (1958) The Capitalist Manifesto, New York: Ran- other, that the low production levels of dom House. gold caused falling prices and trade reces- sion, and that fixed exchange rates be- binomial charge (D4) tween countries on a pure gold standard A TWO-PART TARIFF consisting of a fixed and those on a pure silver standard would payment that allows a consumer access to be possible. The system was practised in the service and variable payments related the nineteenth century in the USA and in to the use made of the service, e.g. a tele- Europe in the Latin Union (a monetary phone rental and telephone call charges. alliance of France, Belgium, Switzerland, Seealso:pricediscrimination Italy, Greece and Romania formed in 1865 and abandoned in 1873 as a consequence bioeconomics (P0, Q0, Q2) of the large amount of Nevada silver and 1 The application of sociobiology to eco-

© 2002 Donald Rutherford nomics,firstsuggestedbyBECKERin Companies participating in this sector 1979.Itisarguedthatcompetitiveness falsify their accounts by omissions or andself-interest,notselfishnessand inaccurate entries. Rich and poor, capital- collectivism,whenbuiltintohuman ist and socialist, economies all have black genesproduceaneffectiveeconomic sectors. These sectors are prominent in systemofthecapitalisttype. India, Portugal, Italy, as well as the USA 2Astudyofeconomicbehaviourinits and the UK. The large black economy in naturalenvironment.HerbertSpencer, Italy could amount to 25 per cent of GROSS 1820–1903,aninspirationforCharles DOMESTIC PRODUCT. Methods of measuring Darwin,1809–82,producedanevolu- the black economy include a comparison tionaryaccountofsociety.MARSHALL of national income with national expendi- statedthatintheearlystagesoftack- ture (a method flawed through errors in linganeconomicproblemamechanical both of these aggregates) and the use of approachshouldbeusedbutlatera household expenditure surveys to calculate biologicalformofanalysis.Thisbranch undisclosed incomes through discrepancies ofeconomicshasflourishedbecauseof between household income and spending. anincreasedawarenessofenvironmen- Also, changes in the ratio of cash transac- taleconomics. tions to total transactions indicate that 3Theeconomicsofrenewablenatural many prefer the less detectable form of resources. trading central to the black economy. If tax authorities succeeded in discovering Seealso:altruism;economicman;homo these activities, they would risk stopping economicus;homosovieticus this form of work altogether. References References Georgescu-Roegen, Nicholas (1971) The Heertje, A., Allen, M. and Cohen, A. Entropy Law and the Economic Process, (1982) The Black Economy, London: Cambridge, MA: Harvard University Pan. Press. Smithies, E. (1984) The Black Economy in Hodgson, G.M. (ed.) (1995) Economics England since 1914, Atlantic Highlands, and Biology, Aldershot: Edward Elgar. NJ: Humanities Press; Dublin: Gill & Macmillan. blackboard trading (G1) A method of trading in small quantities blackfield site (Q3) which involves buyers writing their bids on Land virtually destroyed by heavy indus- one side of the blackboard and sellers trial use. their offers on the other side. When a deal is agreed, it is recorded on the sales panel black gold (Q4) as a binding future contract. The Chicago 1 Coal (originally). Mercantile Exchange deals this way in 2 Oil when it became a more important agricultural commodities. Under heavy source of energy than coal. trading, this method is abandoned. black knight (G3) black chip (G1) A company which makes a hostile take- A SECURITY issued by a black-dominated over bid for another firm. company quoted on the Johannesburg Stock Exchange. blackleg (J5) A worker who reduces the effectiveness of black economy (P0) a STRIKE by continuing to work during a The unofficial, and often illegal, part of a period of an industrial dispute. Police national ECONOMY. In it are tax evaders and protection has often been needed for such illegal producers of goods and services. dissenters.

© 2002 Donald Rutherford blackmarket(D4) Seealso:Thatcherism Anunauthorizedmarketwithtransactions contrarytogovernmentalregulations. Blaug, Mark, 1927– (B3) Marketsofthiskindareoftenfoundwhen Leading historian of economic thought, therearepriceorEXCHANGECONTROLSor education economist and biographer of therestrictionoftradingtoalistof the economics profession. Born in the authorizeddealers.Soviet-typeeconomies Netherlands and educated at Columbia werecharacterizedbythesemarkets. University. After working as a statistician at the US Department of Labor, he was BlackMonday(G1) assistant professor of economics at Yale StockmarketcrashinNewYorkand University (1954–62) before becoming Londonof19October1987.InLondon Professor of the Economics of Education theFTSEindexdroppedby500points. at the University of London Institute of Seealso:BradyCommission Education; since 1984 he has held chairs in England at Buckingham and Exeter and in References theNetherlandsatRotterdam.Hehas Bose, M. (1988) The Crash, London: written extensively on both human capital Mandarin Paperback. theory and labour forecasting and moved from an early interest in the Poor Laws Black–Scholes option pricing model and to wide-ranging (D4, G1) writing and editing of major works on the A formula for calculating the value of a history of economic thought. call or put EUROPEAN OPTION. This form of pricing takes into account the stock price, Seealso:Ricardiantheoryofvalue exercise price, risk-free interest rate, time to expiry and the standard deviation of the References stock return. Blaug, M. (1958) Ricardian Economics: A References Historical Study, New Haven, CT: Yale University Press. Black, F. and Scholes. M. (1972) ‘The —— (1970) An Introduction to the Eco- Valuation of Option Pricing Contracts nomics of Education, London: Allen and a Test of Market Efficiency’, Jour- Lane. nal of Financial Economics 27: 339–418. —— (1973) ‘The pricing of options and —— (1997) Economic Theory in Retro- corporate liabilities’, Journal of Political spect, 5th edn, Cambridge: Cambridge Economy 81: 637–57. University Press. —— (1999) Who’s Who in Economics, 3nd Blairism (E6) edn, Brighton: Wheatsheaf. The creed of the UK government led by from May 1997. It continued bliss point (D6) the public expenditure, education, privati- An optimal combination of PRIVATE and zation and trade union policies of the PUBLIC GOODS. This combination is derived previous Conservative governments but from a SOCIAL WELFARE FUNCTION. In the also adopted a socialist ‘tax and spend’ figure W1, W2 and W3 are different social policy with increased spending delayed welfare functions, BB is a grand utility until the NATIONAL DEBT was reduced. Other maximization frontier, P is the bliss point, aspects of this doctrine are the excessive Ux and Uy are ordinal preference func- targeting of most government-funded ac- tions and W = W(Ux, Uy) is a social tivities, economic regulation and govern- welfare function. At the bliss point P, ment centralization characteristic of social welfare is at a maximum because previous socialist regimes. Also called BB touches the highest welfare function and the . contour.

© 2002 Donald Rutherford blocktrade(G1)seeput-through BlueBook(C8,E6,J5) 1Theannuallypublishednationalincome andexpenditureaccountsoftheUK. 2Thedocumentsettingoutthetermsand conditionsofafirmagreedthrough COLLECTIVEBARGAININGorunilaterally imposedbyanemployer,e.g.theFord Agreement. bluechip(G1) Astockissuebyacompanyorcorpora- tionwithahighstandingbecauseofits earningsrecord.Suchsharesarechosenas abasisfortheFinancialTimes,DowJones andothershareindices.Thetermistaken fromthegameofpokerasthehighest References valuechipsusedareblue. Bator,F.M.(1957)‘Thesimpleanalysisof (J2) welfaremaximization’,AmericanEco- blue-collarworker nomicReview47:22–59. USexpressionforapersonengagedin manualemployment;usuallycontrasted blocgrant(H7) withaWHITE-COLLARworker.DE-INDUSTRIALI- TherevenuetransferredbytheUSfederal ZATIONandtheincreasingeducationofthe governmenttoastateorlocalgovernment labourforcehasreducedthenumberof sothatthelowerlevelgovernmenthas theseworkersand,also,labourunion sufficientrevenuestoprovideaservice,e.g. membership. education,atthestandarddesiredby centralgovernment. blueeconomy(P0) Theofficialeconomy,knowntoandre- blockeddevelopment(O1) cordedbygovernment.Thetermisderived EconomicDEVELOPMENTdeliberatelyim- intheUKfromthetermBLUEBOOK,the pededbyothermoredevelopedcountries. annualsummaryofthenationalincome Ithasbeenassertedthatdominantcoun- accounts. triesoftheworldhaveblockedthedevel- opmentofThirdWorldcountries,per- Seealso:blackeconomy;informalecon- omy;unofficialeconomy mittingthemonly‘PERIPHERALCAPITALISM’. References blue return (H2) Amin,S.(1976)UnequalDevelopment:An A self-assessment business income tax EssayontheSocialFormationsofPer- system, recommended by the SHOUP MISSION ipheralCapitalism,Hassocks:Harvester to Japan of 1949, for collecting taxes from Press;NewYork:MonthlyReview small and medium-sized firms. This system Press. was intended to encourage smaller busi- nesses to maintain minimal accounting blockofshares(G1) systems. Anyblockofmorethan10,000shares, accordingtotheNewYorkStockEx- blue-sky laws (G1, K2) changeRule390.Withfewexceptions,this US Securities Act 1933 and other US rulerequiresthatlistedstocksmustbe statutes which regulate and supervise the tradedontheflooroftheexchange,even US securities industry so that financiers ifsoldin‘blocks’. do not attempt to sell something which

© 2002 Donald Rutherford theydonotpossess,e.g.partofthesky,to studiedlawatParisandlaterbecamea anotherperson,ortodeviseotherfraudu- lieutenantofpolice.Heiscreditedwith lentinvestmentschemes. introducingtheprincipleofLAISSEZ-FAIRE. HismainworkwasDissertationdela Seealso:bubble;SecuritiesandExchange naturedesrichesses,del’argentetdes Commission tributes,ou`l’onde´couvrelafausseide´equi bogey(G1) re´gnedanslemondea`l’e´garddecestrois Thereturntoorincomefromaninvest- articles(1707). mentwhichisusedasthebenchmarkto bond(G1,M2) judgetheperformanceofafundmanager. 1Apromiseundersealtopaymoney. Movementsinastockmarketindexare 2Afixedinterestsecurityissuedbya oftenusedasabogey. government,corporationorcompany. Bo¨hm–Bawerk,Eugenvon,1851–1914 (B3) Seealso:deepdiscountbond;govern- mentbond;junkbond;straightbond LeadingeconomistoftheAUSTRIANSCHOOL anddiscipleofCarlMENGER.Hereadlaw bond fund (G1) atViennaUniversityandtheneconomics A fund established to receive the proceeds atHeidelberg,LeipzigandJenaUniversi- of a bond issue and to make subsequent ties;hisstudentcontemporarywasWIESER. disbursements. Such funds are often set up From1889to1893hewasacivilservant by local authorities. workingonincometaxandcurrencyre- form.Onthreeoccasions(1893,1896–7 bonding cost (M2) and1900–4)hewastheMinisterof The cost to an agent of putting up a BOND FinanceofAustria;in1902Universityof as a guarantee to meet losses. Bonding is Viennaappointedhimtoachair.Inhis common amongst travel agents and insur- economicwritings,hebeganwithatheory ance underwriters. ofvaluebasedonMARGINALUTILITYand bond market (G1) thenproceededtoatheoryofinterestand A market which raises long-term capital capital.Hislengthyexpositionofthe for governments and firms through bonds ROUNDABOUTMETHODOFPRODUCTION,possible bearing a fixed rate of interest, as well as throughtheuseofcapital,iscentraltohis arranging the trading of issued bonds. work.Productionmorecapitalisticinnat- urehasonaveragealongerperiodof bond rating agency (G1) production.Herefusedtorelatethepay- A financial markets specialist which rates mentofinteresttoeitherproductivityor the creditworthiness of the principal is- exploitation,assertingthatinterestispaid suers of bonds – governments, municipa- becausepresentgoodshaveahighersub- lities and corporations. Standard & Poor jectivevaluethanfuturegoods. and Moody’s are the leading US agencies of this kind. References Bo¨hm-Bawerk,E.von(1959)Capitaland Seealso:AAA;BB;BBB;D;DDD; Interest,3vols,trans.G.D.Hunckeand Prime-1 H.F.Sennholz,SouthHolland,IL:Lib- ertarianPress. bonus issue (G1) Kuenne,R.E.(1971)EugenvonBo¨hm- An issue to present shareholders of extra Bawerk,NewYorkandLondon:Co- shares in proportion to existing holdings. lumbiaUniversityPress. If issued without charge, known as a SCRIP ISSUE. Boisguilbert,PierreLePesantde, 1646–1714(B3) book value (M4) BornatSainte-CroixSaintOuendeRouen, The value of an asset as recorded in the

© 2002 Donald Rutherford booksoraccountsofafirmorother border is long, the products exported over organization.Oftenthisvaluationismade one part of a border will also be imported atthetimethatassetsareoriginally over another. This happens, for example, purchasedwiththeconsequencethat with building materials over the USA– changesinvaluecausedbyinflationare Canada border. ignored. borrower’s curse (G0) Seealso:inflationaccounting Having excessive optimism about a project boom(E3) that is loan financed. Apeakineconomicactivity,theupper borrower’s risk (G1) turningpointinthebusinesscycle.Booms The hazard of not knowing whether the arecharacterizedbyhighoutput,low expected returns to a project will materi- unemployment,speculativeinvestment alize. andmanyshortstrikes. Seealso: bottleneck (D2) A in the supply of a FACTOR OF boomandbust(E3) PRODUCTION which, if not remedied, can Thecharacteristicofacyclicaleconomy. add to inflationary pressures; hence an DespitetheoverallstabilityoftheUK economy with full employment suffers economy,forexample,inthelate1990s many bottlenecks. Also, lack of an appro- therewerefluctuationsinsomesectors, priate INFRASTRUCTURE has often been a especiallyagricultureandmanufacturing. major bottleneck impeding the develop- Seealso:cycles;stop–go ment of less developed countries. boomernomics (G1) bottom fisher (G1) US investment practice of investing in An investor who buys stock market secu- equities related to the expenditure carried rities whose prices have recently slumped out by the people born in the late 1940s in the belief the market has reached its after the ending of the war with Japan lower turning point. brought men home to marry in the USA. Seealso:bull bootblack economy (P0) bottom-line accounting (M2) A derogatory term for a national ECONOMY Accounting which is especially concerned dominated by LABOUR-INTENSIVE service in- dustries. Bootblacking is manual and non- with the net profit or earnings that exportable, unlike the products of modern, appears at the bottom of a profit and loss technologically advanced and internation- account. ally oriented service industries, e.g. bank- bottom-up linkage model (R0) ing and accounting. An interregional model of a national Seealso:services economy which aggregates the values of regional variables. The quality of these bootstrap (G1) models in many countries is affected by A self-fulfilling expectation: for example, shortages of regional data. the belief that investment is pointless because the economy is slowing down with References the consequence that the economy does go Ballard, K.P., Gustely, R.D. and Wend- into recession. ling, R. (1980) NRIES. Structure, Per- formance and Applications of a Bottom- border trade (F1) up Interregional Econometric Model, Importing and exporting across a border Washington, DC: Bureau of Economic which is often INTRA-INDUSTRY TRADE. If the Analysis.

© 2002 Donald Rutherford boughtdeal(G1) Kernan,C.E.(1974)CreativeTension:The Thepurchaseofastockissueora LifeandThoughtofKennethBoulding, portfolioofinvestmentsbyoneormore NewYork:BasicBooks. financialinstitutionsforresaleinwholeor Boulwareism(J5) part.Offloadingpartsofanacquired AsubstituteforcollectiveBARGAINING, portfoliohasbecomeeasierasthereare namedafterLemuelBoulware,theVice- nowsomanytypesoffinancialinstru- PresidentforIndustrialRelationsatGen- ment.Asthesedealscutdealingcosts, eralElectric.Itconsistedofacompany theyprovideapopularmethodforINVEST- makingaunilateralofferbasedonre- MENTTRUSTStoacquiresecurities. searchintoaunion’sdemands.Itwasheld Boulding,KennethEwart,1910–92(B3) bytheUSSupremeCourtin1969that ApolymatheconomistbornintheUK thiswasnotUScollectivebargaining whomadediversecontributionstomany in‘goodfaith’asintendedbytheTAFT– areasofUSeconomics.Hewaseducated HARTLEYACT. atOxford,ChicagoandHarvardUniver- boundaryconstraint(C1) sities.Hiscareer,whichbeganasan Thelimittothevalueofavariable,e.g. assistantlectureratEdinburghUniversity, zeroorpositive. wasspentchieflyatMichiganfrom1949 to1977andsubsequentlyatColorado.His Seealso:Tobitmodel writingbeganwithanarticleintheEco- boundedrationality(D0) nomicJournalin1932ondisplacement Atheoryofdecisionmakingtakinginto costandresultedintheproductionofover accountthecapacitiesofthehumanmind, 300articlesandtwelvebooks.Hismajor whichhasbecomeacentralthemeofBE- textbook,EconomicAnalysis,blendedto- HAVIOURALECONOMICS.Itassertsthatthe getherKEYNESIANISMandNEOCLASSICALECO- rationalchoiceofadecision-makeris NOMICS.In1950,inAReconstructionof subjecttocognitivelimitsbecausehuman Economics,heurgedatheoreticalswitch beingslackknowledgeandhaveonlya fromflowstostocks,fromincomesto limitedabilitytoforecastthefuture. assets,andfromthepricesoflabourand capitaltotheirnationalincomeshares.His Seealso:cognitivedissonance;economics closeexaminationofequilibriumlinked andpsychology;Simon priceandecologicalequilibria.Hisstudy References ofsocialorganizationcontrastedtheex- changesystemanditsthreatsystemofwar Cyert, R.M. and March, J.G. (1975) A withtheintegrativesystemofagrants Behavioral Theory of the Firm, 2nd edn, Englewood Cliffs, NJ: Prentice Hall. economy. Simon, H.A. (1982) Models of Bounded Seealso:grantseconomics Rationality, 2 vols, Cambridge, MA: MIT Press. References Boulding,K.E.(1945)EconomicsofPeace, bourgeoisie (D6, N3) NewYork:PrenticeHall. The capitalist middle class created by the ——(1950)AReconstructionofEconom- Industrial Revolution at the beginning of ics,NewYork:Wiley. the nineteenth century and regarded as ——(1966)EconomicAnalysis,4thedn, exploitative by MARX. The bourgeoisie was NewYork:Wiley. accused of wrongly appropriating surplus ——(1978)Ecodynamics,BeverlyHills, value from the product of the PROLETARIAT. CA,andLondon:Sage. ——(1981)APrefacetoGrantEconomics: bourse (G1) TheEconomyofLoveandFear,New Stock market of a European country. The York:Praeger. term is derived from the Bruges commod-

© 2002 Donald Rutherford ityexchangefoundedin1360infrontof JohnBradbury,PermanentSecretaryto thehomeofChevaliervandeBuerse. theTreasury,andwerealsoknownas TreasurynotesorUKcurrencynotes. Box–Jenkins(C1) TheBankofEngland’sdislikeofsmall Amethodologicalapproachtothestudy denominationnotesnecessitatedissueby ofTIMESERIESwhichhasimprovedshort- theTreasury.ThesmallestBankofEng- termeconomicforecastingbyfollowing landnoteuntil1928wasa£5note;inthat themethodofidentificationofeconomic year,£1and10shillingnoteswerein- relationshipsandthenestimationofthem cludedintheBankofEnglandissue. anddiagnosticchecking. Seealso:banknote References Box,G.E.P.andJenkins,G.M.(1970) BradyCommission(G1,K2) TimeSeriesAnalysis:Forecastingand USpresidentialcommissionwhichre- Control,SanFrancisco:Holden-Day. portedin1988ontheWallStreetstock marketcrashofOctober1987.Itsprinci- boycott(J5) palrecommendationswerethatoneinsti- 1Stoppingtradebyrefusingtodealwith tution,preferablytheFEDERALRESERVE aparticularcountryorsupplier.This SYSTEM,shouldhavethetaskofco-ordinat- formofprotest,firstusedagainstIre- ingfinancialregulation;thatclearingsys- land’slandlordsinthenineteenthcen- temsshouldbeunifiedasameansof tury,wasemployedagainstSouth reducingfinancialrisk;thatthereshould Africawhenapartheidwasinforce, bebetterinformation,includingthetrade, andinmanytradedisputes. timeoftradeandultimatecustomerin 2AnactionbyaTRADE(LABOR)UNION eachmajormarket;thatthereshouldbea whichpreventsafirmfromdistributing harmonizationofrulesonmargins;and itsgoodsinanattempttoforceitto that‘circuitbreakers’shouldbeco-ordi- concedetheunion’sdemands.However, natedacrossmarkets. industrialrelationslegislationandANTI- TRUSTlawintheUSAhaveincreasingly Seealso:circuitbreakermechanism madethisillegal. brain drain (F2) Seealso:economicsanctions International migration of highly qualified persons, especially surgeons, physicians, bracketcreep(H2) scientists, information technology specia- Themovementofincometaxpayersinto lists and engineers, from low-income coun- highertaxbracketsastheinevitablecon- tries to more prosperous economies, sequenceofthegrowthofmoneyincomes especially the USA. Differences in salaries withtheincomebandsforeachrateof and research facilities, as well as an over- incometaxremainingthesame.There- supply of specialized graduates in less sultsofthisarehighermarginaland developed countries, have occasioned this, averagetaxrates.TheTAXREFORMACT1986 resulting in an increase in the HUMAN CAPI- (USA)attemptedtoeliminatethiscreep TAL stock of advanced countries. Some byindexingtaxbracketsandreducingthe countries have proposed the repayment of numberoftaxbrackets. state financed education as a deterrent to Seealso:indexation; emigration. Rooker–WiseAmendment Seealso:immigration;migration Bradbury(E5) branch banking (G2) UKTreasurynoteof£1or10shillings A system of banking which permits a issuedin1914to1928afterthewithdrawal banking institution to operate at many ofgoldcoins.Thesewerenamedafter locations. This eighteenth-century Scottish

© 2002 Donald Rutherford inventionwasslowtobecopiedbyother brandtootherproducts.Thisisexten- countries:theUSAonlybegantoadoptit sively practised by tobacco companies. in1933.Branchbankingreducestherisk Brandt Commission (F3, O0) arisingfromanovercommitmenttothe The Independent Commission on Interna- financialneedstoasinglearea.MajorUK tional Development chaired first by Willy clearingbanksexpandedinthepast Brandt, previous Chancellor of West Ger- throughestablishinglargebranchnet- many, and then by Julius Nyerere, ex- works.IntheUSAinthelatetwentieth President of . Its first report, century,branchessprangupinresponseto North-South: a Programme for Survival theliberalizationofstatebankinglaws,the (1980), failed to produce any action; its growthofsuburbs,themovementofin- second report, Common Crisis: North- dustrytoperipherallocationsandthe South Cooperation for World Recovery difficultyofreachingbankssituatedin (1983), responded to the THIRD WORLD debt congestedcitycentres.TheInterstate problem by recommending the AMORTIZA- BankingandBranchEfficiencyAct1994 TION of old debts. permittedbranchbankingacrossUSstate boundaries. breakeven analysis (C1, D4) A graphical representation of the relation- brancheconomy(F4,P0) ship between total costs and total revenue Anationalorregionaleconomysubstan- with breakeven taking place where total tiallycontrolledelsewherebecausemanyof cost is equal to total revenue (i.e. average itsbusinessesareforeign-ownedsubsidi- cost is equal to average revenue). aries.TheScottisheconomyhasacquireda branchstatusthroughtheuseofregional policieswhichencourageinwardinvest- ment;inmanylessdevelopedcountries MULTINATIONALCORPORATIONShavesubstan- tiallytransferredeconomicpowerabroad. branding(L1,M3) PRODUCTDIFFERENTIATIONthatestablishes individualityforaparticularproduct.A producerhopestherebytogainameasure ofMONOPOLYPOWERthroughreducingthe amountofsubstitutionbetweenitspro- ductsandthoseofitscompetitors. Seealso:monopolisticcompetition brandloyalty (D1,M3) Aconsumer’s continuedpurchasingofthe samedifferentiatedgoodforaconsider- ableperiodoftime.Asfirmsbenefitfrom astableregulardemand,theywillmakeit anobjective oftheiradvertisingtoachieve thisgoal.Brandloyaltylowers theELASTI- breakeven level of income (M2) CITYOFDEMAND fora goodandgivesfirms The level of income at which all income is ameasureofMONOPOLYPOWER. consumed and no debts are incurred. Seealso:monopolisticcompetition breakeven pricing (C1, D4) brandstretching(M3) A firm’s policy of setting prices equal to Applyingthenameofanestablished average total costs with the consequence

© 2002 Donald Rutherford that neither SUPERNORMAL PROFITS nor losses bridefare (I3) are made. This was the original pricing A welfare programme in Wisconsin, USA, policy laid down for UK NATIONALIZED IN- enacted in 1994 that increased welfare DUSTRIES. benefits to teenage mothers who got mar- ried. Originally this amounted to $91 extra breakthrough (O3) for a single mother with one child on top A major technological change consisting of benefit of $440 per month. of a new method of production, a new product or a new market. bridge financing (G2) see bridging

Seealso:innovation bridging (G2) Bretton Woods Agreement (F3) Short-term lending needed by a borrower An agreement signed in Bretton Woods, prior to the receipt of permanent finance. New Hampshire, USA, in 1944 that cre- This financing is a popular way of effect- ated the INTERNATIONAL MONETARY FUND.It ing a major purchase such as a house, or set rules for exchange rate behaviour and of adjusting an investment portfolio. It is created a pool of COMMON CURRENCIES, often necessary as purchases are financed thereby making the IMF the world’s ‘len- by the delayed proceeds from the sale of der of last resort’. This agreement was a another asset. compromise between KEYNES’s proposals Bridlington rules (J5) for an INTERNATIONAL CLEARING UNION and TRADE UNION recruitment rules agreed by Harry White’s plan for an International the UK Trades Union Congress in 1939 at Stabilization Fund. Par values for ex- its Bridlington Conference to prevent change rates were fixed in terms of gold. trade unions competing with each other A country had to intervene if its exchange for potential members in the same occupa- rate was 1 per cent above or below par. An tional group. adjustment of more than 10 per cent was permitted if the IMF thought there was a Britannia (E5) fundamental disequilibrium (a condition UK gold coin issued since 1987 in denomi- vaguely defined) in a country’s BALANCE OF nations of £10, £25, £50 and £100. PAYMENTS. Temporary borrowings from the IMF were possible to support a currency. British depository receipt (G1) This GOLD EXCHANGE STANDARD of Bretton A means of purchasing US Treasury BONDS Woods was abandoned on 15 August 1971. in New York and settling in London Critics of Bretton Woods noted that the which was introduced in 1984. agreement did not provide a mechanism Seealso:Americandepositoryreceipt for changing inappropriate national ex- change rate policies, that it failed to make broad money (E4) national monetary and exchange rate po- M2 or M3. licies compatible, and that it discouraged frequent changes in exchange rate parities. brokered deposit (G1, G2) In practice, it was a DOLLAR STANDARD as A deposit obtained by stockbrokers for a most countries fixed their currencies bank in order to increase its liquidity. As against the US dollar. Its demise was such deposits seek the highest yield, they hastened by the problems created by the are highly volatile and consequently un- Vietnam War for the US economy. reliable as liquid assets. References broker loan rate (G1) Dormael, A. van (1978) Bretton Woods: US money market rate, usually 1–1½ per Birth of a Monetary System, London: cent below the US prime rate, charged on Macmillan. the debit balances of margin traders; often

© 2002 Donald Rutherford regardedasanindicatoroffuturechanges Seealso:Ashare inthePRIMERATEOFINTEREST. bubble (D4, G1) BrookingsInstitution(E6) 1 An unsustainable rise in an asset price. Anindependentcentrefoundedin1927in 2 A speculative venture. Famous bubbles Washington,DC,forresearchintoeco- include the Dutch tulip mania of 1625– nomics,government,foreignpolicyand 37 and the South Sea Bubble in Eng- othersocialsciences.Itisfamousforits land of 1720. Unless there are an forecastingmodeloftheUSeconomyand infinite number of traders, a bubble is foritsinfluentialstudiesofmajorecono- irrational in nature. mies,includingthoseofJapanandthe References UK.Taxation,internationaleconomics, growthandstabilizationhavebeenmajor Blanchard, O. I. and Watson, M.W. (1982) researchconcerns. ‘Bubbles, rational expectations and fi- nancial markets’, in P. Wachtel (ed.) References Crises in the Economic and Financial Fromm,G.andKlein,I.R.(1975)The Structure, Lexington, MA: Lexington BrookingsModel:PerspectivesandRe- Books. centDevelopments,Amsterdam:North- Carswell, J. (1960) The South Sea Bubble, Holland. London: Cresset Press. Kindleberger, C. (1978) Manias, Panics brownfield(Q3) and Crashes, New York: Basic Books; Landpreviouslyusedforindustrialpur- London: Macmillan. poseswhichrequiresreclamationbefore bubble economy (P1) newbuildingcanbeundertaken. 1 An economy engaged mainly in market- Seealso:blackfieldsite;greenfield ing currencies and securities rather than in material production. brown good (D2, L6) 2 An unstable economy likely to be de- A consumer durable used for leisure pur- flated after a burst of growth. The poses, e.g. a television set or a compact precarious nature of the NEW ECONOMY disc player. with different technologies is a modern Brundtland Report (Q0) example. The 1987 report of the World Commission bubble policy (Q2) on Environment and Development which A policy which allows an emitter of recommended that THIRD WORLD develop- pollutants to discharge more at one source ment projects should take into account if there is an equivalent reduction at other environmental issues such as the destruc- sources. An example would be a firm with tion of forests and excessive farming which two plants A and B being permitted to ruins agricultural land for a long time. increase its emissions at A if it reduces References them at B. World Commission on Environment and Buchanan, James McGill, 1919– (B3) Development (1987) Our Common Future, US economist, educated at the Universi- Oxford: Oxford University Press. ties of Tennessee and Chicago and pro- B share (G1) fessor of economics from 1956 at various 1 Chinese stock market share denomi- universities in Virginia; appointed Uni- nated in Chinese currency but payable versity Distinguished Professor and Gen- in foreign currency and designated for eral Director of the Center for the Study foreign investors. of , Virginia Polytechnic 2 An ordinary share of a UK company Institute, in 1969. He is famous for with voting rights. founding PUBLIC CHOICE THEORY: this unites

© 2002 Donald Rutherford the theories of market exchange and of the ples of these are vendors of unsold newly functioning of political markets. Inspired issued shares, and travel agents selling by a year in Italy (1955), where he read low-priced air tickets of airlines operating nineteenth-century European classics of their scheduled flights with many unoccu- PUBLIC FINANCE, he developed the concept pied seats. of a democratic government receiving taxes from consenting citizens in return (O4) for governmental services by establishing An approach to ECONOMIC GROWTH which constitutional rules to maintain majority takes into account spiritual development consensus. His wide-ranging critique of and does not squander NATURAL RESOURCES public sector economics relies on the no- so that all have a ‘right livelihood’. tion that costs are basically subjective; also References he departs from the doctrine of the MAR- GINAL COST PRICING of public utilities. His Buiter, W. (1989) Principles of Budgetary analysis of choice is extended to cover the and Financial Policy, Hemel Hempstead: behaviour of politicians, legislators and Harvester Wheatsheaf. Small is Beauti- bureaucrats. Schumacher, E.F. (1973) ful: a Study of Economics as if People Although a leader of the school of Mattered, ch. 4, London: Blond & public choice economics, he recognized Briggs. the early contribution of WICKSELL who discussed the distribution of the costs of budgetary policy (H2) proposed public expenditure. As Frank The principles underlying the revenue KNIGHT and Henry SIMONS were his mentors and expenditure accounts of a govern- when he was a postgraduate student at mental or other organization. The ac- Chicago, it is not surprising that his work counts used in a budget will reflect the has been loyal to the principles of capital- responsibilities of that organization and ism and individualism. In 1986, he was its relationships with others, e.g. a state awarded the NOBEL PRIZE FOR ECONOMICS for budget will show its financial relation- his work on public choice theory. ship with the federal government of that References country. In those accounts will be stated Buchanan, J.M. (1966) Public Finance in a the sources of revenue and objects of Democratic Process: Fiscal Institutions expenditure, a reflection of the taxing and Individual Choice, Chapel Hill, NC: and other fund raising carried out and University of North Carolina. the spending programmes chosen by that —— (1972) Theory of Public Choice: government or firm. It is usual to divide Political Applications of Economics, budgets into current and capital budgets. Ann Arbor, MI: University of Michigan An overall budgetary policy can be Press. Buchanan, J.M. and Tullock, G. (1962) summarized by whether it is balanced, The Calculus of Consent, Ann Arbor, in surplus or in deficit. Until Keynesian MI: University of Michigan Press. policy ideas influenced governments, gov- Reisman, D. (1990) The Political Economy ernment budget deficits were regarded as of James Buchanan, Basingstoke: Mac- a sign of financial recklessness; now millan. budget deficits are regarded as a fiscal policy option available to most govern- bucket shop (L2, L8) ments. An agency selling goods, services or securities at a discount. The main exam- Seealso:fiscalpolicy

© 2002 Donald Rutherford References that such payments discourage the supply Report of the President’s Commission on of labour. Budget Concepts, Washington, DC: US budget incidence (H2, H5) Government Printing Office, 1967. The total effect on a household of the budget constraint (D0) taxation and expenditure policies of a A line showing the maximum amount of government. goods, in different combinations, which a Seealso:taxincidence consumer can obtain from his or her income. It is drawn in combination with budget line (D0) see budget constraint INDIFFERENCE CURVES to indicate the max- Budget Resolution (H5) imum utility which can be obtained from The statement passed by the US Senate a particular level of real income. In the and House of Representatives which de- figure, if AB is the budget line and I1,I2 tails spending outlays and authorizes the and I3 are indifference curves, then M is future expenditure of moneys for specific the combination of quantities of goods purposes. X and Y at which this consumer max- imizes utility. The slope of this budget budget year (H5) line shows the relative prices of the two The fiscal year chosen by national finance goods; a shift of the line away from the ministries and treasuries. In the UK the origin indicates an increase in real in- year runs from 5 April to 4 April of the come. next year; in the USA from 1 October to 30 September of the following year. buffer stock (E4, F3) 1 An accumulation of a commodity for the purpose of stabilizing its world price. The stock built up provides a means of intervention, particularly in the markets for metals, oil and agricul- tural produce. Buffer stock managers buy in the commodity in times of falling prices and sell when prices are rising. But there are limits to the efficacy of buffer stocks – for example, the major price fall of tin in 1985 was so cataclys- mic that the managers were unable to prevent it. Governments have financed many of these stocks to maintain the incomes and employment of primary producers. 2 A cash balance which can absorb un- expected variations in expenditure and budget cutting (H5) income. Proposals to reduce planned public expen- References diture. In the USA, this has been a Laidler, D. (1984) ‘The buffer stock notion prominent feature of recent SUPPLY-SIDE ECO- in ’, Economic Jour- NOMICS and has taken the form of attempts nal (Supplement) 94: 17–34. to reduce federal outlays for civil pur- poses. A major cut proposed has been in building and loan association (G2) social transfer payments, on the grounds US co-operative association whose stock-

© 2002 Donald Rutherford holdersoffermortgageloansforthepur- banksorinsurancecompanies.The1986 chaseorbuildingofhouses. Actfreedthemfrommanyrestrictions, changingtheircharacterfromorganiza- Seealso:buildingsociety;savingsand tionswithsocialaimstocompetitivefirms loanassociation withacommercialorientation. BuildingSocietiesAct1986(G2,K2) Seealso:thrift UKstatutewhichliberalizedtheoperating rulesforbuildingsocietiesandaligned built-instabilizer(E6)seeautomatic themwithotherfinancialinstitutions.The stabilizer societieswereallowedtolendtonon- bulge-bracket firm (G2) members,holdanddeveloplandasa A top investment bank of the USA, one of commercialassetandinvestincompanies the leading oligopolists of the US securi- andothercorporatebodies.Alsodiversifi- ties industry. The separation of commer- cationintobanking,insurance,invest- cial from investment banking under the ment,trusteeshipandexecutorship,and GLASS–STEAGALL ACT protects their privileged landmanagementserviceswasallowed. position. Liquidassetswerelimitedtoathirdofa society’sassets.Insteadofbeingrequired bull (F3, G1) tohave90percentoftheirloanssecured A speculator who, expecting prices of byproperty,buildingsocietieswereper- shares, commodities or currencies to rise, mittedtoreducethatproportionto75per will buy now and sell after prices have centby1992,enablingthemtohave risen, thereby making a capital gain. The broaderinvestmentportfolios.Anew opposite is a BEAR. BuildingSocietiesCommissionregulates bulldog bond (G1) thebuildingsocieties. A bond denominated in sterling by a BuildingSocietiesAssociation(G2) company whose accounts are in another UKassociationofbuildingsocietieswhich currency. jointlyrepresentstheirinterests.Whenit bulldog issue (G1) fixedcommonmortgageinterestrates,it A long-term sterling bond issue, mostly wasapowerfulCARTEL. purchased by UK INSTITUTIONAL INVESTORS. buildingsociety(G2) bullet strategy (G1) AUKfinancialinstitutionprimarilycon- An investment rule to concentrate the cernedwithraising,throughmembers’ securities in a portfolio at one point of deposits,astockorfundformaking the YIELD CURVE. advancestothemsecuredonlandand buildingsforresidentialuse,accordingto bullion (E4) theBUILDINGSOCIETIESACT1986.Asthey Gold or silver ingots or bars used as bank standbetweenthosewhosaveandthose reserves and as private stores of wealth. whoultimatelyborrowmoney,theyactas Seealso:goldbullionstandard financialintermediaries.Allofthemwere foundedaslocalnon-profit-makinginsti- Bullionist controversy (N2) tutions,theearliestdatingfromthe1840s. A major debate in classical monetary Throughmergerssomesocietiesacquired theory from 1797 to 1825 which was apowerrivallingthatofthemajorbanks occasioned by the suspension of cash and,likethelatter,offeringawiderange payments, i.e. the inconvertibility of the offinancialservices.In1900,therewere pound sterling, during the Napoleonic 2,286buildingsocieties;in1990,105;in Wars. The Bullionists, named after the 2000,67.Therecentdeclineintheir supporters of the Bullion Committee’s numbersoccurredthroughmergerswith report of 1810 to the House of Com-

© 2002 Donald Rutherford mons, included RICARDO: they recom- mended a restoration of convertibility as soon as practicable. During the period of suspension, the Bank of England was accused of over-issuing banknotes and creating much of the wartime inflation. However, Henry THORNTON, a commercial banker, in his brilliant Paper Credit, took a broader view of money and the banking system.

Seealso:CurrencySchool

Bullock Committee (J5, L2) UK governmental committee on workers’ participation in the management of com- panies which reported in 1977. The com- mittee, headed by the historian Lord Bullock and consisting of trade unionists, employers and industrial relations experts, Bundesbank (E5) was asked to devise a scheme based on the Germany’s CENTRAL BANK which replaced assumption that there is a need for a the Reichsbank in 1957. Its principal duty radical expansion of industrial democracy has been to safeguard the value of the through trade union representation. The currency by regulating the quantities of trade unionists and academic experts in money in circulation and of credit in the the majority recommended that UK com- economy. Although expected to support panies with more than 2,000 employees the government’s general economic policy, should reconstitute their boards of direc- it is independent of instructions from the tors according to a ‘2x + y’ principle of government. The bank’s president chairs equal numbers of employee and share- fortnightly meetings of the Bank Council holder representatives (2x) and co-opted on which bank directors and presidents directors (y). This was intended to be an from the federal states sit; the council fixes extension of COLLECTIVE BARGAINING into the interest rates and credit policy. Also, the boardroom. The minority report recom- Bundesbank decides on the size of the note mended two-tier (supervisory and execu- issue, is custodian of the nation’s gold and tive) boards following the European foreign currency reserves and is in charge example of West Germany. The report’s of official dealings in foreign exchange recommendations were not embodied in markets. The Bundesbank’s contribution legislation. to low German inflation in the past has References been praised, but critics have accused the bank of setting money market interest rates Committee of Inquiry on Industrial De- which were too high on several occasions, mocracy (1977) Report, London: HMSO, risking recession in the economy. Cmnd 6706. References bunch map (C1) Frowen, S.F. and Pringle, R. (eds) (1998) A set of lines from the origin of a graph Inside the Bundesbank,NewYork:St with each line measuring a coefficient Martin’s Press; London: Macmillan. between two variables. These maps have been used to check for the presence of bundleddeal(D0)seeinterlinked MULTICOLLINEARITIES in data. transaction

© 2002 Donald Rutherford bundling(D0) the US FEDERAL RESERVE SYSTEM from 1970 Thesaleoftwoormoregoodsorservices to 1978, where he practised his conserva- inapackagedeal.Asellerisableto tive monetary beliefs. As US Ambassador increasesalesoflesspopularitemsby to West Germany in 1981–5 he negotiated combiningthemwiththoseingreatde- the German Treaty of 1982 to obtain more mand. German logistic support for US troops. His final years were spent in research at Seealso:mixedbundling;purebundling the American Enterprise Institute. In his References important exposition of business cycle Adams,W.J.andYellen,J.L.(1976)‘Com- theory (with Wesley Mitchell) he compiled moditybundlingandtheburdenofmono- a list of economic indicators which became poly’,QuarterlyJournalofEconomics the basis of business cycle forecasting in 90:475–98. the USA after 1945. He calculated ‘refer- ence cycles’ as the single indicator of bunnybond(G1) turning points in cycles. A noted anti- Afixedinterestsecurityentitlingthe Keynesian in economic policy matters. holdertoaninterestpaymentincashor tomoreunitsoftheasset. References Burns, A.F. (1946) Economic Research and buoyanttax(H2) the Keynesian Thinking of Our Times, Ataxwitharisingyieldbecauseof Washington, DC: National Bureau of increasesintheextentoftheTAXBASE,e.g. Economic Research. throughrisesinincomeorpropertyvalues. —— (1954) Frontiers of Economic Knowl- edge, Princeton, NJ: Princeton Univer- BureauofEconomicAnalysis(H1) sity Press. ThebranchoftheUSDepartmentof —— (1969) The Business Cycles in a Commerceresponsibleforassemblingand Changing World, New York: National publishingUSnationalincomeaccounts. Bureau of Economic Research. Burns, A.F. and Mitchell, W.C. (1946) Seealso:NationalIncomeandProduct Measuring Business Cycles, Washington, Accounts DC: National Bureau of Economic Re- search. BureauoftheBudget(H1) Mullineux, A. (1990) Business Cycles and AUSfederalbureaucreatedwithintheUS Financial Crises, Hemel Hempstead: TreasurybytheAccountingAct1921to Harvester Wheatsheaf. provideoperationalcontroloverexpendi- tureprogrammes.In1939itwastrans- business cycle (E3) ferredtothePresident’sOffice,atwhich ‘A type of fluctuation found in the aggre- timeitchangeditsfunctionincreasinglyto gate economic activity of nations that ensuringmanagerialefficiency. organize their work mainly in business Seealso:OfficeofManagementandBud- enterprises: a cycle consists of expansions get occurring at about the same time in many economic activities, followed by similarly Burns, Arthur Frank, 1904–87 (B3) general , contractions, and revi- An Austro-Hungarian who emigrated to vals which merge into the expansion phase the USA in 1914; educated at Columbia of the next cycle; this sequence of changes University and professor at Rutgers Uni- is recurrent but not periodic; in duration versity from 1927 to 1958. Principally business cycles vary from more than one renowned for his BUSINESS CYCLE research year to ten or twelve years’ (Mitchell). at the NATIONAL BUREAU OF ECONOMIC RE- Previously these were known as periodic SEARCH, Washington, DC, in 1930–44 and ‘commercial crises’. The NATIONAL BUREAU chairman of the Board of Governors of OF ECONOMIC RESEARCH has studied these

© 2002 Donald Rutherford cyclessince1920.HABERLER,inanexten- Movements,3rdedn,London:Allen& sivesurveyofbusinesscycleresearch, Unwin. notedthemanypossiblecausesofcycles, Mitchell,W.C.(1927)BusinessCycles:The includingcreditchanges,overinvestment, ProblemanditsSetting,NewYork: NationalBureauofEconomicResearch; costsofproduction,underconsumption, London:Pitman. masspsychology,variationsinharvests– theinteractionoftheMULTIPLIERandthe BusinessExpansionScheme(G2) ACCELERATORandinternationalinfluences. UKinvestmentschemeintroducedin1981 Morerecently,thecycleofelectionsin toencouragesmallbusinesses,especially democraticcountrieshasbeenassociated bygivingthemaccesstothefinance withfluctuationsinnationaleconomies. providedbytheUNLISTEDSECURITIESMAR- (Seefigure.) KET.Taxincentivesareavailabletoinves- torsinthesebusinesses. Seealso:acceleratorprinciple;Juglarcy- cle;Kitchincycle;Kondratieffcycle;Kuz- businessorganization(M1) netscycle;politicalbusinesscycle Aparticularlegalarrangementforowning afirm.Theprincipaltypesofbusinessare References thesoletrader,thepartnershipandthe Bowers,D.A.(1985)AnIntroductionto company/corporation.Theseformshave BusinessCyclesandForecasting,Read- differentliabilitiesfordebtandvarying ing,MA,andWokingham:Addison- numbersofowners.Thereislimitedliabi- Wesley. lityfortheshareholdersofcompaniesand Burns,A.F.andMitchell,W.C.(1946) corporationshavelimitedliability,butsole MeasuringBusinessCycles,NewYork: tradersandmembersofpartnershipsare NationalBureauofEconomicResearch. unlimited. Haberier,G.(1958)ProsperityandDepres- sion.ATheoreticalAnalysisofCyclical Seealso:limitedpartnership

© 2002 Donald Rutherford businessstudies(M0) ThetechniquesofDEMANDMANAGEMENT Themultidisciplinaryanalysisofthe thattheyemployedwerebasedona problemsofbusiness,usingeconomic, mixtureofplanningandmarketfreedom. accounting,psychological,legalandsta- Thisformofmacroeconomicpolicywas tisticalmethods.Itblossomedasasub- criticisedforentailingtoomanymonetary jectasaconsequenceofthe andfiscalchanges. establishmentofbusinessschools,espe- Seealso:mixedeconomy ciallytheWhartonSchoolofFinance andCommerceinPhiladelphiain1881 butterflyeffect(C0,E0,F0) andtheHenleyAdministrativeStaff Thelargedifferencesinthevaluesof College(UK)in1947.Thesepostgradu- dependenteconomicvariablesasaconse- ateschools,thechiefpractitionersof quenceofminusculedifferencesinin- businessstudies,havereducedmany puttedeconomicvariables.Thistypeof managerialinefficiencieswhichusedto effectmakesitdifficultforpolicy-makers beregardedastheprincipalcauseof tobesureoftheeffectsoftheirdecisions. DISECONOMIESOFSCALE.Thedistinctivedis- Foreignexchangemarketsoftendisplay ciplinedevelopedbythesubjecthasbeen butterflyeffects. ORGANIZATIONTHEORY. Seealso:chaostheory Butskellism(E6) buyers’ market (D4) Thesimilareconomicpoliciespursuedby A market in which buyers have a domi- HughGaitskellandR.A.ButlerasChan- nant influence on price because of excess cellorsoftheExchequerintheearly1950s. supply. Contrast with SELLERS’ MARKET.

© 2002 Donald Rutherford C

C (E2, G2) bury. The final report, issued in December 1 Total consumer expenditure of a na- 1992, recommended at least three non- tional economy. This is shown as a executive directors on boards of directors, function of national income in the CON- checks on the power of any individual SUMPTION FUNCTION. with ‘unfettered powers of decision’ and 2 The lowest quality of security, accord- an audit committee of non-executives. ing to Standard & Poor, as such secu- (F0) rities have no interest paid on them. Cairn’s Group The group of major agricultural exporting Seealso:AAA;BB;BBB;D;DDD countries founded in 1986 and based in cable (F4) Australia. It consists of Argentina, Aus- Transactions between the dollar and ster- tralia, Brazil, Canada, Chile, Colombia, ling in foreign exchange trading. Fiji, Hungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand and cabotage (L9) Uruguay. It seeks to liberalize trade in 1 Coastal and commercial navigation be- agricultural products, especially through tween ports. reductions in agricultural export subsidies 2 Permission for an air carrier of a and barriers to consumer markets: these foreign country to pick up passengers entail changes in national agricultural or freight in another country for trans- policies. The group also acts as the repre- port to a third country. sentative of these countries in GENERAL AGREEMENT ON TARIFFS AND TRADE talks. cab rank rule (J4) The customary regulation that UK barris- call (G1) ters must accept a brief appropriately An order to pay a further instalment of priced if it is within their competence. cash for the purchase of shares. cadastral survey (H2) call centre (L2) A survey of the ownership, extent and Business premises where workers dealing value of land usually undertaken for taxa- with incoming and outgoing telephone tion purposes. calls undertake market research, sell pro- Cadbury code of corporate governance ducts or answer customer enquiries. These (G3) centres have been criticized for the low The recommendations of the Committee rates of pay offered and for strict working on the Financial Aspects of Corporate conditions. By 2001 there were in the UK Governance chaired by Sir Adrian Cad- about 7,000 call centres of all sizes em-

© 2002 Donald Rutherford ployingintotalabout400,000workers.A ControversiesintheTheoryofCapital, centrewithfewerthantwentystaffis Cambridge:CambridgeUniversityPress. calleda‘pocketcentre’. CambridgeEconomicPolicyGroup callmoney(E4,G2) (B2,H3) MoneylentwithintheCityofLondonby AgroupofCambridgeeconomistsledby CLEARINGBANKStoDISCOUNTHOUSESfor WynneGodleywhorecommendedanex- shortperiods,sometimesonlyovernight, pansionaryfiscalpolicyandimportcon- andimmediatelypayableondemand.This trolsinordertoalleviateUKunemployment isrankedaftercashanddepositswiththe after1974.TheyopposedtheuseofDEMAND BankofEnglandasthemostliquidasset MANAGEMENTandINCOMESPOLICIESascen- oftheUKclearingbanksasitcanbe tralinstrumentsfordeterminingthelevel recalledatanytime. ofAGGREGATEDEMAND. calloption(G1) Seealso:NewCambridgeeconomics Therighttobuyastockexchangesecurity Cambridge School (B1, B2) atthecurrentpricewithinaspecified Successive generations of economists at period,normallythreemonths. Cambridge University, particularly after CambridgeCircus(B2) the establishment of the separate Econom- Severalyoungeconomistswhodebated ics Tripos in 1903. The school was withKEYNESintheearly1930sthedevel- founded by MARSHALL and was made fa- opmentofhisideasinATreatiseof mous in the 1930s by KEYNES, its intellec- Money(1930)intothetheoriescentralto tual leader. After 1945 its prominent TheGeneralTheoryofEmployment,Inter- leaders included KALDOR, , estandMoney.ThegroupincludedJoan SRAFFA and Wynne Godley. A succession ROBINSON,RoyHARROD,RichardKAHN, of ideas has occupied the school in the JamesMEADEandPieroSRAFFA. post-war period: in the 1950s, the refine- ment of Keynesian ideas; in the 1960s, ‘the References CAMBRIDGE CONTROVERSIES’ about CAPITAL; Keynes,J.M.(1985)CollectedWorks,Vols and, more recently, an examination of the XIIIandXXIX,London:Macmillan. nature of markets to show that MARKET Cambridgecontroversies(D3,E0) CLEARING is so poor that DISEQUILIBRIUM is DisputesbetweeneconomistsinCam- a major economic problem. bridge,England(ROBINSONandKALDOR), Seealso:NewCambridgeeconomics andCambridge,Massachusetts(SOLOW andSAMUELSON),aboutthenatureofCAPI- Canal Age (N7) TAL.Inparticular,theEnglishcontestants The period 1757–1830 in UK history when attackedtheneoclassicalassumptionsof a network of 4,250 miles (6,800 km) of theirtransatlanticopponentsbyquestion- navigable rivers and canals was created to ingtheexistenceoftheaggregatePRODUC- transport agricultural produce and the TIONFUNCTION.Also,theydebatedthe manufactures of the Industrial Revolution. theoryofprofitsandcapital,thedetermi- It was succeeded by a railway age. nationofsavingsandtheinterestrate, canons of taxation (H2) aggregatecapitalandthere-switchingof Adam SMITH’s criteria for taxes: equality techniques. (based on a person’s ability to pay), References certainty (the time for payment, manner Blaug,M.(1975)TheCambridgeRevolu- of payment and quantity to be paid tion:SuccessorFailure?,rev.edn,Lon- should be clear), convenience (payable at don:InstituteofEconomicAffairs. the time the taxpayer is in receipt of Harcourt,G.C.(1972)SomeCambridge income) and economy in collection.

© 2002 Donald Rutherford References sellergivesfundstocoverinterestpay- Smith,A.(1776)TheWealthofNations, mentsoveraspecifiedrate.Alsoappliesto ed.R.H.CampbellandA.S.Skinner, anadjustableratemortgage. BookV,ch.II,PartII,Oxford:Clar- endonPress,1976. Seealso:collar;floor capacity(D2,E4) Cantilloneffect(E4) 1Themaximumoutputthatafirmora Thedifferentialimpactofanincreaseinthe nationaleconomycanproducefromits moneysupply.Asdifferentrecipientsof existingsupplyoffactorsofproduction. extracashhavedifferentusesforit,there Afirmcanincreaseitscapacitybyen- willbeachangeintherelativedemandfor, largingitslabourforceoritscapitalstock. andrelativepricesof,goodsandservices. 2Themaximumamountofmoneywhich Therateofinterestwillfalliftherecipients afinancialinstitutioncanlend. oftheextramoneysaveandinvest. Seealso:capitalutilization Cantillon,Richard,c.1680–c.1734(B3) Irish-bornbankerandeconomistwho capacitycharge(D4,M2) spentmuchofhislifeinFrancewherehe Acomponentofthepriceofthegoodsor madealargepersonalfortuneafterthe servicesofpublicenterpriseswhichis collapseofJohnLAW’sMississippiCom- expectedtocoverthecostsoffixedcapital. pany.Hiswritingsoneconomics,other capacityratio(J2)seevolumeratio thantheEssaisurlaNatureduCommerce enGe´ne´ral,appeartohaveperishedwith capacityutilization(D0,E0) himwhenhishouseinAlbemarleStreet, Theratiooftheactualoutputofafirm, London,wasburntdown.Hisremarkable industryornationaleconomytoitsmax- Essaishowedhiskeenreadingofseveral imumoutputatapointintime.Thisratio economists,includingPETTY,andhisim- willfluctuatecyclically.Ahighdegreeof mensepracticalknowledgeofbanking.In utilizationwillbeasignalformorenet manysensesheanticipatedQUESNAYand investment. otherPHYSIOCRATSbysettingoutamodel Seealso:acceleratorprinciple;tradecycle oftheeconomywithvillages,market townsandcitiesengagedinmutualex- capital(D0, E0) changes.Also,hepowerfullyexplainedthe 1Durablegoodscapableofproducing a roleoftheENTREPRENEURineconomic streamof goodsorservicesovera activity,withamoreplausibleexplanation periodoftime. thanSmith’sINVISIBLEHANDpostulate.His 2Afactorofproductiondistinctfrom analysisofexchangerates,openmarket land, theentrepreneurandthelabour operationsandthebankcreditmultiplier currentlybeingused. giveshisworkamodernfocus. 3Asum ofmoney whichisinvestedin a businessenterprise. References 4Accumulatedexpenditures givingrise to Cantillon,R.(1755)EssaisurlaNaturedu highersubsequentincomes, as in HUMAN CommerceenGe´ne´ral,Englishtrans. CAPITAL. H.Higgs,London:Macmillan,forthe 5 Wealth. RoyalEconomicSociety,1931. 6 Stored-up labour; exchange value which Murphy,A.E.(1986)RichardCantillon: is becoming wealth, according to Marx. EntrepreneurandEconomist,Oxford: ClarendonPress. Seealso:Cambridgecontroversies;capital theory cap(E4,G1) Themaximuminterestratepaidona capital account (F4) floatingratesecuritybyitsissuer.The A balance of payments account which

© 2002 Donald Rutherford records the flow of capital assets between probable returns from securities invested one country and the rest of the world. then, and that investors can borrow or World interest rates will have a major lend unlimited amounts of money at a influence on a country’s capital account, risk-free rate of interest. The publication as capital mobility is stimulated by differ- of beta statistics for many shares has often ences in the rates of return to financial enabled investors to increase the overall assets in different countries. return to their portfolios. Criticisms of the model are directed chiefly at its assump- capital accumulation (E2) tions. Increasing the capital stock by undertak- ing investment in excess of REPLACEMENT References INVESTMENT. This accumulation has been Levy, H. and Sarnat, M. (eds) (1977) viewed as the expansion of the productive Financial Decision Making under Uncer- potential of the economy and as the tainty, New York: Academic Press. adjustment of the amount of capital to Merton, R.C. (1973) ‘An intertemporal capital asset pricing model’, Econome- the equilibrium level necessary to achieve trica 41: 867–87. an optimal allocation of scarce resources. Adam SMITH attributed this investment to capital-augmenting technical progress a person’s desire for betterment; MARX to (O3) the innate greed of capitalists. Today, the Technical progress which increases output principal motivation is to achieve a desired even though the rate of investment re- rate of economic growth. mains the same as measured in machine hours. capital adequacy (G0) Sufficient capital to protect depositors and capital budgeting (M2) counter-parties from the risks present in a Appraising the financial implications of bank’s balance sheet and off-balance sheet investment plans using techniques such as activities. Rules have been devised to calculating DISCOUNTED CASH FLOW, NET PRE- ensure adequacy, especially by the Basle SENT VALUE, PAYBACK METHOD and RATES OF Committee on Banking Supervision. The RETURN. As major investments are risky committee issued the Capital Accord 1988 and irreversible, capital budgeting is a (revised 1999, 2000). This included a mini- crucial managerial activity of firms. mum capital 8 per cent of liabilities, with higher requirements for each of the five capital consumption (M2) classes of asset according to risk. Subse- DEPRECIATION. Given that fixed assets have quently the committee experimented with only a limited life-span, it is necessary to internal models to calculate market risks add to the annual costs of an enterprise or of capital and ordered more disclosure of a national economy an estimate of the information. Other capital adequacy tests amount notionally spent on the wear and are based on measuring liquidity, solvency, tear of such assets. Capital consumption is market and settlements risks. deducted from the gross national product to obtain the net national product, or capital asset pricing model (G1) NATIONAL INCOME. A model which demonstrates that the reward for holding a risky security which capital controls (F2) is part of a well-diversified portfolio is Barriers to the flow of capital between based on its BETA risk. It is assumed that countries erected in order to calm finan- the securities market is in a state of cial markets and provide short-term pro- frictionless PERFECT COMPETITION, that inves- tection for a country with a balance of tors invest for the same length of time and payments deficit. The UK suddenly aban- have identical expectations concerning the doned its controls in 1979; in the

© 2002 Donald Rutherford EuropeanUnioncontrolshavebeenpro- 4Productionmotivatedbytheprofit gressivelyabandoned. motive. capitaldeepening(E2,O4) Investmentwhichproducesanincreasein ThePHYSIOCRATSandclassicaleconomists aCAPITAL–LABOURRATIObecausethecapital suchasSMITHregardedcapitalismasthe stockgrowsatafasterratethanthe naturalformofeconomicorganization labourforce. baseduponman’spropensitytotruckand Seealso:capitalwidening barterandlikelytobethemostsuccessful inincreasingECONOMICWELFARE.MARXcri- capitalflight(F2) ticizedmanydefinitionsofcapitalismfor Acapitaloutflowfromaparticularcoun- beingtimeless,ignoringthedifferenthis- try.Thisisbroadlydefinedasallpur- toricalformsittakes,andfortheinstitu- chasesofforeignassets(otherthanto tionofprivateproperty,whichprevents increaseofficialreserves),togetherwith thereconciliationofindividualandgen- theerrorsandomissionsitemofaBAL- eralinterests,causingthealienationof ANCEOFPAYMENTS;narrowly,itcanbe workers.Marxistshaveclassifiedcapital- regardedasshort-termcapitaloutflows ismintodifferentstages,namelyagricul- (hotmoney)pluserrorsandomissions. turalcapitalism,merchantcapitalism, capitalgainstax(H2) industrialcapitalismandstatecapitalism. Ataxbasedontheincreaseincapital Seealso:creativedestruction;fundamen- valueofanassetbetweenitspurchaseand alcontradictionofcapitalism;industrial itssale.Thistaxdiscouragesinvestors capitalism;latecapitalism;lemonade-- fromadjustingtheirportfoliosandreduces standcapitalism;merchantcapitalism; businessforstockbrokers.Thecountry monopolycapitalism;peripheralcapital- withthehighestrateoftaxisAustralia ism;personalcapitalism;popularcapital- (48.5percent)followedbytheUKand ism;socialism;statecapitalism;state theUSA. monopolycapitalism capitalincometax(H2) References Ataxleviedonthereturnsfrominvest- Dobb, M. (1946) Studies in the Develop- mentsorcapital.Oftensuchataxislevied ment of Capitalism, London: Routledge. atahigherratethantaxesonemployment Graham, D. and Clarke, P. (1986) The incomes. New Enlightenment: The New Birth of Liberalism, London: Macmillan. capitalintensive(D2) Hirschman, A. O. (1982) ‘Rival interpreta- Aformofproductionusingmuchphysical tions of market society: civilizing, de- capitalperunitoflabourinput.The structive, or feeble’, Journal of Economic degreeoffactorintensityisusuallymea- Literature 20 (December): 1463–84. suredbytheslopeofanISOQUANT. Tribe, K. (1981) Genealogies of Capitalism, Seealso:capitaldeepening;labourinten- London: Macmillan. Wallerstein, I. (1979) The Capitalist World- sive Economy, Cambridge: Cambridge Uni- capitalism(P1) versity Press. 1Asocioeconomicsystemofproduction capitalistclass(J5)seebourgeoisie usingROUNDABOUTMETHODSOFPRODUC- TION. capitalist imperialism (L2, O0) 2AnECONOMYbasedonprivateenter- The exercise of power by major capitalist prise. countries over less developed countries, 3Theuseofmarketsnotplanningto often through the medium of MULTINA- allocateeconomicresources. TIONAL CORPORATIONS. Marxists have argued

© 2002 Donald Rutherford thatthedecliningrateofprofitonhome capital–outputratio(D2) productionforcedcapitaliststoexpand Theamountofcapitaldividedbythe overseas. amountofoutputproducedbyit.This measureofCAPITALINTENSITYunderliesthe References ACCELERATORPRINCIPLE. Owen,R.andSutcliffe,B.(eds)(1972) StudiesintheTheoryofImperialism, capitalre-switching(D2) London:Longman. AreturntomoreCAPITAL-INTENSIVEmeth- odsofproductionbecauseatechniquehas capitalization(G1) becomemoreprofitablethroughanin- Theconversionofaninterestpaymentor creaseinthemarginalproductofcapital aliquidassetintopermanentcapital. orafallintherateofinterest. Acompanycancapitalizeitscashreserves bytheissueofshares(afree,BONUSor Seealso:Cambridgecontroversies SCRIPISSUE).Adebtor,evenanation,can capitalizeinterestpaymentsbyadding capitalreversing(E2) themtotheoriginalsumborrowed. AchallengetotheNEOCLASSICALviewthat inputsubstitutionrespondstotherelative Seealso:securitization scarcityoffactorsofproduction.Instead ofrelativeprices,changesinthequantity capitalizationeffectofatax(H2) ofcapitalleadtocapitalreversing.Also Thereducedvalueofanassetresulting knownasreversecapitaldeepeningbe- fromtheimpositionofataxontheincome causealowerrateofprofitcanbe fromtheasset;forexample,ataxonthe associatedwithalowercapital–labour imputedincomefromowner-occupied ratio. housingdepressesthevalueofhouses. capitaltax(H2) capital–labourratio(D2) Ataxbasedonthevalueofassets.Such Theamountofphysicalcapitalemployed taxes,whichareverycostlytocollect byeachworkerusuallymeasuredbydivid- becauseofvaluationproblems,rarelycon- ingthevalueofthecapitalstockbythe stitutealargeproportionofacountry’s sizeofthelabourforce.Theseratiosare totaltaxrevenuebutareimposedforthe centraltotheoriesofgrowthandofCOM- distributionalreasonofincreasingthe PARATIVEADVANTAGE. relativetaxburdenoftherich.Inpractice, Seealso:capitaldeepening;capitalinten- governmentsoftenreducetheeffectiverate sive;capitalwidening ofcapitaltaxesbyavarietyofallowances, e.g.toallowfordepreciation,lifeinsur- capitalmarket(G1) anceandpensions. Amarketwhichissuessecuritiestoraise long-termcapital. Seealso:wealthtax Seealso:primarymarket;secondarymar- capital theory (D2, E2) ket A theory which links the theories of production, growth, value and distribution capitalmobility(F2) to explain why capital produces a return Theflowoffinancialcapitalbetweenone which keeps capital intact but yields inter- employmentandanother.Itwasassumed est (or profit) which is permanent. Over byRICARDOandotherpractitionersofCLAS- the past 200 years the notion of capital SICALECONOMICSthatcapitalwouldflow has varied greatly: to many of the CLASSI- betweenplacesandindustriesuntilrates CAL ECONOMISTS it was to a large extent the ofprofitwereequalized. raw materials and the WAGES FUND; later it Seealso:mobilityoflabour;multi- was viewed as a physical INTERMEDIATE nationalcorporation good. To MARX capital was a social mode

© 2002 Donald Rutherford ofproduction;totheAUSTRIANSCHOOLtime incomeexpectedfromtheassetorby wascrucialtotheconcept;toFISHER capitalizingtheexpectedincome. capitalwasastockwhichproduceda Seealso:discounting;netpresentvalue streamofincomewithitsvaluedeter- minedbyrelativepreferenceforfuture capitalwidening(E2) ratherthanpresentgoods.Importantde- Anincreaseintherealcapitalstock batesincludetherelationshipbetweenthe leavingtheCAPITAL–LABOURRATIOun- RATEOFINTERESTandthevalueofcapital, changedasthecapitalstockandthe aswellasdiscussionofthenotionof labourforcegrowatthesamerate. aggregatecapital.Astherearemany Seealso:capitaldeepening importantsub-speciesofcapital,including HUMANCAPITALandEQUITYcapital,specia- capitationtax(H2)seepolltax listtheoriesofcapitalarealsopro- cappinganinterestrate(G1) pounded.Capitaltheoryexpandedits Separatingthepartofinterestpaymentsin concernsinthe1960swithinthecontext excessofrealinterestpaymentsandthen ofgrowththeory.Amajorissuediscussed capitalizingitbyaddingittothelong- thenwasthemethodofmeasuringaggre- termdebt. gateorsocialcapitaltoachieveavalue independentofdistributionandprices. captiveinsurance(G2) JoanROBINSONsuggestedusinglabourtime Aninsurancecompanywhosebusinessis asameasure;Champernowneintroduced mainlysuppliedandcontrolledbyits aCHAININDEXMETHOD. owners.Theprincipalbeneficiariesare thoseoriginallyinsured. Seealso:Cambridgecontroversies capturetheory(K2,L4)seeregulatory References capture Harcourt,G.C.(1972)SomeCambridgeCon- troversiesintheTheoryofCapital,Cam- carbonsequestration(Q2) bridge:CambridgeUniversityPress. Storingcarbondioxidebyplantingtrees Kregel,J.A.(1976)TheoryofCapital, orpumpingintoundergroundreservoirs: London:Macmillan. anapproachtoreducingglobalwarming. capitaltransfertax(H2) carbonsink(Q2) UKtaxintroducedin1975ontransfersof Anareawithtreesandplantswhichhas wealthpayablebythedonororrecipient beencreatedtoabsorbcarbondioxide. duringlifeoratdeath.Estateduty,in Thishasbeenproposedtoreduceglobal forcefrom1894to1975,wastheprede- warming. cessorofthistax. carbontax(H2,Q2) capitalutilization(D2,E2) Ataxrelatedtothecarboncontentof 1Theproportionoffixedcapital(build- coal,naturalgasoroil,whichisimposed ingsandmachinery)inuse.Ifmachin- toimprovethenaturalenvironment.The eryisworkedforonlyhalfofatime taxcantaketheformofafixedamount period,thecapitalutilizationrateis50 pertonofcarbonembodiedineachfuel percent. orbean AD VALOREM TAX. The level of the 2Actualoutputasapercentageofpoten- taxisrelatedtotheemissionreduction tialoutputatareferencedate. targetchosen. Seealso:capacityutilization Seealso:effluentfee;environmentaltax; marketabledischargepermit capitalvalue(E2,M2) Avaluationofanassetbroadlymeasured cardinal utility (D0) eitherbydiscountingthetotalfuture The satisfaction obtained from consump-

© 2002 Donald Rutherford tion,orengaginginaneconomicactivity, carry-back,carry-forwardsystem(H2) whichisdirectlymeasurableinmonetary Ataxsystemwhichpermitsbusinessesto orotherunits.Thecardinalistarguesthat carrynetoperatinglossesbackorforward itispossibletocompare,e.g.inUTILS,the againstpastorfuturegainsinincomeor relativeamountofsatisfactionfromcon- capitalappreciation. sumingdifferentquantitiesofthesameor othergoods.Thus,thelawofDIMINISHING carryingcapacity(J1) MARGINALUTILITYcouldbedescribedas Theabilityofaparticularareatosustaina follows:awomanobtains10utilsfrom populationataspecifiedlevelofsubsis- thefirstglassofchampagne,8utilsfrom tence,usuallyspecifiedasthenumberof thesecond,6utilsfromthethird.... personsperunitofland. Proxymeasuresofutility,e.g.theamount cartalist(E4) ofmoneywhichapersonispreparedto Apersonbelievingthatthevalueofa giveuptoobtainxamountofagood, currencydependsonthepowerofthe haveallbeenconsideredtooindirect. issuingauthorityandnotonitsintrinsic Seealso:ordinalutility;revealedprefer- valueoritsconvertibilityintogold. ences;utility Seealso:BankingSchool;fiatmoney; References metallist Majumdar,T.(1961)TheMeasurementof ` ´ Utility,LondonandNewYork:Mac- carte a memoire (G2) millan. French for SMART CARD. carer(I3) cartel (L1) Anunpaidfamilyworkerwhoprovides An association of producers who agree to nursinganddomesticcaretoyoung,in- fix common prices and output quotas in firmorelderlyrelatives.Moralobligation an oligopolistic market. As the aim of a isthebasisforundertakingthiswork. cartel is to prevent competition, there is a tendency for the producers to strive to CaribbeanBasinInitiative(F0) maintain existing market shares, with the Anarrangementagreedin1984togive consequence that a firm can only increase exportsofcountriesoftheCaribbean its output if total market demand rises. regiontariff-freeaccesstotheUSA. The device of a cartel has long been used CaribbeanCommunity(F0) as a method of restricting competition: Acommonmarketwithagriculturaland Adam SMITH acknowledged the existence industrialintegrationfoundedin1973in of cartels in the eighteenth century: ‘Peo- successiontotheCaribbeanFreeTrade ple of the same trade seldom meet to- Area(1968–73).ThemembersareAngu- gether, even for merriment and diversion, illa,Antigua,Barbados,Belize,Dominica, but the conversation ends in a conspiracy Grenada,Guyana,Jamaica,Montserrat, against the public or in some contrivance StKitts-Nevis,StLucia,StVincent,Trini- to raise prices.’ Firms afraid of the effects dadandTobago. of recession are eager to join such associa- tions, e.g. in the 1880s in the USA and in CaribbeanDevelopmentBank(G2) Germany in the interwar period. Increas- DEVELOPMENTBANKfoundedin1970con- ingly tough legislation in the USA and sistingofseventeenmembercountries Western Europe has outlawed many car- fromtheCaribbeanregionaswellas tels. The ORGANIZATION OF PETROLEUM EXPORT- CanadaandtheUK. INGCOUNTRIES has some of the characteristics of a cartel. caringsociety(D6,P0)seealtruism; welfarestate Seealso:competitionpolicy

© 2002 Donald Rutherford cash(E4) 6,886intheUKand7,172inFrancebut ThemostLIQUIDofASSETS,consistingof only2,000inWestGermany. coinandbanknotes;oftendefinedasa Seealso:automatedtellermachine;debit zero-interestasset,althoughGoodhart card;smartcard andothershavesuggestedthatinterest couldbepaidbyrunninganational casheconomy(G2,P0) lotteryontheserialnumbersofthenotes. PartofanationalECONOMYusingcashto Commercialbanksalsoregarddepositsat makeallpayments.Thisoccurseither the‘central’bankascash. becauseofashortageofbankingfacilities References orbecauseofadesiretoevadetax.In moderneconomies,muchoftheBLACKor Goodhart,C.A.X.(1986)‘Howcannon- INFORMALECONOMYisofthisnature. interestbearingassetsco-existwithsafe interest-bearingassets?’,BritishReview cashflow(M2) ofEconomicIssues8:1–12. 1Thenetamountofmoneyreceivedbya cashaccounting(M4) firmoveragivenperiod. Therecordingofincomeandexpenses 2Retainedprofitsandfundssetasidefor whencashisactuallyreceivedorspent. depreciation.Thisflowpermitsafirm Thismethodisoftenusedtocalculate tofinanceitsowninvestment. incometax. cashflowaccounting(M4) Seealso:accrualaccounting Accountingbasedonthetransactions whicharerecordedwhenpaymentisactu- cashbudgeting(M2) allymade.ContrastwithACCRUALACCOUNT- Predictingthecashflowsofabusiness. ING. Seealso:cashflow;cashflowaccounting cash-in-advanceconstraint(E4) Agoodhasthestatusofmoneythrough cashcrop(Q1) beinginvolvedinmosttypesofexchange, Agriculturalproducemarketedforcash, sopurchaseswithinaperiodarecon- ratherthanretainedfortheuseofthe strainedbytheamountofmoneyavailable farmer’shousehold. atthebeginningofthatperiod.Also Seealso:agriculturalhousehold knownasthefinanceoreffectivedemand constraint. cash–depositsratio(G2) Theratioofabank’sholdingsofcashtoits References totaldeposits,sometimesusedasameasure Kohn,M.(1981)‘Indefenseofthe ofcontroloverthebankingsystemto financeconstraint’,EconomicInquiry guaranteeitsliquidity.Inthesecondhalf 19:177–95. ofthetwentiethcentury,LIQUIDASSETratios cashlesssociety(G2,P0) cametobethepreferredmethodofcon- AmoderneconomywhichusesCREDIT trollingthetotalvolumeofbankdeposits. CARDSanddirectdebitingofbankac- cashdispenser(G2) countstomakepayments,insteadofnotes Amachineprovidedbyabankorother andcoins. deposit-takinginstitution,oftenatitspre- Seealso:debitcard mises,todispensecashthroughtheinser- tionofacardtoaccount-holdersofthat cash limit (H5) bankorabankinassociationwithit. A method of controlling government Usageofdispensersvariesfromcountryto spending in the UK which replaced a country.IntheUKandFrancetheyare constant-prices system. From 1974 to particularlypopular:by1985,therewere 1976, cash limits were used for several

© 2002 Donald Rutherford publicsectorbuildingprogrammesand person or firm in the private sector, e.g. a from1976forabout60percentofcentral pension, an educational bursary, a training governmentexpenditures.Originally,the grant, which is made to implement a governmentcalculatedtherealvalueof government’s redistribution policy. Unlike currentprogrammesandthenaddedan the alternative, IN-KIND TRANSFER, the reci- amounttocompensateforsomeorallof pient has more freedom to determine inflationaryincreases.From1981,the consumption. systemwassimplifiedbyexpressingpublic expendituretargetsentirelyincashterms. Cassel, Karl Gustav, 1866–1945 (B3) After studying mathematics at Uppsala cashmanagementaccount(G2) University, Sweden, he became a professor AbankdepositofUScommercialbanks, of economics at Stockholm University in aCHECKINGACCOUNTthatpaysareturnlin- 1902. He was a founder of modern Swed- kedtoinvestments.Originallydesignedby ish economics, especially noted for Theory MerrillLynch(withtheprocessingdone of Social Economy (originally published in byBankOne,Columbus,Ohio)in1977to 1918) and monetary writings. He rejected evadethestricturesofREGULATIONQ. both labour and theories of value in favour of a price theory which Seealso:NOWaccount he also applied to his study of the RATE OF CashManagementBill(E5,G1) INTEREST. He relied on the QUANTITY THEORY UStreasurybillwithveryshortmaturity OF MONEY in his monetary economics and thatissoldoccasionallybytheUSTreas- was anti-Keynesian. His pupils included urytoboosttheTreasury’scashbalance. OHLIN and MYRDAL. cashnexus(E4,P0) References Humanrelationshipsbasedonmonetary Mitchell, W.C. (1969) Types of Economic transactions.ThomasCarlyleinChartism Theory, Vol. 2, ch. 16, New York: wrote:‘Cashpaymenthadnotthengrown Augustus M. Kelley. tobetheuniversalsolenexusofmanto casualization (J2) man’. The process of changing employment from Seealso:dismalscience regular and permanent to occasional and part-time forms. This is done to increase cashpositive(M3) the flexibility of a labour force. Asurplusincashbutnotnecessarily profits;apositiveCASHFLOW. catallactics (D4) The study of all market phenomena, i.e. of (G1) cashprice–earningsratio actions conducted on the basis of mone- AmodifiedversionofaPRICE–EARNINGS tary calculation. RATIO,withearningsmeasuredaspost-tax earnings+non-cashprovisions(e.g.de- References preciation).Thisratioremovessomeof von Mises, L. (1949) Human Action, 3rd theeffectsofconservativeaccounting, edn, New Haven, CT: Yale University makinginternationalcomparisonsmore Press. meaningful.Butasdepreciationreflects catalytic policy mix (E6) theCAPITALINTENSITYofanindustry,the A mixture of major and subsidiary poli- cashprice–earningsratiowillundervalue cies: the latter are used as a catalyst to serviceindustryshares. avert the undesired effects of a major cashratio(G2)seecash–depositsratio policy. cash transfer (H2) catastrophe theory (C1) An income or grant by a government to a The applied mathematical study of discon-

© 2002 Donald Rutherford tinuitieswhichstateshowmanystable CATstandard(L5) equilibriaexistgivenachoiceofcontrol Thestandardaproducthastomeetin variablesbutdoesnotindicatewhichof Charges,AccessandTerms.Thisapproach themwillbeinaparticularsystem.A toqualitymanagementwasintroducedin ‘catastrophe’occurswhentransitionfrom theUKinthe1990s. oneequilibriumtoanotherproducesin- ceiling(E3) stabilityinthesystem. Apeakineconomicactivity;themax- References imumlevelofproductioninaBUSINESS Poston,T.andStewart,I.(1978)Cata- CYCLEorTRADECYCLEafterwhichthereis stropheTheoryanditsApplications, adownturninoutput,employmentand LondonandSanFrancisco:Pitman. prices.Thepeakisoftenassociatedwith Saunders,P.T.(1980)AnIntroductionto FULLEMPLOYMENTofthefactorsofproduc- CatastropheTheory,Cambridge:Cam- tion:shortagesofskilledlabourandBOT- bridgeUniversityPress. TLENECKSinproductionbringabouta declinefrompeakactivity. catching-uphypothesis(N1,O4) 1Theviewthatinthepost-1945period Seealso:crisis;floor thecountrieswhichhadlostagreatdeal ceiling price (D4, L5) oftheircapitalstockintheSecond Maximum price set under a system of WorldWar,andhadtorenewit,experi- price control. If, as is often the case, this encedhighergrowthandproductivity price (OC in the figure) is less than the throughhavingmodernplantandma- market equilibrium price OE, there will be chinery. excess demand MN and some need for 2Moregenerally,thewaythenational to allocate goods. incomeofanylow-productivitycountry israised.Thus,grossinvestment(in- cludingreplacementinvestment)has beenregardedasamoreimportant determinantofeconomicgrowththan netinvestment. References Abramovitz,M.(1986)‘Catchingup,for- gingahead,andfallingbehind’,Journal ofEconomicHistory46:385–406. categoricalgrant(H2) Agrantfromacentralorfederalgovern- menttoalowerlevelofgovernmenttobe spentononlyaparticularcategoryof expenditure.Suchgrantscanbebasedon aformula(e.g.reflectingthesizeandage distributionofthepopulation)orona project(e.g.introducinganeweduca- Celler–Kefauver Antimerger Act 1950 tionalcurriculum).Theyusuallyrequire (L4) matchingfundsbystateorlocalgovern- ment. This US federal statute, amending the SHERMAN and CLAYTON Acts, limited the catsanddogs(G1) expansion of firms by merger by making it Speculativestocksandshareswithapoor illegal for major firms to acquire their historyofsalesandearnings. competitors’ assets or stock if the effect is

© 2002 Donald Rutherford asubstantialreductionincompetitionora banks).Bysettinginterestratesfordis- contributiontothecreationofamonopoly. countingtheshort-termBILLSofthebank- ingsystemandbyOPENMARKETOPERATIONS, Celtictiger(P0) acentralbankisabletoexertapowerful Ireland,becauseofitsexceptionaleco- influenceoverthesizeofthemoney nomicandemploymentgrowthamong supply.Othermethodsofcontroloverthe OECDcountries.GDPgrowthaveraged bankingandfinancialsystemsincludethe over9percentannuallyinthe1994–8 prescribingofRESERVEASSETSratios,the periodandunemploymentfellbynine issuingofdirectivesandtheexamination percentagepoints.Therewaslabourforce oftheaccountsofbanksandotherfinan- andlabourproductivitygrowth.Merchan- cialinstitutions. disetradegrewto25percentofGDPand Althoughtheoldestcentralbankis thefiscalsurplusto1.75percentofGDP. Sweden’sRiksbank(foundedin1668),the AlthoughEuropeanUnionfundsand BankofEnglandwasthefirstcentral foreigninwardinvestmentcontributedto banktospecializeasacentralbank,i.e. economicgrowth,therewasnooverriding largelytoabandonitsprivatefunctions policyplanwhichdrovetheeconomy andtoconcentrateonissuingbanknotes, forward. actingasthegovernment’sbankinmana- CensusofManufactures(L6) gingthenationaldebtandcontrollingthe Aregularlypublishedstatisticalaccountof moneysupplyandtheexchangevalueof theeconomicactivitiesofthefirmsofthe thepoundsterling.Inthenineteenth manufacturingsectorofanationalECON- century,England’sexampleinfluenced OMY.IntheUSA,thiscensuswasfirst France,theNetherlands,Austria,Norway, conductedin1809andhasbeenpublished Denmark,Belgium,Spain,Germanyand everyfiveyearssince1967. Japantosetuptheirownnationalbanks. TheUSA’sFederalReserveSystemof CensusofRetailTrade(L8) twelvedistrictbankswassetupin1913. Asurveyoftheeconomicactivitiesof retailingESTABLISHMENTSandFIRMS.Inthe Seealso:BankofEngland;Bundesbank; USA,itwasfirstpublishedin1929;since FederalReserveSystem 1967therehasbeenacensuseveryfive References years. Blinder,A.S.(1998)Centralbankingin CenterforInternationalStudies(F0) theoryandpractice,Cambridge,MA, Foundedin1951attheMassachusetts andLondon:MITPress. InstituteofTechnology. Goodhart,C.A.E.(1987)‘Whydobanks needacentralbank?’,OxfordEconomic CentralArbitrationCommittee(J5) Papers39:75–89. UKbodyestablishedin1975withthe centralbankindependence(E5) concernsofSEXUALDISCRIMINATION,COLLEC- TheconductofMONETARYPOLICYbyaCEN- TIVEBARGAININGagreementsandpaystruc- TRALBANK,independentofgovernmental tures,aswellasmakingawardsif controlthroughitsTreasury.Thishaslong employersrefusetodiscloseinformation beentrueoftheUSAwithitsFEDERAL forcollectivebargainingpurposes. RESERVESYSTEM,andoftheUKsince1997. centralbank(E5) Seealso:MonetaryPolicyCommittee Thebankofanycountrywhichultimately guaranteestheLIQUIDITYofthebanking central limit theorem (C1) systemasawhole.Itisusuallyownedby An attempt to explain why so many thegovernment(intheUSA,theFederal distributions of independent variables are ReserveSystemisownedbythemember close to the NORMAL DISTRIBUTION.

© 2002 Donald Rutherford centrallyplannedeconomy(P2) phicalperipherybecauseoffactorssuchas 1AnECONOMYwhoseinvestmentand marketingandtraffic productionisco-ordinatedbyacentral References governmentalbody. Christaller,W.(1966)TheCentralPlaces 2ACOMMANDECONOMY.Inspiredbythe ofSouthernGermany,EnglewoodCliffs, celebratedSovietfive-yearplansofthe NJ:PrenticeHall. 1930s,manycountriesinEasternEur- Losch,A.(1954)TheEconomicsofLoca- opeandintheThirdWorldusedthis tion,NewHaven,CT:YaleUniversity alternativetotheMARKETECONOMYbut Press. founditimpossiblyinefficient,withthe CentreforPolicyStudies(E6) resultthatinthelate1980sitwas AnindependentLondon-basedeconomics largelyabandoned.Inthistypeof researchinstitutefoundedin1975withthe economyinformationisregularlycol- aimsofresearchandeducationineco- lectedtoformthebasisofaforecastof nomicandsocialaffairs.Itisnotedfor economicactivityandtoconstructpro- applyingmarketsolutionstoeconomic posalsforthefuturedevelopmentof problems. production.Thereisanannualissueof targetsforsubordinatestateenterprises. centre–peripherysystem(F0,P0) Someeconomiesofthistypetriedto Asystemofinternationaleconomicrela- reformtheirplanningprocedures,e.g. tionsconsistingofactiveworldindustrial Hungarywithitsmajoreconomicre- centresandapassiveperiphery.Theper- formof1January1968. ipheryproducesandexportsrawmaterials to the centre; the centre receives a dispro- Seealso:indicativeplanning;marketso- portionate share of income and is slow to cialism transmit technical knowledge to the per- References iphery – it does so mainly in exporting industries. Dembinski,P.(1990)TheLogicofthe PlannedEconomy:TheSeedsofthe certainty equivalent (D0) Collapse,trans.K.Cook,Oxford:Clar- The amount of money definitely available endonPress. that will give a decision-maker the same utility as that from a more risky course of centraloccupation(J2) action. Themainoccupationwhichcharacterizes anindustryandisessentialtoitsworking, certificate of deposit (G2) e.g.doctorsandnursesinmedicalservices, A marketable bank deposit receipt which farmworkersinagriculture. has the advantage of allowing the holder to gain the higher rate of interest asso- centralplacetheory(B1) ciated with fixed or long-term deposits. Anaccountofthewayacontinuous Certificates of deposit (CDs) were intro- hierarchyofeconomicactivitiesdetermines duced in the USA in 1961 and grew in theoptimallocationsofcities.Ittakesinto volume after 1973 when REGULATION Q no accountTHRESHOLDPOPULATIONsizeandthe longer insisted that there had to be a IDEALLIMITofconsumers’traveltotrading ceiling to the rate of interest. Dollar CDs enterprises.Thecentralplaceisthesettle- have had to be registered securities from mentinaregioncomplementingit,offer- 1983 onwards. The Eurodollar CD was inggoodsandproducingservicesfor introduced in London in 1966 and the consumersatdispersedpoints.Thiskey sterling CD in 1968. Companies, and even settlementisoftenlocatedatthegeogra- banks, depositing surplus funds short term

© 2002 Donald Rutherford andobtainingCDsbothincreasetheir acomment’,Review ofEconomicStudies investmentincomeandmaintaintheir 21:112–35. liquidity. chainmigration(F2,J1) CertificationOfficer(J5) Asequentialprocessofmigrationwith UKofficialwhosepostwasestablishedin onephaseof migrationlinkedtosubse- 1975withtheparticularremitofcertifying quentphasesofmigration. Amajorex- thattradeunionsareindependent;also ampleiswhenthefirstcohortofmigrants concernedwiththepoliticalfundsoftrade induces subsequentflowsofmigrantscon- unions. sistingoftheirrelativesandfriendswho have beenpersuadedtomovebecause of ceterisparibus(D0) theinformationsentbackbythe‘pio- Latinexpressionmeaning‘otherthings neers’. beingequal’.Atermpopularfromthe mid-nineteenthcentury,especiallyinPAR- Chamberlin,EdwardHastings,1899– TIALEQUILIBRIUMANALYSISwhentherelation- 1967(B3) shipbetweentwovariablesisinvestigated, EducatedattheUniversitiesofIowa, allothervariableswhichmightbeinfluen- Michigan andHarvardwherehis PhD, tialbeingassumedtohaveunchanging supervisedbyAllynYOUNG,formulatedthe values.ThisisausefulconceptinMICRO- theory ofMONOPOLISTICCOMPETITION,his ECONOMICSasaDEMANDCURVEshowsthe principal achievement.AlthoughJoanRO- relationshipbetweenpriceandquantity BINSON produced a theory of IMPERFECT demandedwithincome,tastesandthe COMPETITION in the same period, Chamber- pricesofothergoodsheldconstant. lin was always keen to differentiate his theory from hers. chaebol(L0,M1) Koreangroupofgiantcompaniescon- References trolledbyafamily-ownedholdingcom- Chamberlin, E.H. (1933) Theory of Mono- pany. polistic Competition, Cambridge, MA: Harvard University Press. Seealso:zaibatsu Kuenne, R.E. (ed.) (1967) Theory: Studies in Impact: chainbank (G2) Essays in Honor of Edward H. Chamber- Abanklinkedtoothersthrough common lin, New York: Wiley. stockholding.Banksofthis kindwere Robinson, R. (1971) Edward H. Chamber- presentinChicagoasearlyas1893. lin, New York: Columbia University Press. chainindexmethod(D2) AmeasureproposedbyChampernowneto Chancellor of the Exchequer (H1) enableaconventionalproductionfunction UK finance minister who is the ministerial tobebuiltwhichiscompatible withMAR- head of the Treasury. The Chancellor is GINALPRODUCTIVITYTHEORY.All alternative responsible for proposing changes in pub- productiontechniquesare arrangedina lic expenditure and taxation, the conduct ‘chain’forsomepredeterminedrates of of monetary policy nationally (apart from profit. the independent setting of interest rates) and internationally and all currency mat- References ters Champernowne, D.G.(1953)‘Theproduc- tionfunctionandthetheoryofcapital:Seealso:MonetaryPolicyCommittee

© 2002 Donald Rutherford changeindemandorsupply(D0) detectedbycumulativesumchartsandby calculatingthenumberofBOOTSTRAPS.A90 Anincreaseordecrease(e.g.ofincome) percentor95percentconfidenceis whichcausesashiftinthedemandor neededtoestablishachange. SUPPLYCURVE.AshiftintheDEMANDCURVE fromDDtoD0D0raisespricesforeach chaostheory(D0,G1) quantity,e.g.fromOPtoOP0atOQ.An Ananalysisofrandommovementsapplied increaseinsupplyfromSStoS0S0leadsto tothepricedataofstockandcurrency morebeingsuppliedateachpricelevel, markets,aswellastometeorology.Chaotic e.g.fromOQtoOQ0atOP.Thisisnot behaviourappearsrandominthatchanges causedbyapricechange,whichwould inpricesorothereconomicvariablesshow resultinamovementalongtheparticular noregularperiodicityandarenotpartofa curve,butbyachangeintheCETERISPAR- structuredetectablebystatisticaltests. IBUSconditions. However,moresophisticatedtestsoffera chanceofidentifyingunderlyingnon-lin- earmathematicalstructures. Seealso:butterflyeffect References Baumol, W.J. and Benhabib, J. (1989) ‘Chaos: significance, mechanism and economic applications’, Journal of Eco- nomic Perspectives 3: 77–105. Gleick, J. (1988) Chaos Making a New Science, London: Heinemann. Grauwe, P. de and Vansauten, K. (1990) ‘Deterministic chaos in the foreign ex- change market’, Paper 370, London: Centre for Economic Policy Research. Savit, R. (1988) ‘When random is not random: an introduction to chaos in market prices’, Journal of Futures Mar- kets 8: 271 Chapter 17 (E5) The authority for the BUNDESBANK to pro- vide temporary liquidity to financial mar- kets using the funds deposited with it. characteristics theory of consumer de- mand (D1) Consumer theory based on the assertion that consumers demand the characteristics of goods rather than the goods themselves. For example, instead of there being a demand for housing, there is a demand to live in a house with certain amenities located in a pleasant area. Kelvin Lan- caster proposed this alternative to tradi- tional utility-based consumer theory. changepointanalysis(C5) Anattempttodeterminewhetherand References whenachangehasoccurred.Changesare Lancaster, K. (1971) Consumer Demand. A

© 2002 Donald Rutherford NewApproach,NewYork:Columbia nicalAnalysisofStockTrends,5thedn, UniversityPress. Boston:JohnMagee. charge(D0,G2) chartpoint(F3,G1) 1Thepriceofaservice. Asignificantpointonagraphofprice 2Arightoverpropertygiventoacred- movements,especiallyofacurrency,which itorinreturnforaloan. usuallypromptsinterventioninthatmar- ket. Seealso:bankcharges;binomialcharge; capacitycharge;emissioncharge;user cheapmoney(E4) charge Apolicyofkeepinginterestrateslowto encouragecapitalaccumulationandeco- chargecard(G2) nomicdevelopment.IntheUK,thispol- Aplasticcardissuedbyafinancialinstitu- icywaslaunchedbytheWarLoan tion,suchasabankoraretailer,which ConversionofJune1932andcontinued allowstheholdertochargethesumdue until1951:underitthebankratewasonly forthepurchaseofgoodsorservicestoan 2percent.IntheUSA,thispolicywas account.Thisreducestheneedtohold usedtoeasethecostofservicingthe cashfortransactionspurposesandpro- nationaldebtduringtheSecondWorld videstheholderwithcredituntilthe Warandintheimmediatepost-waryears. accountispayable.Majorexamplesof AlsosomeLatinAmericancountriesfol- suchcardsincludethoseissuedbyAmer- lowedit.Apolicyofthiskindhasits icanExpressandtheDiners’Club. problems.Realinterestratescanbecome negative,generatinganexcessdemandfor Seealso:creditcard;debitcard credit,withtheconsequencethatfinance hastoberationedratherthanallocatedby charteredcompany(M1) interestrates. AUKcompanyestablishedbyaRoyal Charter.Several,inparticulartheEast check(G2)seecheque IndiaCompanyandtheHudson’sBay Company,weresetupinElizabethan checkingaccount(G2) Englandintheearlyseventeenthcentury. AUScommercialbankdepositavailable forimmediateusebythewritingofa chartism(G2,N0) check(cheque).Thesedepositsarepartof 1Atechniqueofmarketanalysiswhich theM1moneysupply:until1980theydid predictspricesbyextrapolatingfuture notbearinterest.IntheUK,theyare pricemovementsfromachartofpre- knownasCURRENTACCOUNTS. viouspricefluctuations.Thishasbeen Seealso:DepositoryInstitutionsDeregu- appliedtothestudyofstockand lationandMonetaryControlAct1980; foreignexchangemarkets.Itisargued NOWaccount thatpricesrepresentallinfluenceson demandandsupply,includinginforma- check-off provision (J3) tion.Recurrentpatterns,e.g.a‘head A clause in an employment contract re- andshoulders’shape,areusedtopre- quiring an employer to deduct TRADE UNION dictchangesintrends. subscriptions from workers’ pay. This ar- 2ApoliticalmovementinEnglandand rangement lowers the cost of trade union Scotlandofthe1830sand1840sforthe administration and stabilizes trade union reformofthefranchise,namedaftera membership as many persons will remain charterpresentedtoparliament. in the union through inertia.

References Chenery, Hollis Burnley, 1918– (B3) Edwards,R.D.andMagee,J.(1966)Tech- A prominent US development economist.

© 2002 Donald Rutherford Agraduateinmathematics,engineering Chicago Board Options Exchange (G1) andeconomicsfromArizona,Oklahoma, The world’s largest options market, trad- VirginiaandHarvardUniversities.Profes- ing over half of the US options contracts. soratHarvardfrom1965to1970and It was created by the Chicago Board of from1983;economicadvisertothepre- Trade in 1973 and is subject to SECURITIES sidentoftheWORLDBANKin1970–2and AND EXCHANGE COMMISSION regulations. Ori- thebank’svice-presidentinchargeof ginally it dealt in call options; put options developmentpoliciesin1972–82.His were introduced in 1977. The majority of quantitativeapproachtoDEVELOPMENTECO- options traded are based on the Standard NOMICSviewsself-sustainingeconomic & Poor 100 stock index. growthasafunctionofindustrialization, whichisitselfassociatedwithaswitch Chicago School (B2) fromagriculturaltoindustrialproductsin A group of liberal US economists which thecommoditystructureofacountry’s first acquired its identity in the 1930s exports.In1959,hepublishedawidely under the leadership of , VINER SIMONS usedINPUT–OUTPUTtext.Hecollaborated Jacob and Henry C. . Promi- withARROWandothersin1961toproduce nent in this group since 1950 have been FRIEDMAN STIGLER theCONSTANTELASTICITYOFSUBSTITUTIONPRO- Milton , George , Ronald COASE BUCHANAN BECKER DUCTIONFUNCTIONwhichsubstantiallyre- , James and Gary : placedthepopularCOBB–DOUGLAS they share an all-embracing belief in the MARKET FORCES PRODUCTIONFUNCTION. power of to solve most economic problems and the desirability of References minimizing the role of the state. They also Arrow,K.J.,Chenery,H.B.,Minhas,B.S. believe that man is a rational agent con- andSolow,R.M.(1961)‘Capital-labour stantly attempting to maximise his advan- substitutionandeconomicefficiency’, tages. Recent crusades of the school have ReviewofEconomicsandStatistics43: included its advocacy of a monetary policy 225–50. based on rules, not discretion, and of Chenery,H.B.andClark,P.(1959)Inter- industryEconomics,NewYork:Wiley. unrestricted capitalism. cheque(G2) References Awritteninstructionfortransferringa Friedman, M. and Friedman, R.D. (1962) bankdepositfromonepersontoanother. Capitalism and Freedom, Chicago: Uni- Inthenineteenthcentury,thecheque versity of Chicago Press. Patinkin, D. (1981) Essay on and in the graduallyreplacedbanknotesandBILLSOF Chicago Tradition, Durham, NC: Duke EXCHANGEasameansofsettlingclaims. University Press. Today,chequecardshavemadethecheque Reder, M.W. (1982) ‘Chicago economics: evenmoreacceptable.Theusageofthe permanence and change’, Journal of chequeformonetarytransactionsvaries Economic Literature 20: 1–38. fromcountrytocountry,beingespecially Simon, H.C. (1948) Economic Policy for a popularfornon-cashtransactionsin Free Society, Chicago: Chicago Univer- France. sity Press. Stigler, G.J. (ed.) (1988) Chicago Studies in Seealso:debitcard;eftpos Political Economy, Chicago: University chequecard(G2) of Chicago Press. Aplasticcardissuedbyabanktoan chief executive officer (M1) account-holdertoguaranteeachequeup The person appointed by the board of toaspecifiedamount. directors of a company, corporation or Seealso:creditcard;debitcard;smart other organization to ensure that its deci- card sions are implemented in its day-to-day

© 2002 Donald Rutherford operations and to co-ordinate the different action over a set of potentially relevant functions of the organization. The CEO probability models. The minimum of pos- sometimes is also a director or president sible expected utilities is maximized. or chairman/woman. Christian socialism (P2) Child, Sir Francis, 1684?–1740 (B3) The intellectual and practical endeavour to In 1721 he became head of the family apply Christian social principles to an banking firm Francis Child & Co.; elected industrial and competitive society. It is Member of Parliament for Middlesex in particularly associated in England with 1727 and 1734, Lord Mayor of London in Frederick Denison Maurice (1805–72) 1731. He introduced promissory bank- and Charles Kingsley (1819–75) who notes in 1729, thereby abandoning the preached the merits of co-operation, pro- GOLDSMITH BANKING SYSTEM. moted associations for working men and Chinese modernization drive (N1) founded in 1854 a working men’s college. The successor to the CULTURAL REVOLUTION. In the twentieth century, the FABIAN SOCIETY From 1978 it attempted to achieve rapid and GUILD SOCIALISM continued the tradi- growth of production through a ten-year tion; many in the UK Labour Party have plan with ambitious targets, e.g. the dou- attempted to marry Christian ideals to bling of coal and steel output. socialism. In France SAINT-SIMON (1760– 1825) recommended a new Christianity References which would encourage producer associa- Riskin., C. (1987) China’s Political Econ- tions; later in the nineteenth century there omy, Oxford: Oxford University Press. were strong Roman Catholic movements ‘Chinese Wall’ (G2) to provide a theology of socialism. In the The separation of the corporate finance USA Washington Gladden (1836–1918) department from the investment and trad- fought to make the Congregational ing departments of an INVESTMENT BANK Church accept its social responsibilities (USA) or MERCHANT BANK (UK). and inspired the Social Gospel movement. Richard Ely (1854–1943), a founder of the chi-squared distribution (C1) AMERICAN ECONOMIC ASSOCIATION, expressed The distribution of chi-squared statistics his Christianity in his advocacy of the where chi is the sum of the squares of the public control of resources and the en- deviations of observations from their sam- couragement of trade unions. The Society ple mean divided by the square of the of Christian Socialists was founded in standard deviation of the population from 1889. The earliest inspirations for Chris- which the sample is taken. There are tian socialism were the New Testament, different chi-squared distributions corre- with its injunction ‘Love Thy neighbour as sponding to different DEGREES OF FREEDOM. Thyself’, and the experiment of the early choice variable (C1) Church of holding all things in common. An independent variable in an OBJECTIVE In the Middle Ages, AQUINAS and others FUNCTION which an economic agent at- recommended a JUST PRICE. tempts to maximize or minimize. Also References known as a decision variable or policy Cort, J.C. (1988) Christian Socialism: an variable. informal history, Mary Knoll, NY: Orbis. choke price (Q0) Norman, Edward (1987) The Victorian The price of a natural resource at which Christian Socialists, Cambridge: Cam- bridge University Press. quantity demanded is zero. Choquet expected utility (D0) Churitsuroren (J5) A valuation of the EXPECTED UTILITY of an National Federation of Independent Un-

© 2002 Donald Rutherford ions:thisJapanesenationalfederationof comes throughout an economy, describing tradeunionswasmergedwithDomeiin the relationship between households, 1987toformRengo. firms, the government, the capital market and the rest of the world. (See the figure.) churning(G1) 1Cancellinganexistinginsurancepolicy circular migration (J1) andpurchasinganewoneasareplace- Temporary or repetitive population move- ment. ment. This can be COMMUTING or repeated 2Frequentchangesinaportfolioof movements from one’s residence to a securities.Commission-hungrylifein- distant place within one year. suranceagentsandstockbrokersoften proposearapidturnoverofthiskind. circulating capital (D0, M2) WORKING CAPITAL which is used to finance circuitbreakermechanism(G1) the current expenditure of a business, Apricelimitortradinghaltusedinmajor especially its wage bill and purchase of USstockmarkets.Ifthemarketdrivesthe raw materials and energy, together with Standard&Poor500indextwentypoints stocks of goods. SMITH distinguished this ineitherdirection,thetradingsessionwill form of capital from fixed capital, i.e. beterminated.Thisinterventioninprice buildings, machinery, land improvements determinationpreventsfluctuationsfrom and HUMAN CAPITAL. creatingexcessivelyhighpricesoraprice collapsesuchashappenedinthemarket Civil Rights Act 1964 (J7) crashofOctober1987. US federal statute which outlawed many forms of racial and sexual discrimination. Seealso:BradyCommission Under Title II, racial discrimination in circular flow (E1) public accommodation was forbidden; un- The circulation of expenditures and in- der Title VI, racial discrimination in fed-

© 2002 Donald Rutherford erallyassistedprogrammeswasproscribed; oneofthefoundersofmoderncapital TitleVIImadesexualandracialdiscrimi- theory. nationinemploymentillegal. References Seealso:discrimination Clark,A.H.andClark,J.M.(1938)John BatesClark:AMemorial,NewYork: Clark,ColinGrant,1905–89(B3) ColumbiaUniversityPress. UK-bornpioneerofNATIONALINCOMEac- classicalclassicalfallacy(J3) counting,educatedatOxfordUniversity. TheviewthatCIRCULATINGCAPITALby HewasalectureratCambridgeUniversity creatingawagefundimproveswagesand in1931–7beforeemigratingtoQueens- increasesthedemandforlabourbutFIXED land,Australia,wherein1938–52hewasa CAPITALdoesnot.SAMUELSONassertedthat financialadviserandUnder-Secretaryof thisviewmakesthemistakeofidentifying StateforLabourandIndustry;subse- thewagefundwiththewholeofcirculat- quentlyDirectoroftheInstituteforRe- ingcapitalandignoresthecontributionof searchinAgriculturalEconomicsof fixedcapitaltothegrowthofREALWAGES. OxfordUniversityfrom1953to1969.His foundationalworkonnationalincome References accountingincludedthemajoradvanceof Samuelson,P.A.(1994)‘TheClassical makingoneofthefirstcalculationsofthe ClassicalFallacy’,JournalofEconomic MULTIPLIER.In1940,hebroadenedhis Literature,32:620–39. intereststoconsiderthenatureofeco- classicaldichotomy(B1,E4) nomicdevelopment;alsowellknownfor Theviewattributedtoclassicaleconomists hiswritingsonpopulationandlanduse. thatrealvariablesaredeterminedbyother References realvariablesaloneandmonetaryvari- Clark,C.(1932)TheNationalIncome, ablesbyonlyothermonetaryvariables. 1924–31,London:Macmillan. Outputandemploymentthusaredeter- ——(1940)ConditionsofEconomicPro- minedbytherealwagebutthemoney gress,London:Macmillan. supplycanchangethegeneralpricelevel ——(1962)Growthmanship:aStudyinthe withoutaffectingrelativeprices.PATINKIN MethodologyofInvestment,2ndedn, usedthistermtodescribethistheoretical London:InstituteofEconomicAffairs. stance.KEYNESwasmuchconcernedwhen ——(1977)Population,GrowthandLand advancingfromhisTreatiseonMoneyto Use,rev.edn,London:Macmillan. hisGeneralTheorytodemolishthisdual- ism.ButwiththeadventoftheNew Clark,JohnBates,1847–1938(B3) ClassicalSchooltherehasbeenrevivalof USeconomistfamousforthetheoryof thisview. MARGINALPRODUCTIVITY.Hewaseducatedat BrownUniversity,AmherstCollegeand classicaleconometrics(C1) theUniversityofHeidelberg.Formostof ECONOMETRICSthatseekstoformulateeco- hisacademiccareer,from1895to1923,he nomicmodelstotesthypothesesabout wasaprofessoratColumbiaUniversity. appropriatedata. Hismajorachievement,inDistributionof Seealso:Bayesianeconometrics Wealth(1899),wastoexpandMARGINALISM intotheconceptofmarginalproductivity (B1) inordertotackleproblemsofproduction The dominant school of UK economics anddistribution.InPhilosophyofWealth from 1752 to 1870. David HUME in his (1885)heusedCLASSICALECONOMICSasthe attack on MERCANTILISM anticipated a new foundationofhisowneconomictheory;in approach to economics but it was Adam CapitalanditsEarnings(1888)hebecame SMITH in The Wealth of Nations (1776) who

© 2002 Donald Rutherford is credited as being the virtual founder: all References subsequent writers of the school used Kaldor, N. (1956) ‘Alternative theories of Smith as a starting point. The school was distribution’, Review of Economic Stu- grand in its aims, providing theories of dies 23: 83–100. value, growth, distribution, international Clayton Act 1914 (L4) trade, public finance and money. All the The important amendment to the US major figures – SMITH, RICARDO, MALTHUS SHERMAN ACT 1890 which extended federal and John Stuart MILL – wrote comprehen- ANTITRUST law. It forbad PRICE DISCRIMINA- sive texts, in most cases entitled ‘Princi- TION, tying arrangements and exclusive ples’. Their economic liberalism was dealing, and the acquisition of another manifest in their limited view of the role corporation’s stock if it was likely to of the state and in their attack on the CORN reduce competition or lead to the creation LAWS, which were incompatible with free of a monopoly; it also allowed triple trade, economic growth and international damages to those suffering breaches of specialization. Ricardo inspired MARX; the antitrust law. It exempted labour more recently Smith has been regarded as unions and agricultural associations from an apostle of the NEW RIGHT. antitrust actions. References Seealso:Celler–KefauverAntimergerAct; Coats, A.W. (ed.) (1971) The Classical Robinson–PatmanAct Economists and Economic Policy, Lon- don: Methuen. Clean Air Act Amendments 1970 (Q2) Hollander, S. (1987) Classical Economics, US federal statute which required the EN- Oxford: Basil Blackwell. VIRONMENTAL PROTECTION AGENCY (EPA) to O’Brien, D.P. (1975) The Classical Econo- set air quality standards for specified mists, Oxford: Clarendon Press. pollutants and to issue control technology guidelines for stationary emission sources. classical model (E1) The EPA, which attempts to control all A formal of the sources of pollution, sought a 90 per cent economy which assumes that factor and reduction in hydrocarbon and carbon product prices are completely flexible so monoxide emissions by 1975. that there are no rigidities to prevent market clearing. This economy will have clean float (F3) FULL EMPLOYMENT of its resources when it is An EXCHANGE RATE regime in which market in equilibrium. KEYNES associated this view forces freely determine the value of cur- of the economy particularly with the rencies as there is no intervention by French economist Jean Baptiste SAY, governments and central banks. although it is possible to find other Seealso:dirtyfloat;fixedexchangerate; classical economists, including James MILL, floatingexchangerate who use similar assumptions. clean opinion (M4) classical savings theory (D3) see class An auditor’s unqualified acceptance of a savings theory set of financial statements. If there is no opinion expressed the auditor issues a class savings theory (D3) disclaimer of opinion. The supposition that in a two-class society consisting of capitalists and workers only clear income (H2) capitalists save and workers consume all of Taxable income in excess of the amount of their incomes. This is an integral part of personal and other allowances permitted Cambridge growth theories. by a government’s revenue service.

© 2002 Donald Rutherford clearing(D0,G2) climatelevy(Q4) 1Thematchingofdemandandsupplyin AUKindirecttaxleviedasapercentage aparticularmarket. oftheenergybillsoffirmswiththehope 2Theexchangebetweenbanksofthe ofreducingtheircontributiontoglobal chequesdrawnuponthem. warming. clearingbank(G2) cliometrics(N0) AUKCOMMERCIALBANKwhichaccepts Thequantitativestudyofhistoryoriginally depositsfromthepublicandgetsitsname carriedoutintheUSAinstudiesofthe frombeingamemberoftheclearinghouse profitabilityofslaveryandtheroleof which‘clears’chequesbysettlinginter- railroads.Thiselaborateeconometricana- bankindebtedness.Thereareseparatesets lysishasbeenappliedtothestudyof ofclearingbanksforEnglandandWales, economicgrowth. ScotlandandNorthernIreland.TheScot- Seealso:Fogel;North tishandNorthernIrishbanksalsohave therighttoissuebanknotes.Abankof References thiskindisdistinguishedfromother McCloskey,D.N.(1978)‘Theachievement financialintermediariesinthatitsreserves ofthecliometricschool’,Journalof arethemonetaryliabilitiesofthegovern- EconomicHistory38:13–28. mentsector,i.e.bills,bondsanddeposits clipping(E5) withthecentralbank. Debasingacoinagemadeofprecious clearinghouse(G2) metalsbycuttingoffpartoftheedgeof Thefinancialinstitutionwhichsettlesthe coins.Thisproblemformonetaryautho- mutualindebtednessofcommercialbanks ritieswassolvedfirstbymillingtheedges byclearingcheques.Abankwithanet andlaterbytheintroductionofTOKEN debtaftertheclearingtoanotherbank MONEYANDBANKNOTESwhichhadnointrin- willsettlebydrawingachequeonits sicvaluetoberemoved. depositswiththecentralbank Seealso:Gresham’slaw

ClearingHouseInterbankPayments closedeconomy(F1,P0) System(G2) AnECONOMYwhichdoesnotengagein NewYorkautomatedclearingfacilityfor internationaltrade.Therearenoecono- transferringdollarsbetweenmajorUS miesofthistypeintheworldtodaybut banks,branchesofforeignbanksand countriessuchasJapanwereclosedto somesubsidiariesofout-of-statebanks. foreignersforcenturies.Theconceptis CHIPS,forshort. importanttheoreticallytoconstructsimple macroeconomicmodelsuncomplicatedby clearingmarket(D0) internationaltrade. Afreemarketwithflexiblepriceswhich quicklyestablishesanequilibriumbetween Seealso:autarky;openeconomy demandandsupply,eliminatinganyexcess demandorsupply.Financialmarketspro- closed-end credit (G2) videexcellentexamples. A form of CREDIT granted on condition that the PRINCIPAL and charges for the loan Seealso:disequilibriumeconomics;equi- are repaid over a specified time period. librium closed-end fund (G1) climacteric(N0) A MUTUAL FUND bought at a discount. Sales Acriticalperiodinthehistoryofa and purchases can only be made between countryofanationaleconomy,e.g.the investors thus maintaining a stable pool of UKinthelatenineteenthcentury. investment money. The price is determined

© 2002 Donald Rutherford by demand and supply, not being decided of the same family. Many US states have by the fund managers who would base the specific legislation for this type of firm. price on net assessment value. These funds club good (H4) can be illiquid if few potential buyers exist A good available to a group of individuals and their prices can be more volatile than and hence is a mixture of PRIVATE and mutual funds. PUBLIC GOODS. Non-members can be ex- closed pension fund (G2) cluded but a member’s consumption is An accumulation of assets which can be not diminished by another member’s. Ex- used only for the payment of retirement amples of club goods include many forms incomes according to the set rules of a of entertainment, e.g. the cinema and pension fund. sporting facilities. closed population (J1) Club of Rome (O4) A population with no emigration or im- A group of leading economists and scien- migration. The size of this population will tists which studied the effects of economic depend entirely on birth and death rates. growth from 1968 onwards. Their study of poverty, environmental issues, urbaniza- closed shop (J5) tion, unemployment, inflation and the An arrangement between a TRADE (LABOR) nature of growth led them to set out the UNION and a management to restrict em- conditions for a global equilibrium in their ployment in a particular place of work or famous Limits to Growth report. occupation to members of that union. A pre-entry closed shop is based on the rule References that only trade union members can apply Meadows, D.H., Meadow, D.L., Randers, for work; in a post-entry closed shop a J. and Behrens, W.W. III (1972) The worker must become a member before or Limits to Growth: a Report for the Club on joining the firm. The Trade Union and of Rome’s Project on the Predicament of Labour Relations Act 1974 (UK) passed Mankind, London: Earth Island. during the period of office of a Labour cluster analysis (C8) government made possible universal enfor- A method of organizing data into mean- cement of the closed shop. The subsequent ingful structures. Biologists and statisti- aim of Conservative governments was to cians have used different methods to remove the pre-entry closed shop (Indus- achieve this goal. There is tree clustering trial Relations Act 1971 and Employment to organise data into successively larger Act 1980); the European Court in 1981 clusters, two-joining when clusters in two ordered the UK government to end the variables are simultaneously examined, rail closed shop. The strongest argument and k-means clustering to see how distinc- in its favour is the equitable view that, as tive each cluster is. all employees benefit from a union’s bar- gaining, all should pay union dues. Some References employers have argued that a closed shop Tryon, R.C. (1970) Cluster Analysis.New promotes harmonious industrial relations. York: McGraw-Hill. In the USA, the post-entry closed shop is Coase, Ronald Harry 1910– (B3) called a ‘UNION SHOP’. Even in countries Born in Willesden, England, and a gradu- such as France where the closed shop is ate in commerce from the London School illegal, shops of this kind still exist in the of Economics. After holding academic docks and in printing. posts in Dundee, Liverpool and the Lon- closely held corporation (L2) don School of Economics he emigrated to A private corporation owned by only a the USA in 1951 to hold chairs in Buffalo few private stockholders, often members and Virginia before settling in Chicago in

© 2002 Donald Rutherford 1964–79. His principal contributions to economic theory have been his analysis of the nature of the FIRM, which he asserted seeks to reduce the costs of participating in a market by internalizing activities, and of SOCIAL COST, building on PIGOU to analyse the problem of pollution to take into account PROPERTY RIGHTS so that the aim of environmental regulation is to maxi- mize the value of production. His many applied studies include an examination of broadcasting, monopoly pricing and anti- trust enforcement. He was awarded the NOBEL PRIZE FOR ECONOMICS in 1991. References Coase, R.H. (1988) The Firm, the Market and the Law, Chicago and London: University of Chicago Press. —— (1994) Essays on Economics and Economists, Chicago and London: Uni- versity of Chicago Press. Coase theorem (D6, Q2) The proposition that the value and com- position of the national income is unaf- fected by the precise pattern of liability for pollution which the perpetrators and vic- tims have determined. Thus do not lead to a misallocation of resources between demand and supply in a particu- provided that there are no TRANSACTION lar market. Central to the model is the COSTS, and PROPERTY RIGHTS are clearly assumption that there is a time lag be- defined. Private and social costs will be tween planning and completing produc- equal under PERFECT COMPETITION. tion. A familiar application, not References surprisingly, is agricultural production (particularly hog/pig production) which Coase, R.H. (1960) ‘The problem of social cost’, Journal of 3: often has a twelve-month production per- 1–44. iod. It is assumed that (1) supply depends solely on the expected price for the pro- Cobb–Douglas production function duct, (2) actual market price adjusts to (C5, D2) demand so as to eliminate EXCESS DEMAND An equation showing physical output as instantaneously, (3) expected price is equal the product of labour and capital inputs. to the previous equilibrium price, with the This function predicted rewards to labour length of delay determined by the produc- and capital that were close to the observed tion lag, (4) there are no INVENTORIES and shares of manufacturing income in na- (5) neither buyers nor sellers have an tional income. The Cobb–Douglas ap- incentive to speculate. Whether or not proach was dominant in the analysis of there is movement to equilibrium in the economic growth from 1945 to 1961. model depends on the relative ELASTICITIES cobweb (C5, D2) of the demand and supply curves. If the A dynamic model of the relationship elasticity of demand exceeds that of sup-

© 2002 Donald Rutherford P f½YðestimatedÞYðmeanÞ2g ply,therewillbeamovementtothe P originalequilibriumpriceandoutput;if f½YðactualÞYðmeanÞ2g elasticityofsupplyisgreaterthenthere willbecontinuingDISEQUILIBRIUMuntilthe Thisratiocanrangefrom0to1,being0if elasticitieschange(seethefigures). allthevariationisunexplainedand1ifall References thevariationisexplained. Nerlove,M.(1958)‘Adaptiveexpectations andcobwebphenomena’,Quarterly Seealso:linearcorrelation JournalofEconomics72:227–40. coefficientofmultiplecorrelation(C1) coconutmodel(E1) Astatisticwhichmeasurestheextentto Amodelofatropicalislandinwhichthere whichchangesinadependentvariableare isatabooagainsteatingthecoconutsone explainedbythejointvariationinthe haspickedsotherehastobeatradeof independentvariableschosentoexplain nutsfornutsbeforeconsumptioncan it.ItisthesquarerootoftheCOEFFICIENT occur.Theabilitytotradedependsonthe OFMULTIPLEDETERMINATION. numberofpotentialtradingpartners. Thereisnomechanismtoensureforecasts coefficientofmultipledetermination ofthetimetocompleteatrade.Thismodel (C1) reflectsthemodernrealityofproducers Fortwoindependentvariablesthiscoeffi- 2 2 consuminglittleofwhattheyproduce. cient,R1.23isequalto1s1.23 /s1 ,where s isthestandarderrorofanestimateof Seealso:RobinsonCrusoeeconomy 1.23 variableX,onindependentvariablesX2, References and X3, and s is the standard deviation of Diamond,P.A.(1982)‘Aggregatedemand X1. insearchequilibrium’,JournalofPoli- ticalEconomy90:881–94. coefficient of variation (C1) The ratio of a STANDARD DEVIATION to an coefficientofcorrelation(C1) ARITHMETIC MEAN of a set of values, usually Referredtoasrbystatisticiansandused expressed as a percentage. This is a better asameasureoftheinterrelatednessoftwo measure of the dispersion of a set of variables.Thiscoefficientismeasuredby values than the standard deviation as it theformula can be used for different measures with P different magnitudes and can cope with (xy) two measures expressed in different units, p P P ð x2 y2Þ e.g. monetary and physical. cognitive consonance (D0) The state of a cognitive system when ideas Aperfectnegativerelationshiphasthe and beliefs are in harmony. value1;aperfectpositiverelationship +1.Valuesinbetweentheseextremeswill cognitive dissonance (D0) dependonhowstrongtherelationship The coexistence of discordant cognitions. x y between and is. As a consequence of this dissonance, peo- coefficientofdetermination(C1) ple will avoid situations and information Aratiooftheexplainedvariationtothe likely to increase such discomfort. This totalvariationofvaluesfromaregression theory of Festinger’s, about an unpleasant line,usuallyreferredtoasr0.Itismea- state of tension, has been applied by econ- suredbytheformula omists to the explanation of work beha- viour, home ownership and discrimination.

© 2002 Donald Rutherford Seealso:economicsandpsychology productionandmanufacturingandtrade sales. References Akerlof,G.andDickens,W.T.(1982)‘The Seealso:economicindicators economicconsequencesofcognitivedis- (H2,L5,N4,N6) sonance’,AmericanEconomicReview Colbertism 72:307–19. Governmentinterventioninindustry, Festinger,L.(1957)ATheoryofCognitive namedaftertheFrenchMERCANTILISTJean Dissonance,Evanston,IL:Row,Peter- BaptisteColbert(1619–83)whosuccess- son. fullyreformedtheFrencheconomyafter 1649.InFrance,thehomeofColbertism, CohesionFund(O0) thegovernment’sabilitytosubsidizein- EUROPEANUNIONfundcreatedin1993by dustryandfollowprotectionistpolicies theMAASTRICHTTREATYtoprovidemoney hasbeenlimitedsinceentrytotheEur- forenvironmentalandtrans-European opeanEconomicCommunityin1958. networkprojectsinmemberstateswhose grossdomesticproductislessthan90per Seealso: centoftheEUaverage.Thefundcan collaborative production (L2) contributeupto85percentofthepublic A form of workplace organization which expenditureonaproject. decentralizes production. This reaction to coinage(E4) TAYLORISM can take many forms, including Piecesofmetalofastandardsizeand TEAM WORK and QUALITY CIRCLES. weightstampedbyasovereignpowerto collar (E4, G2) givethemthestatusofmoney.Coinswere A combination of a CAP and a FLOOR to firstusedasmoneybytheLydians(Greek give an interest rate a fixed range. inhabitantsofwhatisnowWestTurkey) intheseventhcenturyBC.Thefirstcoins collateralized mortgage obligation (G1) weremadeofelectrum,anaturalalloyof A bond based on a portfolio of mortgages goldandsilver.Silver,bronzeandcopper with interest and capital repayments paid werelaterusedinAncientGreeceandthe by the original mortgagors. RomanEmpire.Coppercoins,usedfor collecting bank (G2) smalltransactions,wereissuedwitha Any bank, other than the payer bank, monetaryvalueinexcessofthevalueof handling a bank item, e.g. a cheque, for metalused,establishingtheprincipleof collection. tokenmoney,whichisthenatureofcoin- agetoday.Thefirstproblemsofcoinage, collective bargaining (J5) clippingandforgery,weresolvedbya Negotiations between a TRADE (LABOR) UN- changeinproductionmethodfromham- ION and a single employer or EMPLOYERS’ meringtomillingtoensureastandard ASSOCIATION over pay, working conditions size.Thesecondproblem,theinconveni- and other employment matters. It can only enceoftransportingittocarryoutlarge be genuine if the parties are free to initiate financialtransactions,wasremediedby discussions and reach a settlement: under theuseofbanknotes. INCOMES POLICIES, and in countries where trade unions have little independence from coincidentindicators(E3) the state, this is not possible. It is usually Measuresofeconomicactivityusedby bilateral, but sometimes other interested economicforecasterstotrackcyclical parties are at the bargaining table, e.g. in movementsintheECONOMY.Themainones some US teachers’ negotiations where usedareemploymentinnon-agricultural parents are represented. It can take place enterprises,personalincomelesstransfer at different levels – national, industrial, payments.andindicesoftotalindustrial the firm or workplace. The level at which

© 2002 Donald Rutherford the major decisions are made distinguishes introduced in 1929 but was not implemen- one country’s system sharply from an- ted in a major and systematic way until other. In Japan, the enterprise level is very the 1930s: it was accompanied by much important; in Germany, the industrial resistance and a famine which killed mil- level. In the USA, the parties produce a lions. Subsequently, other countries fol- legally enforceable contract; in the UK, a lowing the principles of Marxist-Leninism framework for individual employment have attempted draconian changes of this contracts. kind, e.g. Mao’s China and Ethiopia. Collective bargaining makes possible collectivized investment (G1) the collective provision of workplace ‘pub- A MUTUAL FUND or UNIT TRUST. lic goods’, e.g. safety, conditions, lighting, heating, speed of the production line, Collor Plan (E6) grievance procedures, pension plans. It A plan to stabilize the Brazilian economy. permits the individual to express his or Collor I was launched in 1990, Collor II in her own preferences without the danger of 1991. The plans included wage and price being sacked. Also it helps to change the freezes to combat inflation rising at 1,800 social relations of the workplace, bridging per cent; they were named after Fernando the gap between labour and capital, by Collor, President of Brazil. making possible the enforcement of labour collusion (L2) contracts. Joint action, usually by OLIGOPOLISTS,to Seealso:exit-voice control prices and market shares. It is illegal in most capitalist countries, e.g. in References the USA under ANTITRUST legislation. As Bean, R. (1985) Comparative Industrial Adam SMITH, the apostle of competition, Relations: an Introduction to Cross-na- observed in his Wealth of Nations (Book 1, tional Perspectives , London: Croom ch. X, Part II), ‘People of the same trade Helm. seldom meet together, even for merriment Clegg, H.A. (1976) Trade Unionism under Collective Bargaining. A Theory Based and diversion, but the conversation ends on Comparisons of Six Countries, Ox- in a conspiracy against the public, or in ford: Basil Blackwell. some contrivance to raise prices.’ Coddington, A. (1968) Theories of the Bar- Combination Acts (J5) gaining Process, London: Allen & Unwin. UK legislation of 1799 and 1800 which, Kochan, T.A. (1980) Collective Bargaining and Industrial Relations, Homewood, like the Common Law, outlawed TRADE IL: Irwin. UNION membership and activities amount- —— (1986) The Transformation of Amer- ing to conspiracy. The repeal of these Acts ican Industrial Relations, New York: in 1824 made possible the organization of Basic Books. labour in England. Sisson, K. (1987) The Management of com-dev company (L3) Collective Bargaining. An International Comparison, Oxford: Basil Blackwell. Commercial development company whose activities often include commercial real collective good (H4) estate and commercial software. A PUBLIC GOOD allocated by political deci- (E1) sions, not by the market. COMET An econometric model of European collectivization of agriculture (N5) economies whose name is an abbreviation The reorganization of a country’s agricul- of ‘COmmon market MEdium Term ture into state farms thereby depriving model’. It was created in 1970 and based peasants of landownership and manage- on eight national models for West Ger- ment. Collectivization in the USSR was many, France, Italy, the Netherlands, Bel-

© 2002 Donald Rutherford gium,theUK,IrelandandDenmark.Itis ofINTERMEDIATEGOODS,theseindustries dynamic,givingpredictionsovertime ifcontrolledwouldcontributesubstan- pathsoffivetotenyears.Itmodelsthe tiallytothecontroloftheECONOMYasa realsectoroftheseeconomies:monetary whole. andfinancialelements,representedby 2Educationandtrainingwhicharebasic interestrates,areexogenous.Theinterde- totheperformanceandgrowthof pendenceoftheeconomiesarechiefly industry. describedbytradeflows.Oneofthe Seealso:nationalizedindustry applicationsofthemodelhasbeento developthemethodologyofEUROPEANUN- commercialbank(G2) IONeconomicpolicy. Abankprovidingawiderangeofbanking Seealso:linkagemodel services,includingreceivingdepositsfrom thepublicandthemakingofloans.Asa References consequenceofmorecompetitioninthe Barten,A.P.,d’Alcantara,G.andCarrin, financialsector,thesebankshavediversi- G.J.(1976)‘COMET:amedium-term fiedintoinsurance,mortgagefinanceand macroeconomicmodelfortheEuropean awiderangeofbusinessfinance,pre- EuropeanEco- EconomicCommunity’, viouslytheconcernofinvestment/mer- nomicReview7:63–115. chantbanksalone. commandandcontrolregulation(Q2) Seealso:clearingbank;retailbank; Administrativeandstatutoryrulescon- wholesalebank cerningpollutioncontrol.Sourcesofpol- lutionarenarrowlydefined,specific References controldevicesprescribedandemissions Ballarin,E.(1987)CommercialBanks standardsapplied.Criticsofthisapproach amidtheFinancialRevolution:Develop- toPOLLUTIONCONTROLassertthatitignores ingaCompetitiveStrategy,London: boththeextentofpollutiondamageand Harper&Row;Cambridge,MA:Bal- thecostsofregulation. linger. commandeconomy(P3) commercialbill(G1) AnECONOMYinwhichtheordersofa Ashort-termBILLOFEXCHANGEbywhich centralplanningauthoritytolowerlevel thepersonwhodrawsitpromisestopay economicorganizationshavetheforceof thedraweethesumspecifiedonaparti- law.Lowerlevelorganizationsarein- cularfuturedate,one,two,threeorsix structedtofollowparticularpracticesand monthshence.Thismethodoffinancewas tousestatedprices,inputsandoutput extensivelyusedintheUKintheearly targets.Thefirstmoderneconomyofthis nineteenthcenturybeforebankswerepre- typewasdevisedbyLeninwhowas paredtomakeshort-termadvancesinthe inspiredbytheGermanmilitaryorganiza- formofoverdraftstotheircustomers.Itis tionoftheFirstWorldWar.Untilthe stillapopularformofshort-termfinance. mid-1980s,theplanningmechanismofthe Whenabillofthiskindisacceptedbyan Soviet-typeeconomyhadcommandchar- ACCEPTINGHOUSE,becomingabankbill,itis acteristics. possibleforthedraweetoobtainimmedi- atepaymentatadiscount(fixedaccording Seealso:perestroika totherulingshort-termmoneymarket commandingheights(I2,L0) interestrate). 1Thebasicindustriesofaneconomy, Seealso:treasurybill especiallyenergy,transportandtele- communications.Itisarguedthatasa commercial paper (G1, M2) highproportionoftheiroutputconsists A form of short-term company borrowing,

© 2002 Donald Rutherford usuallyforthirtydays.Theseunsecured GENERAL EQUILIBRIUM analysis since IOUspermitcompaniestoborrowdirectly HICKS. MARX argued that through the frominvestors,bypassingbanksandbond exchange process goods lose their use markets.Banks,however,areusedas value, becoming ‘citizens of the world’ agentstoplacethepaper;sometimes and merely the vehicle for merchants to investmentbanksunderwritetheIOUs earn SURPLUS VALUE. SRAFFA regarded a investingthemselves.Thistypeoffinan- commodity as a good or service pro- cing,longusedintheUSA,wasintro- duced by a unique combination of ducedintotheUKin1986;alsousedin factor inputs. manyothercountries,includingFrance, 2 A raw material or primary product. Australia,HongKongandSingapore. commodity agreement (F1) Seealso:IOUmoney An international agreement between pro- ducing and consuming countries to stabi- commercialpolicy(F1) lize prices and organize quotas for major Theinternationaltradingpolicyofa metals and foodstuffs. nationalgovernmentwithrespecttoim- The UNITED NATIONS CONFERENCE ON TRADE portduties/quotasandexportsubsidies. AND DEVELOPMENT recommended eighteen Thesepolicieshavebeenacentralissuein agreements in 1977 but only achieved economicssincetheMERCANTILISTSfirst them for sugar, cocoa, tin, rubber and debatedthemeritsofTARIFFS. coffee. Seealso:GeneralAgreementonTariffs Commodity Credit Corporation (Q1) andTrade US federal body set up by the AGRICUL- Committee of Twenty (F3) TURAL ADJUSTMENT ACT 1933 to provide a price A committee of twenty leading members support system for US farmers. It lends to of the INTERNATIONAL MONETARY FUND, offi- farmers who pledge their crops as collat- cially known as the ‘Committee on the eral. Farmers can deliver their crops to the Reform of the International Monetary CCC in lieu of repaying the loan and any System’, with the task of considering the accumulated interest. These crops can be possibility of reviving a BRETTON WOODS resold by the CCC if their market price is type of PEGGED EXCHANGE RATE regime and greater than the ‘loan rate’, i.e. the price the supply of international reserve assets. on which the loan was based. The floating of several exchange rates Commodity Exchange of New York prevented it from reaching its central (G1) objective. It finally reported in June 1974. The major US metals exchange in 1870. commodification (E4) Most of its trading is in FUTURES. The transformation of money into a COM- commodity fetishism (D2) MODITY. This has occurred because COM- Marxian term for a fantastic attitude MERCIAL BANKS now resemble industrial towards production, i.e. regarding a social conglomerates with a range of financial relationship between men as a relation products. MARX had previously stated that between things divorced from their use the nature of exchange under CAPITALISM is value. to change money into a unique commod- ity exchangeable with all commodities. See also: commodity commodity (D0) Commodity Futures Trading Commis- 1 Something, usually physical, which can sion (G2, H1) be bought and sold and is directly US federal commission set up in 1974 and measurable. The concept is used exten- operational since 1975 to regulate the sively in both and eleven US futures exchanges, its members

© 2002 Donald Rutherford andbrokeragehouses.Itcoversawide the stage of economic development of the rangeoffuturestrading,includingtrading country, e.g. Third World countries tend inagriculturalcommodities,currencies, to have a preponderance of PRIMARY PRO- metalsandsecurities.Itaimstoensure DUCTS amongst their exports. The com- fairtradingandfinancialintegrity,e.g.by modity structure is examined to test requiringcustomerfundstobekeptin hypotheses about international trade, e.g. separatebankaccounts. the HECKSCHER–OHLIN TRADE THEOREM. commodityreservecurrency(F3) common access resources (Q0) Acurrencywithavaluebasedona Jointly owned natural resources, e.g. a ‘basket’ofcommoditiesrepresentativeof piece of agricultural land open to all averageconsumption.Thiscurrencytends adjoining a town. The major departure tobestableovertime,ashappenedunder from the principle of common access theGOLDSTANDARD,andcantakeavariety occurred in Great Britain from the thir- offormsreflectingthetechnicalcharacter- teenth century onwards when common isticsofcommoditiesataparticulartime land was enclosed into private holdings. andthedesiredlevelofstability.However, ithasbeenarguedthatfewcommodities Common Agricultural Policy (Q1) aresuitableforinclusioninthe‘basket’, The major economic policy of the EUR- e.g.onaccountofstoragedifficulties,but OPEAN COMMUNITY costing over 40 per cent usingcommodityfuturescouldeliminate of the community’s budget. The principles manyoftheseproblems. of the policy were formulated at the Stresa Conference of 1958 and embodied in References Articles 38 to 47 of the TREATY OF ROME.It Friedman,M.(1953)EssaysinPositive has been more protectionist than several Economics,pp.204–50,Chicago:Uni- of the national agricultural policies that it versityofChicagoPress. replaced. The policy, started in the first commoditystabilizationschemes(F1) Mansholt Plan of 1960, intended to con- Internationalagreementsdesignedtoin- trol the ‘agriculture’ of the member coun- troduceorderintointernationalprimary tries in the widest sense of farming and all commoditymarkets,usuallywiththeaim related industries, including fertilizer pro- ofhelpinglessdevelopedcountries.A ducers, machinery and food processing. typicalschemewoulddrawupaprice Implementation of the policy was slow, stabilizationplantopreventtheagricul- e.g. the target price for cereals, the central turalincomesofthesecountriesfalling agricultural commodity of the European belowtheirpresentlevels. Community, was not agreed until Decem- ber 1964. The European Agricultural Gui- Seealso:bufferstock;commodityagree- dance and Guarantee Fund was set up to ment;pricestabilization;primarycom- finance refunds on exports to third coun- modityprices tries, intervention measures to stabilize markets and common measures, including commoditytax(H2) structural modifications. Ataxonagood,usuallytakingtheform The policy has used a ‘single price ofaSALESTAXoranEXCISEDUTY. system’ of target prices throughout the European Community for fixing interven- commoditytermsoftrade(F1)seenet tion prices and frontier crossing point c.i.f. bartertermsoftrade prices. These prices are expressed in council commoditytradestructure(F1) regulations. Price support has been in- The composition of a country’s imports tended both to support farmers’ incomes and exports classified by major product and to make the European Community self- groups. The structure is some indication of sufficient in agricultural produce. But it has

© 2002 Donald Rutherford beenverycostlyasoverproductionhasled theEUROPEANCOMMUNITY.Somecountries toatleast60percentoftheagricultural outsidetheareamaybepermittedtohave budgetbeingspentondisposingofsur- privilegedaccess,e.g.thoseThirdWorld pluses.Temporarybansonproductionand countriesallowedbytheLOME´CONVENTION thegivingofsurplusestocharitiesareused toexporttoEuropeanCommunitycoun- fromtimetotime.MansholtinAgriculture triespreferentially. 1980(published1968)setoutaten-year Seealso:customsunion planforrestructuringEuropeanagricul- ture,includingtheretiringoffarmersand commonmarket(F0) theconcentrationofagriculturalproduc- ACUSTOMSUNIONwithinwhichthereisfree tionintolargerandmoreefficientunits. movementoflabourandcapital,notariffs Theplanachievedlittleasitmetwith betweenitsmembercountriesandaCOM- nationalresistance,especiallyforthreaten- MONEXTERNALTARIFFtoexcludeother ingtheexistenceofsmallfamilyfarms. countries’produce.Acommonmarketin ThispolicyhasreducedEuropeanCom- manyrespectsbehaveslikeanational munityimportsfromtherestoftheworld ECONOMYasallfirmsofthesameindustry andinsulatedcommunitydomesticprices areincompetitionacrossnationalbound- foragriculturalproducefromworldprice ariesandcandrawuponthesamepoolof fluctuations,destabilizingthepricesand labourandfinancialcapital.Theabsence incomesofthefarmersofothercountries. oftariffswithinthismarketenablespro- WithintheEuropeanCommunity,the ductiontobeallocatedaccordingtothe policyhasredistributedincomefromcon- principleofCOMPARATIVEADVANTAGE.The sumersandtaxpayerstoproducersand EUROPEANUNIONisamajormodernexam- discriminatedagainstindustry.Incoun- ple. triessuchastheUK,higherfoodcosts havemetwithmuchcriticism;indevelop- Seealso:singlemarket ingcountries,manyfarmershavegoneout (P0) ofbusinessthroughbeingexcludedbyso 1 Property rights conferred upon a group, largeamarketastheEuropeanCommu- e.g. the use of land by residents of a nity.TheURUGUAYROUNDoftheGENERAL village. AGREEMENTONTARIFFSANDTRADEnegotia- 2 Ownership by the state or one of its tionsattemptedtoreducetheprotection- agencies, e.g. a NATIONALIZED INDUSTRY. ismoftheCAP. common pool resources (Q0) (D0) commoncost Natural or human-made resources which Thecostofaninputsimultaneouslyused provide social and economic benefits for a intheproductionofseveralgoodsand community or communities. These include servicesofafirm. forests, wetlands and water accumulations. Seealso:jointcost It is difficult to exclude individual users from these common resources but it is commoncurrency(F3) easy for an individual to exploit the Acurrencyavailablefortransactionsby resource to the detriment of the commu- severalcountrieswhichstillretaintheir nity. Use has to be co-ordinated to prevent owncurrencies;notaSINGLECURRENCY.It over- exploitation. wassuggestedthattheECUcouldtakeon thisrole. Seealso:publicgood Seealso:hardecu common property resources (Q0) Land or other natural resources which are commonexternaltariff(F1) not owned by an individual because no Thetariffprotectingafree-tradearea,e.g. property rights have been defined or a

© 2002 Donald Rutherford corporatebodyhasmadethemfreely institutionaleconomics’,JournalofEco- availabletoall. nomicIssues17:721–44. commonstock(G1) commonresourceproblem(Q0) TheEQUITYcapitalofaUScorporation. Thedifficultyofassigningtoaparticular Theownerofcommonstockisentitledto userthecostofusingaresourceavailable voteingeneralmeetings,toreceivede- toseveralusers. clareddividendsandtoobtainasharein thenetassetsofthecorporationonits ,JohnRogers,1862–1945 dissolution.Thisstockdoesnotusually (B3) haveaPARVALUE. USeconomistwhowasborninHollands- burg,Ohio,andafounderofINSTITUTIONAL CommonwealthGrantsCommission economics.Althougheducatedasagradu- (H7) atestudentatJohnsHopkinsUniversity, AnindependentAustralianstatutorybody hewasneverabletofinishacollegeor foundedin1933withtheoriginalaimof universitydegreecourse.Heheldacademic dealingwithstatesinneedofspecial postsatWesleyanUniversityandSyracuse assistance.Nowitmakesspecialgrantsto University.Muchofhislifewasspentin thestatestoenableservicestoconformto empiricalworkinWisconsin,constructing minimumstandards.Mostofthesegrants anindexofwholesaleprices,investigating areunconditional,i.e.notEARMARKED. labourunionsandinvestigatingtheeco- Seealso:federalfinance;unconditional nomicconceptspresentinlegalreasoning. grant Hetookasthefoundationofeconomics volitionaltheoriesofvalueandcost, communaleconomy(P0) ratherthanthosebasedonUTILITYora AnECONOMYconsistingofcommunesas COMMODITY.HeusedUSSupremeCourt basicunitsofproduction.Usually,income casestoestablishtheworkingruleswhich isequallydistributedamongcommune guideandrestrainindividualsintransac- membersandthereisnooutsideowner- tions,thekeyunitsofeconomics.‘Value’ shipofcapital.Ascommunestendtobe and‘economy’weretreatedasthetransac- self-sufficient,productionisprimarilyfor tionsofmillionsofpeopleengagedin members’consumption.Moderntechnol- valuingandeconomizing.Hislegalre- ogyisoftendeploredandstrictrules searchesalsoledhimtoanalysethenature governtheconductofthecommunemem- ofbargainingpower. bers.Manyexamplesoftheseidealistic Seealso:Ayres;Galbraith;Veblen communitiesexist,includingRobert OWEN’sexperimentatNewLanark,Scot- References land,inthenineteenthcentury,theIsraeli Commons,J.R.(1893)TheDistributionof kibbutzand,intheUSA,theShakersand Wealth,NewYork:Macmillan. theHutterites. ——(1905)TradeUnionsandLaborPro- blems,Boston:Ginn. Seealso:autarky ——(1924)TheLegalFoundationsof Capitalism,NewYork:Macmillan. Communaute´ Economique de L’Afri- ——(1934)InstitutionalEconomics:Its que de l’Ouest (F0) PlaceinPoliticalEconomy,NewYork: A CUSTOMS UNION with joint sectoral poli- Macmillan. cies created in 1974 and consisting of the ——(1934)Myself,NewYork:Macmillan. , Mali, Mauritania, Niger, Harter,L.G.(1962)JohnR.Commons:His Senegal and Upper Volta as members. AssaultonLaissez-Faire,Corvallis,OR: OregonStateUniversityPress. commune (P0) Rutherford,M.H.(1983)‘J.R.Commons’ An association of persons jointly owning a

© 2002 Donald Rutherford productiveenterpriseandmanagingit Walesgraduallyfrom1990.Itreplaced themselves.Themostfamousexamples theexistingRATESsystemandwascom- aretheParisCommuneof1871,theIsraeli binedwithaUNIFORMBUSINESSRATE.A kibbutzandRobertOWEN’scommunitiesin principalaimofthischargewastoen- theearlynineteenthcenturyinEngland couragetheadultpopulationtobring andtheUSA. pressureupontheirlocalgovernmentsto moderatetheirexpenditure:byincreasing Seealso:commonownership thenumberpayinglocaltaxationitwas (P2) hopedtherewouldbemoreoppositionto Asocietywithcommonownershipof localgovernmentoverspending.Critics capitalandincomedistributionaccording opposeditshighcollectioncostandre- toneed.UnderMarxist-Leninismitis gressivenature(onlygivingrebatestothe strictlydefinedasthefinalstageofsocial- verypoor).Alsoitwasarguedthata ismwhenthestatehaswitheredaway, communitychargeshouldonlybeusedto everyoneisequalasmembersofauni- financePUBLICGOODS.In1991,itwas versalproletariat,andthereisnoDIVISION decidedtoreplaceitwithamodified OFLABOUR.MARX’svisionwasexceedingly propertytax,theCOUNCILTAX. vaguebecausehisconcernwastoanalyse References contemporarycapitalismratherthanfu- turesocialism.Thenearesttocommunism HMSO(1986)PayingforLocalGovern- ment,Cmnd9714. hasbeeninsmallidealisticcommunities; Mason,D.(1985)RevisingtheRating largersocietiesareunlikelytoconsentto System,London:AdamSmithInstitute. suchlevelling.Thetermwasoftenapplied looselytothecentrallyplannedstate communityprogramme(J2) capitalistcountriesoftheCOMECONand UKemploymentmeasuretohelpthelong- China. termunemployedbyprovidingthemwith jobsofbenefittothecommunity,e.g. Seealso:commandeconomy;socialism rehabilitatingwasteland.Theseareoffered References onatemporarybasisandareoftendis- Daniels,R.V.(ed.)(1965)Marxismand likedforbeinglowpaid. Communism:EssentialReadings,Syra- Seealso:workfare cuse,NY:Singer. commuting(R4) communitarianism(P4) Dailyjourneysofworkersbetweentheir Aneconomicphilosophysometimescalled homesandplacesofwork.Whenatrans- theTHIRDWAYthatisopposedtothe portnetworkmakesplacesdistantfroma doctrineofINDIVIDUALISMandthepraise centreofproductionmoreaccessible, ofECONOMICMAN.Acollectivistsuccessor housebuildingoccursinoutlyingareas, tosocialismthatopposeslibertarianism. causinglandandpropertypricestorise. community(P0) Othereffectsofcommutingincludein- Acollectivity:ahousehold,aneighbour- creasedtrafficcongestionandthediffi- hood,village,city,state,transnational cultyoffinancingcityservicesusedby,but interestgroup,inascendingorderofsize. notpaidfor,commutingworkers. Seealso:communitarianism Seealso:circularmigration;fiscalmobi- lity communitycharge(H2,H7) AformofUKlocaltaxationoftencalled company (M1) the‘polltax’andleviedonmostadults A legal entity or corporate body brought over18yearsold.Itwasintroducedin into existence by registration under the UK Scotlandin1989andinEnglandand Companies Acts (1844 and subsequently).

© 2002 Donald Rutherford Acompanyisownedbyshareholders itieswhichtheyperformrelativelybetter. whoselegalpersonalitiesaredistinctfrom Fromitsfirstenunciationin1815byTOR- thecorporatebody,andithasarangeof RENS,thisprinciplehasstatedthata activitiesdefinedunderitsArticlesof country’spatternofproductionandinter- Association.Forthepasthundredyears nationaltradeandspecializationarede- thishasbeenadominantformofbusiness terminedbyitsrelativeefficiencyin organizationincapitalisteconomies.The producinggoods.Thisapproachadvances existenceofcompaniesiscompatiblewith Smith’sdoctrineofABSOLUTEADVANTAGE, SOCIALISM,providedthatthestatesetsthe whichwasasimpleextensionofhisDIVI- economicandsocialaimsofeachcom- SIONOFLABOURprinciple.TorrensandRI- pany. CARDOarguedthatevenifcountryAwere Seealso:corporation;firm moreproductiveineveryagriculturaland industrialactivitythancountryB,trade companytown(R1) wouldstilltakeplaceifinternalproduc- Atownrunbyonefirm,e.g.aplacerun tioncostratiosweredifferentfromcoun- byaminingcompanywhichprovidesall trytocountry.Althoughthisadvanced jobs,servicesandhousing.Thesetowns internationaltradetheory,itwaslater havebeencriticizedforpermittingunscru- criticizedforassumingconstantcosts, pulousfirmstoperpetratemanyformsof ignoringtransportcostsandfornotdeter- exploitation,includingthemonopolysale miningtheratioatwhichexchangewould ofpoor-qualitygoodsatinflatedprices. takeplace.JohnStuartMILL,withhisLAW companyunion(J5) OFRECIPROCALDEMAND,completedthethe- ATRADE(LABOR)UNIONdependentonthe orybyestablishingtheactualexchange companywhichapprovesit.Onlythe rateresultingfromtrade. employeesofthatcompanyarepermitted Ricardo’sexampleoftradeinclothand tobemembers.Inthenineteenthand winebetweenEnglandandPortugalstates twentiethcenturies,especiallyintheUSA, thattoproduceagivenamountofeach organizedlabourobjectedtothesefake commoditythefollowingamountsofla- unions. bourarerequiredineachcountry: Seealso:enterpriseunion;sweetheart contract;truck England Portugal (J3) comparableworth Cloth 100 men 90 men Therelativevalueofaworker’slabour basedonproductivityratherthanpersonal Wine 120 men 80 men characteristics.Aprincipleadoptedin Australiain1972andintroducedinthree uniformstepsbyJune1975tocounter Thus,Englandcanproduceclothrela- SEXUALDISCRIMINATION. tivelymorecheaplythanwineandPortu- galcanproducewinemorecheaplythan Seealso:EqualPayActs1963and1970 cloth.Thecountrieswillbothgainby References increasedspecializationintheproduction McGavin,P.A.(1983)‘Equalpayfor ofthegoodforwhichtheyhaveacom- women:areassessmentoftheAustra- parativeadvantage,eventhoughPortugal lianexperience’,AustralianEconomic hasanabsoluteadvantageintheproduc- Papers22:48–59. tionofbothcommodities. comparativeadvantage(F1) Seealso:Heckscher–Ohlintradetheorem; Theprinciplejustifyingindividualsorna- Leontiefparadox;Rybczynskitheorem; tionsspecializinginthoseeconomicactiv- termsoftrade

© 2002 Donald Rutherford comparativecosts(F1)seecomparative theINCOMEEFFECTofpricechangessothat advantage onlytheSUBSTITUTIONEFFECTisinforce. comparativestatics(E1) compensatingcommontariff(F1) Atechniqueofeconomicanalysiscompar- ATARIFFwhichkeepstherestoftheworld ingoneequilibriumpositionwithalater aswelloffaftertheformationofaCUS- onewhichistheproductofchangesinthe TOMSUNIONasitwaspreviously. valuesofPARAMETERSandEXOGENOUSVARI- compensatingwagedifferential(J3) ABLES.KEYNESusedthismethod;ROBERTSON Adifferentialinwagesorsalariescreated andHARRODpreferreddynamicmethods tocompensateforapoorjobattribute,e.g. which,unlikecomparativestatics,havethe ahealthhazardorvariabilityofearnings. advantageofshowinghowanearlier Firmsgrantthesedifferentialstoenable equilibriumistransformedintoalater themtoretainstaffinundesirablejobs one. andtorecruitnewworkers. compassionateconservatism(I3) compensationprinciple(D6) Apoliticalcreedadvocatingtheshrinking Therulethatredistributionleadstoan oftheWELFARESTATEbyusingfaith-based improvementineconomicwelfareifthose organizationstoprovidewelfareservices. whogainanincreaseinrealincomeand ThisintheUSAentailedthedismantling welfareareabletocompensatethelosers oftheGREATSOCIETYprojectofPresident andstillbebetteroff.Thismajorprinciple LyndonB.Johnson.PresidentGeorgeW. ofmodernWELFAREECONOMICSwasdevised Bushinhiselectioncampaignof1999– byKALDORandHICKStodealwiththe 2000oftenreferredtothisphilosophyof problemofmakinginterpersonalcompar- conservatism. isonsofUTILITY;ithasoftenbeenapplied inCOST–BENEFITANALYSIS. References References Olasky,M.N.(2000)CompassionateCon- servatism,NewYork:Simon&Schuster. Mishan,E.J.(1981)IntroductiontoNor- mativeEconomics,NewYork:Oxford compensateddemandcurve(D1) UniversityPress. Ademandcurveconstructedsothata compensatoryfinance(H5) consumer’sinitiallevelofUTILITYiscon- Expendituresbyagovernmenttooffset stantbecauseofanadjustmenttohisor LEAKAGESfromtheCIRCULARFLOWofin- hermoneyincome.Thiscurveeliminates come.Thus,theimpactoftaxes,savings andimportswhichreducethevalueofthe MULTIPLIERforanationaleconomycanbe reducedbyagovernmentincreasingits publicexpenditureandboostingexports throughsubsidizingexportindustries. compensatoryfinancialfacility(F3) AnINTERNATIONALMONETARYFUNDarrange- mentinforcesince1963tohelpwiththe fluctuationsincommoditypriceswhich causeashortfallinthevalueofexports. RepaymentsaremadetotheInternational MonetaryFundoverathree-tofive-year period. Seealso:additionalfacilities

© 2002 Donald Rutherford competition (L1) attempt to control dominant , The state of a market in which several RESTRICTIVE PRACTICES and ANTI-COMPETITIVE suppliers of goods or services struggle with PRACTICES, to monitor mergers and to each other to acquire the custom of protect consumers. buyers. The principal types of competition In the UK, this policy was gradually are perfect, duopolistic, monopolistic and developed from 1948. The Monopolies oligopolistic. Adam SMITH and MARSHALL and Restrictive Practices (Inquiry and analysed perfect competition; COURNOT Control) Act 1948 permitted the Board of presented a model of DUOPOLY; CHAMBERLIN Trade to refer to the newly constituted propounded a theory of MONOPOLISTIC COM- Monopolies and Restrictive Practices PETITION. Competition has often been criti- Commission ‘monopoly situations’ where cized by socialists and idealists for one-third of the supply of goods was bringing about an unfair distribution of supplied by one firm, or two or more incomes and discouraging co-operation. interconnected firms, in order to ascertain whether that situation was against the Competition and Credit Control (E5) ‘public interest’, which was regarded as UK discussion paper proposing new tech- the promotion of efficiency, the suitable niques of monetary policy to combine pricing of goods for domestic and foreign effective control over credit conditions markets and technical progress. The com- with competition and innovation. Its re- mission’s report on ‘Collective discrimina- commendations included: (1) the require- tion’ recommended the separate and ment that all banks hold not less than 12½ judicial investigation of restrictive prac- per cent of their sterling deposit liabilities tices. The Restrictive Trade Practices Act in specified reserve assets, which included 1956 set up a register of permitted restric- cash at the Bank of England, money at tive agreements and a Restrictive Practices call, treasury and local authority bills and Court to ascertain whether it was right to UK government securities with less than regard an agreement as against the public one year to run; (2) the placing of SPECIAL interest. The legislation was also extended DEPOSITS, variable in amount, by the banks in 1964 by the Resale Prices Act to cover with the Bank of England; and (3) the individual enforcement of RESALE PRICE withdrawal of Bank of England support MAINTENANCE. References to the renamed for the UK GILTS MARKET. These proposals Monopolies and Mergers Commission were implemented in the 1970s. were possible under the Monopolies and References Mergers Act 1965 where a monopoly ‘Competition and Credit Control’, Bank of situation was strengthened or the value of England Quarterly Bulletin 11: 189–93, assets taken over was in excess of £5 1971. million. The investigation of firms supply- ing services was another concern of the Competition Commission (L4) 1965 Act. Further legislation on restrictive The UK regulatory body inaugurated in practices in the 1968 Restrictive Trade 1999 to replace the MONOPOLIES AND MER- Practices Act brought INFORMATION AGREE- GERS COMMISSION. It conducts inquiries re- MENTS within the ambit of the Restrictive ferred to it on monopolies, mergers and Practices Court. The Fair Trading Act the economic regulation of utility compa- 1973 set up the office of Director-General nies and handles appeals against the deci- of Fair Trading with wide powers to sions of the Director-General of Fair investigate and refer to the Monopolies Trading. and Mergers Commission. The monopoly competition policy (L4) situations which could be investigated in- The set of statutory measures of a country, cluded those with only a quarter of the or of the EUROPEAN COMMUNITY, which market, not only nationally, but also in

© 2002 Donald Rutherford local areas; the concept of ‘public interest’ to include institutions receiving deposits, was clarified by relating it to ‘competi- having deposit insurance and being en- tion’. The Competition Act 1980 trans- gaged in commercial lending. ferred the investigation of prices to the competitive fringe (L1) Director-General of Fair Trading and gave The smaller firms coexisting with a few the latter the task of investigating ANTI- large firms in an oligopolistic industry: COMPETITIVE PRACTICES; under the Act, var- these firms have no influence over the ious public bodies, e.g. bus and water market, especially in the setting of prices. authorities, could be referred to the Monopolies and Mergers Commission for competitiveness index (F3) a consideration of their efficiency and An index to determine average annual costs, the service provided and possible increase in GDP per capita based on seven abuse of a monopoly situation. The 1984 types of variable: openness, government Act consolidated the legislation. The policies, finance, infrastructure, technol- Competition Act 1998 introduced new ogy, management, labour and civil institu- rules to prohibit agreements, business tions. It is compiled by the World practices and conduct that would damage Economic Forum of Geneva, Switzerland. competition with fines up to 10 per cent of a business’s turnover. competitive process (L1) A process consisting of two opposing The EUROPEAN ECONOMIC COMMUNITY from its inception regarded the promotion of tendencies: the transfer mechanism which competition as a major policy goal. The reallocates the market shares of the less efficient firms to the more efficient and the TREATY OF ROME in Articles 3, 7, 37 and 85– 94 deals with many aspects of the promo- INNOVATION mechanism which enables firms tion of competition. State monopolies, lagging behind their competitors to intro- restrictive agreements, abuses of dominant duce new products or processes to reassert positions in markets, the control of public their position in a market. enterprises by national governments and References state aid to industries by national govern- Downie, J. (1958) The Competitive Process, ments are all covered by the policy. London: Duckworth. In the USA, since 1890 the federal government has pursued an active compe- competitive tendering (M2) see tition policy, known as ANTITRUST. compulsorycompetitivetendering References competitive trading (D4) The traditional method of exchange in a Cini, M. and McGowan, L. (1998) Com- petition Policy in the European Union. market consisting of buyers and sellers New York: St Martin’s Press. using their relative market strengths to Wilks, S. (1999) In the public interest: reach an agreed single market price. Competition Policy and the Monopolies Seealso:barter;countertrade and Mergers Commission, Manchester: Manchester University Press. complement (D0) A good consumed in conjunction with Competitive Equality Banking Act another, e.g. petroleum with a car. 1987 (G2, K2) Whether two goods are complements of US federal statute which establishes that each other can be discovered by measuring transactions between member banks of the the CROSS PRICE ELASTICITY OF DEMAND be- FEDERAL RESERVE and their subsidiaries and tween them. If the cross-elasticity is nega- holding company affiliates be on the same tive, then the good is a complement. terms as those offered to unaffiliated companies. A bank was broadly defined Seealso:substitute

© 2002 Donald Rutherford complexitytheory(D0) sum becomes immense compared with the Astudyofagentsinteractingsimulta- original sum. Not surprisingly, Keynes neouslyinamultiplecauseandeffect asserted that ‘there is no more powerful feedback.Itlooksattheemergenceofa force than compound interest’. newphaseofasystemandalargerange ofpotentialsinsteadofforecastingonthe Comprehensive Employment and basisofasimplecauseandeffectchain. Training Act 1973 (J2) TheSantaFeInstituteofNewMexico, US federal statute consolidating previous, foundedin1984,pioneeredthisformof mainly youth, training programmes which analysis. hoped to give every youth and adult an opportunity to work. It decentralized References planning procedures and its implementa- Arthur,W.B.,Durlauf,S.D.andLane, tion, including ON-THE-JOB TRAINING. The D.A.(1997)‘Theeconomyasanevolving Job Corps set up under Title IV was a complexsystem’,Proceedingsofthe residential programme to provide remedial EvolutionaryPathoftheGlobalEcon- work and skills training for severely dis- omyWorkshop,SantaFa,NewMexico, advantaged youths. September,Boulder,CO:Westview Press. Comptroller of the Currency (G2, H1) compliancecost(D0) US office set up under the NATIONAL BANK- Thecostofcomplyingwithagovernment ING ACT 1863 originally to deal with currency regulation,includingtaxation.Suchcosts and monetary matters, but the task of areincurredbytheprivatesectorandby chartering and monitoring national banks governmentalorganizationsbelowthele- also given to it has become its principal velofcentral/federalgovernment.The concern. costsofcomplianceincludeaccountants’ compulsory competitive tendering feesandtheOPPORTUNITYCOSTofthetime (H7, M1) spentfillinginforms. The rule that UK local authorities put out compositecommodity(D0) major services, e.g. street cleaning, to TEN- Acollectionofgoodsrepresentingpur- DER instead of providing them by their chasingpoweringeneral,ormoneyasitis own departments. In many cases, the amediumofexchange.Thiscompositeis contract is awarded to the original local onlypossibleifthepricesofothergoods authority service. remainconstant.HICKSintroducedthe compulsorysavings(E2)seeforced concept. savings Seealso:ceterisparibus Computer-assisted TradingSystem (G2) References Toronto-based securities trading system, Hicks, J.R. (1939) Value and Capital, ch. 2, the first of its type to receive orders from Oxford: Oxford University Press. abroad electronically and to direct them immediately to its trading floor. composite insurance company (G2) An insurance company transacting a wide Seealso:StockExchangeAutomated range of life and non-life insurance busi- QuotationSystem ness. concentration (L1) compound interest (E4) The extent to which an industry is domi- Cumulative interest paid on both the nated by a few firms. This can be mea- original amount lent and subsequent inter- sured by examining the proportion of est which is added to the PRINCIPAL. If the production, sales, value added or employ- totalaccumulationperiodislong,thetotal ment attributable to the largest firm or

© 2002 Donald Rutherford firms.MONOPOLY,DUOPOLYandOLIGOPOLYare thereislessriskofdefaultinservicingthe themostconcentratedofmarketforms; loan.ItisarguedthattheINTERNATIONAL PERFECTCOMPETITIONistheleast.UKin- MONETARYFUNDandWORLDBANKinmaking dustryismoreconcentratedthanthatof thisstipulationmake‘conditionality’a theUSAorotherWestEuropeancoun- PUBLICGOOD. tries,partlybecauseofitssmallerdomestic Condorcetcriterion(D0) market,whichnecessitatesfewfirmsper Avotingprocedurebywhichthecandidate industryifECONOMIESOFSCALEaretobe ischosenonthebasisofdefeatingallthe achieved,andpartlybecauseoftheweak- othersbyobtainingthemajorityofthe nessoftheUKpolicyonmergers. votesinpairwiseelections. Seealso:aggregateconcentration;concen- ConfederationofBritishIndustry(L0) trationratio;Ginicoefficient;Herfindahl– Themajorrepresentativebodyforprivate Hirschmanindex;Lernerindex;Lorenz andpublicsectorfirmsofUKindustry. curve;relativeconcentration TheCBIwascreatedin1965asaresultof concentrationeconomy(D0) themergingtogetheroftheFederationof AnECONOMYOFSCALEarisingfromthe BritishIndustries(foundedin1916),the concentrationofindustryinaparticular BritishEmployers’Federationandthe area. NationalAssociationofBritishManufac- turers. Seealso:agglomerationeconomy confidenceinterval(C1) concentrationratio(L1) Therangewithinwhich,toacertain 1Anabsoluteratio(sometimescalleda percentage,oneisconfidentthatasample leadingfirmsratio)whichshowsthe statisticlies.Thus,witha95percent percentageofsales,output,assets,value confidenceinterval,ifwesample1,000 addedoremploymentwhichcanbe voterstoascertaintheircurrentopinion ascribedtothelargestfirmsofthe ofthegovernmentwecanbeconfident industry,usuallythetopfourorfive. thatonlyfiftyareunrepresentativeofthe Theseratiosaremoreaccurateifthey populationasawhole.Confidenceinter- areadjustedforimportsandexports. valsarestatedforMEANS,STANDARDDEVIA- 2Arelativeratiobasedonasizedistribu- TIONS,proportionsanddifferences. tionoffirmsshowing,forexample, whatproportionoffirmshaswhat Seealso:confidencelevel proportionofoutput;LORENZCURVES confidence level (C1) andGINICOEFFICIENTSareusedforthis A confidence limit, or CRITICAL VALUE, purpose. expressed as a percentage. Seealso:aggregateconcentration;Herfin- conflicting claims approach to inflation dahl–Hirschmanindex;Lernerindex;N- (E3) firmconcentrationratio Attributing INFLATION to the total wage concretelabour(D2,J0) claims of workers exceeding the total Thelabourrequiredtoproduceaparticu- income available. larproduct,e.g.apieceoffurniture. References Labourinthisqualitativesensecreates usevalues. Rowthorn, R.E. (1977) ‘Conflict, inflation and money’, Cambridge Journal of Eco- Seealso:abstractlabour nomics 1: 215–39. conditionality(F3) confluence analysis (C1) Lendingtoadebtoronconditionthatthe A general statistical method used in loanisusedforaspecificpurposesothat econometrics created by FRISCH and others

© 2002 Donald Rutherford fromthe1930sonwards.Itattemptsto votedtoparticularprogrammes:pre- discoverthedifferentlinearrelationships viouslythepresidentcouldrefusetospend betweenseveralobservablevariables,tak- moneysforpurposeswhichhadbeenthe ingintoaccountmeasurementerrors. subjectofappropriationbillsdespiteCon- gressionalapproval. References Frisch,R.(1934)StatisticalConfluence Seealso:Gramm–Rudman–HollingsAct AnalysisbyMeansofCompleteRegres- sionSystems,Oslo:Universitetetsøko- consideration (G1, K0) nomiskeinstitutt. 1 The value of a stock exchange transac- tion expressed in a particular currency. conglomerate(M1) 2 The advantage or detriment which es- Alargefirm,particularlyintheUSA,with tablishes a particular contract under manysubsidiaryfirmsproducingunre- common law jurisdictions such as Eng- latedgoodsandservicessoastoreduce land and Wales, the USA and some risk.FamousUSconglomeratesinclude Commonwealth countries. ITT,LTV,Litton,TextroandGulfand Western.Theirpastgrowthwasbasedon consol (G1) asimplemathematicaltruththatifa A consolidated fund stock (‘Consolidated companywithahighPRICE–EARNINGSRATIO Annuity’) of the UK government issued as takesoveronewithalowerprice–earnings an unredeemable fixed interest security. ratio,theacquiringcompany’searnings They were introduced in 1751 as a means persharewillautomaticallyrise,helping of replacing a variety of government bonds tofinancefurtheracquisitions.Theirre- of different MATURITIES and interest rates centgrowthhasbeenhamperedbythe with a single government stock. The yield oppositionoftheUSDepartmentof on consols has often been used as a Justiceandperiodsoffallingstockmarket measure of the long-term rate of interest. prices. The consols currently traded in the UK conglomeratemerger(L1) have nominal interest rates of 2½ per cent and 4 per cent. AMERGERbetweentwofirmswithdifferent productsoractivities.Thesemergersare Consolidated Fund (H1) motivatedbythedesiretouseunderuti- The fund of the UK central government lizedresources,particularlymanagement into which all direct and indirect tax andmarketing.Althoughitishopedthat revenues and other receipts are paid. Prior themergerwillcreateafinanciallystrong to its establishment in 1787, separate firm,ratherthanafirmwithanincreased funds existed for each type of government marketshare,experiencehasshownthat revenue. manymergersofthiskindhavenotbeen financiallysuccessful. Seealso:funding

CongressionalBudgetandImpound- Consolidated Fund standing services mentControlAct1974(H6) (H6) MajorUSfederalstatutewhichreformed An item of the UK budget covering theUSbudgetprocessbychangingthe expenditures which do not require annual fiscalyearfrom1Julyto1Octobertogive approval by parliament, e.g. interest on Congressmoretimetoconsiderthebud- the NATIONAL DEBT and the salaries of get,creatednewbudgetcommittees,intro- judges. ducedafirstbudgetresolutiontoestablish ceilingsonexpenditure,revenueanddebt Consolidated Metropolitan Statistical andmadeanti-impoundmentprovisionsto Area (J1, R1) stopthepresidentfromseizingmoney A large metropolitan complex of the USA

© 2002 Donald Rutherford includingPRIMARYMETROPOLITANSTATISTICAL prices would show national income for a AREAS. number of years at the prices of one year. consolidationloan(G2) constant returns to scale (D0) see Aloanofferedbyafinancialinstitutionto returnstoscale replaceseveraloutstandingloansofa constrained market pricing (D4, L5) debtor.Thereplacementloanwillbeless Prices in little need of regulation because costlytoserviceeachmonthandwillbe they are constrained by competition. This overalongerperiod.Personswithburden- concept is used by US regulatory agencies, somecreditcarddebtscanuseloansofthis such as the INTERSTATE COMMERCE COMMIS- kind,oftensecuredonresidentialproperty. SION, in its pricing policies. Prices not consortiumbank(G2) constrained by competition have to be Abankjointlyownedbyanumberof between a floor price equal to marginal otherbanksforthepurposesofgiving cost and a ceiling price equal to the STAND- smallbanksrepresentationinafinancial ALONE COST. centre.Theseconsortiadealwithspecific Consumer Advisory Council (L4) typesoffinancing,especiallymassiveloans A subordinate organization of the US FED- forinfrastructureinvestment. ERAL RESERVE Board of Governors estab- conspicuousconsumption(E2) lished in 1976 to advise the board on the Expenditureonexpensivegoodstoimpress discharge of its duties under the Consumer otherswithone’swealthandstatusrather Credit Protection Act. It has thirty mem- thantosatisfybasicneeds.VEBLENwasthe bers. firsttoanalyseostentationofthisnature. consumer credit (G2) constantcapital(D2,E2) Credit granted by banks, finance houses TheMARXIANtermforrawmaterialsand and other financial institutions usually to machinery.Thisformofcapitaltransfers purchase CONSUMER DURABLES. The volume onlyitsownvalue,originallycreatedby of this credit can be controlled by altering labour,tothefinishedproduct. its price, i.e. by changing interest rates or the minimum size of initial deposits. Seealso:organiccompositionofcapital; variablecapital Consumer Credit Act 1974 (G2, K2) UK statute which set up a system of constant elasticity of substitution pro- consumer protection administered by the duction function (C5, D2) Director-General of Fair Trading. Agree- A production function in which the elasti- ments for credit under £5,000 were regu- city of input substitution is constant at 1 lated, businesses conducting consumer or some other value. This production credit or consumer hire were licensed, function succeeded the COBB–DOUGLAS PRO- credit advertisements were controlled and DUCTION FUNCTION. consumers were allowed a cooling-off References period in which agreements could be Arrow, K.J., Chenery, H.B., Minhas, B.S. cancelled. and Solow, R.M. (1961) ‘Capital-labour consumer durable (D0) substitution and economic efficiency’, A consumer GOOD not immediately con- Review of Economics and Statistics 43: sumed but the producer of a stream of 225–50. services over a period of years. Vehicles, constant prices (D0, E3) electrical goods and other durable house- A measure of an economic variable de- hold articles are major examples. Unlike flated to allow for price changes; for the services of houses, there is no inclusion example, the NATIONAL INCOME at constant of the benefits of consumer durable own-

© 2002 Donald Rutherford ershipandallowancefortheirdepreciation theinterestsofconsumers,evenatthe inNATIONALINCOMEaccounts.Despitecon- costofshareholders’incomes.Action sumerdurablesresemblingthefixedcapi- cantaketheformoflobbyingparlia- talusedbyfirms,theyareclassifiedas mentsforlegislation,protestmarches partofconsumption.However,astheir andlegalsuits.Inresponsetothese purchaseoftenrequiresCONSUMERCREDIT, campaigns,manyWesterncountries likefixedcapital,theyaresubjecttoa sincethe1960shaveintroducedelabo- fluctuatingdemandsensitivetomonetary rateconsumerprotectionlegislationto policy. ensurethatconsumersgetafairdeal before,duringandafterbuyingagood Seealso:browngood;whitegood orservice.IntheUSA,forexample,the FEDERALTRADECOMMISSIONsupervisesad- consumerequilibrium(D1) vertising,theFairPackagingandLabel- Thatchoiceofexpenditures,usingagiven ingAct1965preventsinadequate income,whichwillmaximizeaconsumer’s productinformationonpackagesand UTILITY.Formallyitisexpressedinthe labels,theConsumerCreditProtecting statementthateachratioofmarginal Act1968requiresasimplestatementof utilityfromaparticulargoodrelativeto thedetailsofloans,theFairCredit itspriceisequaltoeveryothersuchratio ReportingAct1970allowsconsumers throughouttheconsumer’spurchases(ifit accesstotheircreditreports,anda isnot,itwillbepossibletoredistribute varietyofsafetyactsprotecttheusers one’sexpenditurestoincreasetotalutility). ofcars,toysandotherproducts.Inthe ThisequilibriumisbasedontheLAWOF UK,theCONSUMERCREDITACT1974pro- DIMINISHINGMARGINALUTILITY: videsprotectionforconsumers.How- ever,therearestillopponentsof consumerprotectionwhoarguethat marginal utility of marginal utility of regulationisanexpensiveandbureau- good A good B craticprocedureundulyrestrictingthe price of A = price of B behaviouroffirms.Also,someconsu- ... mersmaybepreparedtoendurelower qualitytomakesomepurchasesfall = marginal utility withintheirbudgets. good n 2Advocacyofmaterialism,ofpurchasing = moreandmoregoodsandservices price of n ratherthanbeingfrugal. Seealso:consumersovereignty

ConsumerExpenditureSurvey(C8) References USsurveyofthecurrentexpenditureofUS Evans, J. (1980) Consumerism in the United residentswhichbeganin1979.Itisusedto States, New York: Praeger. revisetheCONSUMERPRICEINDEXandis Swagler, R. (1994) ‘Evolution and Appli- conductedbytheBureauoftheCensus cations of the Term Consumerism: Theme and Variations’, Journal of Con- fortheBureauofLaborStatistics.Infor- sumer Affairs 28: 347–60. mationiscollectedfromapanelwhichis Swann, D. (1979) Competition and Con- interviewedfivetimeseverythreemonths, sumer Protection, Harmondsworth: Pen- andfromrecordskeptbyparticipating guin. householdsoveraspecifiedfortnight. consumer price index (E3) consumerism(D1) US price index which shows the average 1Concertedactiontomakefirmspursue change in the prices of a representative

© 2002 Donald Rutherford basketofgoodsandservicespurchasedfor largecorporationswithhugeadvertising dailylivingbyUShouseholds.Dataare budgets,GALBRAITHandothershavechal- collectedonthepricesoffood,clothing, lengedthisviewoftheinfluenceofcon- housing,fuelsandservices,etc.,from sumers.Also,theincreaseintheroleof eighty-fiveareas.Marketprices,including governmentandtheimportanceofMERIT indirecttaxes,areusedandeachitemis GOODShavereducedthepowerofindivi- weightedaccordingtoitsimportancein dualconsumersinmoderneconomies. consumers’budgets.TheUSBureauof Seealso:countervailingpower LaborStatisticsbeganthecompilationof thisindexin1919.Twoversionsofitare consumer’ssurplus(D1) published:theCPI-UandtheCPI-W. Thearea,shadedinthefigure,underan individualconsumer’sdemandcurve Seealso:ConsumerExpenditureSurvey; whichshowsthedifferencebetweenwhat retailpriceindex aconsumeriswillingtopayandwhat consumerprotectionlegislation(D1, actuallyispaid.Itwillbegreaterforricher K2) consumersastheyhaveahigherdemand; Measurestoenforceminimumstandards hence,whenthepricestructureisdesigned intheprovisionofgoodsandservices,to toreflectconsumerincomes,higherin- provideadvisoryservicesforconsumers comegroupspaymoreforagoodservice, and,inthecaseofpubliccorporations e.g.employedpersonsarechargedmore (UK),toestablishusers’councilstohan- thanunemployed.Thismajorconcept, dlecomplaints.Theprincipalmeasures introducedintoeconomicsbyDUPUITand protectingtheUKconsumeraretheSale refinedbyMARSHALLandHICKS,hasbe- ofGoodsAct1979,theTradeDescrip- comeamajortoolofCOST–BENEFITANALYSIS. tionsActs1968and1972andtheCon- sumerCreditAct1974.IntheUSA,the FoodandDrugAdministrationandthe ConsumerProductSafetyCouncilenerge- ticallyprotecttheconsumer. Seealso:consumerism consumersociety(D1,P0) Asocietywhichdevotesahighproportion ofitsincometoluxurygoodsandunder- takeslittlesaving.OnlyMARKETECONOMIES havebeenprosperousenoughtochoose thislifestyle. Seealso:conspicuousconsumption consumersovereignty(D1,M3) Thedecisivepowerofconsumerstodeter- Seealso:producer’ssurplus minetheamountandpatternofproduc- tionbyfreelychoosinggoodsandservices References inaccordancewiththeirpreferences. Bergson, A. (1975) ‘A note on consumer’s AdamSMITHinhisrejectionofMERCANTI- surplus’, Journal of Economic Literature LISMturnedthegoalofeconomicactivity 13: 38–44. tosatisfyingtheconsumerratherthan Deaton, A. and Muellbauer, J. (1980) producers.NEOCLASSICALECONOMICSbuilt Economics and Consumer Behavior, manyofitstheoriesonthenotionofCON- New York and Cambridge: Cambridge SUMEREQUILIBRIUM.Giventhegrowthof University Press.

© 2002 Donald Rutherford consumptionexternality(D6) contestablemarketsthesis(L1) Theeffectofoneperson’sconsumptionon BAUMOL’sviewthatcompetitioncanbe theproductionandconsumptionofothers. maintainedbythestateensuring thatan Amodernexampleistheeffectofcigar- industry’sbarrierstoentryarekeptlow. ettesmokingonthehealthofnon-smokers Undersuchcircumstances,freeentryand whoareforcedtobe‘passivesmokers’and exitwillmaintainthemarketinacompe- arecompelledtopayfortheconsequences titive state.Thisthesisiscompatible with ofsmokingonthehealthofsmokers recentUKCOMPETITIONPOLICY. throughhighermedicalinsurancepre- References miumsorhighertaxes. Baumol,W.J.,Panzar,L.C.andWillig, Seealso:externality R.D. (1982)ContestableMarketsand theTheory ofIndustryStructure,New consumptionfunction(E2) York:HarcourtBraceJovanovich. Therelationshipwhichshowsaggregate consumptionasafunctionofincome contingencyclaimscontracting (J3)see (measuredabsolutely,relativelyorperma- employmentcontract nentlyatcurrentorconstantprices)and contingencytable(C1) possiblywealthortherateofinterest.As Atable whose columns and rows are consumptionisthemajorpartofna- observed frequencies so that the expected tionalexpenditure,theconsumptionfunc- frequency of a particular hypothesis can tioniscentraltomodelsofincome be investigated. These tables can be ex- determination.KEYNESinhisGeneralThe- tended to more than two dimensions. oryinspiredmuchoflaterwork,whichhas includedtheABSOLUTEINCOME,RELATIVEIN- contingent commodity (D0) COME,PERMANENTINCOMEandLIFE-CYCLE A new commodity resulting from the approaches. occurrence of a particular event. consumptiontax(H2) contingent fee (D4) Ataxleviedonactualexpenditureswith A fee paid only on the successful outcome thehopethatitwillencouragesaving.In of an activity, e.g. a fee for a lawyer’s wartimewhenithasbeennecessaryto services which is a percentage of the curbconsumption,taxesofthiskindhave damages awarded to a plaintiff. In the beenleviedasanalternativetorationing. USA this fee system is alleged to encou- rage vexatious litigation. Seealso:expendituretax contingent market (D4, G1) contango(G1) A market, particularly an insurance mar- 1Achargeastockbrokerusedtomake ket, which transfers risk from those facing forcarryingoverasaleorpurchase ofa it to those who are prepared to undertake securitytothenext accountingperiod. it. An example of this is when a ship 2Incommoditymarketsitreferstospot owner faced with the risk of the loss of a pricesbeinglowerthanfuturesprices. ship can transfer the risk to LLOYD’S Seealso:backwardation insurers. If the insurance market is in equilibrium, the insurance premium contemporaneousexternality(D6,Q0) should settle at the rate which equates the Aneconomicactivityaffectinganother marginal cost of insurance to the marginal typeofproductioninthesametime benefit of losing an undesired risk. period,e.g.bee-keepinghelpsfruitfarm- contingent valuation (D0, Q0) ing. Valuation of commodities not traded in Seealso:sequentialexternalitymarkets, e.g. clean air, landscapes and

© 2002 Donald Rutherford wildlife.Thevaluationisbaseduponthe used,especiallyintheUSA,asameansof responsesofindividualstoquestions advancingemploymentpolicies,e.g.the aboutwhattheiractionswouldbeifa employmentofwomen,blacksanddis- particularhypotheticalsituationwereto abledpersons. occur.Whentheaverageofresponseshas Seealso:FairWagesResolution beencalculatedwithweightingifneces- sary,people’svaluationofaPUBLICGOODis contractcurve(D0) ascertained.Aproxymeasurealreadyused 1Acurveconnectingthepointsoftan- isthetravelcostapersonwillincurto gencyoftwoindividuals’respectiveIN- benefitfromthatenvironment. DIFFERENCECURVESsuchthatthe MARGINALRATEOFSUBSTITUTIONforthem References isthesame. Brookshire,D.,Ives,B.andSchulze,W. 2ANISOQUANTshowingwherethemarginal (1976)‘Thevaluationofaestheticpre- rateoftechnicalsubstitutionisthesame ferences’,JournalofEnvironmentalEco- nomicsandManagement3:325–46. fortheproductionoftwodifferent goods. continuitythesis(B1) Theviewthatthereisacontinuum Seealso:Edgeworthbox betweentheallocationtheoryofclassical contracting(D0,K0) andneoclassicaleconomistswiththecon- Forminganagreementtosupplyafactor sequencethattherewasnomarginal ofproductionoraproduct. revolutioninthe1870s.Thusitisasserted Seealso:employmentcontract;tendering thatMARSHALLwasnotoverturningCLASSI- CALECONOMICSbutusingthesharpertools contractingout(L2,L3) ofmathematicstoclarifyRicardianeco- PartialPRIVATIZATIONofapublicservice nomicsasstatedbyJohnStuartMILL. oftenthroughemployingsubcontractors Seealso:marginalists to undertakeaspecificfunctionsuchas cleaning,launderingoraccounting. References contractionarynationalincomegap Shove,G.F.(1942)‘TheplaceofMar- (E1)seedeflationarygap shall’sPrinciplesinthedevelopmentof economictheory’,EconomicJournal52: contractualsavings (E2, G2) 294–329. Savings made under a contract that speci- continuousdoubleauction(D4) fies regular payments into a fund over a Bidsaresubmittedbybothbuyersand minimum time period. The advantage to sellers,thenrankedfromhighesttolowest pension funds and life assurance compa- andatradeiseffectedwhenthereisa nies of savings of this type is that they make possible long-term institutional in- match.ADUTCHAUCTIONisacontinuous descendingauction. vestments, e.g. in real estate. continuousvariable(C6) contracyclical policy (E3) see Avariable,expressedinsymbolicform, countercyclicalpolicy e.g.xory,whichcanassumeanyvalue contrarian investment strategy (G1) betweentwogivenvalues. A stock market practice of buying stocks and shares that have been losing value and Seealso:discretevariable selling stocks short which have been im- contractcompliance(H0,J7) proving. This approach is based on the Obeyingthetermsandconditionsof view that a stock market overreacts to the governmentalcontractsawardedtoprivate information it receives. Price–earnings and sectorfirms.Thisapproachhasoftenbeen book–market ratios are used to identify

© 2002 Donald Rutherford stocks suitable for the pursuit of this long-term interest rates to be no more strategy. than 2 per cent of the three member countries with the greatest price stability. References Chan, K.C. (1988) ‘On the contrarian convergence hypothesis (P0) investment strategy’, Journal of Business The supposition that different types of 61: 147–63. economy are becoming similar. This view contribution standard (D3) emerged in the 1960s because SOVIET-TYPE A principle of income distribution that ECONOMIES modified their planning meth- asserts that the productivity of different ods by making more use of the price kinds of resources should determine in- system and MARKET ECONOMIES became come distribution. This principle is derived more corporate and sympathetic towards PUBLIC ENTERPRISE. It was argued that all from the MARGINAL PRODUCTIVITY THEORY of distribution and is criticized on the economies were becoming mixed econo- grounds that it is very difficult to apply as mies. Although economic reforms using a factor of production’s own productivity prices have become increasingly popular in is often inseparable from others. Eastern Europe, has caused market economies to revert more to their Seealso:equalitystandard original form which was more capitalist than mixed. controlled market (D4, L5) A market regulated by a central or local conversion (G1) government. There can be control over Replacing one kind of stock market secur- pricing, over the quantities which can be ity with another. Major types of conver- sold or in the range of people allowed to sion occur when an equity replaces a buy and sell. Many European countries in debenture, or a dated government bond is the past gave the police the power to replaced by an undated one. regulate markets; today the principal orga- nizations regulating prices have been set convertible currency (F3) up under national price or agricultural A currency exchangeable for gold or a policies. In practice, it is difficult to have major currency. After the Second World complete control over a market as the War, the UK pound did not return to full prices set are unlikely to be permanently convertibility until 1958; in the late twen- in equilibrium, thus giving buyers and tieth century, East European currencies sellers an incentive to evade the controls. were the last major currencies to remain inconvertible. Seealso:blackmarket;pricespolicy Seealso:Bullionistcontroversy convergence criteria (F3) The five macroeconomic rules set out in cookie jar accounting (L1) the Treaty of Maastricht for member Setting aside reserves in the years of a countries of the European Union to enter company’s prosperity to be used in a the single currency, the euro: the public recession so that income available for deficit to be no more than 3 per cent of shareholders is stabilized. GDP; average inflation rate over 1997 not Seealso:Swedishbudget to exceed 1.5 per cent of the three best- performing member states; gross govern- co-operative (L2) ment debt to be less than 60 per cent of A group of producers or consumers who GDP; the national currency to fluctuate join together to share the rewards of within the margins set by the Exchange production including profits from retail- Rate Mechanism for at least two years, ing. The oldest consumers’ co-operative avoiding devaluation and severe tensions; was founded in Rochdale, Lancashire, in

© 2002 Donald Rutherford 1844;manyproducerco-operativeswere underPERFECTCOMPETITION,i.e.GENERAL foundedintheUSAandtheUKinthe EQUILIBRIUM. lastquarterofthenineteenthcentury. coreeconomy(P0) Unfairbusinesscompetition,especially Amajoreconomy,usuallyaMARKETECON- thewithholdingofsupplies,destroyed OMY,whichplaysaleadingroleinworld manyoftheUSco-operatives,butsome trade. oftheUKco-operativesfoundedthenstill surviveinprinting,clothingandfootwear corefirm(L1) manufacture.Self-managementofYugo- Agiantcorporationthatdominatesa slaventerprisesandthelargeworkers’co- market. operativesatMondragon(intheBasque coreinflationrate(E3) regionofSpain)attractedmuchattention. TheunderlyingtrendinINFLATIONwhich Alltheseenterpriseshavehadtofacethe dependssolelyonpastlabourandcapital problemsofunderinvestment(asproducer costsandfirms’EXPECTATIONSofchangesin membersoftenpreferpresentwagesto thesecosts.Thisratechangesonlyif futureprofits),lowPRODUCTIVITYandalack expectationsbasedonextrapolatingfrom ofmanagerialexperience.Butpoorperfor- pastcostschange.Tobringthecore mancehasnotbeenuniversal,asMondra- inflationrateofamajoreconomy,suchas gonshows. theUSA’s,downtozerocouldrequirea Seealso:industrialdemocracy;workers’ steadyfallinnationaloutputforseveral participation years.Thisrateisusuallyestimatedby excludingvolatilefoodandenergyprices References fromtheCONSUMERPRICEINDEX. Ireland,N.J.andLaw,P.J.(1982)The Seealso:headlinerate EconomicsofLabour-ManagedEnter- prises,London:CroomHelm. References Vanek,J.(1970)TheGeneralTheoryof Eckstein, O. (1981) Core Inflation, Engle- Labour-ManagedMarketEconomies, wood Cliffs, NJ, and London: Prentice Ithaca,NY:CornellUniversityPress. Hall. co-operativefederalism(H7) core region (R1) Afederalstatewithmuchintergovernmen- A dominant or leading region of a country talco-operationbetweenfederalandstate which often includes the capital city. The governments.Inparticular,thedifferent accumulation of physical and HUMAN CAPI- layersofgovernmentjointlyparticipatein TAL is encouraged there by the AGGLOMERA- manyprogrammes. TION and CONCENTRATION ECONOMIES possible in such a large population. Seealso :dualfederalism;fiscalfederalism corner solution (C1) core(D0) An answer to an OPTIMIZATION PROBLEM in which one of the variables in a TRADE-OFF Asetofpossibleequilibriumprices.As is zero at an optimum. originallydevisedbyEDGEWORTHinMath- ematicalPsychics(1881),itcorrespondsto Corn Laws (N4, N5) allPARETO-EFFICIENTpositionsinatwo- The series of English laws dating from the person,two-goodeconomywhichshow reign of Edward IV which protected Eng- improvementaftertrade.Thisconcepthas lish agriculture by imposing tariffs on the beenappliedtothestudyofco-operative import of corn to maintain its price; also gamesandisshownbytheCONTRACTCURVE export bounties (subsidies) were granted intheEDGEWORTHBOXdiagram.Thecore to farmers. CLASSICAL ECONOMISTS such as coincideswithasetofpriceequilibria SMITH objected to this interference with

© 2002 Donald Rutherford FREETRADE;RICARDOvieweditasanen- factorincome,purecorporateprofits,it couragementtoproductionwhichwould doesnotaffectoutputintheshortorlong expandagriculture,aformofproduction run. subjecttotheLAWOFDIMINISHINGRETURNS, andbringaboutadeclineintherateof corporatemorality(M0) Themaintenanceofhighethicalstandards profitandaSTATIONARYSTATEintheecon- omy.Thegrowingmanufacturinginterest bybusinesses.Thisrequireshonestyinthe accountingandotherstatementsofcorpo- alsoopposedtheselawsasPROTECTIONkept upfoodpricesandwages.Thelawswere rateactivity,high-qualitysafeproducts, repealedbythegovernmentledbySir participationincommunityprogrammes, RobertPeelin1846. carefortheenvironment,anawarenessof thelong-terminterestsoftheeconomyin References itsinvestmentpolicyandpromptpayment Kadish,A.(ed.)(1996)TheCornLaws: oftaxationinordertocontributesuffi- Theformationofpopulareconomicsin cientlytopublicexpenditure. Britain,London:Pickering. corporatestate(P0) cornmodel(E2) Astateconsiderablyinfluencedbyrela- RICARDO’ssimplemodelofaneconomy tivelyfewlargefirmsandtradeunions withonecommodity,corn,whichisboth whichjointly,withthecollaborationofthe thesingleinputandsingleoutputofthat government,makethemajoreconomic country.Cornprovidessubsistencefor decisionsonwhichtherunningofan workerswhoproduceanannualoutputof economyisbased.Italianfascismofthe corn.Thusasinglecommodityisboththe interwarperiodtookthisform;UKgov- intermediateandfinalproduct. ernmentsofthe1960sand1970s,accord- Seealso:Sraffa ingtotheircritics,adoptedsuchapolitical philosophy.Astheproportionofoutput cornucopia(D1,P0) producedbyafewmajorcompaniesin- Anabundanceofconsumergoodspossible creasesintheUSAandotherWestern onlyinahigh-incomecapitalistcountry, countries,CORPORATISMbecomesamore e.g.theUSA. importantissue. corporatefinance(G3) Seealso:minimalstate;statemonopoly Specialistfinancialservicestocorpora- capitalism tionsandotherlargeorganizations.Ad- viceisgivenonraisingnewcapitalandon corporate veil (L2) acquisitions. The disguises of firms to prevent govern- ment and shareholders knowing all of corporategovernance(G3) their activities, including the extent of Thesetofruleswhichareusedtocontrol their income. Shareholders’ ignorance of andrunafirmorotherorganization.The a company’s actual behaviour leads them powersofdifferentmanagers,theformu- to underestimate the true value of a laeforcalculatingremunerationandgrie- company, e.g. they ignore the effect of vanceproceduresarepartofgovernance. current corporate saving on prospective Seealso:Cadburycode;Greenburycode; PRICE–EARNINGS RATIOS and hence the stock MynersCommittee market valuation of the company. Govern- ments collect less in corporate taxation corporateincometax(H2) because of their ignorance of firms’ total Aseparatetaxonfirmswhichhasthe earnings. advantageofbeingeasiertocollectthan anincometaxappliedtobothpersonsand corporation (M1) firms.Asitisataxonaspecialkindof A privately or publicly owned firm whose

© 2002 Donald Rutherford powersandactivitiesaredefinedinthe menttocoverthesocialcostsbornebya statuteorarticleswhichsetitup.Itisthe firm. majorwayoforganizingalargefirmin manycountriesandhenceisresponsible Seealso:Pigoviansubsidy formostindustrialandcommercialoutput correctivetax(H2) ofseveralnationaleconomies.Asmost AnINDIRECTTAXusedtocounterEXTERNAL- largecorporations,whetherinthepublic ITIEStherebybringingaboutaPARETO orprivatesectors,aretoalargeextent equilibrium. controlledbytheirmanagers,manyhave askedtowhomtheyareultimatelyrespon- Seealso:effluentfee sible. correlation(C1) Seealso:managerialmodelsofthefirm; Theextentofinterdependencebetween multinationalcorporation;publicenter- twovariables.Unlikeregression,thiscal- prise;transnationalcorporation culationisnotusedtopredictthevalueof onevariablefromtheother. corporationincometax(H2) AmajortaxusedbytheUSfederal Seealso:autocorrelation;coefficientof governmentforraisingrevenue.Toavoid correlation;Durbin–Watsonstatistic;mul- itsconstitutionalitybeingchallengedinthe tiplecorrelation;non-linearcorrelation; courts,itwasleviedasanexciseonthe rankcorrelation;Spearman’srankcorrela- privilegeofdoingbusinessasacorpora- tionformula tion.Until1941,itraisedmorerevenue correspondent bank (G2) thantheINDIVIDUALINCOMETAX.Thetaxis paidintwoinstalmentsinthefirstsix A bank accepting deposits from another monthsoftheyearfollowingthetaxyear bank located in another area to provide inwhichacorporation’sincomearises. local services for it. Many banks interna- tionally have this arrangement to be able corporationtax(H2) to make payments in different currencies. Adirecttaxontheprofits,afterinterest In the USA, the UNIT BANKING system anddepreciation,ofcompanies.Separate necessitated correspondent banking as a incometaxationforindividualsandcom- means of transferring funds between dif- paniesenablesdifferentratestobe ferent localities. charged.Theyieldfromthecorporation taxvariesfromcountrytocountryasa corridor (E0) consequenceofdifferenttaxratesand A range above and below the equilibrium differencesincorporateprofitability. path of an economy. Within the corridor, normal market forces bring the economy (L2,P0) back to the equilibrium path. Controlofaneconomybygivingmajor economicdecisionmakingtocorpora- corruption (K4) tions,industrialministriesand,insome The use of public office for private gain by economies,leadingTRADE(LABOR)UNIONS. the political establishment, bureaucrats or Thiswassaidtobethecharacterofthe legislators. Its different forms include ac- UKeconomyinthe1960sand1970sand cepting bribes to change decisions, fraud, haslongbeentrueofFrance. LAUNDERING MONEY and op- erations. Corruption increases TRANSACTION Seealso:corporatestate;indicativeplan- COSTS and the final cost of many goods ning and services, especially where a govern- correctivesubsidy(D6,H2) ment licence is needed. Although it can ASUBSIDYgiventoafirmasanincentive discourage foreign investors, it does make forinternalizinganEXTERNALITY;apay- some economic systems work faster.

© 2002 Donald Rutherford References criterionforselectingaproject.Thebene- Elliott,K.A.(ed.)(1997)Corruptionand fitsandcostscanbereal(tangibleor theGlobalEconomy,Washington,DC: intangible)orpecuniary.Tangiblebenefits InstituteforInternationalEconomics. canoftenbeequatedwithincreasedout- Treisman,D.(2000)‘Thecausesofcor- put;intangiblebenefitswithprestigeand ruption:across-nationalstudy’,Journal thecreationofsomethingbeautiful;and ofPublicEconomics76:399–457. pecuniarybenefitswithachangeinthe ‘corset’(E5) relativeremunerationofanindustryoran ThemethodofBankofEnglandcontrol occupation. overcommercialbanks’liabilitiesinforce Seealso:compensationprinciple fromDecember1973toJune1980.Alimit wasplacedontheamountofbanks’ References sterlingdepositsandforeigncurrency Hicks,J.R.(1943)‘Thefourconsumers’ depositslentinsterling:ifthelimitwas surpluses’,ReviewofEconomicStudies exceeded,aspecialdeposit,bearingno II:31–41. interest,hadtobelodgedattheBankof Pearce,D.W.(1983)Cost-BenefitAnalysis, England.Banksobjectedtothewayin 2ndedn,London:Macmillan. whichitencouragedcompaniestolend cost-effectivenessanalysis(H5) directlytoeachotherratherthanusing Ananalysisofthecostsofalternative banksasintermediaries.Theremovalof programmesdesignedtomeetasingle thecorsetledtoanupsurgeinthemoney objective.Theprogrammewhichcosts supply. leastwillbethemostcosteffective.This Seealso:disintermediation formofanalysiswasfirstdevelopedwhen RobertMcNamarawasUSSecretaryof cost–benefitanalysis(C1,D6,R1) Defenseinthe1960s. Theevaluationofaninvestmentproject withalong-termperspectivefromthe Seealso:planningprogramming;budget- viewpointoftheeconomyasawhole ing (althoughitissometimesusedinthe privatesector)bycomparingtheeffectsof cost gradient (M2) undertakingtheprojectwithnotdoingso. The increase in costs resulting from an Thisformofanalysiswasdesignedto enterprise being less than optimum size. provideameansforevaluatingpublic worksanddevelopmentprojectsincases costing margin (D4, M2) wherethevalueofthemcouldbemea- An addition to average direct costs to suredempirically.Itcanbetracedbackto cover indirect costs and provide a normal level of net profit under FULL-COST PRICING. DUPUIT’sDelamesuredel’utilite´des travauxpublics(1844),butitwasfirst This rule is most likely to be used in a appliedasatechniqueforassessingpro- mature oligopolistic industry not faced jectsundertheUSFloodControlAct with potential competition. 1936.Thetheoreticaljustificationfor References manycost–benefitprocedureswasslight Andrews, P.W.S. (1949) Manufacturing untilHICKSpublishedanarticlein1943on Business, London: Macmillan. CONSUMERS’SURPLUSES.Acalculationofthe NETPRESENTVALUEofexpectedcostsand cost, insurance and freight (F3) expectedbenefitsmakesitpossibletouse The full-cost valuation of imports paid by thedecisionrulethataprojectwillonlybe purchasers. International trade statistics undertakenifthebenefitsexceedthecosts. usually measure imports ‘c.i.f.’ so that all Themaximizationofnetsocialbenefits the charges of international trade are cametoberegardedastheappropriate included in balance of payments accounts.

© 2002 Donald Rutherford costleader(L1) inworkers’homes.Handloomweaving Thelowestcostproducerofanindustry. beforetheINDUSTRIALREVOLUTIONwasorga- Thisleadershipisusuallyestablishedby nizedinthisway;now,NETWORKINGand ECONOMIESOFSCALE,exclusiverightsover TELECOMMUTINGarehomebased. newtechnologyorpreferentialaccessto Seealso:domesticsystem;homeproduc- rawmaterials.Acostadvantagehasoften tion;homework;networkingeconomy; beenthebasisofmonopolypower. proto-industrialization costoflivingadjustment(J3) Council for Mutual Economic Aid (F0) AprovisioninaUSlabourcontract The intergovernmental council ‘Comecon’ providingforautomaticwageincreasesin of the USSR, Bulgaria, Czechoslovakia, linewithrisesintheCONSUMERPRICEINDEX. Hungary, Poland and Romania established UsuallyabbreviatedtoCOLA. in 1949, which promoted mutual interna- costoflivingindex(J3) tional trade and the co-ordination of NowtermedintheUKtheRETAILPRICE national economic plans. (Albania joined INDEX.Itshowschangesinthecostof in 1949, East Germany in 1950, Mongolia purchasingabundleofgoodsandservices in 1962 and Vietnam in 1978; Romania representativeoftheaverageconsumer. weakened its ties in 1973 by making TheMinistryofLabourandnowits separate agreements with the European successor,theDepartmentforEducation Community; Yugoslavia became an associ- andEmployment,hadtomaintainthis ate member in 1964; China and North indexasitisofcrucialimportancetowage Korea enjoyed observer status from 1964.) bargaining. It was established by Stalin to provide a socialist ‘market’ to oppose the world-wide Seealso:consumerpriceindex capitalist market – hence Comecon was cost-pushinflation(E3) called ‘the Russian MARSHALL PLAN’. To Inflationcausedbyanautonomousin- Comecon were added the INTERNATIONAL creaseincostsintheabsenceofan BANK FOR ECONOMIC CO-OPERATION and the increaseindemand.Theprincipalcost INTERNATIONAL INVESTMENT BANK as alterna- increasesarewageincreasesforcedby tives to the INTERNATIONAL MONETARY FUND. powerfultradeunions,importedrawma- Initially, Comecon agreed on general goals terialcostspushedupbyinternational for trade and technical assistance which producers’cartelsandtheprofitMARK-UPS led to the joint organization of scientific ofoligopolisticfirms. research, technical assistance in the build- ing of industrial plants and the develop- costratio(M2) ment of mineral resources. In 1954, a step Theratiotosalesoffactorycosts,admin- was made towards economic integration istrativecosts,researchanddevelopment by the co-ordination of five-year plans and costs,capitalexpenditure,sellingcostsor in 1955 production priorities for member distributioncosts. states were established. Multilateral trade cost-utilityanalysis(I1) agreements were recommended, as was the Amethodofevaluatinghealthpro- co-ordination of energy policies. Although in 1961 ‘Basic Principles’ for the long-term grammesbycalculatingthecostpereffect producedofamedicalprocedureortreat- plans of member countries were drawn up, ment.Effectsareconvertedintoprefer- Soviet proposals the following year for a single plan and a single planning authority encesorutilities.ItmakesuseofQUALITY- were rejected as being an encroachment on ADJUSTEDLIFEYEARS. national sovereignty. The International cottageindustry(L0) Bank for Economic Co-operation was Anindustrywhoseproductiontakesplace chartered in 1963 to arrange multilateral

© 2002 Donald Rutherford payments and short-term credits and the political views close to those of the admin- International Investment Bank was cre- istration. ated in 1970 to finance specific projects References which were part of co-ordinated five-year plans. In 1970, medium- and long-term co- Feldstein, M. (1992) ‘The Council of Economic Advisers and Economic Ad- operation up to 1980 was agreed; to vising in the United States’, Economic implement this, central economic planning Journal 102: 1223–34. machinery was set up in Moscow. In 1987, direct links within Comecon between pro- council tax (H2) ductive enterprises and research institutes UK local property tax introduced in 1991 of the USSR and Eastern Europe in the as a replacement of the COMMUNITY CHARGE. form of joint ventures were set up. To Poorest households are exempted from it; avoid currency negotiations, dividends other households are assessed on the could be paid in goods. The political assumption that two adults live in the convulsions of 1989 in Eastern Europe household (a single person would have a provoked some members of Comecon to rebate of 25 per cent). The value of each call for a more market-oriented approach property is placed within one of seven to their economic decision making. Come- con was dissolved in 1991. bands, which are defined differently for England, Scotland and Wales. References Schiavone, G. (1981) The Institutions of countercyclical policy (E3) Comecon, London: Macmillan. Government policy to reduce fluctuations in government spending which has to be council housing (R2) such as to restore the economy to an UK housing owned by local governments. equilibrium path, the trend line through Less of the UK housing stock is now cyclical fluctuations. Since 1933 Sweden publicly owned as a result of the Conser- has been the best-known user of such vative government policy in the 1980s of policies but in the 1950s, when DEMAND allowing council house tenants to pur- MANAGEMENT was believed to be a possible chase the houses which they had for a art, many Western economies used mone- long time rented at less than market rates. tary, fiscal and other policies to reduce Economists have been concerned that fluctuations in the gross domestic product much of this housing has been let at less and in employment. In less developed than market rents and by the impact on countries it is more difficult to have geographical labour mobility of access to successful countercyclical measures: fluc- housing being dependent on continued tuations in climate and in export demand residence in the same locality. (which are of central importance to pri- Council of Economic Advisers (H1) mary producers) cannot be controlled by The team of three in the USA which governments. Also, poverty itself is more a advises the president on the state of the product of long-run factor shortages than economy. This council was set up under deficiency in home demand, and taxation the EMPLOYMENT ACT 1946. A principal task of and expenditure affect a smaller percen- the council is to assist the president in tage of the population. preparing his annual Economic Report to Seealso:investmentreservesystem;Swe- the Congress, a report formulating broad dishbudget guidelines for stabilization policy and other aspects of the government’s eco- References nomic programme. The academics chosen Baumol, W.J. (1961) ‘Pitfalls in contracy- as members of the council usually have clical policy: some tools and results’,

© 2002 Donald Rutherford Review of Economics and Statistics 43: only limited access by foreigners. As such 21–6. funds are less liquid than OPEN-ENDED FUNDS counterparty capital (G2) which can invest globally, they often sell at The capital required by a securities house a discount to their net asset value. to cover the risk that a party being dealt coupon (E4, G1) with in the settlement system has little or 1 Originally the warrant which had to be no credit to meet a payment due. presented to obtain interest on a bond. counterpurchase (F3) 2 The nominal rate of interest, e.g. £5 per COUNTERTRADE not entirely BARTER as the £100 of nominal stock. It is to be exporter requires part payment in cash. distinguished from the bond’s YIELD, which will be higher than the coupon if countertrade (F3) the market price of the bond is lower BARTER or parallel sales and purchases; a than its nominal price, and vice versa. method of trade between East and West which has been used to minimize the need Cournot, Antoine Augustin, 1801–77 for East European countries to use hard (B3) currencies. French mathematician and philosopher References who was a major founder of MATHEMATICAL Hammond, G.T. (1990) Countertrade: Off- ECONOMICS. His important work, which was sets and Barter in International Political to inspire MARSHALL considerably, formu- Economy, London: Pinter. lated the law of demand (with demand Korth, C.M. (ed.) (1987) International curves constructed for the first time in Countertrade, New York: Quorum. economics), rigorously expounded theories of DUOPOLY, BILATERAL MONOPOLY and OLIGO- countervailing duty (F1) POLY, and examined the incidence of INDIR- A selective TARIFF on imports to counter ECT TAXES and costs. As a French civil government subsidies in the exporting servant and academic he also wrote on nation. This is used to reduce some trade probability and epistemology. His princi- distortions. pal work on economics was Recherches sur countervailing power (J5, L1, M3, P0) les Principes Mathe´matiques de la The´orie The power of an opposing group, e.g. of a des Richesses (1838), republished in Eng- trade union facing a large firm, or of a lish as Researches into the Mathematical consumer facing a monopolist or oligopo- Principles of the Theory of Wealth (New list. The best examples of it occur under York, 1960). BILATERAL MONOPOLY. GALBRAITH regarded References such power as a means of stabilizing and making fairer the capitalist system. Theocharis, R.D. (1983) Early Develop- ments in , 2nd Seealso:consumersovereignty edn, ch. 9, London: Macmillan.

References Cournot’s duopoly model (D4, L1) Galbraith, J.K. (1952) American Capital- A market model of two springs and two ism: The Concept of Countervailing proprietors, each of whom independently Power, London: Hamish Hamilton; Bos- seeks to maximize their income. As pro- ton: Houghton Mifflin. prietor A has no direct influence on the country fund (G2) sales of water from proprietor B’s spring, A fund of stocks and shares invested in A can only adjust the price but B is forced the securities of only one country. These to accept A’s price. If A’s sales are D1, and funds provide a means of investing in B’s sales are D2, the final and stable countries whose stock exchanges allow equilibrium occurs where

© 2002 Donald Rutherford cowboy economy (M0) f ðD þ D ÞþD f 0ðD þ D Þ¼0 1 2 1 1 2 An economy, like the US economy, which behaves as if natural resources are infinite f D D D f 0 D D 0 ð 1 þ 2Þþ 2 ð 1 þ 2Þ¼ in supply and that Nature can absorb any amount of refuse. BOULDING coined this term to describe the ‘Wild West’ philoso- phy still prevalent in modern USA. Seealso:spacemaneconomy

Cowles Commission (B2, C0) US econometric research centre founded in Colorado Springs in 1932 and then moving to Chicago University in 1939 to avoid the Colorado state income tax which affected its publisher benefactor. It was noted in its early days for the distinctive econometric methodology of HAAVELMO and his followers which concentrated on the problems of simultaneity, identification and estimation. Seealso:econometrics References Seealso:duopoly Haavelmo, T. (1944) ‘The probability ap- proach in econometrics’, Econometrica References (Supplement) 12: 1–115. Cournot, A. (1897) Researches into the Hildreth, C. (1986) The Cowles Commis- Mathematical Principles of the Theory sion in Chicago, 1935–55, Berlin: of Wealth, trans. N.T. Bacon, ch. 7, New Springer Verlag. York: Macmillan. CPI-U (E3) cover (G1) A version of the US CONSUMER PRICE INDEX Earnings available to shareholders divided for all urban consumers covering about 80 by the total amount of dividend paid. per cent of the US population. Thus, if cover is 3.2, the dividend is CPI-W (E3) covered more than three times so it is A version of the US CONSUMER PRICE INDEX unlikely that the dividend will have to be for all urban wage earners and clerical cut in the next year and the company has workers covering about 32 per cent of the sufficient retained earnings to be able to US population. expand. However, a company with a high cover for a number of years appears to be craft union (J5) cautious and neglecting growth opportu- A TRADE (LABOR) UNION drawing all of its nities. membership from a ‘trade’, i.e. a few closely related occupations, e.g. in engi- cowboy (M1) neering or printing. Many of the first A small-scale business, often in the con- unions in the UK and the USA were of struction industry, which dishonestly per- this nature. Craft unionism has been forms a contract and then rides away blamed for much DEMARCATION, a practice before non-performance of the contract is which raises labour costs by insisting on a discovered. rigid subdivision of labour. Unskilled

© 2002 Donald Rutherford workers, before forming general unions, ing of entrepreneurs employing new resented the craft unions for maintaining a products and new processes to supplant labour elite. the old. Seealso:generalunion;industrialunion References crashometrics (G1) Schumpeter, J.A. (1976) Capitalism, Soci- alism and Democracy, 5th edn, New The quantitative analysis of crashes in York: Harper; London: Allen & Unwin. security or currency markets. This exercise provides a means of estimating the expo- creative federalism (H7) sure of a portfolio to a market crash. A co-operative partnership between the federal, state and local governments of the crawling peg (F3) USA which led to many new programmes. An exchange rate adjustment method President Lyndon B. Johnson used this term which gradually changes the par value of to describe US federalism in the 1960s. an exchange rate by small amounts. This is less disruptive than DEVALUATION or reva- Seealso:co-operativefederalism;dual luation as it does not encourage specula- federalism;fiscalfederalism tion. credit (G2) creative accounting (M4) 1 A loan, or an agreement to lend money, The manipulation of the accounts of a to be repaid at a later date. firm or other enterprise to produce a more 2 Bank lending (in ) as favourable picture of its financial state. credit is chiefly analysed within the Profits are made to appear higher to context of the money supply. induce a rise in the company’s share price; 3 All the sources of finance available to costs are inflated to justify product price firms (including TRADE CREDIT) and to increases. A variety of methods can be households. used, e.g. changing the method of allocat- ing expenses, changing the valuation of assets and using more convenient ex- In the past two decades there has been a change rates than those ruling at the time great increase in the amount of credit of the transaction. Some of these practices given to households on the basis either of are within the rules of company law; collateral (a house in the case of a building others are so questionable as to amount society mortgage) or of CREDIT SCORING for to deception. UK local authorities in the hire purchase expenditure on CONSUMER 1980s used many devices to increase their DURABLES. The creation of new credit spending, including selling their principal instruments, e.g. the credit card, has re- buildings and leasing them back, barter sulted in an expansion in the total volume (e.g. exchanging council land for a new of credit. building), rescheduling debts and capitaliz- References ing current expenditure (e.g. including house repairs in their capital programme). Beckman, T.N. and Foster, R.S. (1969) Credits and Collections: Management References and Theory, 8th edn, New York: Griffiths, I. (1986) Creative Accounting: McGraw-Hill. How to Make Your Profits What You credit card (G2) Want Them to Be, London: Sedgeworth A means of purchasing consumer goods & Jackson. and services by presenting a card issued by creative destruction (O3, P1) a bank, financial institution or retailer SCHUMPETER’s description of the evolution- permitting the buyer to settle in part or in ary process inherent in CAPITALISM consist- full the amount payable. Major examples

© 2002 Donald Rutherford of these include Visa and Mastercard. Such ment, a scale from the lowest (0) to the cards, in use in the USA since 1950 and in best (100) using the information supplied the UK since 1966, have contributed to the by leading international banks is used; for large increase in consumer debt. As the corporations, the most famous rating is banks financing these cards advance the conducted by STANDARD & POOR. amount due to retailers and collect from credit rationing (E5) the cardholders later, they bring about a Restricting the total amount which can be short-term increase in the money supply. borrowed or excluding types of borrower Like the development of other modern so that a central bank can control the total financial arrangements, credit cards have volume of bank deposits. The aim of this made it more difficult for central banks to rationing is to reduce the risk of borrowers control the money supply. defaulting or to prevent increases in inter- Seealso:affinitycard;chargecard;debit est rates. In the UK this was traditionally card;smartcard done by the BANK RATE, which provided the basis for all other interest rates. However, credit crunch (E5) in the UK as elsewhere a greater variety of A shortage of bank loans and other forms controls have been employed. The recent of credit which brings about the curtail- growth of new money markets, where ment of a business’s activities or even its interest rates are largely determined sepa- collapse. Credit can be limited by its price, rately within each market, has weakened by the type of borrower or by the state of the power of central banks to exercise the lender’s balance sheet relative to the complete control. criteria used by a regulatory body (this often happened in the USA under REGULA- Seealso:‘corset’;specialdeposit TION Q). The crunch comes under regula- credit reserves (F3) tion because the lenders cannot use their Gold and foreign currency reserves of own funds. central banks which are used to settle References intercountry indebtedness. Increasingly, Wojnilower, A.M. (1980) ‘The central role major currencies, such as those of the of credit crunches as recent financial USA, Germany, Japan, Switzerland and history’, Brookings Papers on Economic the UK, have been held in preference to Activity 2: 277–326. gold. credit enhancement (G1) credit scoring (G2) A technique for improving the credit- Assessments of applicants for credit using worthiness of a security or asset-backed a points system. A score is awarded for debt. The collateral can be larger than the each of the applicant’s characteristics, e.g. debt, or losses can be underwritten. home ownership, employment and pay- ment record for previous credit. Credit is credit money (E4) granted if the total score is above the Banknotes and bank deposits which have acceptance level. been created by banks. This has gradually displaced coinage credit spread (G1) made of precious metals. That part of the yield to maturity attribu- table to credit risk. Treasury bonds have creditmultiplier(E4)seemoney no credit risk but financial instruments multiplier with less liquidity do. credit rating (G0, H0) credit tranche facility (F3) Measuring the creditworthiness of a gov- An INTERNATIONAL MONETARY FUND lending ernment or corporation. For a govern- facility to help a member country deal

© 2002 Donald Rutherford with a short-term balance of payments ble disasters, e.g. floods, interference with problem, similar to a COMPENSATORY FINAN- the quality of a product or an act of war. CIAL FACILITY. The loan has to be repaid The police, fire and ambulance services over a three- to five-year period. have to consider worst case scenarios but firms also need contingency planning. credit union (G2) They can maintain EXCESS CAPACITY and A friendly society whose members save to keep large inventories, e.g. to guard provide small loans to other members in against a disruption in the supply of need of financial assistance at an interest crucial components, as well as contracting rate lower than the market rate. The group to retain the services of other firms as forming a credit union usually resides in back-up. the same area, or works for the same employer or belongs to another associa- critical economy (E3, P0) tion, e.g. a church. In the depressed areas An atypical ECONOMY subject to disrup- of the UK in the 1980s credit unions tions and shocks. became popular alternatives to the main critical value (C1) financial institutions. By 1990, 310 were The lower or upper value of a CONFIDENCE formed in the UK with over 40,000 mem- INTERVAL. bers; the USA has more than 60 million persons in credit unions; in Germany they cross price elasticity of demand (C1, appeared as early as the 1860s. D0) The responsiveness of the quantity de- crisis (E3) manded of one good to a change in the In Marxian economics, a phase of the price of another good. It can be measured, TRADE CYCLE which is the upper turning for example, as the ratio of the percentage point where an economy turns down from change in quantity demanded of good A a boom to a recession. Marx believed that to the percentage change in the price of such crises were inevitable under CAPITAL- good B. If A and B are substitutes the ISM and would occur every ten years. A cross price elasticity is positive; it is crisis could occur for two reasons. The negative if A and B are complements. The preceding increase in employment pushes concept has been used extensively by up wages and reduces the analysts of market concentration and ANTI- below the normal level, cutting back TRUST lawyers as it indicates whether the capital accumulation. Also, producers dissimilar output from different firms is who are slow to innovate have higher costs supplied to one or several markets. and may go bankrupt and cause a collapse of firms throughout the economy. Crises, Seealso:elasticity according to Marxists, are inevitable under cross-section data (C8) capitalism because of its continual capital Data referring to different groups at the accumulation without the co-ordination of same point in time, e.g. wages of workers investment decision making which plan- in different countries at a particular date. ning would achieve. Economic analysis based on time series References data faces the problem of the effects of the Sweezy, P.M. (1942) The Theory of Capi- passage of time on exogenous variables; talist Development: Principles of Marx- cross-sectional analysis eliminates this dif- ian Political Economy, chs 8–10, New ficulty. York: Oxford University Press; London: (L1, L3) D. Dobson. cross-subsidization The financing of an unprofitable part of crisis management (H1, L2, Q2) an enterprise by a more profitable part. A Working out strategies to deal with possi- public enterprise, instead of following the

© 2002 Donald Rutherford ruleofattributingcostsproperlytoeach ELASTICITY of IS-LM CURVES. In the figure, divisiontomakeeachpartofthatenter- although an increase in government ex- priseindividuallyfinanciallyaccountable, penditure raises the IS curve from IS1 to couldallowtheprofitabledivisionsto IS2, because of the INELASTICITY of the LM financeloss-makingdivisions.Inthepri- curve the rate of interest rises from r1 to vatesector,cross-subsidizationoccurs r2, without an increase in national income. withinfirmsifsomeoftheirproductsare Crowding out may also occur because soldatlessthanincrementalcost.To increased government spending changes ensuremaximumefficiency,firmsshould private sector expectations about the fu- avoidthispracticeasfaraspossible. ture of the economy, thereby reducing the amount of investment carried out. cross-trading(D4) Amethodofdisposingofallthegoodsa selleroffersinamarketbysellingthe samegoodatdifferentpricesthroughouta tradingday,withpricesfallingtowardsthe endoftheday. crowdinghypothesis(J2,J7) TheviewthatDISCRIMINATIONoccursbe- causesomeworkersarecrowdedintothe fewoccupationslackingbarrierstoentry. Women’swages,forexample,havebeen depressedbyanexcesssupplytothefew jobstraditionallyavailableforwomen. BothJohnStuartMILLandEDGEWORTH usedthismodelofdiscrimination. Seealso:occupationalsegregation crowdingin(E2) Publicexpenditurewhichstimulatespri- References vatesectorinvestment. Carlson, K.M. and Spencer, R.M. (1975) ‘Crowding out and its critics’, Federal Re- Seealso:crowdingout serve Bank of St Louis Review 57: 2–17. Friedman, B.M. (1978) ‘Crowding out or crowding out (E2) crowding in? Economic consequences of An alleged effect on private sector demand financing government deficits’, Brookings of an increase in public expenditure. It was Papers on Economic Activity 9: 593–641. argued, especially by MONETARISTS, that KEYNESIAN--style budget deficits will raise crude population rate (J1) borrowing with the effect of increasing The ratio of births, deaths, or other demo- interest rates which will lead to a reduc- graphic events, to the average total popu- tion in private sector investment and lation of a country at the midpoint of a expenditure on consumer durables. The specified period, usually a year. These stimulative effect of increased government rates are called ‘crude’ because the popu- expenditure will be cancelled out by ex- lation used in the denominator is not penditure reductions in the private sector. adjusted to give the measure theoretical The reduction in business investment, in significance, e.g. a crude birth rate per the long term, will further reduce the total population is less useful in a demo- ability of the private sector to spend. The graphic model than a birth rate per size of this effect depends strongly on the women of child-bearing age.

© 2002 Donald Rutherford Cshare(G1) YorkandLondon:MonthlyReview AChinesestockmarketshareownedonly Press. bystate-ownedenterprises.Itisdenomi- cumdividend(G2) natedandpayableineitherChineseor Astockexchangesecuritywiththeentitle- foreigncurrency. menttoreceiveanimminentdividend. cultivatedcapital(E0,Q0) cumulativemultistagecascadesystem AhybridformofCAPITALcombininghu- (H2) man-madeandNATURALCAPITAL,e.g.food, woodandnaturalfibres. Asalestaxonthegrossvalueofa commodityateachstageofproduction.It culturaleconomics(Z1) doesnotallowarebateoftaxespaidat Theanalysisofthedemandforand earlierstagesofproduction.Thistaxwas productionofliterature,music,opera, inforceinWestGermanyuntiltheendof drama,paintingandsculpture.Thepecu- 1967,inLuxemburguntiltheendof1969 liaritiesofthelabourmarketforthese andintheNetherlandsuntiltheendof performersandproducersareanalysed 1968. andtheroleofpublicsubsidiesconsidered. cumulativepreferenceshare(G1)see References preferenceshare Baumol,W.J.andBowen,W.G.(1966)The EconomicDilemma,NewYork:The cumulativesecurity(G1) TwentiethCenturyFund. Astockexchangesecuritywhichaccumu- Peacock,A.andRizzo,I.(1994)Cultural latesunpaidinterestorpreferencedivi- EconomicsandCulturalPolicies,Dor- dendssothattheholderdoesnotsuffer drecht:KluwerAcademic. fromayearofpoorprofitability.Inreturn Ruskin,J.(1857)ThePoliticalEconomyof forthisgreatersecurityofincome,many Art,London:Smith,Elder. cumulativePREFERENCESHARESarewithout CulturalRevolution(N0) votingrights. Achangeintheorganizationofthe Chinesesocietyandeconomyinthelate currenciesoftheworld(F3)see 1960sand1970s.Thisrevolutionchal- AppendixA lengedtheDIVISIONOFLABOURpreviously currency (F3) practised,especiallybybreakingdownthe The official money currently circulating in divisionbetweenthetownandcountry- a country and available for immediate use side.Revolutionaryfactorycommittees as a medium of exchange. It can take the weresetuptoimplementchanges.These form of coins, BANKNOTES and, in a broader includedusingfive-yearplansonlyas sense, BANK DEPOSITS. Currencies are called generalguidelines,requiringadministra- by various names, the most popular being torstoworktwoorthreedaysperweek dollar, franc and kroner. The value of a inmanualworkandsettingupofwork currency is regarded as an overall indica- teamsinvolvedinmattersasdiverseas tor of world opinion about that country’s productionplanning,assigningproduction economy. Apart from the use of prudent tasks,establishingsafetyregulationsand fiscal and monetary policies to boost managingwelfarefunds.Massactionwas confidence in a currency, there are other usedtounifytheworkingclass. ways of making a currency attractive. A References central bank can produce beautiful bank- Bettelheim,C.(1974)CulturalRevolution notes, offer CONVERTIBILITY into another andIndustrialOrganizationinChina. currency or raise its interest rates to ChangesinManagementandtheDivi- encourage foreign holdings of that cur- sionofLabour,trans.A.Ehrenfeld,New rency. A few small countries – Luxemburg,

© 2002 Donald Rutherford PanamaandLiechtenstein–donothave Seealso:J-curve;Marshall–Lernercondi- theirowncurrencies. tion

Seealso:coinage currencymarket(F3)seeforeign exchangemarket currencyappreciation(F3) Ariseintheinternationalvalueofa currency reform (F3) currency.If,forexample,moreFrench Replacing an existing currency which has francsareexchangedthanpreviouslyfor lost its value with a new currency. Ger- thesameamountofUSdollars,thedollar many after the First and Second World hasappreciated. Wars provides good examples of this. On an appointed day, holdings of the old currencybasket(F3) currency are replaced by the new at a Acombinationofcurrenciestoproducea particular exchange rate. The intention of commonunit,e.g.theECU.Thevaluesof such reform is to restore confidence in thesecurrenciesareweighted,e.g.by the money used by a state. In some sharesinworldtradeorthegrossnational extreme cases where a currency has been productsofthecountriesparticipating. severely devalued, it has changed its name, e.g. in Peru the sol de oro became currencycocktail(F3) the inti. Amixtureofcontributingcurrencies,e.g. currency revaluation (F3) theECUorSDR. A deliberate increase in the price of a currencydepreciation(F3) currency with a fixed exchange rate. This Afallintheinternationalvalueofa is undertaken to reduce a balance of currencyaslessofanothercurrencyis payments surplus. Revaluation is often exchangedforoneunitofone’sown. urged by countries in deficit to enable Residentsofonecountryusingthecur- them to compete more easily in interna- rencyinothercountrieswillhavetheir tional markets. As a consequence of a purchasingpowerperunitofthecurrency revaluation, a CENTRAL BANK suffers losses reduced.Depreciationcanoccurveryra- from the fall in value of its foreign pidlyinforeignexchangemarketsinreac- exchange holdings: taxpayers ultimately tiontobadnewsaboutthestateofthe bear these losses as central banks are economyissuingthecurrency. usually owned by governments. currency risk (F3) currencydevaluation(F3) The possibility of suffering a financial loss AfallinaFIXEDEXCHANGERATEwhich through holding a currency which falls in reducesthevalueofacurrencyinterms value. Supporters of the EURO argue that ofothercurrencies.Thepound,forexam- one of the principal arguments for mone- ple,wasdevaluedin1949fromUS$4.03to tary union is the reduction in this type of US$2.80andin1967fromUS$2.80to risk. US$2.40.Theaimofdevaluationisto improvethebalanceofpaymentsCURRENT currency run (G2) ACCOUNT.Thechangeintheexchangerate A great increase in the public’s demand for byraisingimportpricesandlowering cash because of the belief that other forms exportpriceswillreduceimportsand of finance, including CREDIT CARDS, will be increaseexports,ifthereisaprice-elastic ineffective. At the time of the beginning of demandforbothandthepossibilityof the new millennium, 1 January 2000, many divertingproductiontoexportsandsub- believed that only coins and banknotes stitutesforimportsbyreducingdomestic were reliable at a time when widespread expenditure. computer failures were possible.

© 2002 Donald Rutherford CurrencySchool(B1,N2) consistofstockintrade,workinprogress, AgroupofUKeconomistswho,following debtsowedtothefirm,readilyrealizable RICARDO,believedthatthenoteissue investments,billsreceivable,prepayments, shouldbeconvertibleandstrictlydeter- cashatthebankandinhand. minedbytheamountofgoldpossessedby Seealso:currentliabilities theBankofEngland.Theleadersofthe school,RobertTORRENSandSamuelLOYD currentcostaccounting(M4) (laterLordOverstone),convincedPrime Aformofaccountingwhichincludes MinisterSirRobertPeeloftheirtheory– adjustmentsfortheeffectsofinflation. hencetheBANKCHARTERACT1844whichwas TheUK’sStatementofStandardAccount- toprovidetheframeworkformanyofthe ingPractice1980requiredseveraladjust- operationsofUKbankinguntil1980. mentstobemade:toDEPRECIATIONforfixed assetswhichhadriseninprice,tosales References figuresforthehighercostofreplacing Felter,F.W.(1965)DevelopmentofBritish stocksandtomonetaryworkingcapital. MonetaryOrthodoxy,1719–1875,Cam- bridge,MA:HarvardUniversityPress. Seealso:inflationaccounting;Sandilands Report currencystabilizationscheme(F3) Aninternationalarrangementbywhicha currentdeposit(G2) groupofstatesagreestolinktheexchange AbankdepositofaUKbankwhichis ratevaluesoftheircurrenciestogold,a payableondemand,nowtermedaSIGHT leadingcurrency(e.g.theUSdollar)oran DEPOSIT. artificialcurrency.Thefirstschemeinthe Seealso:demanddeposit;timedeposit post-1945periodwasBRETTONWOODS;the majoroneinforceatthebeginningofthe currentliabilities(M2) twenty-firstcenturyistheEUROPEANMONE- Thedebtsofafirmpayablewithinthe TARYSYSTEM. currentaccountingperiod,usuallytwelve months,whichincludesumsowedby currencyswap(F3) creditorsandbillspayable.Theseare Acapitalmarketexchangeofaloanin liquidifpayablewithinamonth;other- onecurrencyforaloaninanother,e.g.a wise,‘deferred’. fixedinterestdollarloanforafloating interestloaninSwissfrancs. Seealso:currentassets currentaccount(F4,G2) current operating profit (M2) 1AbankaccountofaUKCLEARINGBANK The current value of output sold over a immediatelyavailableformakingpay- period, less the current cost of related ments.Inthepast,bankaccountsof inputs. thistypeneverearnedinterest;some current population survey (J2) nowdo.IntheUSAtheyareknownas A survey of US households undertaken by CHECKINGACCOUNTSorSIGHTDEPOSITS. the US Census Bureau. Its monthly sur- 2Asub-accountofanation’sBALANCEOF veys are used to provide data on employ- PAYMENTSaccountsconsistingofvisible ment, unemployment, wages and hours andinvisibletradeplusprivateand statistics. Also it provides annual figures officialcurrenttransfers;capitalflows on school enrolments, living arrangements, areintheseparatecapitalaccount. annual incomes, poverty status and other Seealso:NOWaccount important socioeconomic variables. currentassets(M2) current prices (C1) Theassetsofafirmconvertibleintocash A measurement of an income variable at withinaperiodoftwelvemonths.They the prices of the period for which data

© 2002 Donald Rutherford werecollected;forexample,consumption tomsunion,e.g.themovementofcapital atcurrentpriceswouldshowforyearsX, andpopulationtowardsGROWTHPOLES YandZtheactualcostofpurchasingsuch creatingadynamiceffectofaunion. goodsandservicesatthepricesrulingin yearsX,YandZrespectively. cycles(E4) Regularfluctuationsinanationalecon- currentpurchasingpower(M2,M4) omyfromapeakthroughadownswingto Thehistoricvalueofanassetadjustedby atroughandthenanupswingbacktothe changesinaretailpriceindex. peak.Fewnationaleconomiesarewithout Seealso:inflationaccounting thisinstability. currentratio(M2) Seealso:boomandbust;businesscycle; Juglarcycle;Kitchincycle;Kondratieff TheratioofCURRENTASSETStoCURRENT cycle;Kuznetscycle;stop–go LIABILITIESofafirm.Alsoknownasa workingcapitalratioor2:1ratiofollowing cyclical trade (F1) theruleofthumbthatassetsshouldbe A type of INTRA-INDUSTRY TRADE, particu- twiceliabilities,unlesstheseasonalor larly in agricultural products which are speculativenatureofthefirmrequires traded north to south between the two moreworkingcapital.Thisistheprincipal hemispheres in one harvest and south to measureoftheLIQUIDITYofafirm. north in the other part of the year. customize(L2) TomodifythestandarddesignofaCON- cyclical unemployment (J6) SUMERDURABLEbyminorchangesinits Recurrent unemployment occurring at appearanceorfunctionstoallowitsowner particular phases of the business cycle, toexpresshisorherpersonality,e.g. starting with the downturn from a boom. replacingsmallcar/automobilewheelsby This unemployment is caused by a defi- largerones. ciency of AGGREGATE DEMAND and is asso- ciated with a fall in the number of job customsunion(F0) vacancies. AgroupofcountrieswithaCOMMON EXTERNALTARIFFbutwithfreetrade cyclical variations (C1) amongstthemselvesandfreemovement Movements in a TIME SERIES brought about oflabourandcapital.TheEUROPEANCOM- by the BUSINESS or TRADE CYCLE. These MUNITYisamajorexampleofsuchan components of changes in the values of a arrangement.Manytheoriesaboutcus- variable can be removed from raw data by tomsunionsarebasednotonlyonhow first removing seasonal variations by mak- freetradebasedonCOMPARATIVEADVANTAGE ing a SEASONAL ADJUSTMENT and then divid- isbeneficialbutalsoonLOCATIONTHEORYto ing the adjusted data by corresponding understandthechangeswithinthecus- trend values.

© 2002 Donald Rutherford D

D(G1) prominence to insignificant economic re- ASECURITYofquestionablevalueaccording lationships. totheratingagencyStandard&Poor. David Hume Institute (H0) Seealso:AAA;BBB;BB;QDDR An economic research institute founded in 1985 and now based in Edinburgh, Scot- daisy-chain scheme (H2, M2) land, with Sir Alan Peacock as its first A commercial scheme for passing a com- executive director. It has examined the modity through a chain of company sub- economics of regulation, broadcasting, sidiaries to avoid taxation. small firms and banking.

Dalton improving tax reform (H2) Davignon Plan (L5) An income transfer from a household of The plan of the European Coal and Steel high social rank to a lower ranking house- Community in 1980 to restructure the hold that does not change the ranking of European steel industry; named after the households. This MARGINAL TAX change EUROPEAN COMMUNITY’s Industry Commis- yields a marginal improvement in social sioner, Viscount Etienne Davignon. State welfare. aid was offered (mainly for environmental improvements or research and develop- References ment) provided that there was a cut in Dalton, H. (1920) ‘The measurement of the steel-making capacity. Minimum prices inequality of income’, Economic Journal were set together with production quotas 30: 348–61. to cover 85 per cent of the European Community’s output. The plan succeeded data (C8) in scrapping production quotas by the end Measured observations obtained from of- of 1987 and using MARKET FORCES to ficially or privately collected statistics: the complete the adjustment process. raw material of empirical economics. Davos man (F0) data-mining (C1) A businessman, banker, official or intellec- Persistent and repeated attempts to find tual who is a literate and numerate grad- significant relationships between variables. uate with a belief in individualism, market However, the excessive zeal of the re- economics and democracy. These men, searcher may produce a false relationship. from any culture, control governments This misuse of ECONOMETRICS gives undue and their economic capabilities. The World

© 2002 Donald Rutherford EconomicForumisheldannuallyin SURPLUS. This concept is crucial to much Davos,Switzerland. of WELFARE ECONOMICS, e.g. the analysis of the effects of a monopoly, of taxes and of dawnraid(G1) tariffs. The size of the Amethodofacquiringthesharesofa depends on the ELASTICITY of demand or companypopularinLondonintheearly supply. 1980s.Acompanywastakenoverbyrapid purchaseofsharesatthebeginningofthe Deane, Phyllis Mary, 1918– (B3) workingday.Sinceshareswereacquiredat Educated at Glasgow University. Research differentprices,theInternationalStock officer at the National Institute for Eco- ExchangeCouncilhasnowregulatedthis nomic and Social Research from 1941 to technique. 1945, at the Colonial Office from 1946 to 1949 and at the Department of Applied daysofgrace(G0) Economics, Cambridge University, from Theextradaysafteradebt,e.g.an 1950 to 1951. Fellow of Newnham Col- insurancepremium,isdueinwhichthe lege, Cambridge, from 1961 to 1983 and debtorisallowedtopay. professor of economic history from 1981 daytrade(G1) to 1982. She has produced several works Thepurchaseandsaleofastockmarket on colonial national income accounting securityinamarginaccountwithinthe and the celebrated The First Industry sameday.Alsoknownasdaylighttrade. Revolution (Cambridge University Press, 1965) and The Evolution of Economic Ideas Seealso:bedandbreakfast (Cambridge University Press, 1978), one DDD (G1) of the finest introductions to the history of Standard & Poor’s credit rating of a economic thought. security which reflects that servicing of it debasing a currency (F3) is in default or in arrears. An action taken by a monetary authority Seealso:AAA;BBB;BB;C;D to reduce the value of the money it issues, e.g. by diminishing the intrinsic value of dead cat bounce (G1) the currency or by over-issuing banknotes. A short lived rise in the price of a stock This is mainly done to finance government that had dropped considerably. expenditure and to extract a high level of deadweight loss (D6) SEIGNORAGE. A loss of CONSUMER’S SURPLUS by buyers not debenture (G1) matched by a corresponding PRODUCER’S A company or corporation security, usually taking the form of a fixed interest loan, secured on the assets of a company. debit card (G2) A card which makes possible the immedi- ate debiting of a bank account at the time of purchasing goods or services; an ‘elec- tronic cheque book’. In the late 1980s major UK clearing banks, for example, made arrangements with retailers to intro- duce this system which makes possible transactions without the use of CASH, CHE- QUES or CREDIT CARDS. Credit is only given to debit cardholders with permission to overdraw.

© 2002 Donald Rutherford Debreu,Gerard,1921–(B3) Whateverthefinancialsuccessorfailure AFrenche´migre´totheUSAin1948, ofanenterprisethecommitmenttoservi- educatedinmathematicsinParisand cingthedebtremains.Itiscontrastedwith subsequentlyprofessoratChicago,Yale EQUITYfinance. andBerkeley(since1960)Universities. WithArrowin1954,heusedtopological debtillusion(H0) Voters’lackofawarenessofthecostof methodstoprovetheexistenceofGENERAL publicsectorexpenditurebeingfinanced EQUILIBRIUM.HisTheoryofValue:anAxio- maticAnalysis(1959,1971)produceda byborrowingratherthantaxation.They moresophisticatedexpositionofcompeti- cannotperceivecorrectlythepresentvalue tivepricetheory,usingsettheoryand offuturebenefitsinthepublicsector topology.In1983hewasawardedthe becauseofimperfectinformation,with theconsequencethatalargeramountof NOBELPRIZEFORECONOMICS.Hisworkis theoreticalratherthanempiricalinnature. publicexpenditureisapproved. References Seealso:fiscalillusion;renterillusion Debreu,G.(1983)MathematicalEconomics: debt-led growth (O4) TwentyPapersofGerardDebreu,Cam- Economic development financed by bor- bridge:CambridgeUniversityPress. rowing, usually from foreign countries. debt(G0,M2) This turned out to be a disastrous policy Theliabilitiesofafirm,agovernmentora in the 1970s leading to the THIRD WORLD household.Acompany’sdebtoftentakes DEBT PROBLEM. theformoffixedinterestDEBENTURES, debt neutrality (G0) cumulativenon-votingpreferenceshares Non-responsiveness of a portfolio of in- andshort-termbankloans.Agovernment vestments to changes in the mixture of hasBILLSasshort-termdebtandlong-term taxes and borrowing used by a government debtissuedasBONDS.Ahousehold’sdebts to finance the public sector’s real spending includebankloansandliabilitiesincurred programme on goods and services. topurchasepropertyandconsumerdur- ables. debt policy (H7) The course of action taken to manage a debtcontract(G0) country’s NATIONALDEBT. The official approa- Anagreementtolendmoney. ch often adopted is to maintain market debt–equityswap(F3,G2) conditions so as to maximize the present Theexchangeofafixedinterestdebtfor and future demand for government debt, anequityshareholding.Countrieswith but such a policy stance may be in conflict largedebtstoWesternbankshavebeen with credit/interest rate policy. offeredthissolutiontotheirindebtedness. Previously,swapstooktheformofbanks debtratio(G0)seegearing givingloanstocompanieswantingto debt restructuring (G0) makeaninvestmentinadebtorcountry. Changing the MATURITIES of the debts of a Fixedinterestdebthasalsogrownin government or a firm so that it is easier to ThirdWorldcountriesbecauseoftheir service them. Restructuring often takes the lackofdevelopedstockmarkets. form of lengthening the maturity of debt. Seealso:securitization It is allowed by creditors who would otherwise have little prospect of receiving debtfinance(G2) interest and repayment of the PRINCIPAL. Short-orlong-termfixedinterestfinance thatdoesnotinvolvethetransferofown- debt security (G0) ershipbutusuallyrequirescollateral. A loan made by an investor to an issuer

© 2002 Donald Rutherford whoagreestorepaythedebtataspecified arrangedinorderofmagnitudebydivid- dateandtopayinterest.Thesesecurities ingitintotenequalparts.Thefirst,or areissuedbybothgovernmentsandcor- lowest,decileissometimesusedasa porationsandcanbelinkedtoanEQUITY benchmarkforcalculatingLOWPAY. issuedbyafinancialintermediary. Seealso:lowerquartile;median;percen- debtserviceindicator(G0) tile;upperquartile Ameasureoftheabilityofaborrowerto meetcapitalandinterestpaymentsona decimalization(E5) debt.Indicatorsusedincludethedebt Achangeinthecurrencyofacountryso serviceratio(interestandcapitalrepay- thatthebasicunitisdivisibleintoten mentsduedividedbyexportearnings),the parts.TheFrenchfrancandUSdollar cashflowratio(currentaccountsurplus havebeendividedintoahundredcents minusinterestpaymentsdividedbyexport sincetheeighteenthcenturyandtheAus- earnings),andthesolvencyratio(the traliandollarsince1966.IntheUKin percentageofacountry’sexportearnings 1971thepound,previouslydivisibleinto whichitwouldhavetodevotetodebt twentyshillingsor240pence,wasmade servicingtokeepitstotaldebt–export equivalentto100newpence.Itisfeared ratioonadecliningtrend). thatthistypeofcurrencychangeleadsto consumerslosingtheirPRICEPERCEPTION debtsustainability(F4) andunwittinglyacceptingpriceincreases. Thecalculationoftheprojectedearnings However,thequotationofpricesinold fromexportsrelativetothecostofservi- andnewformsreducesthisdisguised cingtheexternaldebtofacountry. inflation. Seealso:debttrap decisioncycle(D0,E6) debttrap(G0) Therecurrentroundofeconomicdecisions Theconsequenceforagovernment,oran madebynationalgovernmentsandother individual,ofborrowingatarateof economicagents.Exchangeratedecisions interestgreaterthantherateofgrowthof havetobemadeseveraltimesaday;many itsincomecausingitscurrentexpenditure commoditypricesandinterestratesare onitemsotherthandebtservicingtobe changedweekly;taxchanges,wagesand increasinglyreduced. productpricesmainlyannually.Major investmentdecisionsaremadeinfre- decelerator(H3) quently. Afiscalchange,e.g.acutinpublic expenditureoranincreaseintaxation, decisionvariable(C6)seechoicevariable whichcounteractstheexpansionaryeffects deconcentration(L1, L4) oftheinvestmentACCELERATOR. 1Dispersalofanindustry overawider decentralizedmarketeconomy(P0) area. AnECONOMYinwhicheconomicagents 2 Thebreak-upofanindustry dominated belowthelevelofcentralgovernmenttake byafewfirms. Thishas occurredunder majorinvestment,productionandpricing ANTITRUSTlegislation. decisions.Allocationisaccordingtomar- decreasingreturns(D2)seereturnsto ketconditionsratherthanplanningtar- scale gets. dedicatedbudget (H6) Seealso:centrallyplannedeconomy;eco- A budget which permits the use of funds nomicdevolution for specified types of public expenditure decile(C1) only because of strict legislation. Much Thevalueobtainedfromasetofdata US federal budgeting has this inflexibility

© 2002 Donald Rutherford sofurtherCongressionalapprovalis This type of financing, also known as neededtomakesomepublicspending ‘pump priming’, has often taken the changes. form of PUBLIC WORKS. KEYNES recom- mended that the government’s current Seealso:earmarking;ringfencing expenditure budget should be in bal- deemedtax(H2) ance but that its capital budget could go UScorporatetaxconcessionequaltothe into deficit in times when aggregate amountoftotalincomealreadypaidtoa demand needed to be stimulated. foreigngovernment.IfaUScorporation 2 The financing of a BALANCE OF PAYMENTS haspaid$10milliontaxabroadonapre- deficit. taxincomeof$20millionwhenitremits Seealso:functionalfinancing $5millionindividendstotheUSAits deemedtaxwillbe$10million0.5. (E3, E6) 1 A reduction in AGGREGATE DEMAND.A deepdiscountbond(G1) deflationary policy of extra taxation Abondpayinglittleornointerestwhich and lower public expenditure is chosen issoldbelowitsredemptionvalue.Inves- by governments to correct balance of torsmakeacapitalgainbyholdingitto payments deficits and to lower the price thedateofredemptionand,inmanycases, level. reducetheirtotaltaxburdenasincome 2 A fall in the average price level. taxationisoftenmorepunitivethancapi- 3 The elimination of price increases from talgainstaxation. an index of production or consumption. deepintegration(F1) Economic statisticians are frequently Anassociationofnationaleconomies engaged in ‘deflating’ time series to goingbeyondFREETRADEtoaharmonizing separate real from nominal changes. ofnationaleconomicregulations.Increas- deflationary gap (E6) inglytheEUROPEANUNIONhaspursuedthis The excess of AGGREGATE SUPPLY over AGGRE- coursetorealizeitsoriginalobjectives. GATE DEMAND of a national economy. This defactopopulation(J1) overall situation of an economy at less Apopulationcountbasedonwherepeo- than FULL EMPLOYMENT has often encour- plewereoncensusnight.Thisisapopular aged KEYNESIAN policies of deficit spend- formofcensus,especiallyindeveloping ing. countries. degrees of freedom (C1) Seealso:dejurepopulation The number of observations in a sample minus the number of population PARA- deficiencypayment(H2,Q1) METERS to be estimated by the sample. Aformofgovernmentalsubsidytofarm- ersequaltothedifferencebetweenthe de-industrialization (L6) marketpriceofanagriculturalcommodity The decline of a country’s manufacturing andthepricesetunderanagricultural industry absolutely or relatively. This fall in policy.Thepurposeofthepaymentisto manufacturing activity is most noticeable achieveadesiredleveloffarmers’incomes. in employment, but a slower rate of growth, Seealso:interventionprice or even a fall, in output and a fall in the world share of trade in manufactures also deficit financing (F4, H6) measure this change. Most OECD coun- 1 Government spending not fully fi- tries have experienced de-industrialization nanced by government revenue usually in the past twenty years as economic undertaken to reduce unemployment activity has switched from manufacturing and to stimulate the growth of output. to service industries. Marxist economists

© 2002 Donald Rutherford areespeciallyconcernedwiththisbecause bethegreaterconvergenceofeconomic oftheirviewthatwhatisproductiveisthe performancethroughco-ordinationof creationofgoods,notofservices. budgetaryandmonetarypolicies,possibly withaEuropeanReserveFundwithre- References servesdrawnfromeachparticipatingcen- Blackaby,F.(1979)De-Industrialisation, tralbank.Thesecondstagewouldprovide London:HeinemannEducational. amedium-termframeworkforkeyeco- Bluestone,B.andHarrison,B.(1982)The DeindustrializationofAmerica:Plant nomicobjectivessothatstableeconomic Closings,CommunityAbandonment,and growthcouldbeachieved.Finallyprecise theDismantlingofBasicIndustry,New rulesofanon-bindingnaturewouldbe York:BasicBooks. createdforannualbudgetsandthefinance Rodwin,L.andSazanami,H.(eds)(1989) ofgovernmentactivity,andaEuropean DeindustrializationandRegionalEco- SystemofCentralBanksfortheformula- nomicTransformation:TheExperience tionofacommonmonetarypolicywould oftheUnitedStates,BostonandLon- besetup.Itwaslateragreedtoletthe don:UnwinHyman. EUROreplacenationalcurrenciesin2002. Saeger,S.S.(1997)‘Globalizationandthe Deindustrialization:MythandReality Seealso:Eurofed;EuropeanMonetary intheOECD’,WeltwirtschaftlichesAr- System;EuropeanMonetaryUnion;Wer- chiv133:579–608. nerReport dejurepopulation(J1) References Thepopulationpermanentlyresidentina CommitteefortheStudyofEconomicand particulararea. MonetaryUnion(1989)ReportonEco- Seealso:defactopopulation nomicandMonetaryUnionintheEur- opeanCommunity,Luxemburg:Office delinking(F1) forOfficialPublicationsoftheEur- Thebreakingoffoftradingandother opeanCommunities. relationshipsbetweenThirdWorldcoun- triesandWesterncountries.Itisargued Delphimethod(M2) thatthebenefitsofsuchacourseofaction Amethodofbusinessforecastingusedby includeanincreasedfreedomtoshapethe manylargeUScorporationsconsistingof developmentofthatcountry,aswellas panelsofexpertsexpressingtheirviewsof lesschanceofeconomicexploitationby thefutureandthenrevisingtheminthe foreigninvestors. lightoftheircolleagues’viewssothatbias andextremeopinionscanbeeliminated Seealso:dependencytheory Seealso:alphastock;betastock;gamma DelorsPlan(F0) stock TheplanoftheEuropeanCommunity CommitteefortheStudyofEconomicand delta stock (G1) MonetaryUnionof1989chairedbyJac- The least traded stocks and shares which quesDelors,thePresidentoftheEUROPEAN are not quoted on the STOCK EXCHANGE COMMUNITY.TheEuropeanCommunityset AUTOMATED QUOTATION SYSTEM. upthecommitteetoproposeaprogression fromtheSINGLEEUROPEANACT1986toa demand (D0) SINGLECURRENCYandacommonMONETARY 1 The amount of factors of production, POLICYthroughouttheEuropeanCommu- or of their products, desired at a parti- nity.Itwasproposedthatthereshouldbe cular price. This is shown graphically in threestagesinthemovementtothe a DEMAND CURVE. committee’sgoals.Thefirststagewould 2 Total expenditure on a good or service.

© 2002 Donald Rutherford demandabledebtinstruments(G0) forcash,withheldtaxes,withheldinsur- Banknotes,current/checkingbankac- anceandTIMEDEPOSITSwhosenoticeof counts. withdrawalhasexpired. Seealso:NOWaccount demandcurve(D0) Agraphrelatingthequantitydemanded demandformoney(E4) ofagood,serviceorfactorofproduction Thedemandfor cashorabankdeposit, todifferentpricesofit.AlthoughJohn notforanassetsuch asastockcertificate STUARTMILLfirsthadtheideaofsuch orbond.KEYNES,bydistinguishingthe schedules,itwasCOURNOTandtheMARGIN- TRANSACTIONS,PRECAUTIONARYandSPECULA- ALISTSwhointroducedthemtoeconomics. TIVEDEMANDSFORMONEYrevolutionized Asthecurveshowstherelationshipbe- monetarytheory.Itisabroader theory tweenonlytwovariables,theCETERISPAR- aboutthemotivationforholdingmoney IBUSassumptionhastobemade.Much than theQUANTITYTHEORYOFMONEYthat controversyhasarisenaboutthenatureof moneyisheldsolely fortransactions theMARSHALLIANDEMANDCURVE,particu- purposes.Thedemandformoneybya larlythecircumstancesunderwhichthere representativeindividual canbeconsid- canbeamovementalongthedemand ered intermsofMARGINAL UTILITYasbeing curvewithoutaffectingtheassumption theresultofbalancingtheimputedyield thatrealincomeisconstant.Thenormal fromholdingit (theconvenienceand demandcurveisassumedtobedownward securityofacashholding)againstthecost slopingbecauseofthepsychologicalbelief intermsofinterestincome forgone.Dis- underlyingtheLAWOFDIMINISHINGMARGINAL cussions ofMONETARISTS’viewshaveledto UTILITY. manyeconometric studiesofdemandfor money functionswhich have shownthem tobe lessstablethanoriginallyasserted. References Fisher,D. (1989)MoneyDemandand MonetaryPolicy,HemelHempstead: HarvesterWheatsheaf. demandmanagement(E5, H3) Discretionary changes in national MONE- TARY and FISCAL POLICIES attempting to change the level of AGGREGATE DEMAND. Under the influence of KEYNESIANISM such policies were very popular in the 1950s and 1960s. However, some critics of de- mand management have asserted that frequent changes destabilized the econ- omy. Seealso:Giffenparadox;price–consump- tioncurve Seealso:fine-tuning demand-pull inflation (E3) demanddeposit(G2) INFLATION originating in EXCESS DEMAND. Fundsheldatabankwithanoticeperiod KEYNES introduced this approach to infla- oflessthansevendays.Theycantake tion in his How to Pay for the War (1940). manyforms,includingCHECKINGACCOUNTS, The notion of an ‘INFLATIONARY GAP’, i.e. an certifiedcashier’sandofficer’scheques, excess of AGGREGATE DEMAND over AGGRE- travellers’cheques,LETTERSOFCREDITsold GATE SUPPLY at FULL EMPLOYMENT, was used

© 2002 Donald Rutherford toexplainthisphenomenoninsteadofthe loweredproductivityandincreasedlabour viewinherentintheQUANTITYTHEORYOF costs. MONEYthatinflationwascausedbyan Seealso:jobcontrolunionism increaseinthemoneysupply.Thefullest formofdemand-pullinflationiswhen dematerialization(G1) excessdemandoccursinbothfactorand Paperlesssettlementofstockexchange productmarkets. transactions. Seealso:demand-shiftinflation Seealso:paperlessentry;Taurus demand-shiftinflation(E3) demerger(L1)seeunbundling INFLATIONbroughtaboutbyastructural changeinaneconomywhichpermanently demeritgood(H0)seemeritbad raisesdemand.Thisisaconsequenceof demographic accounting (J1) increasesinwagesandinthepricesof The tabulation of the population accord- capitalgoodsinexpandingsectorsbeing ing to its characteristics and its states (at communicatedtoothersectors.Itisa birth, death and place) at various dates. mixedformofinflationaschangesinboth demandandcostbringabouttheultimate References increaseinproductprices. Stone, R. (1971) Demographic Accounting and Model-building, Paris: OECD. demarcation(J2,J5) Reservingworkactivitiesforaparticular demographic transition (J1) occupation.Thus,forexample,inan A model showing a society’s population engineeringplantwherethereisdemarca- changes through four stages (see the fig- tion,taskswillbeassignedseparatelyto ure). Stage 1 is the traditional society with mechanical,electricalandelectronicsen- little population growth, a stable popula- gineers.CRAFTUNIONS,anxioustoprotect tion with a high birth rate counteracted by theworkavailablefortheirmembers,have an equally high death rate. Stage 2 shows beenkeentofollowthispractice,especially rapid population growth because im- intheUK.Theinflexibilityintheuseof proved health care has pushed down the labourbroughtaboutbythispracticehas death rate but the birth rate is still high.

© 2002 Donald Rutherford Stage3hasapopulationdeclinecausedby References couplesdesiringfewerchildren.Stage4isa Hayek, F.A. (1990) Denationalisation of maturesocietywithastablepopulation Money - the Argument Refined, 3rd broughtaboutbyhigherincomesand edn, London: Institute of Economic bettereducation,wherecoupleshaveabout Affair. twochildreneach.ManyThirdWorld Denison residual (O4) countriesarestillinthesecondstage;most Advances in knowledge and associated oftheOECDcountriesareinstage4. causes of economic growth. Denison dis- References covered this important growth determinant Caldwell,J.C.(1976)‘Towardarestate- in his study of the USA and eight West mentofdemographictransitiontheory’, European countries for the period 1950–62. PopulationandDevelopmentReview2: References 321–66. Denison, E.F. (1967) Why Growth Rates Notestein,E.W.(1945)‘Population:the Differ, ch. 20, Washington, DC: Brook- longview’,inT.W.Schultz(ed.)Food ings Institution. fortheWorld,Chicago:Universityof ChicagoPress. Denison’s law (E2) This states that the private sector saving of demography(J1) companies and households is a constant Thestudyofthesizeandcompositionof proportion of national income. This rela- humanpopulations,particularlytheir tionship held for twenty-five years but it is births,deathsandmigration.Bothhistor- now being disputed. icalrecordingandprojectionsoffuture References populationsarecalculatedtoprovidethe basisforeconomicandsocialplanning. Denison, E. F. (1958) ‘A Note on Private Saving’, Review of Economics and Sta- Seealso:populationcensus;Malthus; tistics, 40: 261–7. Petty department (M1, P1) References 1 Part of an economy or economic orga- Pressat,R.(1972)DemographicAnalysis. nization. Methods,Results,Applications,London: 2 A branch of capitalist production, ac- EdwardArnold;Chicago:AldineAther- cording to MARX. He divided the ton. economy into three departments: De- partment I, the means of production, demometrics(J1) i.e. energy, machines and tools, raw Themeasurementoftherelationshipbe- materials and buildings; Department II, tweensocioeconomicvariablesanddemo- consumer goods which reconstitute both graphicvariables,e.g.betweenincome the labour force and capitalists, contri- levelsandinterregionalmigration. buting to their well-being; Department III, luxury goods, weapons, which renew denationalizedmoney(E4) neither constant nor variable capital. Moneyissuedbyavarietyofprivateand foreignbanksandnotbyanational dependency culture (D6, H2) government.Thismoneyislesslikelyto A society, or major part of it, permanently bedebased.Thisdiminutionoftheroleof dependent on TRANSFER INCOMES because thestateenablesbankstobenefitfrom the extensive provision of welfare benefits has inhibited work and individual effort. SEIGNORAGE. Several governments, including those of Seealso:debasingacurrency;freebank- the USA and the UK, fear that benefits ing fix the poor in a perpetual state of relative

© 2002 Donald Rutherford deprivation.Itisalsoarguedthatexcessive dependencytheory’,inS.Haggard(ed.) internationalAIDcanhavethesameeffect TheInternationalPoliticalEconomyand onwholecountries. theDevelopingCountries,Vol.1,pp. 300–41,Aldershot:EdwardElgar. dependencyratio(I3,J1) Theproportionofapopulationwhichhas dependenteconomy(F0,P0) Aneconomycloselylinkedwithanother, tobesupportedbyrecipientsofFACTOR eitherthrougheconomictreaties(seeCO- INCOMES.Itiscommonlymeasuredas MECON)orthroughdependenceonanar- childrenundertheageof15 rowrangeofexportedgoods.ManyThird +adultsover64 Worldcountriesaredependentonasingle 100percent numberofadultsinthe export,e.g.MauritiusonsugarandZaire labourforce oncopper. Seealso:brancheconomy Thevalueofthisratioislargewhen persistentlyhighbirthrateshaveincreased depletableexternality(D0) theproportionofchildreninapopulation, AnEXTERNALITYwhichbyaffectingone ormuchinternationalemigrationhasleft personaffectsothersless,e.g.horseman- anoldpopulation. ureusedingardening. Seealso:greysociety Seealso:pollutioncontrol dependencytheory(O1) depositaccount(G2) Exploitationtheoryappliedtosmallcoun- Aninterest-bearingbankaccount(UK) tries.Asmallcountryexportingagricul- whichcannotbewithdrawnwithoutdue turalcommoditiesfindsthatthecontrolof notice(inmostcases,atleastsevendays). itseconomy,especiallyitstrade,shipping, IntheUSA,suchaccountsareknownas insurance,bankingandportfacilities, savingsaccountsortimedeposits. passestoforeignerswhoareoftenasso- ciatedwithalocalwealthyelite.The depositbase(E4,G2) economysuffersfromtherepatriationof Narrowmoney. profitsandimports,bothofwhichare detrimentaltodomesticindustries.The Seealso:M0;M1 deteriorationinlocalindustryreduces industrialemploymentandpushesindi- depositinsurance (G2) genousworkersintothesubsistencesector. Insuranceusedtoprotectdepositsheld in Inordertocounteractthelossescreated banksandotherfinancialinstitutions.In bydependency,thesetheoristsrecommend theUSA,themajorschemehasbeenthe fastindependentgrowthandthegranting FEDERALDEPOSITINSURANCECORPORATION ofprioritytobasicneeds.Criticsargue whichfrom 1933insuredthedepositsof thatthetheoryatbestisapplicableonlyto thememberbanksoftheFEDERALRESERVE sometropicalcoloniesinthe1900–50era, SYSTEMand ofnon-memberbankschoos- thatitexaggeratestheextentofprofit ingtojoin.Instabilityinthebanking repatriationandthatitfailstoestablisha systemof the USA in the 1990s put singleoptimalsetofprices. deposit insurance under a great strain. Critics argued that insurance made banks References more reckless in their lending policies, Frank,A.G.(1978)DependentAccumula- causing the financial difficulties which tionandUnderdevelopment,London: insurance sought to avoid. Macmillan. Smith,T.(1995)‘Theunderdevelopment Seealso:BankingAct1979;Resolution ofdevelopmentliterature:thecaseof TrustCorporation

© 2002 Donald Rutherford DepositoryInstitutionsDeregulation fewyears.Overthepast200years,there andMonetaryControlAct1980(G2, havebeenseveraldepressions,especiallyin K2) thenineteenthcentury,intheeconomies USfederalstatutewhichincreasedfair ofWesterncountries.Thetermisoften competitioninUSbankingbyimposing usedlooselytorefertoaperiodof universalreserverequirementsof3per extensiveunemploymentandbusinessfail- centforthefirst$25millionofdeposits ures.Thestartofthe1930sisusuallycited and12percentoffurtherdepositson asthemajorrecentexampleofadepres- COMMERCIALBANKS,mutualsavingsbanks, sioninthestrictsense. SAVINGSBANKS,SAVINGSANDLOANASSOCIA- Seealso:GreatDepression;recession TIONSandCREDITUNIONS.TheFEDERALRE- SERVESYSTEMwasempoweredtodemand References supplementaryreservesof4percentof Bernanke,B.S.(2000)EssaysontheGreat depositsforamaximumofninetydays Depression,Princeton,NJ:Princeton andallowedtochargeforitsservices.NOW UniversityPress. ACCOUNTSwerelegalizedandmanyinterest Hall,T.E.andFerguson,J.D.(1998)The rateceilingsphasedout. GreatDepression:Aninternationaldis- asterofperverseeconomicpolicies,Ann Seealso:HuntCommission Arbor:UniversityofMichiganPress. deposit-takingbusiness(G2) deprivalvalue(M4) ACOMMERCIALBANK,orotherfinancial Ameasureofthevalueofanassettoits institution,licensedtoconductfinancial owner;thelowerofthereplacementcost businessaccordingtotherulesofaCEN- orECONOMICVALUE. TRALBANK,e.g.theBankofEngland. Seealso:SandilandsReport Seealso:BankingAct1979 deregulation (K2, L5) depreciation(F3,M4) Abolition of governmental regulations, 1Thedeclineinvalueofanassetmea- especially for prices and the operations of suredbyvariousaccountingrulesof publicly owned organizations, with the thumb.Underthestraight-linemethod, aims of lowering prices through more theannualamountofdepreciationis competition, and of stimulating the equaltoafractionofthecapitalex- growth of small businesses. Examples of penditure(thevalueofanassetdivided deregulation include the securities markets byitslife).Othermethodsincludethe of New York and London, US airlines and ‘decliningbalance’approachwhich UK buses. Deregulation of stock markets makesdepreciationequaltoafraction occurred in the USA in 1975, in the UK in ofthewritten-downvalueoftheasset, 1986 and in Japan gradually in the mid- andthe‘sumofdigits’approachunder 1980s. In banking the USA amended its whichafractionofthecapitalexpendi- regulatory bank legislation in the DEPOSI- turedeclineslinearlyovertime.True TORY INSTITUTIONS DEREGULATION AND MONE- economicdepreciation,thereplacement TARY CONTROL ACT OF 1980 and the GARN–ST costofphysicalwearandtear,isdiffi- GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982, culttocalculateascapitalmarketsare to remove ceilings on interest rates and to oftenimperfect. allow THRIFTS to diversify their financial 2Thefallinvalueofacurrencyundera activities, e.g. credit cards and commercial FLOATINGEXCHANGERATEregime. and industrial loans. Critics of deregulation argue that safety Seealso:currencyappreciation suffers, industries are destabilized and depression(E3) there is less provision for underused ser- Afallinnationaloutputcontinuingfora vices thought desirable for social reasons.

© 2002 Donald Rutherford Some large bank failures in the 1980s were designated competitive bidding (M2) partly attributed to the removal of regula- A restricted form of offer in which firms tory safeguards. wishing to participate are screened for their expertise and location. Seealso:economicdevolution References destructive competition (L1) Kahn, A.E. (1988) The Economics of Fierce competition, often in the form of Regulation, Cambridge, MA: MIT price wars, which drives many firms out of Press. an industry and weakens those that re- Majone, G. (1990) Deregulation or Re- main. regulation? Regulatory Reform in Europe Seealso:creativedestruction and the United States, London: Pinter. derivative (C6, G1) devalorization (D0) 1 A sophisticated financial product, e.g. The process that reduces the value of CAPI- TAL SWAP, WARRANT, OPTION or FUTURE avail- through a fall in the price of inter- able in security, commodity and cur- mediate or final goods, or as a result of rency markets. The product is derived bankruptcy. from a simple transaction in a SPOT MAR- KET. devaluation(F3)seecurrencydevaluation 2 A function f(x)ofx which shows the slope of a graph of the function x.For development (O1, O4) the function x to be at a maximum or a 1 The movement of an economy from minimum, it is necessary that this deri- agricultural activities using simple tech- vative be zero. Major derivatives in nology to the production of industrial economics include MARGINAL COST, MAR- products and a range of services using GINAL REVENUE, the MARGINAL PROPENSITY modern technology. (Even in the seven- TO CONSUME, the MARGINAL PROPENSITY TO teenth century PETTY regarded develop- IMPORT and the MARGINAL PRODUCT OF LA- ment as the growth of service BOUR. industries.) 2 The cumulative growth of per capita derived demand (D0) income, accompanied by structural and The demand for a factor of production institutional changes. Although per ca- derived from the demand for its product, pita income is a crude measure unless e.g. there is a demand for labour in the problems of measuring the GROSS DOMES- construction industry because of a de- TIC PRODUCT and its distribution are mand for houses. Demand for a product taken into account, this is often the best and the derived demand for a factor will proxy measure. Post-1945 development change by the same proportion if the policies have often failed to help the input–output ratio is constant, which is poorest 40 per cent of the world’s unlikely in a period of technological population. Although many aid pro- change. grammes have an urban bias, they have widely achieved lower rates of infant deserving poor (I3) mortality, more hospital beds, an in- Those with low incomes through no fault creased supply of piped water and the of their own, e.g. the victims of a trade building of many all-season roads. DEPRESSION. The distinction between the deserving and undeserving poor has been Seealso:industrialization used to deprive the latter of welfare References benefits. Kitching, G. (1989) Development and Un- Seealso:PoorLaws;poverty derdevelopment in Historical Perspective.

© 2002 Donald Rutherford Populism, Nationalism and Industrializa- References tion, rev. edn, London: Routledge. Hirschman, A.O. (1981) ‘The rise and Lipton, M. (1977) Why Poor People Stay decline of development economics’, in Poor, London: Temple Smith. A.O. Hirschman (ed.) Essays in Trespas- Little, I.M.D. (1982) Economic Develop- sing, New York: Cambridge University ment: Theory, Policy and International Press. Relations, New York: Basic Books. Meier, G.M. (1989) Leading Issues in Myrdal, G. (1956) Development and Un- Economic Development, 5th edn, New derdevelopment, Cairo: National Bank York and Oxford: Oxford University of Egypt. Press. Myint, H. (1980) The Economics of Devel- development bank (G2, O1) oping Countries, London: Hutchinson. A bank specializing in the provision of finance for development projects in devel- development planning (O2) oping countries and depressed regions. The use of CENTRAL PLANNING in Third Major international development banks World countries as a route to economic use both capital subscribed by donor development. The earliest plans were car- countries and capital borrowed from inter- ried out before and after the Second national capital markets to support parti- World War in British, French, Belgian cular projects and programmes, often over and Portuguese colonies. These plans in- the medium term. The principal interna- cluded a crash investment programme, tional development banks include the IN- especially in the public sector, and a TERNATIONAL BANK FOR RECONSTRUCTION AND commitment to rapid industrialization. DEVELOPMENT, the INTERNATIONAL FINANCE CORPORATION, the INTER-AMERICAN DEVELOP- development policy (O2) see aid; MENT BANK, the ASIAN DEVELOPMENT BANK, development the AFRICAN DEVELOPMENT BANK, the CARIB- BEAN DEVELOPMENT BANK, the EUROPEAN IN- diamond model (F1) VESTMENT BANK, the EUROPEAN BANK FOR A theory of competitive advantage based RECONSTRUCTION AND DEVELOPMENT and the on four different determinants within a INTERNATIONAL INVESTMENT BANK. domestic economy: factor conditions, do- mestic demand conditions, the presence of development economics (O1) related and supporting industries, and Growth theory applied to the economic strategy, structure and rivalry of firms problems of developing countries. In a within the industry. sense, it started with SMITH’s The Wealth of Nations which was concerned with an References analysis of the causes of economic growth, Porter, M.E. (1990) The Competitive Ad- but it boomed as a subject in the period of vantage of Nations, London: Macmillan. decolonialization of the 1950s. When de- velopment economists began devising difference equation (C6) growth policies for less developed coun- An equation relating a variable measured tries, they were inspired by Soviet eco- at one time to variables measured at nomic management of the 1930s, wartime previous times. This mathematical device economic management and the MARSHALL is much used in DYNAMIC ECONOMICS, e.g. in PLAN for recovery in Western Europe. the case of a COBWEB the quantity sup- Criticism of the industrialization bias of plied in year t + 1 is a function of the early development plans, and their conse- price in year 1. Difference equations can quent environmental effects, made INTER- be linear or non-linear, homogeneous or MEDIATE TECHNOLOGY increasingly popular non-homogeneous, of first or second or- as a development strategy. der.

© 2002 Donald Rutherford References series. The value is 0 per cent for a Goldberg,S.(1958)IntroductiontoDiffer- decrease, 50 per cent if there is no change enceEquations,NewYork:Wiley. in the overall number rising or falling, or 100 per cent if there is an increase over a differentialtaxincidence(H2) given time period. In the USA, Business Theburdenofonetaxcomparedwith Cycle Indicators, published from 1961, has another. measured diffusion for twenty-one eco- Seealso:taxincidence nomic indicators. differentialtheory ofrent(D3) diffusion rate (O3) The theoryofANDERSON,RICARDOand The proportion of output of an industry otherswhichassertedthattherentonland using a particular technique by a stated subject toDIMINISHINGRETURNSarose from date, e.g. the percentage of the steel differencesinfertilityorlocation withno industry using technique X by 2000. This rentbeing paidontheleastfertileor most is a major measure of technical progress distantland.Asthemarginofcultivation and of INNOVATION. High rates of diffusion isextended,thetotalamountofrentpaid are encouraged by the possibility of cost increases. reduction and by energetic advisory and information services. differentiatedgood(D0, M3) Agoodappearingdifferentfromitsmar- Dillon Round (F1) ketrivalsbybeingsoldunderabrand The fifth round of tariff reductions, orga- nameand packageddifferently.Recogni- nized under the GENERAL AGREEMENT ON TAR- tionofthismarketingdevicemadeagreat IFFS AND TRADE, of 1960–1. Under it, the contributiontotheformation ofthethe- USA agreed to a 20 per cent reduction in ory ofMONOPOLISTICCOMPETITION. tariffs on 20 per cent of its dutiable Seealso:branding;brandloyalty;pro- imports. As the concessions were concen- ductdifferentiation trated on manufactures, the round had little effect on the exports of less devel- differentiatedmarketing(M3) oped countries whose industrialization was Amarketingstrategywith separatemar- at a low level. It was of far more impor- keting programmesforeachproductofa tance for bilateral deals between the USA firm. and industrialized countries. differentiatedproduct(D0, L1)see diminishing marginal rate of substitu- productdifferentiation tion (D1) differentiation(C6,L1) This rule of consumer behaviour states 1Amajorbusinessstrategytoacquire that at the same level of utility a consumer someMONOPOLYPOWERbythedifferentia- will sacrifice decreasing amounts of good tionof products,orof theirmarketing Y to obtain extra units of good X. This is anddistributiontotheconsumer. usually expressed as an INDIFFERENCE 2Amathematicalmethodof calculating CURVE. thederivativeofafunction;thisismuch References usedinNEOCLASSICALECONOMICS. Hicks, J.R. (1939) Value and Capital, ch. 1, Seealso:branding;monopolisticcompe- Oxford: Clarendon Press. tition;productdifferentiation diminishing marginal utility law (D1) diffusionindex(C1,E3) This states that the amount of satisfaction A measure used to identify BUSINESS CYCLES. derived from the consumption of succes- The standard diffusion index is calculated sive units of the same good or service will by giving a value to each component decline. The law is used to explain the

© 2002 Donald Rutherford downward-slopingnatureofthenormal stancesofataxpayerandcanhaveits DEMANDCURVE,toresolvetheso-called incidenceshiftedtotheproducer.Direct WATERANDDIAMONDSPARADOXandtojustify taxationisregardedasmoreequitablebut redistributionfromtherichtothepoor. itismoredifficultandexpensivetocollect. AlthoughBENTHAM,SENIORandJEVONSare Seealso:taxincidence notedfortheirclearexpositionofthislaw, hintsofitappearedinearliereconomic directcost(D0) writings. 1Aproductioncostdirectlyattributable tothecostofproducingoneunitofa diminishingreturnslaw(D2) particularoutput. Thedeclineinoutputwhichoccursas 2Variablecost. successiveunitsofavariablefactorof productionareappliedtoafixedfactor. Seealso:indirectcost Themostfamiliarexamplewastheappli- directfactorcontent(M0) cationofincreasingamountsoflabourto TheamountsofFACTORSOFPRODUCTION afixedamountoflandwiththeconse- usedonlyinthelaststageofproduction. quencethattheMARGINALPRODUCTofla- bourdeclined.Thisviewofagricultural directforeigninvestment(F2) productionwascentraltomuchofCLASSI- 1Investmentinproductivefacilitiesbya CALECONOMICS,includingRICARDO’smodel foreigncompany,e.g.thepurchaseor oftheeconomy.TheUSeconomistHenry buildingoffactories. CharlesCarey(1793–1879)wasoneofthe 2Thepurchaseofstocksandshares feweconomicwritersofthenineteenth whichgiveaforeigncompanycontrol centurytoarguethatinadeveloping overexistingrealassets. economycultivationcanproceedfromthe leasttothemostfertilelandbringing Seealso:multinationalcorporation;port- aboutincreasingreturns. folioinvestment Seealso:returnstoscale direct–indirecttaxes ratio (H2) A measure of the TAX STRUCTURE which References compares the yields from the various types Carey,H.C.(1848)ThePast,ThePresent of tax to see their relative importance as andTheFuture,Philadelphia:Carey& sources of revenue. Hart. direct labour organization (L3) Dinks(J1) A department of a UK local authority Doubleincome,nokids:USprofessional carrying out building, street cleansing or couplewithahighjointincomeandno other activities itself rather than contract- dependants. ing them out to private sector firms. They were severely criticised for their low pro- directandindirecttaxation(H2) ductivity. In the 1980s, the UK govern- Twobroadcategoriesoftaxationdifferen- ment began the replacement of direct tiatedaccordingtoadministrativearrange- labour organizations by private firms ments,incidence,orthecharacteristicsof through COMPETITIVE TENDERING in an at- taxpayers.Incometaxes,forexample,are tempt to reduce the cost of local govern- paiddirectlytorevenueauthorities,can ment services. directlyreducetaxpayers’realincomesand bedirectlyrelatedtotaxpayers’character- directly unproductive profit-seeking istics.Butanindirecttax,suchasasales activities (L3) tax,isindirectlypaidbyanindividual Activities yielding pecuniary returns but throughpurchasinggoodsandservices,is not producing goods or services. A major notdirectlyrelatedtothepersonalcircum- example is the evasion of tariffs.

© 2002 Donald Rutherford References loss than receiving pleasure from gaining Buchanan, J.M., Tellison, R.D. and Tul- the same amount. This aversion causes lock, G. (eds) (1980) Toward a Theory of many people to prefer the high probability the Rent Seeking Society, College Sta- of a small loss in a lottery to the low tion, TX: Texas A & M University probability of a high loss through invest- Press. ing in EQUITIES. direct product profitability (M4) References A measure of a retailer’s net profit after all Gul, F. (1991) ‘A theory of disappointment labour, equipment and storage costs attri- aversion’, Econometrica 59: 667–86. butable to that product have been de- ducted. This is a more precise cost discomfort index (E3, J6) accounting technique than the previously OKUN defined this as the sum of the popular method of calculating gross profit unemployment rate plus the rate of infla- margins before deducting the average costs tion. of handling and storage of each product. disconnective taxation (H2) The knowledge gained from applying the Taxation unconnected to any spending. direct product profitability method enables The opposite of a BENEFIT TAX. a retailer to have a more optimal product mix and a better use of shop space. discount bond (G1) A BOND valued at less than its nominal direct sale (M3) value because of its high risk or its low A sale to a customer without the use of COUPON. agents and the payment of their commis- sion. This is a cheaper way of selling, discounted cash flow (M4) especially for services such as insurance. A method of investment appraisal which discounts the future benefits and costs of directtax(H2)seedirectandindirect an investment to discover its present value. taxation The method can be used to evaluate direct utility function (D0) whether an investment project is worth- A consumer’s utility related to the quan- while either by following the rule that the tities of goods consumed. present value of benefits must exceed the present value of costs, or by considering Seealso:indirectutilityfunction whether the INTERNAL RATE OF RETURN is dirigisme (L5) acceptable compared with that on other State intervention in society and direction investment projects. of the economy as practised in France discounted share price (G1) from the seventeenth century. A share price which takes into account Seealso:Colbertism;mercantilism expectations of future changes in earnings per share. As stock markets are constantly dirty float (F3) responding to information about particu- An exchange rate regime which, for the lar companies’ prospects, the announce- most part, is dominated by market forces ment of a fall or rise in company profits but occasionally has interference by gov- can often have little impact on a share ernments and central banks to prevent an price. excessive fluctuation in the value of a currency. discount house (G2) A financial institution of the City of Seealso:floatingexchangerate London, which borrows MONEY AT CALL disappointment aversion (D0, G1) from banks and other institutions and Being willing to suffer more pain from a invests it in TREASURY BILLS, high-quality

© 2002 Donald Rutherford COMMERCIALBILLSandCERTIFICATESOFDE- cialrateisbasedonthegovernment’s POSIT.Thetwelvediscounthouses,forming view,whichcanbemorelong-sightedas themoneymarket,actasabufferbetween itattempts,inmostcases,totakeinto thecommercialbanksandtheBANKOF accountthewelfareoffuturegenerations. ENGLAND.Banksshortofcashwillrecall moneylenttothemoneymarketwhich discountwindow(E5) thenhastodiscountbillstobalanceits UStermforlendingtodepositoryinstitu- books.TheBankofEnglandasLENDEROF tionsbyeachofthetwelvedistrictFEDERAL LASTRESORTisalwayspreparedtolendto RESERVEBANKS.From1913to1916,thiswas discounthouses,bydiscountingbills,in theonlylendingaFEDERALRESERVEBANK ordertopreservetheliquidityofthe couldundertake.Itiseitheradjustment bankingsystemasawhole. credittomeetatemporaryneedforfunds Curiously,manyofthesediscount orextendedcredittohelpbankssubjectto housesarenowownedbyclearingbanks seasonalfluctuations,oraccommodation whocouldeasilyabolishthembyaban- tocopewithspecialcircumstances,e.g.the doninganagreementnottocompetein effectsofachangeinthefinancialsystem. themoneymarketwhichhasexistedsince Otherlendingisbydiscountingeligible the1930s:thebankspreferthisunusual paper,e.g.acommercialoragricultural bufferbetweenthemselvesandtheBankof loanmadebythebanktoacustomer. England. Before1980,suchlendingwasonlymade toFederalReservememberbanks;now, discounting(D0,M4) undertheDEPOSITORYINSTITUTIONSDE-REGU- Amethodusedtovalueatthesamedate LATIONANDMONETARYCONTROLACT1980,itis economicflowsorstockswhichhave opentoalldepositoryinstitutionsexcept originatedatdifferentdates.Atypicaluse bankers’bankswhichmaintaintransac- ofdiscountingistoconverttheexpected tionaccountsornon-personaltimedepos- futureincomesfromanassettopresent its.Discountwindowloansareusually valuesusingaDISCOUNTRATE. onlyasmallproportionofbankreserves, Seealso:discountedcashflow e.g.lessthan3percentin1985.This lendingcanbeusedinMONETARYPOLICY discountmarket(G1) insteadofOPENMARKETOPERATIONS. Themoneymarketspecializingintransac- tionsinshort-termfinancialassets. References Seealso:short-termmoneymarket Mengle,D.L.(1986)‘Thediscountwin- dow’,FederalReserveBankofRichmond discountmarketloans(G1)see EconomicReview72(3):2–10. overnightmoney discouragedworkershypothesis(J2,J6) discountrate(D0,E4) Theviewthatworkersgiveupjobsearch 1TherateofinterestchargedbyaCEN- activitybecausehighunemploymentrates TRALBANKtolowerlevelfinancialin- andalackofhiringbybusinessesmakeit stitutions(usuallyCOMMERCIALBANKS) unlikelythattheywillsucceedingaining fordiscountingtheirbills,i.e.lending employment.Lackofsearchlosesthem themmoney,oftenwhenactingasthe thestatusofbeingunemployedandso LENDEROFLASTRESORT. theydropoutoftheLABOURFORCE. 2Therateusedfordiscountingfuture valuestothepresent.InCOST–BENEFITANA- Seealso:additionalworkerhypothesis LYSISthereisadistinctionbetweena privateandasocialrateofdiscount.A discrete variable (C6) privaterateofdiscountreflectsthetime A variable which can take only some of preferenceofprivateconsumers;aso- the values between two given values, e.g.

© 2002 Donald Rutherford thenumberofcountriesintheworldcan rialfatigue,increasesinthemarginalcost be50,100or200butnot1.8. ofattractingmorecustomersandrising factorprices–howmanyofthese‘causes’ Seealso:continuousvariable arevaliddependsonhowstrictlyadis- discriminatingauction(D4) economyisdefined. Aformofsalewithdiscriminationbased Seealso:economyofscale onprice.Thebidsarerankedfromthe highest.Eachbidderpayswhathasbeen disembeddedeconomy(P0) biduntilthegoodorserviceauctionedis AnECONOMYinwhicheconomicrelation- soldout. shipsdominatethesocialrelationshipsof kinshipandpolity.Thisphenomenon,ob- discriminatingmonopoly(L1)seeprice servedbytheGERMANHISTORICALSCHOOL,is discrimination followedtodaybyanemphasisonmarkets. discrimination(J7) disembodiedtechnicalprogress(O3) 1Unfairandunfavourabletreatmentofa AnincreaseinPRODUCTIVITYwhichoccurs groupofworkersorotherpersons. withouttheinstallationofnewcapital 2Settingdifferentwagesforworkerswith goods.Examplesincludeorganizational thesameproductivitybutdifferentper- changesorLEARNING-BY-DOING. sonalcharacteristics,i.e.sex,ageor race,orrefusingtohirethem. Seealso:embodiedtechnicalprogress disequilibrium (D0, E3) Differentschoolsofeconomicshavechosen 1 An economic system in a state of EXCESS differentapproachestotheissue:NEOCLASSI- DEMAND or EXCESS SUPPLY. CALeconomistssuchasBECKERexamined 2 The state of an economic system whose howatastefordiscriminationaffectsthe key variables continue to fluctuate demandforeachgroup,whileothershave around an EQUILIBRIUM or an equili- placeddiscriminationinthecontextof brium growth path. Expectations of widerconcernssuchasclassconflict. economic agents or lags in the system Seealso:ageism;horizontaldiscrimina- can cause this. tion;racialdiscrimination;sexualdiscrimi- disequilibrium economics (D0, E0) nation;verticaldiscrimination The analysis of non-clearing markets or References national economies with less than FULL Becker,G.S.(1971)TheEconomicsof EMPLOYMENT. In macroeconomics, the DY- Discrimination,Chicago:Universityof NAMIC MULTIPLIER shows how disequili- ChicagoPress. brium occurs in the economy as a whole; Marshall,R.(1974)‘Theeconomicsof in the MULTIPLIER–ACCELERATOR MODEL racialdiscrimination:asurvey’,Journal changes in the national income are stu- ofEconomicLiterature12:849–71. died. is believed to be Reich,M.(1981)RacialInequality,Prince- essentially a theory of disequilibrium ton,NJ:PrincetonUniversityPress. rather than a theory of GENERAL EQUILI- diseconomyofscale(D2) BRIUM as NEO-KEYNESIANS would assert. Ariseinaveragecostsasaconsequenceof References anincreaseinoutput.Thisisvisibleinthe Barro, R.J., Howitt, P.W and Grossman, positivelyslopedpartoftheAVERAGECOST H.I. (1979) ‘Macroeconomics: an apprai- curve.Earlywritersonthesubjectattrib- sal of the non-market clearing paradigm’, utedsuchdiseconomiestothemanagerial American Economic Review 69: 54–69. problemofco-ordinatingtheactivitiesof Hey, J.D. (1981) Economics in Disequili- largeenterprises.Laterwritersnotedother brium, Oxford: Basil Blackwell. sourcesofdiseconomies,includingmate- Muellbauer, J. and Portes, R. (1979)

© 2002 Donald Rutherford ‘Macroeconomicswhenmarketsdonot disguisedunemployment(J6) clear’,inW.Branson(ed.)Macroeco- ThatpartoftheLABOURFORCEconsisting nomicTheoryandPolicy,ch.16,New ofemployedworkerswithalowproduc- York:Harper&Row. tivitymakinglittlecontributiontothe Samuelson,P.(1939)‘Interactionsbetween GROSSDOMESTICPRODUCT.Alowlevelof multiplieranalysisandtheprincipleof acceleration’,ReviewofEconomicSta- investmentperworker,orthereluctance tistics21(May):75–8. oflabourtomovetomoreproductiveand higherpaidworkinthemoremodern disequilibriumgrowththeory(O4) sectorsofaneconomy,cancausethis AdynamictheorywithKEYNESIANfounda- unemployment.Countriesorregionswith tionsaccountingforthecourseofchange largeagriculturalsectors,e.g.lessdevel- ofanationaleconomy.Thisgrowthpro- opedcountriesandsouthernregionsof cesscanbeinitiatedbydisequilibriumina theEUROPEANUNION,oftenhaveagreatdeal factororproductmarketorthroughthe ofthissortofunemployment. non-equalityofaggregatedemandand disincentiveeffect(H2,H3) aggregatesupply. Thediscouragingeffectofataxonthe References supplyofeffortorthenumberofpersons Ito,I.(1980)‘Disequilibriumgrowththe- availableforwork.Thebestexampleisan ory’,JournalofEconomicTheory23: incometaxwithahighmarginalrate.This 380–409. canresultinaBACKWARD-BENDINGLABOUR SUPPLYCURVE. disequilibriummoney(E4) Themismatchbetweenthedemandfor Seealso:incentiveeffect andsupplyofmoneybroughtaboutby (E3) lagsthatpreventSUPPLY-SIDESHOCKSfrom The reduction of inflation to a very low affectingthedemandformoney.These level. A major way of attempting to reach shocksinmoneyandcreditmarketslead this goal is to lower AGGREGATE DEMAND by toassetpricesovershootingtheirequili- the use of MONETARY and FISCAL POLICIES. briumlevel. disinflation cost (E3, E5) disequilibriumprice(D4) The loss of output resulting from a MONE- Apricethatfailstoequatedemandwith TARY POLICY seeking to reduce inflation by a supply.Inthefigure,Peistheequilibrium reduction in aggregate demand, often price.AbovePepriceswillbedetermined through increasing interest rates. bythedemandcurve;belowit,bythe disintermediation (G2, M2) supplycurve. Bypassing the banking system by direct borrowing and lending between companies/ corporations or other users and suppliers of finance. When the BANK OF ENGLAND introduced the ‘corset’ as a means of reducing bank lending, disintermediation enabled companies to continue to borrow short term when refused credit by their bankers. ‘dismal science’ (A1) The summary dismissal of ECONOMICS made by Thomas Carlyle (1795–1881). He ar- gued that as utilitarianism had been me- chanically applied and as humans were

© 2002 Donald Rutherford increasinglyconnectedonlybycashpay- tionamajorconcern. ments,fundamentalspiritualvalueswere 2Thedistributionofonetypeofincome beingneglected. betweenpersonsorbetweengroups. 3Thelaststageofproductioninwhich Seealso:cashnexus goodsorservicesreachfinalconsumers. References Seealso:labour’sshareofnationalin- Rutherford,D.(1996–7)‘DismalCarlyle come;post-Keynesians andthe‘‘DismalScience’’’,TheCarlyleSo- cietyPapersNewSeries,No.8:24–36. distributional/socialweights(C1) Theincreasedweightingofonesocialor disposableincome(D3,H2) incomegroupinCOST–BENEFITANALYSIS.This 1PERSONALINCOMEplusTRANSFERINCOME givesagroupmoresignificance:forexam- netofalltaxesleviedonincomes. ple,iftheLOWERQUARTILEofanincome 2Theamountsofmoneyapersoncan distributionisgivenaweightof4butthe spendorsaveinagiventimeperiod. UPPERQUARTILEonly1thencostsand Seealso:finalincome benefitsaffectingthelowestincomegroup willberegardedasfourtimesasimpor- dissaving(E2) tantasthoseofthetopgroup. 1Thespendingofaccumulatedsavings. 2Anetincreaseinborrowing. disturbanceterm(C1) Avariable,positiveornegativeinvalue,or distortion(D6) ERRORtermwhichindicatestheextentto Thefailuretoreachawelfareoptimum whichthedependentvariableofaregres- becausethesocialmarginalcostofprodu- sionequationfallsshortofthecentral cinggoodsislessormorethanthesocial valueoftheindependentvariables.Inthe marginalbenefitofconsumingthatgood. equationI=a(YY1)+u,Iisnet WELFAREECONOMICSismuchconcernedwith investment,Yisthisyear’sincome,Y is distortionswhenanalysingtaxationand 1 lastyear’sincomeanduisthedisturbance monopoly. termshowingtheextenttowhichIismore distortionarytax(H2) orlessthanthecentralvalueofa(YY1). Abiasedtaxcausinginefficiencies.Many Thistermreflectstherandomelementin specifictaxes,e.g.thoseleviedonthe economicrelationships. productsofoneindustrybutnotonthose disutility(D0) ofanother,canchangethepost-taxalloca- Anegativesatisfaction,e.g.pain,tiredness, tionofdemand. unhappiness.Studyandworksupposedly distribution(D3,L8) createdisutility,justifyinghigherearnings 1ThedivisionoftheNATIONALINCOME tobettereducatedandmoreproductive amongtheFACTORSOFPRODUCTIONinthe workers.Consumptionofagoodorser- formofWAGES,PROFITS,INTERESTand vice,accordingtothelawofDIMINISHING RENT.TURGOT,inhisRe´flectionssurla MARGINALUTILITY,cancontinuetothepoint formationetladistributiondesrichesses whereUTILITYturnsintodisutility,e.g.a (1766),wasprobablythefirsteconomic fewglassesofclaretcangiveaperson writertoexaminethedistributionasa utility,afewlitresseveredisutility.ABAD separateissue.DespiteJohnStuart producesdisutility. MILL’sattempttoseparatethelawsof Seealso:labourdisutilitytheory productionfromthelawsofdistribu- tion,therehasalwaysbeenanintimate divergence indicator (F3) relationshipbetweendistributionand The margin by which a currency in the othereconomictheories.Socialistecon- EXCHANGE RATE MECHANISM can diverge from omistshavemadethestudyofdistribu- its central or PAR VALUE. This is 2.25 per

© 2002 Donald Rutherford cent except for the later entrants to the policy on net profit distribution. For PRE- mechanism, e.g. Italy and the UK, which FERENCE SHARES, the dividend is at a fixed can diverge by 6 per cent in either direc- rate determined when they were issued, tion to make adjustment to a fixed ex- unless there is a right to participate in change rate easier. residual profits. divergence threshold (F3) dividend discount model (G1) The crucial value of the DIVERGENCE INDICA- The fair pricing of an asset measured as TOR for a currency of the EXCHANGE RATE the present value of expected cash flows MECHANISM. At this value, either a change from it. In the case of a COMMON STOCK or in the domestic economic policies of the EQUITY it is the expected dividend pay- country concerned or a change in the PAR ments and the expected price of the stock VA LU E of its currency is required. at a future date. diversification (D2, G1, L0) References 1 The production of a range of products William, J.B. (1938) The Theory of Invest- by a firm. ment Value, Cambridge, MA: Harvard 2 The establishment of several industries University Press. in a region or a country. dividend net (G2) 3 The spreading of investments over a The rate of dividend paid in the last year, range of assets with different degrees of less income tax paid at the standard rate. risk. dividend yield (G1) Ultimately diversification is always con- The yearly return on each £100 or $100 cerned with minimizing the risk of a loss invested: of income. nominal value of a Seealso:conglomerate share dividend (%) yield (%) = 100 diversification cone (F1) market price 100 Combinations of factor endowments which produce the same set of goods at Divisia money index (E4) the same factor prices in the HECKSCHER– A combination of different measures of OHLIN TRADE THEOREM. money weighted by the amount of interest diversification discount (M2) paid on each. The higher the interest rate, The discount arising from a firm having the less the monetary instrument is several divisions each with the authority to ‘money’ in the narrow sense of being CASH. make investments. The discount occurs The growth of interest-bearing CURRENT owing to the lack of co-operation between ACCOUNTS has rendered the index less use- divisions. ful. divestment (L1) Seealso:moneysupply The disposal of part of the assets of a References firm; the opposite of a MERGER. An apprai- Barnett, W.A., Fisher, D. and Serletis, A. sal of the activities of a diversified firm (1992) ‘Consumer theory and the de- often results in divestment as a means of mand for money’, Journal of Economic rationalizing its interests. Literature 30: 2086–119. dividend (G1) division of labour (D2) The variable return to equity shares, Specialization of productive activity either decided by the board of directors of a by persons in different occupational company or corporation according to its groups undertaking particular tasks or by

© 2002 Donald Rutherford dividingataskintoitscomponentopera- provokingalong-runningcontroversy tions.AlthoughwritersasearlyasXENO- amongstMarxists.Hehadadeepinterest PHONhadmentionedtheprinciple,SMITH, inthehistoryofeconomicthought,colla- withhisfamousexampleofpinmaking, boratingwithSRAFFAintheeditingofRI- madeitacentralexplanationofthe CARDO’sworksandsuggestingthat growthprocess,Henotedthatsuchspe- economictheorydescendedfromQUESNAY cializationwouldsavetimeastherewould throughRICARDOandMARXtoLEONTIEFand nothavetobefrequentchangesfromone SRAFFA.Currentpolicyissuesalsocon- activitytoanother,thatworkerswould cernedhim:hewasabletomakeuseofa becomemoredextrousandthattheanaly- Ricardo–Marxtwo-sectormodeltomake sisofjobswouldmakepossibletheintro- policyrecommendationsforlessdeveloped ductionofmachinery.However,hewas economies. awarethatworkerswouldbecomedull References throughrepetitivetasks–aSmithianpoint oftenmisinterpretedbyMarxists:division Dobb,M.H.(1946)StudiesintheDevelop- mentofCapitalism,London:Routledge. oflabourinitselfcanproduceALIENATION ——(1966)SovietEconomicDevelopment amongstworkers,whetherornottheyown since1917,London:Routledge. thecapitaltheyuse. ——(1978)‘MauriceDobbMemorial Issue’,CambridgeJournalofEconomics divisionofthought(D2) 2:2. Specializationintheprocessingofinfor- mationandactinguponthatdata.Such dogsoftheDow(G1) specialistswillundertakeeitherstrategic Anapproachtoinvestmentbasedonusing planningorexecutiveoperations. dividenddata.Atthebeginningofthe References year,USstockslistedbyDowareranked Arrow,K.J.(1979)‘Thedivisionoflabour bydividendyieldfromthehighesttothe intheeconomy,thepolityandsociety’, lowestandthenanequalamountis inG.P.O’Driscoll(ed.)AdamSmithand investedineachofthetoptenstocks.The ModernPoliticalEconomy:Bicentennial followingyeartheprocedureisrepeated EssaysonTheWealthofNations,Ames, andthestockswhoserankhasfallen IA:IowaStateUniversityPress. belowthetoptenaresold. do-able(O2) dolebludger(J6) Adevelopmentstrategyemphasizingpro- AnAustralianunemployedpersonwho jectsandmethodswantedbylocalpopula- doesnotseekworkbutenjoysalifeof tionsastheyaremorelikelytobe leisurefinancedbysocialsecuritybenefits. maintainedinthelongterm. Abolitionofunemploymentbenefitwas Dobb,MauriceHerbert,1900–76(B3) intendedtoforcesuchpersonsintore- UKMarxisteconomist,educatedatCam- trainingorjobsearch. bridgeandtheLondonSchoolofEco- Seealso:job-seeker’sallowance;New nomics,andafellowofTrinityCollege, Deal Cambridge,from1924to1967andReader inEconomicsfrom1959.Throughouthis dollar(F3) academiccareerhisCommunistParty ThenameoftheUSA’scurrencysince ideologicalstanceinformedhisviewsand 1785. Other countries, including Hong hiswritings.AsadefenderofSoviet-style Kong, Canada and Australia, have fol- economicplanning,heparticipatedin lowed the US lead. The term is derived majordebateswithMISESandHAYEK.His from the Bohemian thaler introduced in analysisofcapitalismdefendedtheMarx- 1517. ‘Yen’ (Japanese) and ‘yuan’ (Chi- ianinterpretationofeconomichistory, nese) both mean dollar.

© 2002 Donald Rutherford Seealso:currencies studiesoftaxationandcomparativeeco- nomicsystems. dollarization(F3) 1TheuseoftheUSdollarfordomestic References monetarytransactionsoutsidetheUSA Domar,E.V.(1957)EssaysintheTheoryof becausethelocalcurrencyisdepreciat- EconomicGrowth,NewYork:Oxford ingrapidlythroughhighinflation.In UniversityPress. 1904Panamaabandoneditsowncur- rencyforthedollar,asdidEcuadorin Domei(J5) 2000andElSalvadorin2001. JapaneseFederationofLabour.Thisla- 2Theabandonmentofanationalcur- bourunionnationalfederationmerged rencyinfavouroftheUSdollar.In withChuritsurorentoformRengoin countriessuchasEcuadorarapid 1987.Domeihad2.09millionmembers declineinthevalueofitscurrency,the in1987. sucre,requiredthisdrasticeconomic domesticabsorption(E2) reform. Anation’stotaluseofitsownoutputof Seealso:dualexchangerate goodsandservicesinconsumptionand investment. dollaroverhang(F3) USdollarsheldoutsidetheUSAinthe Seealso:absorptionapproach 1960sinexcessofthegoldbackingfor them. domestic banking system (G2) The interconnected banking institutions of Seealso:monetaryoverhang a particular country. These receive depos- its from the public, lend at home and dollarstandard(F3) abroad and effect the transfer of funds. ThebasisofvalueforINTERNATIONALMONE- As the ultimate guarantor of the LIQUIDITY TARYFUNDcurrencies,theUSdollar,under of a banking system, a national CENTRAL theBRETTONWOODSsystem(1968–73),a BANK operates and, to a large extent, successortotheGOLDSTANDARD.Unlike attempts to control all WHOLESALE and RE- linkingcurrenciestogold,thisstandard TAIL BANKS. didnotrequiredollarholdingsasaback- The greater sophistication attributed to ingforothercurrencies,thusmakingita the banking systems of Western countries lesspotentsystemofinternationalmoney. is a product of their long period of relative domain(C6) freedom to develop a variety of financial Thesetofvaluesavariablecantake. instruments, unlike the MONO-BANKS of Soviet-type economies whose role was Seealso:continuousvariable;discrete limited through subservience to a system variable of central planning. Domar,EvseyDavid,1914–(B3) The Second World War created an Afounderofmoderneconomicgrowth excessive volume of public sector debt theory.EducatedattheUniversitiesof which made possible a post-war expansion California(LosAngeles),Michiganand in bank advances to meet the demands of Harvard.Earlyinhiscareerhewasan private sector borrowers. Other changes economistwiththeFEDERALRESERVEBoard have been a widening of the range and ofGovernorsandthenattheCOWLESCOM- activities of COMMERCIAL BANKS, including MISSION,andprofessorattheMassachu- new techniques and financial products, settsInstituteofTechnologyfrom1958to particularly in the UK and the USA. In 1972.Heisbestknownforreviving the USA in the 1960s, for example, there economicgrowththeoryintheHARROD– was a switch from asset management to DOMARMODEL;hisotherworksinclude liability management and later a shift from

© 2002 Donald Rutherford fixed rates to variable rates for lending. To domestic system (D2) assess a domestic banking system a com- A primitive form of production in which monly used indicator is the trend in the MERCHANT CAPITALISTS advance capital to prices of the stocks and shares of issued self-employed craftworkers and artisans bank securities as these reflect investors’ who, using their own simple tools, make a confidence. product. Before the Industrial Revolution in Great Britain, the textile industry was Seealso:banking;derivative organized in this way. References Seealso:advancedorganiceconomy; Lewis, M.K. and Davis, K.T. (1981) Asiaticmodeofproduction;cottagein- Domestic and International Banking, dustry;homework Cambridge, MA: MIT Press; Hemel Hempstead: Philip Alan. dominant firm (L1) A firm making most of the sales of an domestic credit expansion (E5) industry and often a price leader. There Growth of the money supply, adjusted by are many firms of this type in oligopolistic the deficit or surplus on the BALANCE OF industries. PAYMENTS current and capital accounts. It consists of the PUBLIC SECTOR BORROWING Seealso:competitivefringe REQUIREMENT less net sales of public sector dominant strategy (L1) debt to the non-bank private sector and The pursuit of objectives by a firm which bank lending to the private and overseas ignores the possible actions or reactions of sectors. The reasoning behind this measure its rivals. is that a balance of payments deficit leads to a reduction in the expansion of the Donovan Commission (UK) (J5) domestic money stock through excess The Royal Commission on Trade Unions spending overseas. Conversely, a money and Employers’ Associations of 1965–68 supply expands with a balance of pay- chaired by Lord Donovan. It concluded ments surplus, increasing foreign currency that the UK had two systems of industrial reserves. This measure was intended to relations: a formal system with industry- produce a monetary aggregate suitable for wide collective agreements on pay, hours open economies. It was first used in the of work and other employment conditions; UK in 1968 when it was monetary target and an informal system at the factory level popular with the INTERNATIONAL MONETARY setting earnings supplements to national FUND. wage rates and causing WAGE DRIFT and Seealso:monetarism;moneysupply unofficial strikes to enforce workers’ de- mands. This dual system was partly the domestic labour (J4) consequence of FULL EMPLOYMENT in the 1 Unpaid work within households often UK in the 1950s and 1960s. To remedy undertaken by women. these faults in the INDUSTRIAL RELATIONS 2 Hired servants engaged in cleaning, system, the Donovan Commission recom- cooking and other household tasks. mended the limitation of industry-wide agreements to matters which could be domestic resource cost (D2) regulated effectively at the industry level The of using a FACTOR OF and the introduction of factory agreements PRODUCTION to produce one unit of output, to replace informal understandings. divided by the international value added Seealso:shopsteward by producing that unit. This is used as an alternative measure to the EFFECTIVE RATE References OF PROTECTION. Royal Commission on Trade Unions and

© 2002 Donald Rutherford Employers’Associations1965–8(1968) savingsaremadeandtheincomefrom Report,London:HMSO,Cmnd3623. thesavingswhentheyareinvested.Many incometaxsystemshavethisfeature. dose–responsefunction(I1,Q0) Therelationshipbetweenadoseofpollu- double-taxationrelief(H2) tionandthephysicalconsequences,in- Ataxcreditallowedagainstthetaxpay- cludingmortality,morbidity,cropyields ablebyaresidentofacountryonaccount andmaterialdeterioration. ofincomealreadyhavingbeentaxed References abroad,e.g.ifaUScitizenhasalready Lave,L.andSeskin,E.(1967)AirPollu- beentaxedinFrance,thenthatwillbe tionandHumanHealth,Baltimore,MD: takenintoaccountwhencalculatingthat JohnsHopkinsUniversityPress. person’sliabilityforpayingUStaxation. Ridker,R.(1967)EconomicCostsofAir Thisreliefisonlypossibleifthereisa Pollution,NewYork:Praeger. taxtreatybetweenthetwocountriescon- cernedorbetweenstatesinacountry,such dotcomcompany(L2) astheUSA,withafederalconstitution.In Afirmwhichmarketsitsgoodsand theUSAwheretherateofINDIVIDUALIN- servicesfromitswebsiteontheInternet. COMETAXcanvaryfromstatetostate,a doublecounting(M4) personwhoresidesinonestateandworks Recordingsomethingtwicewiththecon- inanothercangainreliefbybeinggiven sequencethatthetotalresultingfrom taxcreditsbyonestate. aggregatingindividualitemsisincorrectly Seealso:deemedtax toolarge.InNATIONALINCOMEaccounting, doublecountingisacrucialproblemtobe Douglas Amendment 1965 (G2) avoided.Itisessential,forexample,to An amendment to the BANK HOLDING COM- ensurethatTRANSFERINCOMESarenot PANY ACT (USA) prohibiting bank holding addedtoFACTORINCOMESastransferin- companies from acquiring banks in other comesarederivedfromfactorincomes. states. doublediscounting(M4) Douglas, Paul Howard, 1892–1976 (B3) Acalculationwhichtwicetakesintoac- A US economist who was taught, and countinflationthusproducingtoosmalla much influenced, by at netpresentvalue.Doublediscountingis Columbia University. For most of his onlyapprovedwhenitisusedtocorrect academic career, i.e. 1920–4 and 1927–48, forbothinflationandtimepreference. he was a professor at Chicago. As US doublefactorialtermsoftrade(F1) Senator for Illinois in 1948–66, he fought for family allowances, old-age pensions NETBARTERTERMSOFTRADEmultipliedbythe ratiooftheproductivitychangeindexfor and pro-union legislation. onecountry’sexportindustriesandthe In 1928, he used MARGINAL PRODUCTIVITY productivitychangeindexforaforeign THEORY as the foundations of the COBB–DOU- country’sexportindustries.Thismeasure GLAS PRODUCTION FUNCTION, the leading ap- proach on the subject until 1961. His early oftheTERMSOFTRADEindicatestheex- changeratebetweendomesticandforeign work on wages included a seminal study of factorservices. LABOUR FORCE PARTICIPATION relating wages to participation within major US cities Seealso:singlefactorialtermsoftrade and attempting to vindicate MARGINAL PRO- DUCTIVITY THEORY. doubleswitching(D0)seereswitching References doubletaxationofsavings(H2) Douglas, P.H. (1934) Theory of Wages, Taxingboththeincomeoutofwhich New York: Macmillan.

© 2002 Donald Rutherford Douglas, P.H. and Cobb, C.W. (1928) ‘A evidence of drug dealing, are required theory of production’, American Eco- under the Money Laundering Act 1986 nomic Review (Supplement) 18: 139–65. and the Anti-Drug Abuse Act 1988. In the Dow Jones Industrial Average (G2) UK, a court can order the confiscation of The leading US index of stock market the assets of drug-traffickers. prices, which is an unweighted arithmetic Seealso:launderingmoney average of the thirty industrial shares most widely quoted in the USA. Averages are dual-decision hypothesis (E6) also published every trading day for trans- Clower’s reinterpretation of KEYNES’s un- portation and utilities stocks, as well as a employment equilibrium by distinguishing composite index combining the move- ‘notional’ demand, the demand of house- ments in the three indices. holds at prices reflecting a FULL- EMPLOY- Seealso:Standard&Poor500 MENT equilibrium from ‘effective’ demand, the demand of households whose actual downsizing (J6) incomes have fallen through unemploy- Reducing the size of a labour force by ment. Adjustment to unemployment equi- making workers redundant. A term parti- librium takes place through incomes and cularly applied to the staff reductions not through relative prices. This hypoth- made by securities houses after 1987. esis recognizes that in a market system a Seealso:BigBang household cannot buy and sell what it pleases if there is excess supply in the downstream dumping (F1) economy, and attempts to reconcile WAL- Exporting goods with artificially low RAS’S LAW with KEYNES’s General Theory. prices because intermediate goods have been purchased below cost. References Clower, R.W. (ed.) (1969) Monetary The- downstream firm (L2) ory, ch. 19, Harmondsworth: Penguin. A firm engaged in a later stage of produc- tion or retailing. (P0) droit de suite (K2, M3) A national economy consisting of a rich A directive approved by the European modern sector and a poor traditional Parliament and European Commission in sector. Originally this term was used to June 2001 that the authors of works of art describe many colonial economies after should benefit from the resale of their the Second World War. artistic work; not to be fully implemented References until 2010. The fees charged will be Boeke, J.H. (1953) Economics and Eco- according to five bands of selling prices nomic Policy of Dual Societies, as Ex- with the lowest band giving the artist 4 per emplified by Indonesia, New York: cent of the value of the sale and the Institute of Pacific Relations. highest 0.4 per cent. dual exchange rate (F3) drug economy (P0) The two values of a currency determined The part of a national ECONOMY financed separately for different sets of monetary by the proceeds from the sale of illegal transactions. A fixed exchange rate can be drugs. It is so large in some economies, used for normal commercial transactions including the USA, that it is sufficient to and a floating rate for capital account keep consumer spending buoyant whatever transactions. Mexico has followed this macroeconomic policy is being followed. system. In the USA, examination of large and suspicious cash deposits at banks, possible Seealso:multipleexchangerate

© 2002 Donald Rutherford dualfederalism(H7) or avoiding the costs of storing unsold Alooseformoffederalisminwhichthe goods. Although in some countries the federalandstatelevelsactseparatelybut practice is encouraged, and made possible inparallel.ThistraditionalviewoftheUS by means of government subsidization, Constitutionimpliesthatfederalgovern- there is much opposition to dumping, e.g. mentismainlyconcernedwithinterstate the GENERAL AGREEMENT ON TARIFFS AND commercewithproductionbeingthecon- TRADE has an International Dumping Code cernofthestates. and the USA passed the Anti-Dumping Act in 1921. In some cases, dumping can Seealso:co-operativefederalism;fiscal only be prevented by retaliatory acts such federalism;newfederalism as the imposition of duties or the severing dual labour market (J4) of trading relationships. A labour market divided into a primary References sector with better jobs and a secondary Jackson, J.H. and Vermulst, E.A. (eds) sector with inferior jobs. The primary sector (1990) Antidumping Law and Practice. consists of large firms offering training and A Comparative Study, Hemel Hempstead: high remuneration but the secondary sector Harvester Wheatsheaf. has many small marginal firms offering small rewards and prospects to their work- Dunlop, John Thomas, 1914– (B3) ers. The primary sector firms use INTERNAL A leading US expositor of labour econom- LABOUR MARKETS but in the secondary ics educated at the University of California sector there is heavy reliance on the EXTER- at Berkeley. Apart from governmental NAL LABOUR MARKET. Students of sexual and posts, including being US Secretary of racial DISCRIMINATION frequently use this Labor from 1975 to 1976, he has held a concept, pointing out that women and succession of academic posts at Harvard blacks are often trapped in the secondary University from 1936. His chief research market. interests have been wage determination and labour management relations in many dual pricing (D4, F3) national economies, including those of the The practice of quoting prices in two USA, Eastern Europe and the Third currencies. This occurs as part of the World. His detailed work on the relation- transition to a new currency or because of ship between MARKET STRUCTURES and wage lack of confidence in the national cur- setting contributed to the analytical link- rency. This occurred in many eastern ing of INDUSTRIAL ORGANIZATION and labour European countries and in EUROPEAN UNION economics. countries after the introduction of the EURO. References Dunlop, J.T. (1944) Wage Determination dummy variable (C1) under Trade Unions, New York: Mac- A variable in an econometric equation millan. only taking the values 0 or 1. It is used to —— (1957) The Theory of Wage Determi- refer to being in one state or another, e.g. nation, New York: Macmillan. married or not married, living in one Dunlop, J.T., Kerr, C., Harbison, F.H. and century or another. A shift dummy reflects Myers, C.A. (1960) Industrialism and an EXOGENOUS shift; a slope dummy, a Industrial Man, Cambridge, MA: Har- change in the slope of a function. vard University Press. dumping (F1) duopoly (L1) The sale of goods by a firm or government An industry with two firms. Each duopo- at a price below their cost of production list’s output and prices will depend on the with the aim of increasing a market share market actions of the other. COURNOT’s

© 2002 Donald Rutherford analysis of 1838 considered two firms previous time period to the sum of the making an identical product, each aiming squares of the residuals in the present to maximize its profits on the assumption period. These disturbances are usually that the other firm kept its output con- absent if the DW statistic has a value of stant. He proved that equilibrium would about 2. be reached with equal division of the Seealso:autocorrelation;disturbance market and the charging of the same price, term a price lower than a monopolist’s price but higher than under PERFECT COMPETITION. Dutch auction (D4) Seealso:Bertrandduopolymodel;Cour- A method of selling which consists of an notduopolymodel;spatialduopoly auctioneer inviting a bid much higher than model;Stackelbergduopolymodel what is regarded as likely to be acceptable to the buyers. The starting price is gradu- Du Pont formula (G2) ally reduced until a buyer shouts ‘mine’ An analysis of the determinants of the and accepts the item at that price. In difference between an actual rate of return Holland, an automated method is used on investment and the budgeted return for such auctions: the buyers face a ‘clock’ where return on investment = return on with prices on its face and a pointer moves sales asset turnover. gradually counterclockwise from the higher to the lower prices. Dupuit, Arse`ne Jules Etienne Juve´nal, 1804–66 (B3) Seealso:auction French engineer educated at l’Ecole Poly- Dutch book (D7) technique des Ponts et Chausse´es. In his A principle for dynamic decision-making work on public utilities, especially the situations that leads to a sequence of bets construction of bridges and public works, finishing in an inescapable loss, as in the he pioneered the use of COST–BENEFIT ANALY- case of a bookmaker always gaining from SIS. He was one of the earliest MARGINAL- gambling on the outcome of horse races. ISTS, introducing a DEMAND CURVE related to MARGINAL UTILITY and suggesting the notion Dutch disease (L0) of CONSUMER’S SURPLUS. His contributions to The harmful consequences for a national economics are chiefly contained in two economy of discovering natural resources, articles, ‘De la mesure de l’utilite´ des especially the decline in traditional indus- travaux publics’ (1884) and ‘De l’influence tries brought about by the rapid growth des pe´ages sur l’utilite´ des voies de com- and prosperity of a new industry. New munication’ (1849) in the Annales desponts dominant industries can afford to pay et chausse´es. JEVONS and MARSHALL recog- wages far in excess of other industries, so nized him as their forerunner. the latter raise their wage levels to un- References affordable levels causing unemployment. The successful new industry has high Ekelund, R.B. Jr (1968) ‘Jules Dupuit and exports, creating a foreign exchange sur- the early theory of marginal cost pri- cing’, Journal of Political Economy 76: plus and raising the country’s exchange 462–71. rate, with the consequence that other industries of the economy become inter- Durbin–Watson statistic (C1) nationally uncompetitive. This was notice- A test for the presence of autocorrelated able in the Netherlands after the discovery disturbances. This statistic (DW) is calcu- of North Sea gas. There rising prosperity lated as the ratio of the sum of the squares brought about higher levels of welfare of the differences between regression resi- benefits which persisted after the down- duals in the present period and in the turn in the economy, causing immense

© 2002 Donald Rutherford difficultiesforthefinancingofpublic tionofformaldynamicmodelsofECO- expenditure.Manyothereconomieshave NOMICGROWTHandchange.Theinclusion experiencedthisphenomenon,e.g.Ja- oftimeinthestudydistinguishesthis maicawithitsbauxiteindustry,Venezuela approachfromstaticmodelsofeconomic withitspetroleumindustry. systems.Indynamicmodels,atleastone variableismeasuredatadifferenttime References fromtheothers;subscriptsareattachedto Corden,W.M.andNeary,L.P.(1982)‘Bo- eachvariabletoindicatethedate(s)to omingsectorandde-industrializationin whichtheyrefer. asmallopeneconomy’,EconomicJour- nal92:825–48. Seealso:comparativestatics;staticmodel Wijnbergen,S.van(1984)‘TheDutch disease:adiseaseafterall?’,Economic References Journal94:41–55. Simonovits, A. (2000) Mathematical meth- ods in dynamic economics,NewYork:St dynamicallyinconsistentpolicy(E6) Martin’s Press; London: Macmillan. Apolicybasedondecisionswhichlater dynamic gains from trade (F1) ceasetobeoptimal. The effects of a trade policy on ECONOMIC GROWTH. Important determinants of these dynamiceconomics(E1) gains are the accumulation of physical Thestudyofthemovementofaneconomy capital, the transmission of technology fromaparticularstateataparticulardate and improvements in the quality of macro- toanotherstatelaterusuallyusinglagged economic policy. variables.Althoughclassicaleconomists suchasAdamSMITHandJohnStuartMILL dystopia (P0) wereconcernedtostudythenatureof A disagreeable state, the opposite of a economicprogress,itwasparticularlyRO- UTOPIA. It is likely to have low incomes, BERTSON,HARROD,HICKSandtheSTOCKHOLM high crime and other social problems, and SCHOOLinthe1930swhobeganthecrea- few economic prospects.

© 2002 Donald Rutherford E

earlyretirementscheme(J2,J6) ing of basic wages or salaries and all Amodernproposaltoreduceunemploy- other premium and bonus elements. ment,ormakespaceinafirmforyounger 2 The INCOME of a business available for workers,bylowering,ormakingmore distribution to shareholders. flexible,thestatutoryretiringage.The 3 The share of the proceeds of production principalaimoftheseschemes,toredis- going to a FACTOR OF PRODUCTION. tributejobsfromoldertoyoungerwork- ers,canbefrustratediftherising earnings per share (G2) Pre-tax earnings divided by the number of productivityofthefirm’slabourforce shares entitled to a variable dividend. This reducesitstotaldemandforlabour. ratio, when used as an indicator of the earmarkedgold(E5) long-term growth potential of a company, GoldheldatUSFEDERALRESERVEBANKSfor should be compared with other indicators foreignandinternationalaccounts;itis of a firm’s performance, including its notpartoftheUSgoldstock. market share and its research and devel- opment expenditure. Earnings per share earmarking(H5) are usually larger than dividend per share Theallocationofpublicrevenueexclu- as few companies distribute all of their sivelytotheexecutionofaparticular profits. functionofgovernment,e.g.usingthe proceedsoftelevisionlicencesintheUK earnings ratio (G2) tofinancetheBritishBroadcastingCor- Net profit (excluding preference dividends) poration.Somegovernmentshaverejected divided by equity capital. thisapproachbecauseoftheinflexibilityit earnings yield (G2) introducesintopublicfinances,arguing Earnings (per cent) par value/market thatdifferenttypesofpublicexpenditure price; for example, for a company with a growatdifferentratesfromvarioustax dividend of 25 per cent earned on a share revenues.Nevertheless,theprincipleis with a par value of £1 with a market price oftenfollowedinsocialexpenditureandis of 125p, the earnings yield is 25 100/125 amethodofcontrollingit. = 20 per cent. Seealso:dedicatedbudget;ringfencing; trustfund East Asian economic crisis (E3, G1, N1, P0) earnings (D3, J3, M2) The crisis of 1997–8 in the financial sector 1 Total pre-tax pay of employees, consist- of five Asian countries: Indonesia, South

© 2002 Donald Rutherford Korea,Malaysia,thePhilippinesand cies,thephysicalenvironmentandthe Thailand.In1996therewasacapital weather. inflowintothesecountriesof$73billion butin1997anoutflowof$30billion. ecologicalfootprint(Q0) Withfinancialderegulationcamecareless Theamountoflandanindividualneedsto lendingbyinternationalbankstothese supporthisorherpresentconsumption. Asiancountries.Whentheextentofin- ThisconceptwasanticipatedbyRichard debtednesswasknown,thecreditorspa- CANTILLON’slandandlabourtheoryof nicked.Therewasafallinexchangerates, value. anineffectiverescueeffortbytheIMFand e-commerce(L8) subsequentlyabankingcrisisandasevere Tradeingoodsandserviceseffectedbye- fallineffectivedemand. mail(electronicmail). easymoneypolicy(E5) Arelaxedmonetarypolicypermittinghigh econometrics(C1,C2,C3) ratesofgrowthofthemoneysupplyto Themeasurementofeconomicrelation- keepinterestrateslow.Thishasbeen shipsusingstatisticaltechniques,andthe advocatedasameansofkeepingaggregate testingofeconomictheories.Econometrics demandhighandunemploymentlow.The hasbecomethebasisforeconomicfore- UKandtheUSAusedthepolicyinthe casting. yearsimmediatelyfollowingtheSecond Itwasinseparablefrommathematics WorldWar. andstatisticsasanacademicdiscipline untilthefoundationoftheEconometrics Seealso:cheapmoney Societyin1931.Althoughaquantitative easyrider(H3,J5)seefreerider approachtoeconomicsgoesbacktoPETTY, inthetwentiethcenturyitowesitsorigins ecfare(D6) toHenryMoore’sattemptin1911to ROBERTSON ECO- ’sabbreviatedexpressionfor providestatisticalevidenceforMARGINAL NOMICWELFARE . PRODUCTIVITYtheory.Graduallyitchanged eclecticKeynesians(B2)seenew itsemphasisfromsearchingforconstant Keynesian economiclawstoprobabilisticmodels. Themajortechniquesmostfrequently eclectictheory(F2) usedareMULTIPLEREGRESSION,TWO-STAGE Atheorydrawnfromvarioussourcesto LEASTSQUARESandamultitudeofteststo explainFOREIGNDIRECTINVESTMENT.Loca- preventproblemssuchasAUTOCORRELA- tiontheoryisemployedtoexplainwhy TION.After1945,thegrowthofmacroeco- productionoccursatseverallocations;IN- nomicsandthemoresophisticatedstudy TERNALIZATIONTHEORYexplainswhythe ofconsumerbehaviourinspiredagreat internalmarketispreferredtotheexter- volumeofeconometricwork.Thedata nal;ownershipadvantages,especiallyof usedareeitherTIMESERIESprovidedby productbrandsandPATENTSexplainwhya officialgovernmentalstatisticalorganiza- firmproducesoverseasratherthanlicense tionsorCROSS-SECTIONDATAcollated itstechnology.Thistheoryhasbeenused throughsurveys. toexplaintheexpansionofmultinational bankingandofhotelchains. Seealso:CowlesCommission ecodevelopmentvaluation(D4,Q0) References Valuationofanenvironmentaccordingto Griliches, Z. (1983) Handbook of Econo- relativescarcityandminimaldislocation. metrics, Amsterdam: North-Holland. Haavelmo, T. (1944) ‘The probability ap- ecologicalcapital(Q0) proach in econometrics’, Econometrica Thechangingstockofplant,animalspe- (Supplement) 12: 1–115.

© 2002 Donald Rutherford Marchi,N.deandGilbert,C.(eds)(1989) achieveeconomicefficiency.MISESargued HistoryandMethodologyofEcono- thatmarketsareessentialtothisprocess metrics,Oxford:ClarendonPress. andusedthisconcepttoattacksocialism. Pagan,A.(1987)‘Threeeconometric methodologies:acriticalappraisal’, References JournalofEconomicSurveys1:3–24. Horwitz,S.(1998)‘Monetarycalculation Pagan,A.R.andWickens,M.R.(1989)‘A andMises‘‘CritiqueofPlanning’’’, surveyofsomerecenteconometricmeth- HistoryofPoliticalEconomy30:427–50. ods’,EconomicJournal99:962–1025. Walters,A.A.(1968)AnIntroductionto economicclimate(E6) Econometrics,London:Macmillan. Thepersistingstateofaneconomyappar- entinitsgeneraltrendsoveraspecified economicagent(D0,M0) timeperiod. Apersonorfirmwiththepowertomake decisionsaboutoutput,investment,prices, Seealso:economicweather etc. EconomicCommunityofthecountries EconomicandSocialCouncil(F0) oftheGreatLakes(F0) UnitedNationscouncilelectedbythe AneconomicassociationofZaire, GeneralAssemblyoftheUNtoco-ordi- RwandaandBurundisetupin1979to nateitseconomicandsocialwork.Its establishtradeagreements. commission’sremitincludespopulation, EconomicCommunityofWestAfrican humanrights,thestatusofwomen,drugs States(F0) andregionalproblems.Ithasfifty-four Aneconomicassociationwithfreemove- members. mentoflabourandaproposedCOMMONEX- economicanthropology(A1) TERNALTARIFFsetupin1975.Themember Thestudyofsocioeconomicorganizations. countriesareBenin,Gambia,,Guin- Insuccessiontotheclassicalpolitical ea,Guinea-Bissau,IvoryCoast,Liberia, economyofQUESNAY,SMITH,RICARDOand Mali,Mauritania,Niger,,Senegal, MARXthattracedtheeconomicconse- SierraLeone,TogoandUpperVolta. quencesofhumannature,ithasexamined economiccost(D0)seeopportunitycost economicbehaviour.VEBLENusedan anthropologicalapproachinhisdistinctive economiccrime (K4) INSTITUTIONALECONOMICS.Increasinglyeco- Acrimeundertakenforfinancialgain.Its nomicanthropologistshavestudiednon- specificnaturedependsontherulesof a marketeconomicinstitutions. particulareconomicsystem.Intheformer USSRfrequentusewasmadeofthis References concept.Itcovers boththetheft ofstate Gregory,C.A.(1982)GiftsandCommod- propertyandtheillicit makingofprofits; ities,London:AcademicPress. in theUK,itrefers tofraudand INSIDER North,DouglassC.(1990)Institutions, DEALING. InstitutionalChangeandEconomicPer- formance,Cambridge:CambridgeUni- Seealso:economicsofcrime versityPress. economic development (O1) see economicbasemultiplier(R0)see development regionalmultiplier economic devolution (D0, P0) economiccalculation(D2,P2) 1 The transfer of all economic decision Valuationsbasedonpresentandexpected making to individual households and futureconditionsusedtoallocatescarce businesses. capitalresourcesamongcompetinguses. 2 The principal characteristic of a MINI- Thepurposeofthecalculationisto MAL STATE.

© 2002 Donald Rutherford economicefficiency(D0) omy,policy,environment,NewYorkand Thesimultaneousachievementofboth Chichester:Wiley. TECHNICALandALLOCATIVEEFFICIENCY.Far- Lloyd,P.E.andDicken,P.(1977)Location rellalsodescribeditasproductorglobal inSpace:ATheoreticalApproachto EconomicGeography,NewYork:Har- efficiency. per&Row. References economicgood(D0) Farrell,M.J.(1957)‘Themeasurementof Ascarcegood,yieldingUTILITY,which productiveefficiency’,Journalofthe mustbeallocatedeitherbyrationingor RoyalStatisticalSociety.SeriesA120: 253–81. bythepricemechanism;notaFREEGOOD. economicgrowth(O4) economicforecasting(C5) Thegrowthinthetotal,orpercapita,output Predictionsofthevaluesofparticular ofaneconomy,oftenmeasuredbyan economicvariables,oftenonthebasisof increaseinrealGROSSNATIONALPRODUCT, extrapolationofpasttrends,modifiedby andcausedbyanincreaseinthesupplyof otherinformationandusingthetechni- FACTORSOFPRODUCTIONortheirPRODUCTIVITY. quesofeconometrics.Nationaleconomic ThisapproachwascentraltoSmith’s forecastingisanessentialelementofDE- WealthofNationsandtomuchofCLASSI- MANDMANAGEMENT,aswellasafirststage CALECONOMICS.HARRODandDOMARin1948 innationalandcorporatePLANNING.The weremajorfoundersofmoderngrowth forecastsdrawnupbyprivateinstitutes theory.Growththeoristshavewedded andnewspapersprovidedifferentviewsof theirworktoDEVELOPMENTECONOMICSand thefuturetothegovernment’s. toastudyofECONOMICPLANNING.Ecolo- Seealso:linkagemodels;Treasurymodel gistsandothersconcernedaboutthe scarcityofnaturalresourceshaveadvo- References catedzeroeconomicgrowthratesasap- Clements,M.P.andHendry,D.F.(1998) propriateforthetwenty-firstcentury.A Forecastingeconomictimeseries,Cam- writerasearlyasJohnStuartMILL(inhis bridge,NewYorkandMelbourne: PrinciplesofPoliticalEconomy,BookIV, CambridgeUniversityPress. ch.6)extolledthebenefitsoftheSTATION- Fildes,R.(ed.)(1995)WorldIndexof ARYSTATE. EconomicForecasts,4thedn,Aldershot: GowerPress. References Kacapyr,E.(1996)Economicforecasting: Mishan,E.J.(1977)TheEconomicGrowth thestateoftheart,Armonk,NY,and Debate.AnAssessment,London:Allen London:Sharpe. &Unwin. Rostow,W.W.(1990)TheoristsofEco- economicgeography(R1) nomicGrowthfromDavidHumetothe Economicanalysisofthelocationof Present,NewYork:OxfordUniversity economicactivity,togetherwiththestudy Press. oflanduseandurbanareas.Although economicincidence(H2)seetax vonThimenwas,inasense,thefatherof incidence LOCATIONTHEORY,itwasnotuntilthe1950s thatmuchdetailedworkwasdoneinthis economic indicators (C8, E3) branchofgeography. Statistics used in economic forecasting to analyse the state of an ECONOMY. Overall Seealso:landeconomy indicators of economic activity include References indices of industrial production, manufac- Hanink,D.M.(1997)Principlesandappli- turing output, engineering orders, retail cationsofeconomicgeography:Econ- sales volume, registered unemployment

© 2002 Donald Rutherford andunfilledvacancies.Indicatorsofout- inaparticularbranchofthediscipline putshowthegrowthofproductionof havebeenfounded.Manyeconomistsonly principalindustries;indicatorsofexternal publisharticlesandavoidpublishing tradeincludeindicesofexportandimport booksbecauseofthegreatstatusthe volume,thevisibleandcurrentbalances journalshaveattainedintheeconomics andthetermsoftradeplusthesizeofthe profession.Recentlymanyoftheseperiod- officialreserves;financialindicatorsin- icalshaveaddedassessmentsofcomputer cludechangesinvariousmeasuresofthe softwaretotheirbookreviews.Thelead- MONEYSUPPLY.Inflationindicatorsinclude ingacademicjournalsofeconomicsin- thoseforretailprices,basicmaterialsand cludeAmericanEconomicReview,Bankof wholesalepricesofmanufacturedpro- EnglandQuarterlyReview,Economica, ducts. EconomicJournal,JournalofIndustrial Economics,JournalofPoliticalEconomy, Seealso:coincidentindicators ManchesterSchoolofEconomicandSocial economicinstitution(P0) Studies,NationalInstituteEconomicRe- 1Anorganizationwhichisacomponent view,OxfordEconomicPapers,Quarterly ofaneconomy. JournalofEconomics,ReviewofEconomic 2AsystemofPROPERTYRIGHTS. Studies,ReviewofEconomicsandStatis- 3Anormofeconomicbehaviour. tics. 4Adecision-makingunit. Seealso:financialjournalism 5Atypeofcontract,e.g.aformof insurancetocoveraparticularsortof economicjustice(D6) risk. Distributivejusticebasedonfullyin- References formedandvoluntarytransactions.Since Wiles,P.J.D.(1977)EconomicInstitutions Aristotle’sNicomacheanEthicsmanyeco- Compared,Oxford:BasilBlackwell. nomicwritingshaveassertedtheimpor- tanceofensuringthatexchangeisfairto economicintegration(F0) bothpartiesandthatthefruitofproduc- Thejoiningtogetherofeconomicactiv- tionshouldbedistributedtofactorsof ities,especiallythetradeofseveralcoun- productionaccordingtotheirrelativein- tries.Thiscantakedifferentforms, puts. includingFREE-TRADEAREAS,CUSTOMSUN- IONS,COMMONMARKETSandfederationsof Seealso:Rawlsianjustice nationaleconomies.Differentformsof integrationcanbedistinguishedbythe economic life (M4) extenttowhichindividualnationalgov- The period during which an asset is ernmentsretainindependenceindecision expected to yield a return. For the pur- making. poses of calculating DEPRECIATION, assets are assumed to have a standard life. Seealso:EuropeanMonetarySystem Houses are given a notional life of 80 economicjournals(A1) years, coal mines 100 years and machines Thelearnedacademicperiodicals,mostly 8, 16 or 25 years. publishedquarterly,containingarticles andbookreviews,which,bypresenting economic man (D0) theresearchfindingsoftheeconomics A person, motivated by self-interest, who profession,givetheclearestindicationof attempts in consumption, work and leisure thepresentstateofthesubject.Someof to maximize his total utility. Much of them,e.g.theAmericanEconomicReview, CLASSICAL and attempttocoverallbranchesofeconom- makes this assumption about human nat- ics,butincreasinglyjournalsspecializing ure. To behave as an economic man, it is

© 2002 Donald Rutherford necessary to engage in many mathematical Economics, or How Economists Explain, calculations. Cambridge and New York: Cambridge University Press. Seealso:homoeconomicus;homosovieti- Keynes, J.N. (1891) The Scope and Method cus of Political Economy, London: Macmil- lan. (B4) Kulin, T.S. (1970) The Structure of Scien- The different approaches to the task of tific Revolutions, Chicago: University of formulating economic theories and models. Chicago Press. Economists have inevitably been influenced Popper, K. (1959) The Logic of Scientific by parallel debates in science, especially Discovery, New York: Harper Torch Popper’s assertion of the falsification prin- Books. Robbins, L. (1949) An Essay on the Nature ciple, Kulin’s emphasis on paradigms and and Significance of Economic Science, Lakatos’ stress on scientific research pro- London: Macmillan. grammes. Nevertheless, throughout the de- Samuelson, P.A. (1947) Foundations of velopment of economics particular works Economic Analysis, Cambridge, MA: on, and demonstrations of, economic Harvard University Press. methodology have been prominent. In the classical period, RICARDO demonstrated economic methods (D2, P2) the power of simple 1 In a specialized sense, the use of the building when setting out the effects of market or the price mechanism as part on wages, profits, rent and of PERESTROIKA. economic growth. John Stuart MILL 2 Production techniques at least cost. praised but did not practise the a priori References abstract approach to formulating eco- Aganbegyan, A. (1988) The Challenge to nomic theories, and SENIOR considered the Economics of Perestroika, London: crucial difference between normative and Hutchinson. positive issues. In the 1930s, ROBBINS clearly set economics apart from other social economic model (D0, E1) science disciplines by making the study of A simplified picture of economic reality ‘ends and means which have alternative showing the interrelationships between a uses’ central to the subject. With the few economic variables. CANTILLON, QUES- growth of mathematical economics and NAY and RICARDO were the first economists econometrics in the twentieth century, it to formalize their economic theories in was inevitable that the formalization and this way. With the increasing use of empirical testing of theories became the mathematics and ECONOMETRICS by econo- major ways in which economists went mists, economic models have become more about their work: writers such as SAMUEL- complex. SON guided economics in this direction. However, the empirical thrust of much of economic paradigm (B4) present-day economics is balanced by the A major principle central to a school of wrestlings of welfare economists who have economics as it provides a fundamental sought to put value judgements on a analytical tool of economic theorizing. sounder basis. and NEOCLASSICAL ECONOMICS, for example, have been able to demon- Seealso:economicsasrhetoric strate the powerful applications of the References marginal concept backed up by calculus. Backhouse, R.E. (ed.) (1994) New direc- In periods when there has been great tions in economic methodology, London dissatisfaction with the state of economics, and New York: Routledge. a cry for a new paradigm has often heard: Blaug, M. (1980) The Methodology of in the 1930s the concepts of KEYNES in his

© 2002 Donald Rutherford General Theory provided one for a genera- including the OPPORTUNITY COSTS of employ- tion of macroeconomists. ing all inputs. Seealso:economicmethodology Seealso:accountingprofit

References economic programming (P1) Latsis, S.J. (ed.) (1976) Method and Ap- The co-ordination of the independent praisal in Economics, Cambridge and production decisions of independent com- New York: Cambridge University Press. panies in late capitalist economies. economic planning (D2, L1, O2, P2) economic refugee (F2, J1) The allocation of economic resources and A person migrating from one country to the determination of production on the another to improve economic prospects basis of a plan; the alternative to alloca- but often posing as a person fleeing from tion by markets. The Soviet plans of the political persecution. An increasing Eur- 1930s were the first major attempts to opean phenomenon after the fall of com- organize entire national economies accord- munism and conflict in the Balkans. ing to this method. In the post-war period, French also attracted (D3, R2) much attention. Governments also use 1 Part of the earnings of a factor of planning for aspects of their economies, production in excess of its TRANSFER particularly for regional development and EARNINGS arising from its scarcity. (See major investment. Since planning essen- the figure.) tially commits a government to a future 2 A factor’s earnings over its OPPORTUNITY course of action, it can lead to many COST, according to PARETO. inflexibilities, including a slow reaction to 3 The full market rate for housing ser- change, especially in the foreign trade vices. sector. As planners rely greatly on eco- As land was regarded in CLASSICAL ECONOM- nomic FORECASTING the difficulties of mod- ICS as the only fixed factor of production, elling complex economies can make the it alone earned rent. However, as any quality of their plans suffer. Also planning factor of production can be fixed in necessitates much bureaucracy, which is supply, ‘rent’ can be earned by any factor both costly and often opposed to entre- of production. Popular examples of fac- preneurship. Increasingly planning in tors with an INELASTICITY of supply abound. countries such as Hungary allowed the Labour can earn economic rent: especially reintroduction of market mechanisms for persons with rare talents such as opera small-scale production. At the beginning singers and top sports players of the twenty-first century there is little enthusiasm for the revival of large-scale national planning. Seealso:centrallyplannedeconomy;de- velopment References Cave, M. and Hare, P.G. (1981) Alternative Approaches to Economic Planning, Lon- don: Macmillan. economic profit (D3, M4) The surplus of revenue over all costs,

© 2002 Donald Rutherford ities. But the Greeks also, to their credit, raised the basic issues of VA LU E , the nature of MONEY and the DIVISION OF LABOUR. The word ‘e´conomistes’ was first used by the French PHYSIOCRATS in the 1760s and in that century CANTILLON and SMITH pro- duced the first comprehensive treatises on the subject. Smith, and his classical dis- ciples, produced theories of growth, value, distribution and taxation. CANTILLON, the PHYSIOCRATS and RICARDO introduced model building into economics. Although metho- dological debates were present in the sub- ject as early as John Stuart MILL and SENIOR, particularly in the standard debate about deduction and induction, it was DUPUIT, the MARGINALISTS and EDGEWORTH who first encouraged a mathematical treat- ment of economic theory. The hints of earlier writers have pro- vided the foundations for present-day economists. Issues of welfare, raised by MARSHALL and his follower PIGOU, led to a Seealso:councilhousing;rent formal study of WELFARE ECONOMICS. The concern for measurement, first proposed economics (A1, A2) by PETTY, has inspired the econometric ‘The study of the general methods by testing of economic theories. The wider which men co-operate to meet their mate- discussion of economics as ‘POLITICAL ECON- rial needs’ (Sir William Beveridge); ‘the OMY’ has linked economics to ideological study of mankind in the ordinary business positions in current policy debates, and of life’ (A. Marshall); ‘a science which later KEYNES produced a general theory of studies human behaviour as a relationship the economy which determined the post- between ends and scarce means which war agenda for macroeconomic theory. have alternative uses’ (L. Robbins); ‘Eco- The increased size of the economics pro- nomics investigates the arrangements be- fession (in the UK there were only sixteen tween agents each tending to his own professional economists in 1908) has in- maximum utility’ (F.Y.Edgeworth); ‘Wants, Efforts, Satisfaction – this is the circle of evitably led to subdivision of the subject, Political Economy’ (Frederic Bastiat); ‘Not especially in more empirical areas. a gay science . . . what we might call . . . the dismal science’ (Thomas Carlyle). economic sanctions (F1) First discussed by the Ancient Greeks, Trade and financial penalties and barriers and the subject of general textbooks since to trade imposed upon a country in order the eighteenth century, economics has to induce it to change its basic political changed its focus as the concerns and system or policies. Occasions when this techniques of its practitioners have devel- strategy has been used include the 1930s oped. Originally the word meant ‘house- when Italy invaded Abyssinia, the 1960s hold management’ as the household was when Southern Rhodesia (now Zimbabwe) the basic economic unit of the time, includ- refused to adopt a system of majority rule, ing both farming and manufacturing activ- the 1980s to force South Africa to treat all

© 2002 Donald Rutherford racial groups equally and the 1990s to end (eds) (1986) Economic Psychology: Inter- Iraq’s occupation of Kuwait. sections in Theory and Application, Am- The use of sanctions has long been sterdam: North-Holland. available as an ultimate economic weapon economics as rhetoric (B4) (e.g. the Continental System of Napoleon A disciplined form of conversation that at the beginning of the nineteenth cen- rejects modern quantitative economics tury), but it has always been difficult to which has prediction as its goal, in favour enforce sanctions universally. In the form of a literary approach which examines the of a trade embargo, sanctions stimulate nature of economists’ various arguments, domestic industry to produce import sub- recognizing the metaphors used and ques- stitutes, but this movement of an economy tioning the objectivity of the subject. towards AUTARKY causes losses in ECONOMIC WELFARE as production cannot be concen- Seealso:economicmethodology trated in the most efficient industries. References Article 41 of the Charter of the United Nations mentions sanctions as a permissi- Klamer, A., McCloskey, D.N. and Solow, R.M. (eds) (1989) The Consequences of ble form of international action. Economic Rhetoric, Cambridge: Cam- References bridge University Press. Carter, B.E. (1989) International Economic McCloskey, D.N. (1983) ‘The rhetoric of Sanctions, Cambridge: Cambridge Uni- economics’, Journal of Economic Litera- versity Press. ture 21 (June): 481–517. Curtin, T. and Murray, D. (1965) Eco- —— (1986) The Rhetoric of Economics, nomic Sanctions and Rhodesia, London: Brighton: Wheatsheaf. Institute of Economic Affairs. economics of crime (K4) Hufbauer, G. and Schott, J. (1985) Eco- nomic Sanctions Reconsidered, Washing- 1 A branch of NEOCLASSICAL ECONOMICS ton, DC: Institute for International which analyses the decision making of Economics. criminals in terms of a comparison of the marginal benefit of succeeding and economics and psychology (D1) the MARGINAL COST of being detected and Psychological theory has been used in sentenced. This celebrated analysis of economics to improve the modelling of BECKER’s is mainly applicable to the the motivation of economic agents, to study of property offences. understand how human beings behave 2 A study of the effects of allocating when faced with UNCERTAINTY and to learn resources to law enforcement and crime about the formulation of preferences. Psy- prevention. The poor quality of crime chology has contributed to many areas of statistics, partly caused by varying rates economics, including the examination of of reporting offences, makes empirical entrepreneurship, unemployment, poverty, work difficult. taxation and marketing. References Seealso:boundedrationality;cognitive Anderson, R.W. (1976) The Economics of consonance;cognitivedissonance Crime, London and Basingstoke: Mac- millan. References Andreano, R. and Siegfried, J.J. (1980) Earl, P.E. (1988) Psychological Economics: The Economics of Crime, Cambridge, Development, Tensions, Prospects, Bos- MA: Schenkman. ton: Kluwer. Becker, G.S. (1968) ‘Crime and punish- —— (1990) ‘Economics and psychology: a ment: an economic approach’, Journal survey’, Economic Journal 100: 718–55. of Political Economy 76: 169–217. MacFadyen, A.J. and MacFadyen, H.W. Fiorentini, G. and Peltzman, S. (eds)

© 2002 Donald Rutherford (1995)Theeconomicsoforganisedcrime, Suchistheimportanceofthismod- Cambridge,NewYorkandMelbourne: ernbranchofeconomicsthatseveral CambridgeUniversityPress. journalsspecializeinblendingeconomic andlegalanalysis,notablyJournalof economicsofinformation(D8) LawandEconomics,JournalofLegal Abranchofeconomicsthatrecognizesthe Studies,InternationalReviewofLawand imperfectionofinformation,thecostsof EconomicsandJournalofLaw,Econom- obtainingitanditsasymmetriccharacter icsandOrganization. becauseoftheactionsoffirmsandin- Seealso:economicsofcrime dividuals.Thesourcesofinformation, includingthatwhichisspontaneously References generatedbythemarket,areconsidered. Hirsch,W.Z.(1999)Lawandeconomics: Informationeconomicshasmanyimplica- Anintroductoryanalysis,3rdedn,San tionsforfinancialmarkets. DiegoandLondon:AcademicPress. Ogus,A.I.andVeljanovski,C.G.(eds) References (1984)ReadingsintheEconomicsof Stigler,G.J.(1961)‘Theeconomicsof LawandRegulation,Oxford:Clarendon information’,JournalofPoliticalEcon- Press. omy69:213–25. Polinsky,A.(1989)AnIntroductiontoLaw Stiglitz,J.E.(2000)‘Thecontributionof andEconomics,Boston:Little,Brown. theeconomicsofinformationtotwen- Posner,R.A.(1986)EconomicAnalysisof tiethcenturyeconomics’,Quarterly Law,3rdedn,Boston:Little,Brown. JournalofEconomics115November): ‘Symposiumonlawandeconomics’,Co- 1441–78. lumbiaLawReview85:899–1116,1985. Veljanovski,C.(1990)TheEconomicsof economicsoflaw(K0) Law.AnIntroductoryText,London: 1Theeconomicanalysisoflegalissues, InstituteofEconomicAffairs. especiallyPROPERTYRIGHTS,negligence, economicsofreligion(L3) contractandcrime,aswellasthemore Astudyofnon-marketbehaviourwithin obviouslyrelatedareasofregulation, communitiesofbelievers.Matterscovered competitionandmonopoly. includetheinfluenceofreligiousbeliefon 2Theapplicationofpricetheoryand economicbehaviour,theuseoftheologyto statisticalmethodstothestudyof criticizeeconomicpolicy,andtheapplica- legislation,legaldecisionsandcourtsof tionofmicroeconomictheorytothestudy law.COMMONSwasoneofthefirst ofindividualandcollectivereligiousbeha- economiststouselegalmaterialsto viour. furthereconomicanalysis.COASEpio- neeredtherigorousapplicationofeco- References nomicstoalegalproblem–inhiscase Azzi,C.andEhrenber,F.G.(1975)‘House- thelawofnuisance.STIGLERandothers holdallocationoftimeandchurch broughttheilluminationofeconomics attendance’,JournalofPoliticalEcon- intodarkareasofREGULATION.Posner omy83:27–56. demonstratedthatmostbranchesofthe Iannaccone,L.R.(1998)‘Introductionto lawcanbenefitbytheuseofeconomic theeconomicsofreligion’,Journalof EconomicLiterature36:1465–96. concepts.Thevaluationofcostsand benefitsandtheapplicationofthe economicsofthearts(Z1)seecultural notionofOPPORTUNITYCOSTtomany economics legalproblemsaretheprincipalwaysin whicheconomistshaveshownthem- economic specificity (A1, J5) selvestobeinvaluablecolleaguesof An economic commitment to a firm or lawyers. person. Cases include a firm’s hiring of a

© 2002 Donald Rutherford worker, a worker’s choice of a particular Japan agreed to reflate its economy. firm as a training establishment, and bank . Toronto (1988) provided a framework credit to a particular firm. Specificity for the rescheduling of Third World increases RISK. debt. . Paris (1989) was principally concerned economic summits (E6, F0) with the global environment and inter- Meetings of the GROUP OF SEVEN which national traffic in drugs. attempt to co-ordinate the economic poli- . Houston (1990) discussed the aftermath cies of the major world economies. These of the collapse of communism in East- have taken place annually since the oil- ern Europe, set up a study of appro- price shock of 1973–4: priate methods to revive the Soviet . Rambouillet (November 1975) approved economy and agreed to phase out sub- of intervention to maintain the orderli- sidies to farmers. ness of financial markets (Canada was . London (1991) agreed to co-operate on absent). keeping interest rates low, encouraging . Puerto Rico (June 1976) made the greater personal savings and reducing reduction of unemployment and infla- emissions which contribute to ‘global tion central goals. warming’. . London (May 1977) announced growth . Munich (1992) failed to produce agree- targets for the Group of Three. ments to stimulate the . Bonn (July 1978) extended growth tar- but urged the completion of the URU- gets to all of Group of Seven, using GUAY ROUND of GATT and the cutting West Germany as the initiator of of government budget deficits to lower growth. interest rates. . Tokyo (June 1979) fixed ceilings for oil . Tokyo (1993) asked the USA, Canada imports. and European countries to cut their . Venice (June 1980) changed the empha- fiscal deficits and Japan to bolster sis of economic policy to the lowering domestic demand. Unemployment was of inflation rates. to be cut through non-inflationary . Ottawa (July 1981) announced the goals growth. of cutting public sector debt and redu- . Naples (1994) agreed to take steps to cing the rate of growth in the money reduce high unemployment levels. Lea- supply. ders were pleased with the reduction in . Versailles (June 1982) ordered a study inflation. of intervention to stabilize exchange . Halifax (1995) urged the reform of the rates. IMF and the World Bank to provide . Williamsburg (May 1983) ordered a emergency financing to cope with Mex- study of the international monetary ico-type liquidity crises. system. . Lyons (1996) agreed to write off 80 per . London (June 1984) tackled the world cent of the debts of poor countries in debt problem by announcing arrange- six years. ments for debt rescheduling. . Denver (1997) admitted Russia as an . Bonn (May 1985) continued to support associate member and urged the con- strict fiscal and monetary policies. tinuance of democracy in Hong Kong; . Tokyo (May 1986) agreed on more the USA resisted European demands for economic co-operation and ordered a a reduction in greenhouse gas emissions. study of appropriate economic indica- . Birmingham (1998) agreed to strengthen tors. financial architecture to avoid new finan- . Venice (June 1987) announced contin- cial crises but no agreement on extend- ued support for the LOUVRE ACCORD; also ing debt relief to developing countries.

© 2002 Donald Rutherford .Cologne(1999)producedanaidpack- nationbytheimpositionofbindingrules ageforKosovoandtheBalkansand forbudgetarypolicies,especiallybystating consideredrestructuringRussia’sexter- upperlimitsforbudgetdeficitsandby naldebt. defininganoverallFISCALSTANCE.Aunion .Okinawa(2000)consideredtheelimina- ofthiskindhasbeenproposedforthe tionofpovertyindevelopingcountries EUROPEANUNION. andfinancialassistancetoprovidein- Seealso:DelorsPlan formationtechnologyforthem. .Genoa(2001)providedaglobalfundto economicvalue(D0,M4)seereplacement combatAIDS,recommendedaNew cost DealforAfricaandcalledfornew worldtradetalks. economicweather(E6) Theshort-termconditionsunderwhichan economicsystem(P0) economyoperatesoverperiodsasshortas Thesystemofownership,institutionsand aweek,amonthoraquarterofayear. allocationmechanismsofanECONOMY. Ownershipistheprincipalcriterionfor Seealso:economicclimate distinguishingvariousformsofSOCIALISM economicwelfare(D6) fromCAPITALISM.Institutionsindicatethe Thetotalsatisfactionresidentsofacoun- degreeoffreedomfromcentralcontrol, tryreceivefromtheconsumptionofavail- particularlythenatureoftradeunions, ablegoodsandservices.Increasinglythere productiveenterprisesandbanks.Methods havebeenattemptstomovebeyondNA- ofallocationcontrastplannedwithmarket TIONALINCOMEmeasuresasaproxyesti- economics.Universityandcollegecourses mateofeconomicwelfaretotheuseofa oncomparativeoralternativesystems widerrangeofsocialandeconomicindi- contrastdifferenttypesofeconomy. catorssothatEXTERNALITIESandthesubtle- Seealso:economicinstitution;economy tiesofhumantastescanbetakeninto account.Totalwelfareconferredbythe economictransition(P0) productionofgoodsandservicesmustbe ThechangefromonetypeofECONOMIC viewedalongsidewelfarelosses,e.g.more SYSTEM,usuallyfromacentrallyplanned incomeisjudgedwithinthecontextofthe toamarketeconomy.Theprincipalrecent amountofleisureenjoyedbyworkers.A aspectsofthistransformationinEastern high-welfarecountryusuallyhasahigh EuropehaveincludedPRIVATIZATIONof proportionofthepopulationowningthe stateindustries,liberalizationofcapital majortypesofconsumerdurable,e.g. andlabourmarkets,thefoundingofstock washingmachinesandtelevisionsets;a exchangesandthestrengtheningofprivate low-welfarecountryhaspoorhousing, propertyrights. muchpollutionandlongworkinghours. Dissatisfactionwithaneconomyhas economicunderpinning(P0) severalindirectindicators,includingthe Theeconomicactivitieswhichfinancea incidenceofalcoholism,therateofsui- society.Previouslythissupportwasmainly cide,infantmortalityrates,lifeexpectancy, agriculturalandindustrial;nowitisin- diseaseanddisabilityrates. creasinglybasedoninformation. Seealso:measureofeconomicwelfare; economicunion(F0) socialwelfare Thisunitingofnationaleconomiescon- sistsoffourelements.ASINGLEMARKET, economism (D0) COMPETITIONPOLICY,commonpolicieson A taste for material success. To Marxists, structuralchangeandregionaldevelop- economism amounts to pursuing inter- ment,andmacroeconomicpolicyco-ordi- mediate economic goals instead of ulti-

© 2002 Donald Rutherford matepoliticalgoals.Inmoderneconomies, ariseinmanyaspectsofafirm’sopera- workerswithloweconomismoftenendup tions–itsfinancing,marketingandpro- intheSECONDARYLABOURMARKETwhere duction.Anexcellentexampleofascale thereislittletrainingandsmallchanceof economyisthespreadingofafixedcost economicadvancement overalargeroutput,e.g.typesettingcosts spreadoveranincreasedprintrun.Inthe economy(P0) figure,thereareeconomiesofscaleupto 1Themarketorder. outputOPbutdiseconomiesathigher 2Asetofexchanges. outputs. 3Theentiretyoftheeconomicactivities ofonenationusingthesamecurrency. 4Frugaluseofresourcesinorderto minimizecosts. Seealso:advancedorganiceconomy;auto- economy;bartereconomy;blackeconomy; blueeconomy;bootblackeconomy;branch economy;casheconomy;centrallyplanned economy;closedeconomy;command economy;coreeconomy;communalecon- omy;cowboyeconomy;decentralizedmar- keteconomy;dependenteconomy;drug economy;dualeconomy;enclaveecon- omy;estateeconomy;financialeconomy; firstbesteconomy;formaleconomy;han- somcabeconomy;informaleconomy; marketeconomy;matureeconomy;mesoe- conomy;mineral-basedeconomy;moon- Seealso:diseconomyofscale;economy lighteconomy;networkingeconomy;one- ofscope;externaleconomyofscale;inter- cropeconomy;openeconomy;parallel naleconomyofscale marketeconomy;permanentarmsecon- omy;pinkeconomy;primitiveeconomy; References proteaneconomy;psychologicaleconomy; Gold, B. (1981) ‘Changing perspectives on purecrediteconomy;revenueeconomy; size, scale and returns: an interpretive secondeconomy;self-sufficienteconomy; survey’, Journal of Economic Literature shadoweconomy;shareeconomy;short- 19(March): 5–33. ageeconomy;socialisteconomy;Soviet- economy of scope (D2) typeeconomy;spacemaneconomy;steady A reduction in AVERAGE COST brought about stateeconomy;undergroundeconomy; by the joint production of two or more villaeconomy;warehouseeconomy goods or services by a single firm, rather than by several firms. The similarities of economyofscale(D2) the products permit the use of the same Areductioninlong-runAVERAGECOSTasa factor inputs for different products, e.g. resultofanexpansioninoutputleadingto marketing, basic research. In the transport increasingRETURNSTOSCALE.Tomeasurea industry the use of the same fixed capital purelyscaleeffect,itisnecessarytomake for both passenger and freight vehicles somestrictassumptions:that,asoutput provides a good example of this economy. changes,thereisnochangeintechniques used,factorpricesareconstantandthe References samedegreeofverticalintegrationholds Panzar, L.C. and Willig, R.D. (1981) ‘Eco- asoutputchanges.Scaleeconomiesmay nomics of scope’, American Economic

© 2002 Donald Rutherford ReviewPapersandProceedings71(May): ofinternationaltransactions,andthat 268–72. theirinvestmentscanbewiderthanthose ofFEDERALRESERVEmemberbanks,e.g.in economyofsize(D2,M2) foreignfinance. AreductioninAVERAGECOSTresultingfrom thegrowthinsizeofafirm,e.g.the Seealso:McFaddenBranchBankingAct managerialeconomicsarisingfromthe multiplantnatureofalargefirmorfrom Edgeworth box (D0, F1) itssuperiortypeofmarketingorganiza- This depicts the trading relationships be- tion. tween two persons or two countries using INDIFFERENCE CURVES and a CONTRACT CURVE economyth(A1) which joins the points of tangency where Afalseeconomicgeneralizationfollowing each indifference curve of X touches an awrongparadigmandbasedonpoor,or indifference curve of Y. In the figure, IX1– no,empiricalresearch. IX7 and IY1–IY7 are indifference curves of consumer X and consumer Y respectively. ecu(E4) CC is the contract curve. The MARGINAL TheEuropeanCurrencyUnit,acomposite RATES OF SUBSTITUTIONS are equalized for basketofcurrenciesconsistingofthe each consumer. currenciesofEUROPEANCOMMUNITYcoun- tries.In1990,theDeutschmarkcomprised about30percent,theFrenchfrancabout 19percent,sterlingabout12percentand theItalianliraabout10percentofthis basket. Itisincreasinglyusedincommercial bankingtransactionsbecauseitsgreater stabilitymakesitmoresuitableforfixing contractualtermsthananationalcur- rency.EmployeesoftheEuropeanCom- missionarepaidinecusandevenBankof Englandtreasurybillsaredenominatedin them.ItwasreplacedbytheEUROin1999 ona1:1basis. Seealso:hardecu Edgeworth, Francis Ysidro, 1845–1926 EdgeActCorporation(G2,M1) (B3) AtypeofUSfinancialcorporationin Irish-born economist and statistician who existencesince1919whichcanreceive received a classical education at Trinity depositsfromforeigngovernmentsand College, Dublin, and Oxford University. othernon-USresidentsandfromUS He began his academic employment as a citizenswhosedepositsaretransmitted lecturer in logic in 1880 and afterwards the abroad.Itcanalsoholdforeignsecurities Tooke Chair of Political Economy at andengageinforeignexchangeactivities. King’s College, London, in 1890; then Thesecorporationscanbeeitherbanking Drummond Professor of Political Econ- corporationsmainlyconcernedwithac- omy at Oxford from 1891 to 1922. A ceptingdepositsorcorporationsprinci- natural mathematical ability enabled him pallyinvolvedininvestinginforeignnon- to write the very influential Mathematical bankingfirms.Theadvantagesofbeinga Psychics (1881), much admired by MAR- corporationofthiskindarethattheycan SHALL: in it he applied mathematics to operateacrossstateboundaries,inthecase UTILITARIANISM, analysed the nature of con-

© 2002 Donald Rutherford tract in a and invented INDIF- put, and B is the world price of a good FERENCE CURVES and CONTRACT CURVES, still minus the unsubsidized cost of inputs per much used in international and labour unit of output. economics. In many articles he made major contributions to the theories of effective rate of protection (F1) index numbers and probability theory. This measures the extra value added, as a Also, he was the first editor of the result of TARIFFS, as a proportion of the Economic Journal from 1891 to 1926. free trade value added. The most com- monly used formula is te = t1 kt2/(l k), References where te is the effective rate of tariff Creedy, J. (1986) Edgeworth and the Devel- protection, t1 is the tariff rate on output, opment of Neoclassical Economics, Ox- t2 is the tariff rate on input and k is the ford: Basil Blackwell. proportion of total price accounted for by Edgeworth, F.Y. (1925) Papers Relating to inputs. Political Economy (2002), Oxford: OUP. O’Brien, D.P. and Presley, J.R. (eds) (1981) effective tax rate (H2) Pioneers of Modern Economics in Brit- The average rate of tax levied on gross ain, ch. 3, London: Macmillan. personal income. This rate for companies refers to taxation as a proportion of VA LU E effective demand (E0) ADDED. The value of AGGREGATE DEMAND equal to aggregate supply. KEYNES introduced this effectual demand (E0) concept in his General Theory. The notion stated by MALTHUS in his Principles of Political Economy of a level See also: effectual demand of demand in a national economy able to References bring about FULL EMPLOYMENT of land and Amadeo, E.J. (1989) Keynes’s Principle of labour. He used this idea to challenge the Effective Demand, Aldershot: Edward complacent view that there could not be a Elgar. general GLUT. Effectual demand, Malthus Keynes, LM. (1936) The General Theory of asserted, could be increased by landlords Employment, Interest and Money, Book employing menial servants, more distribu- 1, ch. 3, London: Macmillan. tion of wealth to the middle classes and PUBLIC WORKS employment for the poor. effective exchange rate (F3) KEYNES saw Malthus as one of his precur- An index of a currency’s international sors in the formulation of macroeconomic value in terms of a basket of currencies, ideas. weighted by the relative importance of each foreign country in the trade of the See also: effective demand currency concerned. For sterling, the bas- References ket of currencies included the US dollar, the Japanese yen and the Deutschmark, Eltis, W.A. (1980) ‘Malthus’s theory of effective demand and growth’, Oxford and the weights reflected the UK’s trade Economic Papers 32: 19–56. with the USA, Japan and Germany. Rutherford, R.P. (1987) ‘Malthus and Keynes’, Oxford Economic Papers 39: effective rate of assistance (F1) 175–89. VALUE ADDED to a country’s production as a result of PROTECTION as a proportion of the efficiency wage (J3) value added by producers under FREE ‘A wage measured with reference to the TRADE. This is calculated by the formula exertion of ability and efficiency required (A B)/B, where A is the domestic price of the worker’ (Marshall). He asserted that of a good, including a tariff, minus the there would be a tendency towards effi- subsidized cost of inputs per unit of out- ciency wages or earnings in the same

© 2002 Donald Rutherford district.Manyfirmsattempttobasetheir revenuefromitisequaltothemarginal wagestructureonaproductivityprinciple. costsofpollution.Anearlyexampleofthe useofthesefeeshasbeeninGermany’s Seealso:locallabourmarket RuhrValley;theyhavealsobeenchargedin References theUSA,FranceandtheNetherlands. Marshall,A.(1920)PrincipleofEconom- Seealso:pollutioncontrol;pollutiontax ics,8thedn,BookV1,ch.3,London: Macmillan. eftpos(G2) Electronicfundstransferatpointofsale, efficientestimator(C1) i.e.automaticdebitingofcustomers’bank Thestatisticoftwosamplingdistributions orcreditcardaccounts.Thisisthemajor withthesamemeanbutthesmaller methodofintroducingthecashlesssociety variance. butunlikelytoreplacethepresentvariety efficientjobmobility(J6) ofpaymentmethods. Movementofworkerstodifferentjobsin Seealso:debitcard responsetoachangingpatternofdemand whichresultsintheeliminationoflabour egalitarianism(D3) shortages. 1Advocatinguniversalsuffrage. 2EQUALITYOFOPPORTUNITYbecausethere Seealso:labourmobility arenobarrierstoenteringanyoccupa- efficientmarket(D4) tionwith orwithoutthefinancial Amarketinwhichpricesreflectallavail- meansbeingofferedtofacilitateentry. ableinformation.Inaweakversionofthis 3 Anabsenceofincomedifferentials. marketpricesreflectpastprices;ina Seealso:Bentham strongerversion,pricesreflectfullyall publiclyavailableinformation.Profitsin eigenprices (D0) anefficientmarketcannotbemadeby The economically rational prices of an studyinghistoricalpricesasthetraders economy derived from the actual state of havethatdataalready.Thisconceptis an economy, as shown in an INPUT–OUTPUT crucialtothemacroeconomictheoryofthe table. Each eigenprice is a full-cost price, RATIONALEXPECTATIONSSchool.Theefficient reflecting the input–output coefficients for markethypothesisappliedtothestock the production of that good. Eigenprices marketistheRANDOMWALKhypothesis. make output and factor prices consistent, taking into account the final yield of an References economy and the principle of full-cost Mandelbrot,B.(1966)‘Forecastsoffuture pricing. Actual prices are irrational if they prices,unbiasedmarketsandmartingale diverge from eigenprices. Eigenprices are models’,SecurityPrices:ASupplement ‘ideal’ because factors of production are JournalofBusiness39:242–55. Samuelson,P.(1965)‘Proofthatproperly rewarded according to their marginal rev- anticipatedpricesfluctuaterandomly’, enue products. IndustrialManagementReview6:41–9. References effluentfee(Q2) Seton, F. (1985) Cost, Use and Value. The Achargetoapollutergivingtherightto Evaluation of Performance, Structure and Prices across Time, Space and Eco- dischargeintotheairorawatercoursea nomic Systems, Oxford: Clarendon noxiousemission.Althoughthisapproach Press. topollutioncontrolhasbeencriticizedasa ‘licencetopollute’,itdoesencouragefirms elasticity (D0) tominimizethedischargeofpollutants. The responsiveness of the value of an Ideally,thefeeshouldbefixedsuchthatthe economic variable to a change in the value

© 2002 Donald Rutherford ofanotherwhichisrelatedtoit.Themost relativesharesandtheelasticityof commonuseoftheconceptisPRICEELASTI- substitution’,JournalofPoliticalEcon- CITYOFDEMAND.Thisconcept,oneofthe omy68:284–7. mostdurabletoolsoftheeconomist,is usedextensivelyinpricetheory,interna- elasticityofsupply(D0) tionaleconomicsandindustrialeconom- The responsiveness of the quantity sup- ics. plied to a change in the price of that factor, good or service. In the short term, Seealso:crosspriceelasticityofdemand; elasticityofsupply;incomeelasticityof demand elasticityofafactorofproduction(D0) Theproportionatechangeinoutput causedbyaproportionateincreaseinthe inputofonefactorofproduction,holding theotherfactorsconstant. elasticityofdemand(D0) Theresponsivenessofquantitydemanded ofagoodorservicetoachangeinits priceorinaconsumer’sincome. elasticityofexpectations(D0) HICKSdefinedthisastheratioofthe proportionalchangeintheexpectedfuture valuesofXtotheproportionalchangein itscurrentvalue.Ifthisisequaltounity, expectedvaluesandcurrentvalueschange inthesamedirectionandbythesame proportion,e.g.ifpresentpricesdouble thenitisexpectedthatfuturepriceswill doublealso. elasticityofsubstitution(D0) Theeasewithwhichonefactorofproduc- tioncanbesubstitutedforanother.Ifthe elasticityofsubstitutionisgreaterthan unityforaFACTOROFPRODUCTION,thenan increaseinitssupplywillincreaseits relativeshareofthenationalincome. HICKSintroducedthisconceptinhisThe- oryofWages(1926)toshowtheeffectofa changeinthesupplyofonefactor,assum- ingtwofactorsonlyandconstantreturns toscale,onthemarginalproductivityof theother.Theconcepthasbeenexten- sivelyusedinthestudyofPRODUCTION FUNCTIONSandtheanalysisoftheeffects ofINVENTIONS. References Bronfenbrenner,M.(1960)‘Anoteon

© 2002 Donald Rutherford supplycanbeincreasedonlybyusing a source of pollution which reduces its existingfactorsofproductionmoreinten- emissions more than legally required to sively(e.g.byovertimeworking);inthe ‘bank’ the right to pollute more in the longtermsupplycanbeincreasedby future. Thus over a period of time the flow increasingfactorsupply(e.g.recruiting of emissions is on average at the legal andtrainingmoreworkers,increasingthe limit. capitalstock).Supplyelasticitiesincrease empirics (C8) asthetimeperiodlengthens,asdemon- Empirical findings acquired through ob- strated(inthefigures)bythechanging servation and experiment. slopeofthesupplycurves(S). employee ratios (J2) elephant(G1) Measures of the characteristics of a LA- UStermforanINSTITUTIONALINVESTOR. BOUR FORCE which include: eligibleliability(E5,G2) 1 capital employed per employee, a CAPITAL– Sterlingdepositliabilities(excludingde- LABOUR RATIO; positswithanoriginalmaturityofover 2 sales per employee, a measure of the twoyears)+sterlingresourcesobtainedby PRODUCTIVITY of sales staff; switchingforeigncurrenciesintosterling. 3 profit per employee, a measure of la- From1971to1981intheUK,commercial bour utilization; bankshadtomaintain12½percentof 4 average wage per employee, a measure theireligibleliabilitiesintheformof of labour costs. reserveassets. (J3) embargo(F1) Employee Stock Ownership Plan Prohibitionoftradeoranactivitysuchas An arrangement for a company to set up an thepublicationofabook. employee trust to allow employees to ac- quire the shares of the company. These embodiedtechnicalprogress(O4) schemes have flourished in the USA and Technicalimprovementsembodiedinthe the UK. In the USA, the National Center capitalstock.Netorreplacementinvest- for Employee Ownership (NCEO) esti- mentcanincreasetheamountofembodied mated in 1986 that 8,000 US firms had technicalprogressasinbothcasestheequip- such schemes by then, covering 10 million mentavailableandchosenforpurchasewill to 11 million workers, i.e. 8 per cent of the usuallyemploythelatesttechnology. total national workforce. The company makes regular tax-deductible contributions Seealso:disembodiedtechnicalprogress; to the Employee Stock Ownership Plan. innovation Ownership exercises a strong psychological emission charge (Q2) effect on workers: someone earning £18,000 A fee related to the quantity of a pollutant per annum would accumulate £32,000 in discharged, e.g. a noxious liquid, and ten years’ time. It is mainly a scheme for the imposed on the firm causing pollution. more successful firms. In the UK, the Companies Act of 1989 helped to acceler- emission fee (Q2) ate the growth of these schemes by allowing A payment giving a firm the right to companies more freedom to purchase their pollute. If the fee is too low, then it does own shares. In developing countries, there little to prevent pollution levels from is scope for such schemes as a means of rising; if too high, it may require expensive redistributing wealth from rich elites to the monitoring and prevent the production of poor. The usefulness of the schemes is any output at all. judged by the extent to which employees emission reductions banking (Q2) become more profit conscious, manage- An environmental control policy allowing ment–worker communications are im-

© 2002 Donald Rutherford proved and the recruitment and retention Employment Act 1980 (J5) of staff are facilitated. UK statute providing for the financing of secret ballots on trade union matters such Seealso:industrialdemocracy;workers’ as strike action, the election of union participation officials and the amendment of trade employer–employee bargaining (J5) union rules. The protection of trade union Negotiations between an employer, or members was increased by making it un- employers’ association, with a worker or a lawful unreasonably to refuse trade union TRADE (LABOR) UNION concerning pay and membership or to terminate it and to working conditions. It can take the forms require trade unions to make compensa- of individual or COLLECTIVE BARGAINING. tion if a member’s complaint was well founded. The Act also narrowed the range employers’ association (J5) of SECONDARY ACTION exempt from actions A federation of firms of one industry in tort to those actions relating to the which jointly engages in COLLECTIVE BAR- breaking of a contract of employment. GAINING with the TRADE UNIONS representing their workers. As employers usually apply Employment Act 1982 (J5) negotiated wages to all of their workers, This UK statute extended industrial rela- irrespective of their union membership, tions legislation by declaring contracts for collective bargaining covers a larger part the supply of goods and services void if of the labour force than that part which is only members of a specified trade union unionized. These associations often repre- can carry out the work or if a trade union sent their industries on other matters, e.g. has to be recognized. Also, there was a proposed legislation. requirement that only union officials could authorize trade union acts. Damages could employment (D0, J2) be recovered from trade unions, employ- The engagement of a factor of production ers’ associations, their trustees, members in a productive activity with the result that and officials, except for protected prop- it receives a factor income. Employment erty, e.g. a political fund. The limit for gives people wages or salaries, and rewards damages was set at £250,000 for the largest capital with interest or profits. Increased unions with 100,000 or more members. LABOUR FORCE PARTICIPATION makes more persons available for employment; eco- Employment Act 1988 (J5) nomic growth makes possible actual em- This UK statute amended labour legisla- ployment growth. Even in advanced tion by stating various rights of union economics with an employed labour force members, including a right to a ballot static in size, technological change effects before industrial action, a right of access many sectoral shifts in the composition of to the courts, a right to inspect a union’s employment. accounting records and a right to require an employer to stop deductions of union Employment Act 1946 (E6) subscriptions. Also, the Act stated that Federal statute of the USA which set out trade union funds cannot be used to pay major economic goals for the USA, in- fines imposed by a court and that indus- cluding the FULL EMPLOYMENT of labour and trial action to enforce membership of a COUN- other resources. Under the Act, the CLOSED SHOP is a tort. CIL OF ECONOMIC ADVISERS was established. The Act sought to promote ‘maximum Employment Appeal Tribunal (J5) employment’ rather than FULL EMPLOYMENT; UK body established in 1975 to hear it did not guarantee a high level of appeals from industrial tribunals, particu- employment by pledging the use of federal larly concerning discrimination and unfair resources to job creation programmes. dismissal.

© 2002 Donald Rutherford employment contract (J2, J3) investment occurs and in associated indus- The terms on which a person is hired by a tries, e.g. those producing and transport- firm. Williamson distinguishes four types: ing raw materials. Secondary employment recurrent spot contracting (by which an is the consequential employment in the employee is hired from day to day); con- production of consumption goods to meet tingency claims contracting (being hired the increased expenditure of the recipients depends upon the occurrence of an event, of wages and profits in the primary e.g. ball-boys are needed at Wimbledon on industries. Employment effects of govern- a fine day); authoritative contracting (a ment expenditure are variable as the value master–slave contract, a modern example of the employment multiplier changes with might be military conscription); and INTER- the type of expenditure. Expenditure di- NAL LABOUR MARKET contracting (a flexible rectly on personnel has a greater multiplier form of hiring to the senior posts of an effect than consumption and capital organization determined by managerial spending. rules). References Seealso:implicitcontracttheory;invisi- Kahn, R.F. (1931) ‘The relation of home blehandshake investment to unemployment’, Economic Journal 41: 173–98. References Williamson, O.E., Wachter, M.L. and Har- employment rate (E0, J2) ris, J.E. (1975) ‘Understanding the emplo- The proportion of the LABOUR FORCE em- yment relation: the analysis of idio- ployed. This alternative to the unemploy- syncratic exchange’, Bell Journal of ment rate is used to estimate the level of Economics 6: 250–78. demand in a national economy. employment function (J2) Seealso:activityrate;labourforceparti- The desired level of employment as a cipationrate function of the demand for output. Employment Relations Act 1999 (J5) References Its provisions, based on the White Paper Ball, R.J. and St Cyr, E.B.A. (1966) ‘Short Fairness at Work (1998), concern recogni- term employment functions in British tion and derecognition of trade unions for manufacturing industry’, Review of Eco- collective bargaining purposes, the black- nomic Studies 33: 179–207. listing of workers with membership of a Employment Institute (L3) union, an extension of the right to claim London-based institute founded in 1985 for unfair dismissal, and a right for work- and originally headed by Richard Layard ers to be accompanied in some disciplin- and Sir Richard O’Brien. It has enjoyed ary and grievance proceedings. widespread political support for its neo- empty nester (J1) Keynesian approach to the problems of A married person in late middle age whose UK unemployment. It has advocated some children have moved elsewhere leaving an general , special measures for the ‘empty nest’. long-term unemployed and infrastructure investment. Seealso:ThirdAge employment multiplier (E0) enclave economy (P0) The first version of a formal MULTIPLIER, 1 An isolated economy without forward suggested by KAHN in 1930. It shows the and backward economic linkages within ratio of secondary to primary employ- it, e.g. an agrarian economy which ment. Primary employment consists of the imports its tractors and fertilizers and jobs in an industry where the original exports its products. In such economies,

© 2002 Donald Rutherford aneconomicactivitydoesnothaveany endowment (A1) spin-offsintermsofservicesandpro- 1 An original asset, especially land; in- cessingandsothereisanabsenceofthe herent ability. dynamiceffectsofintersectoralgrowth. 2 Something of value bestowed upon an- 2Asub-economyofanadvancedecon- other. omy,e.g.intheUSA,ethnicgroupshave endowment effect (G2) formeddistinctsub-economieswith,for An increase in a bank’s profitability as a example,CubansorMexicanscompris- result of a rise in interest rates. ingboththeownersandworkers. endowment insurance (G2) endofgeography(F3,G1) A form of insurance which provides for a Awayofreferringtoglobalfinancial fixed sum of money to be paid on a integration. specified date, or at death. References endowment mortgage (G3) O’Brien,R.(1992)GlobalFinancialInte- A mortgage linked to an insurance policy gration.TheEndofGeography,London: that provides at the end of its term a sum ChathamHouse. to redeem the mortgage. The mortgagor pays both interest on the amount bor- endogenizingtheexogenous(E1) rowed and insurance premiums. In times Theinclusioninaneconomicmodelof of falling property prices the problem of somethingpreviouslyregardedasgiven. NEGATIVE EQUITY makes this form of house Classicaleconomists,forexample,re- purchase unattractive. gardedFULLEMPLOYMENTasgiven,whereas KEYNESincludeditasavariableinhis Engel, Ernst, 1821–96 (B3) modelofthenationaleconomy.Expecta- German statistician who was educated at tionswereoftenregardedasgivenbutnow the Ecole des Mines, Paris. Director of the manyeconomicmodelsincludethem. statistical bureaux of Saxony from 1850 to 1858 and of Prussia from 1861 to 1862. In Seealso:endogenousvariable;exogenous 1857 he propounded Engel’s law, one of variable the first major empirical findings of lasting endogenousgrowththeory(O4) importance. AnexplanationofECONOMICGROWTHasthe Engel coefficient (D2) productofthestructuralfeaturesofan Expenditure on food, beverages and to- ECONOMY.AnearlytheorywasHARROD’s bacco as a proportion of final private warrantedrateofgrowththatmadethe consumption expenditure. growthratedependonthesavingsratio andoutput–capitalratio,bothstructural Engels, Friedrich, 1820–95 (B3) features.Laterversionsofthistheoryhad The principal intellectual collaborator of foundationsinmicroeconomicsandem- MARX from 1844. Although his family phasizedthecontributionofaccumulated owned textile mills in the Rhineland and HUMANCAPITALtoincreasedproductivity. Manchester, he was a social critic from the age of 18. He never attended university Seealso:post-neoclassicalendogenous but came under the influence of the Young growththeory Hegelians in Berlin; his practical knowl- edge of business was to temper Marxian endogenousvariable(D0,E1) theory. His interest in economics began Aneconomicvariablewhosevaluesare with an essay Outlines of a Critique of determinedbytheothervariablesofan Political Economy (1844). His analysis of economicmodel. industrialization and his prophecy of a Seealso:exogenousvariable proletarian revolution impressed Marx.

© 2002 Donald Rutherford TheyjointlywroteDieHeiligeFamilie thehighestbidder,providedthatthebidis (TheHolyFamily)(1845),DieDeutsche notlessthantheseller’sreserveprice.The Ideologie(TheGermanIdeology)(1845–6) earliestauctionsintheRomanEmpire andManifestderKommunistischenPartei wereprobablylikethissince‘auction’is (TheCommunistManifesto)(1848).En- derivedfromtheLatinwordauctusmean- gelsisalsonotedforhisUmrissezueiner ing‘increase’. KritikderNationalo¨konomie(Outlinesofa Seealso:auction CritiqueofPoliticalEconomy)(1844)and DieLagederarbeitendenKlasseinEngland Englishdisease(J5) (TheConditionoftheWorkingClassin Theconsequencesofpoorindustrialrela- England)(1945),aswellashisposthu- tionsandindustrialorganizationmanifest mouseditingofthesecondandthird instrikes,lowproductivityandlowgrowth. volumesofMarx’sDasKapital.Hisfre- quentfinancialhelptotheMarxfamily enterpriseculture(P0) maintainedhisgreatfriendinhischosen AnECONOMYwithlittleREGULATIONand career.Livinginretirementfortwenty-six everyencouragementtoENTREPRENEURS. years,hewasabletoreconstructthe enterpriser(M1)seeentrepreneur remainderofMarx’sDasKapitalfrom moundsofnotes. enterpriseunion (J5) AJapaneseTRADEUNIONcoveringallthe References workersbelowsupervisor levelwithinan Carver,T.(1983)MarxandEngels:The enterprise orwithinanestablishmentof IntellectualRelationship,Brighton: thatenterprise.Theunionhasitshead- Wheatsheaf. Henderson,W.O.(1976)TheLifeofFrie- quartersoncompanypremisesandis drichEngels,2vols,LondonandPort- oftenrunby companyemployeeson land,OR:FrankCass. secondmentfrom theirusualemployment. Thisisthemostimportant levelofunion- Engel’slaw(E2) isminJapanasmostofworkers’contribu- Theassertionthat,asincomerises,the tionsarespentatthislevelandvitalwage proportionspentonfoodfalls.Formally, bargaining isdone.Oftenanenterprise thiscanbestatedastheINCOMEELASTICITY unionisgiventhetaskofallocating OFDEMANDforfoodislessthanunity. betweentypesofworkerthegrossaddition totheenterprise’swagebill.Although engineofgrowth(O4) therewere72,605unionsby 1989,this 1Themechanism,oftensaidtobeinter- doesnotimplyaweakunionmovement as nationaltrade,whichstartsanecono- thereisjointaction through their national my’sexpansion.Thisviewhasbeen federations, the major ones having been contrastedwiththeviewthattradeisa RENGO, SOHYO, DOMEI, SHINSANBESU. Since ‘handmaiden’.Aconceptattributedto 1948, statistics on Japanese unions have ROBERTSON. been produced by the Basic Survey on 2Amajoreconomyoftheworld,e.g.the Trade Unions. USA,whichissolargethatitsexpan- siongeneratesademandforimports Seealso:companyunion;localunion whichstimulatesmanyothernational economies. enterprise zone (R5) A local UK or US area, often a decaying Englishauction(D4) inner city, selected for special government Amethodofsellinganitemwhichbegins help in the form of exemption from withthefirstbidbeingrequestedbythe property taxation and from many govern- auctioneerandendswhenthebidsreach mental regulations. The purpose of these anuncontestedpeak.Theitemissoldto zones is to encourage the location of new

© 2002 Donald Rutherford industriesandnewjobsbyreducingthe one point to the envelope. The main use of factorcostofdoingso.Thecreationof envelope curves is in relating long-run to suchzonesleadstoconflictbetweenlocal short-run cost curves. In the figure authoritiesandbusinesseswithinand SATC1–SATC4 are short-run average total withouttheseareasasthelattercansuffer cost curves; LRAC is the long-run average alossofindustry. total cost curve. Seealso:regionalpolicy entrepoˆt (F1) A commercial centre or warehouse en- gaged in the distribution of goods through- out the world. entrepreneur (M1) The fourth FACTOR OF PRODUCTION, after land, labour and capital, which organizes production and undertakes the risk of an enterprise. In JOINT STOCK COMPANIES, the risk bearing is undertaken by the share- holders; in small businesses, usually by the manager–proprietor. The idea of entrepre- neurship was introduced into economics environmental accounting (M4) by CANTILLON, literally to mean the ‘under- taker’, i.e. a person who buys at a fixed Accounting for the private and social costs price and sells at an uncertain price. of environmental events in NATIONAL IN- Subsequently different economists debated COME accounting, FINANCIAL ACCOUNTING alternative definitions, which include risk- and MANAGEMENT ACCOUNTING. bearer, organizer of production, innovator environmental determinism (Q0) and decision-maker in circumstances The doctrine that economic and social which give people unequal access to in- activities are determined by the physical formation. New entrepreneurs are often environment, particularly the climate. De- well-educated persons with managerial ex- velopment economists ascribe to this de- perience having small firms in areas with terminism the lower incidence of wealthy local markets. development in some areas of the world References and the international DIVISION OF LABOUR. Casson, M.C. (1982) The Entrepreneur: An Economic Theory, Oxford: Robertson. environmental issues (Q0) Gilder, G. (1984) The Spirit of Enterprise, World population growth, the demand for New York: Simon & Schuster; Har- exhaustible resources, the loss of topsoil mondsworth: Viking, Penguin. and forests, and pollution are the principal Knight, F.H. (1921) Risk, Uncertainty and matters discussed. Profit, Chicago: Chicago University Press. Environmental Protection Agency (Q2) Schumpeter, J.A. (1934) The Theory of Washington-based US federal agency esta- Economic Development, Cambridge, blished in 1970 for research into the MA: Harvard University Press; Lon- don: H. Milford. environment and the control of pollution. It reinforces the efforts of other federal ag- envelope curve (D0) encies and co-ordinates the anti-pollution A curve enclosing a whole family of enforcement work of state and local gov- curves, each of which contributes at least ernments. It is concerned with air, water,

© 2002 Donald Rutherford radiation,solidwaste,pesticidesandtoxic equalityofopportunity(D6,J7) substances. 1Accessbyminoritygroupsandthe disadvantagedtoeducationandevery- environmentaltax(Q2) thingnecessaryforfullparticipationin Ataxonapolluterrelatedtotheexternal society. costsofprivateproduction. 2AnabsenceofDISCRIMINATIONsothat Seealso:effluentfee peoplearejudgedonlybythepersonal attributesrelevanttoaparticulartask EPA(C5,F0) oractivity.Individualsareresponsible AworldeconometricmodeloftheJapa- foroutcomes. neseEconomicPlanningAgencywhich References includesninecountrymodels(oftheseven majorOECDcountries,Australiaand Roemer,J.E.(1998)Equalityofopportu- nity SouthKorea)andsixtradingregions. ,Cambridge,MA:HarvardUniver- sityPress. Seealso:linkagemodels equalitystandard(D6) References Anidealisticapproachtoincomedistribu- Amano,A.,Maruyama,A.andYoshi- tiongivingequalsharestoallbyequaliz- tomi,M.(eds)(1982)EPAWorldEco- ingpercapitaincomes.Criticsofthis nomicModel,Vols1and2,Tokyo: approachassertthathumannatureisnot EconomicPlanningAgency. soaltruisticastotolerateasystemof rewardwhichignoresdifferencesinindivi- epidemicmodel(O3) dualpersons’contributionstooutput. Anexplanationofthediffusionoftech- Alsoafallinlabourproductivityisa nologyusingtheanalogyofthespreadof likelyconsequenceofusingthispolicy. infectiousdisease.Therateofdiffusionis regardedasafunctionoftheproductof Seealso:altruism;contributionstandard; (1)theshareofthepopulationwitha egalitarianism;needsstandard particularinnovationand(2)thenumber equalizing wage differential (J3) ofthefixedpopulationwithoutit.The A wage differential which compensates a modelattemptstoexplainwhyadiffusion worker for a non-pecuniary aspect of a ratefollowsasigmoidS-shapedtimepath job, e.g. the degree of risk or the dirtiness withlowinitialrates,aquickeningof of working conditions. These differentials diffusion,thenafallbacktolowratesas discourage labour mobility to more plea- thepotentialfordiffusiondiminishes. sant occupations. CANTILLON and SMITH References were both aware of this reason for wage Romer,P.(1990)‘Endogenoustechnologi- differentials. calchange’,JournalofPoliticalEcon- omy(October1990Supplement)99: Equal Opportunities Commission (J7) S71–102. UK institution set up in 1976 to deal with complaints about SEXUAL DISCRIMINATION. equality(D6) Initially the bulk of complaints concerned Theachievementofthesameamountof job adverts specifying applicants of a ECONOMICWELFAREperheadorthesame particular sex; subsequently the issues economicopportunitiesforeachindivi- covered have included a wider range of dual.AsthecreedofEGALITARIANISM,it grievances. It publishes annual statistics on deniesdifferencesininnateabilitiesand sexual wage differentials. arguesthatsuperiorabilitiesaremerely Equal Pay Act 1963 (USA) (J3, J7) theproductoftraining. US federal statute which sought to equal- Seealso:humancapital ize male and female pay for workers in

© 2002 Donald Rutherford interstatecommerce.Employmentdiscri- minationagainstwomenandethnicmino- ritieswasdealtwithunderTitleVIIofthe CivilRightsAct1964.

EqualPayAct1970(UK)(J3,J7) UKlegislationthatenforcedtheprinciple ofequalpayforequalwork:thiswasto applytoallcollectivelybargainedagree- mentsandSTATUTORYMINIMUMWAGERATES by1975.DespitetheAct,thereisstilla divergencebetweenmaleandfemaleearn- ings,reflectingOCCUPATIONALSEGREGATION ofwomen,differencesinhoursworked andpromotionpoliciesoffirms.

EqualPayDirective(J3,J7) AdirectiveissuedbytheEUROPEANCOMMIS- SIONin1975tocounterdiscriminationin pay,especiallyonthegroundsofsex. equalproductcurve(D0)seeisoquant equilibrium(D0,E0) Astateofbalancesuchthatasetof selectedinterrelatedvariableshasnoin- herenttendencytochange.Ineconomics, amajorexampleisthebalanceofthe forcesequatingdemandandsupply.SMITH inhisdiscussionofpricesusedtheideaof marketpricesfluctuatingaroundtheNAT- Seealso:generalequilibrium;temporary URALPRICEwhichcanbeconsidereda equilibrium centralprice.TheSUBSISTENCETHEORYOF References WAGESregardedexpansionsandcontrac- tionsofapopulationasequilibrating Amendola, M. and Gaffard, J.-L. (1998) forcesmakingthesubsistencewagerate Out of equilibrium, Oxford and New York: Clarendon Press. thelong-runequilibriumwage.Anequili- Caravale, G. (ed.) (1997) Equilibrium and briumcanexistforaneconomyasa economic theory, London and New whole,forasectorofit,foraparticular York: Routledge. marketorforaninstitution,suchasa Fisher, F.M. (1983) Disequilibrium Founda- firm.Althoughthetermisappliedprinci- tions of Equilibrium Economics, Cam- pallytostaticmodels,therecanbean bridge: Cambridge University Press. equilibriumindynamicmodelswhenvari- Samuelson, P.A. (1965) Foundations of ablesproceedalonganequilibrium-type Economic Analysis, 2nd edn, New York: path.Equilibriacanbestableorunstable, Athenaeum. temporaryorpermanent:someofthemdo notexist.TheMarshallianandKeynesian equilibrium GNP (E0) cross-diagramsarethemostfamousdia- The level of real national income at which grammaticalrepresentationsofequili- AGGREGATE DEMAND equals AGGREGATE SUP- brium(E,equilibrium). PLY, i.e. desired expenditure equals the

© 2002 Donald Rutherford quantityofgoodsandservicessuppliedin TRALLYPLANNEDECONOMIES.Tothepartici- thateconomy. patinggovernmentthereistheadvantage ofnothavingtopayfixedinterestcharges. equilibriumprice(D0) ManyEastEuropeancountriesturnedto Thepricewhichequatesdemandand thisorganizationalformafter1989asa supplyinamarketinaparticulartime meansofreconstructingtheireconomies. period. Seealso:EuropeanBankforReconstruc- equilibriumvelocity(E4) tionandDevelopment;jointventure TheVELOCITYOFCIRCULATIONthatmaintains interestratesondepositsattheirlong-run equity-linked mortgage (G2, R2) equilibrium(i.e.average)rates. A method of purchasing commercial or residential property. The lender offers to equipmenttrustbond(G2) pay, for example, half the current interest Afinancialarrangementforleasingequip- rate on the mortgage in return for acquir- ment.Theholderofthebondownsthe ing half the equity in the property (or equipmentandthenleasesittothefirm another proportion). This device makes it whichhasissuedthebondviaatrustee. possible for borrowers to obtain finance Thetrusteepaystheinterestandprincipal for large property purchases and for len- tothebondholder,receivingrentalpay- ders to benefit from the capital apprecia- mentsfromtheissuerofthebond. tion of properties. equity(G1) 1ORDINARYSHARES. equity premium (G1) 2COMMONSTOCK. The excess of the average real return to 3Theportionofacompany’scapital stock market securities over the interest whichdoesnotearnafixedrateof rate on treasury bills. In the USA this has interest.Equityholdersusuallyreceive been about 6 per cent for 100 years. dividendsvaryingwiththeprofitability References ofthecompany/corporationandits Kocherlakota, N.R. (1996) ‘The equity profitdistributionpolicy.Theissueof premium: it’s still a puzzle’, Journal of equitysharesenablesacompanyto Economic Literature 34: 42–71. expanditscapitalandtospreadbusi- Mehra, R. and Prescott, E.C. (1985) ‘The nessrisk. equity premium: a puzzle’, Journal of 4Fairness. Monetary Economics 15: 145–61.

Seealso:horizontalequity;Rawlsianjus- equity release scheme (G2) tice;verticalequity A loan obtained by a house owner equitycomovement(G1) through taking out a mortgage on the Theextenttowhichthepricesofequities property to buy a high-yield bond in ondifferentstockexchangeschangebythe order to provide an income. Falling house sameamountandinthesamedirection. prices caused some owners to lose their Theremovalofexchangecontrolshas homes. increasedthepossibilityofcomovement. equity-style management (G2) equityjointventure(M1) The choice by a portfolio manager be- Abusinessjointlyownedandrunbya tween large or small growth or value of a privatefirmandagovernmentalorganiza- client’s investments where growth is mea- tion.Asitisfinancedpartlybyequity sured by earnings growth and value is the capital,thereturntotheprivateinvestoris ratio of price to book value of a share. A avariabledividend.Thisarrangementwas popular strategy is to choose growth at a usedbycapitalistfirmstoinvestinCEN- reasonable price.

© 2002 Donald Rutherford equitytaxation(G2) policyinstrumenttokeepatargetvariable Taxationbasedonthefairnessprinciple closetoitsdesiredvalueusedasearlyas thateachpersonshouldsufferanequal 1954byPHILLIPS. sacrifice.‘Sacrifice’,however,isanambig- References uoustermasitcanrefertoequalityin absolutetermsoratthemargin. Salmon,M.(1982)‘Errorcorrectionme- chanisms’,EconomicJournal92:615–29. Seealso:abilitytopay escalatorclause(M2) equitywarrant(G2) Aclauseinacontractdesignedtorevise AnoptiontobuyanORDINARYSHAREor paymentsdueunderthatcontractinline COMMONSTOCKatafixedpriceinthefuture. withchangesinaspecifiedpriceindex.In Itisissuedintheformofabondwithalow timesofconsiderableinflation,these COUPON.InthecaseofEUROBONDS,thewar- clausesarepopularinlabourandbuilding rantisissuedattachedtoabonddenomi- contracts,aswellasintaxschedulesand natedinaparticularcurrency.However,the socialsecuritybenefitstables. warrantisoftendetachedandtradedsepa- Seealso:costoflivingadjustment rately.Thepopularityofthischeapmethod ofstockmarketspeculationisreflectedin establishment (M1) therapidincreaseinwarrantprices. A place of business, a factory or a plant which is part or the whole of a firm. equivalentvariation(D6) Theminimumamountapersonwhogains estate economy (P4) fromachangehastobegiventoforgothe An underdeveloped economy with much change. of its agriculture organized into large estates, usually foreign owned. Malaysia ergonomics(J2) with its rubber plantations, Ceylon with its Thescientificstudyofthephysicalmeth- tea plantations and Argentina with its odsofworkwiththeaimofminimizing cattle ranches had this character. effortandmaximizingoutput.Inspiredby Although wages of the estate workers were thestudyofthepracticalproblemsof low by international standards, they were usingmilitaryequipmentintheSecond high enough to induce the movement of WorldWar,itbecamearecognizeddisci- workers from subsistence agriculture. plinein1949.Muchworkhasbeendone These estates were the basis of develop- ontheappropriatewaysofdisplaying ment in several ex-colonial countries. information,onthestudyofmachine controlsandontherelationshipbetween e-tail company (L8) aworkerandthephysicalenvironment. A company which retails its goods and services using e-mail. References Singleton,W.T.(ed.)(1982)TheBodyat ethical unit trust (G2) Work,Cambridge:CambridgeUniver- UK equivalent of a SOCIAL CONSCIENCE FUND. sityPress. Euler’s theorem (D3) error(C1) The rule that if FACTORS OF PRODUCTION are Thedifferencebetweenobservedandtrue paid according to their MARGINAL PRODUCTS, valuesbroughtaboutbychancerather the total product will be distributed com- thansystematically. pletely if and only if there are constant RETURNS TO SCALE. The theorem is of Seealso:probableerror;standarderror importance when considering the applica- ofestimate;TypeIerror;TypeIIerror tion of the MARGINAL PRODUCTIVITY OF WAGES error-correctionmodel(C5) since if there are DIMINISHING RETURNS and Aneconometricmethodofadjustinga workers are paid according to their

© 2002 Donald Rutherford marginal products, the total wage bill will Euroclear (G2) be less than the total product. Conversely, An international agency for clearing bank if there are increasing returns to scale and cheques between ten European countries. workers’ wages equal their marginal pro- See also: Cedal ducts, the total wage bill will be more than the value of their output. Eurocurrency market (G2) The international market dealing in bank euro (F3) deposits in the major currencies, including The common currency of the EUROPEAN the US dollar, yen, Deutschmark, Swiss UNION adopted by all member states ex- franc, French franc, guilder and ecu, cepting Denmark, Sweden and the UK. It which has been in existence since the came into force on 1 January 1999 in 1950s. Its early growth was stimulated by parallel with the currencies of participat- REGULATION Q which encouraged the expa- ing states. Euro coins and notes were triation of US dollars in search of higher issued from 1 January 2002 and became interest rates. the sole currency in circulation in the states of the eurozone by 28 February Eurodollar (F3) 2002. Soon after its inception it experi- Dollars on deposit with banks outside the enced a slump in its value. USA, some of them the European branches of US banks. Originally, the Eurobank (G2) attraction of such deposits was that they A bank able to receive TIME DEPOSITS and could evade the RESERVE REQUIREMENTS make loans in currencies other than that needed for domestic deposits and any of the country in which it is located. restrictions on maximum interest rates Eurobond (G1) (REGULATION Q). As a consequence of US A long-term bond marketed internation- balance of payments deficits, dollars are ally by an international syndicate of banks supplied for the reserves of the central in countries other than the country with banks other than the FEDERAL RESERVE SYS- the currency in which the bond is denomi- TEM. Increases in Eurodollar deposits are nated, e.g. a bond in French francs can be encouraged by the investment facilities marketed anywhere outside France. The and interest rates of the Eurobanks. There advantage of this type of financial instru- is also a small creation of Eurodollars by ment is that it escapes national financial the Eurobanks themselves. regulations. Eurodollar market (F3, G2) Eurobond market (G1) A WHOLESALE MONEY MARKET dealing in An international market, founded in the expatriate US dollars, outside the control early 1960s, as a PRIMARY and SECONDARY of national banking authorities. However, MARKET in BEARER BONDS issued outside the increasingly the BANK OF ENGLAND, the BUN- country of that particular currency. The DESBANK and the US FEDERAL RESERVE BANKS anonymity of this market has attracted have introduced controls on the foreign investors who wish to remain discreet banks within their jurisdiction. Despite about their holdings. Previously able to these controls, the banks operating in this avoid any regulation, it is now under the market are more competitive than other ASSOCIATION OF INTERNATIONAL BOND DEALERS commercial banks because their operating in the UK. It has become a leading world costs are lower as a consequence of the securities market. insistence on minimum deposits of at least £50,000. Eurocheque (F3, G2) A CHEQUE that can be written in any one of Euroequity (G2) a number of CURRENCIES. An EQUITY of one country which is issued

© 2002 Donald Rutherford or sold in another, e.g. the sale of Fiat structure investment and 60 per cent for shares in Germany. private sector commercial investment.

Eurofed (E5) see European Central Bank European Central Bank (E5) Established in June 1998 and located at Eurofranc (G2) Frankfurt, Germany. It conducts mone- A franc deposit in a non-French bank in tary policy for all the twelve European Europe but outside France. countries using the EURO as their only euro interbank offered rate (F3) currency. It has a six-member Executive The interest rate at which euro interbank Board, a Governing Council consisting of term deposits of the eurozone are offered the members of the Executive Board and by one prime bank to another. the governors of the central banks using the single currency, and a General Council Euroland (P4) which includes governors of central banks The member states of the European Union of the European Union not using the in the EUROPEAN MONETARY UNION using the single currency (they are not allowed to euro as their currency. vote).

Euromarket (G1) European Communities (F0) A financial market trading in financial The three organizations consisting of the instruments that are denominated in cur- European Coal and Steel Community, rencies other than that of the country established in 1952, the EUROPEAN ECONOMIC where that market is located, e.g. London COMMUNITY, established in 1958, and the trading in bonds denominated in French European Atomic Energy Community, francs. also established in 1958. The original member states of each of the three com- Euromoney deposit (G2) munities were France, West Germany, A bank deposit in another currency, e.g. Italy, Belgium, the Netherlands and Lux- US dollars, French francs, Swiss francs emburg. In 1967 the original institutional and yen. structures of the three communities were Euronext (G1) merged to create the common executive, The stock exchange formed by the merger judicial and legislative institutions of the of the exchanges of Amsterdam, Brussels EUROPEAN COMMUNITY. and Paris in September 2000. This cross- European Community (F0) border exchange began with trading in The name given to the EUROPEAN COMMU- over 1,600 securities. NITIES since 1967. The original six member Euro overnight index average (F3) states (France, West Germany, Italy, Bel- The effective overnight interest rate of the gium, the Netherlands and Luxemburg) panel banks in the euro interbank market. were joined, in 1973, by the UK, Ireland and Denmark, followed by Greece in European Bank for Reconstruction and 1982, and Spain and Portugal in 1986. Development (G2) The signatory countries of the European The development bank founded in 1991 Community hoped to promote a greater and based in London which lends to the equality of incomes between nations and East European countries in order to ease regions, to raise the rate of economic their transition from centrally planned to growth, to help Third World countries market economies. Its capital was raised and to establish a major economic power, from EUROPEAN COMMUNITY institutions and rivalling the USA and the USSR. By 1987, forty-one countries. Its lending policy is to the European Community had a popula- make 40 per cent of its loans for infra- tion of 323 million inhabitants, making it

© 2002 Donald Rutherford thelargestmarketintheindustrialized full employment and productivity in its world(USA,244million;Japan,122mil- area, to trade on the basis of fair competi- lion),butJapanesepercapitaincomewas tion and to remove tariffs between mem- then48percenthigherandUSpercapita bers by 1 January 1970. Although it income40percenthigherthaninthe reduced TARIFFS in 1961 and quotas among EuropeanCommunity.Theindustrial members during 1961–6, it was not origin- strengthoftheEuropeanCommunitylies ally intended to be a CUSTOMS UNION, i.e. especiallyinitschemical,transportequip- with a COMMON EXTERNAL TARIFF. After 1973, mentandindustrialmachineryindustries. a series of agreements between EFTA and the European Economic Community re- Seealso:EuropeanEconomicCommuni- duced tariffs between the member coun- ty;EuropeanUnion tries: by 1977 duties on most industrial References goods between EFTA and the European El-Agraa, A.M. (1990) The Economics of Economic Community had been abol- the European Community, 3rd edn, New ished. York and London: Philip Allan. European Investment Bank (F3, G2) European Co-operation Administra- The major lending institution of the EUR- tion (F0, H1) OPEAN COMMUNITY founded in 1958 to The US agency which administered MAR- provide loans to assist ‘the balanced and SHALL AID to Europe, 1948–52. smooth development of the Common Market’ with an initial capital of $1,000 EuropeanCurrencyUnit(E5)seeecu million. It provides loans for three types of European Economic Community (F0) project: the modernization of less devel- A CUSTOMS UNION of Western Europe, also oped regions, the conversion of undertak- known as the Common Market. It was ings to new types of production and founded by the Treaty of Rome in 1958 employment, and the financing of projects when France, West Germany, Italy, Bel- of interest to several member countries. In gium, the Netherlands and Luxemburg its first fifteen years, 60 per cent of its agreed to enter into a customs union with lending went to Italy, in particular to a common external tariff, mobility of assist the development of the Italian labour and capital between the nation south. states, and a COMMON AGRICULTURAL POLICY. European monetary co-operation (F3) In 1967 its institutional structures were A series of plans and agreements leading merged with those of the European Coal to the launching of the EUROPEAN MONETARY and Steel Community and the European SYSTEM in 1979. It began with the Barre Atomic Energy Community to form the Plan and the Hague Summit of 1969 and common institutions of the EUROPEAN COM- was followed in 1971 by the WERNER REPORT MUNITY. and the European Council of Ministers’ European Free Trade Association (F0) resolution. These initiatives resulted in an Founded in 1959 as the alternative Eur- agreement between EUROPEAN COMMUNITY opean trade organization to the EUROPEAN central banks in 1970 to provide a short- ECONOMIC COMMUNITY with Austria, Den- term monetary support system, a central mark, Norway, Portugal, Sweden, Switzer- banks’ medium-term financial assistance land and the UK. Its members are now scheme in 1972, the ‘snake in the tunnel’ Austria, Finland, Iceland, Liechtenstein, short-term financing facility in European Norway and Sweden (Denmark, Portugal currencies of April 1972 to February 1973, and the UK left on joining the European the joint floating of European currencies, Economic Community). At its inception, and the ‘snake outside the tunnel’, March EFTA aimed to expand economic activity, 1973 to March 1979. Prior to 1979, there

© 2002 Donald Rutherford wereunsuccessfulattemptstowardsEur- Amsterdam,DordrechtandLancaster: opeanmonetaryunionintheTindemans Nijhoff. Reportof1976andtheJenkinsInitiative deGrauwe,P.andPapadenos,L.(1990) of1977. TheEuropeanMonetarySysteminthe 1990s,Harlow:Longman. EuropeanMonetaryCo-operation EuropeanMonetaryUnion(F3) Funds(F3) Theintegrationofthemonetarypolicies PartoftheEUROPEANMONETARYSYSTEMthat andcurrenciesofmemberstatesundera financesimbalancesinpaymentsbetween newEUROPEANCENTRALBANKusingasingle thecountriesparticipating. currency.Thisunionwasenvisagedbythe EuropeanMonetarySystem(F3) WERNERREPORTanddesignedbytheDELORS TheWestEuropeansystemforaligning PLANwhichsetoutthreestagestowards exchangeratesandbringingaboutacon- integration.Thefirststagestartedin1990 vergenceinmonetarypolicies.Itcameinto withtheabolitionofrestrictionsoncapital beingwhenWestGermany,France,Den- movementsintheEEC;thesecondstage mark,theNetherlands,Italy,Belgiumand amendedtheTreatyofRomeunderthe Irelanddecidedin1979tochangetheir MaastrichtTreaty1992tocreatethe exchangeratesonlywithinajointconsul- EuropeanMonetaryInstitute1994to tationprocedure.Theprincipalcompo- provideforcentralbankco-operationand nentsofthesystemaretheECU,the monetarypolicyco-ordination(theInsti- EXCHANGERATEMECHANISMandcreditme- tutewasdissolvedafterthecreationofthe chanisms.Majorcurrencyalignmentshave EuropeanCentralBank1998)andthere takenplaceinSeptemberandNovember wasanirrevocablefixingofexchangerates 1979,MarchandSeptember1981,Febru- oftheparticipatingcurrenciesby1Janu- aryandJune1982,March1983,July1985, ary1999;thethirdstagefrom1999ledto April1986andJanuary1987.Thesizeof theabolitionofnationalcurrenciesof12 realignmentshastendedtoincreaseover countrieswiththeeuroincirculationfrom time:bythe1980stheywereasgreatas10 1January2002. percentperrealignment.Underthesys- Europeanoption(G1) tem,IrelandandItaly,thehighestinfla- AnOPTIONthatcanonlybeexercisedonits tioncountries,havesuffereddeteriorating expirydate. competitivenessandothercountries,parti- cularlyBelgiumandDenmark,haveim- EuropeanRecoveryProgram(O2)see proved.Thesystemisahybridofafixed MarshallPlan ratesystemandamanagedfloat. European Regional Development Fund Priorto1992itcreatedazoneof (R5) exchangeratestabilityinEuropeand A EUROPEAN COMMUNITY fund offering re- contributedtotheconvergenceofthe gional assistance, particularly for infra- economicpoliciesofthemembers.Spec- structure projects, in member countries. ulationforcedthepoundandtheliraout oftheEMSinSeptember1992.Further European Social Charter (I3, J0) speculationinAugust1993requiredthe A treaty of the Council of Europe signed wideningofthepermittedfluctuation in 1961. It sought to protect social and marginto15percentforsixofthe economic human rights. Most of its arti- remainingcurrencies. cles concern employment conditions but it also grants social and medical assistance Seealso:Europeanmonetaryco-operation to resourceless people, the right to social References security and the protection of mothers and Coffey,P.(1984)TheEuropeanMonetary children, and migrant workers. By June System–Past,PresentandFuture, 2001 the Social Charter had been ratified

© 2002 Donald Rutherford byeighteencountriesincludingIceland andthecentralbanksofthefifteenmem- andTurkey;theUKagreedtoimplement berstates. itin1997. eurozone(F3) Europeansystemofaccounts(E0) ThecountriesoftheEUROPEANUNIONwhich Aclassificationofhouseholdexpenditures acceptedtheeuroastheircommoncur- bycategoriesofuse.Itisacoherent rency. frameworkforthepresentationofthe nationalincomeaccountsofthemember eventstudy(C5,G0) countriesoftheEUROPEANCOMMUNITY.The Theanalysisofthestatisticalsignificance principalaccountsare: oftheoccurrenceofaparticulartypeof 1Domesticaccounts event,e.g.astockrepurchaseorfinancial restructuring,forthemarketvalueofa Goodsandservicesaccounts companyinafinancialmarket. Productionaccount Generationofincomeaccount evolutionarygametheory(C7) Distributionofincomeaccount Anapplicationofevolutionarymethodsto Useofincomeaccount gametheory.Throughlearningandevolu- Capitalaccount tionitispossibletoreachanequilibrium Financialaccount. lackinginrationality.Atrialanderror processestablisheswhichstrategyworks 2Restoftheworldaccounts best.Asearchfornewmicrofoundations Currenttransactionsaccount toevolutionarydynamicshasbeenunder- Capitalaccount takentoenablethetheorytobeapplicable Financialaccount. tohumansociety. References References EuropeanSystemofIntegratedEconomic Samuelson,L.(1997)EvolutionaryGames AccountsESA,2ndedn,Luxemburg: andEquilibriumSelection,Londonand StatisticalOfficeoftheEuropeanCom- Cambridge,MA:MITPress. munities,1980. Weibull,J.W.(1995)EvolutionaryGame Theory,LondonandCambridge,MA: EuropeanUnion(F0) MITPress. AcombinationoftheEUROPEANCOMMUNITY, co-ordinationofforeignandsecuritypo- evolutionarytheoryofthefirm(L1,L5) licies,andco-ordinationofjusticeand Astudyofthedeterminantsofthe‘des- interioraffairsestablishedbytheMaas- tiny’offirmswhichrejectstheviewthat trichtTreatyandeffectivefrom1Novem- firmsaremaximizersandassertsthat ber1993.TheCounciloftheEUconsists firms’actionshaveevolvedfromtheir oftheappropriateministersfromeach owntraditions.Innovatorychangeisonly memberstateforthematterunderdiscus- acceptedinacrisis;itisnotpartofalong- sion. termgrowthplan.MARSHALL,withhis biologicalanalogiesforthegrowthofthe EuropeanUnitofAccount(E4) firm,wasafounderofthistheoretical Abasketofthecurrenciesofthemember approach.Theviablefirm,accordingto countriesoftheEUROPEANECONOMICCOMMU- ALCHIAN,hasprofitsgreaterthanare NITY.Eachcurrencyisweightedaccording neededtomaintaincurrentactivities; toitsstandingandamountincirculation. thereforeunderconditionsofUNCERTAINTY, Seealso:ecu managerscannotpredicttheoutcomeof theirdecisions,soluckisquiteimportant. Eurosystem(E5) ThisconsistsoftheEUROPEANCENTRALBANK Seealso:Penrose

© 2002 Donald Rutherford References 2Moregenerally,anyoutputlevelless Alchian,A.(1950)‘Uncertainty,evolution thanthemaximumamounttechnically andeconomictheory’,JournalofPoliti- possible. calEconomy58:211–21. Nelson,R.R.andWinter,S.G.(1982)An Seealso:X-efficiency EvolutionaryTheoryofEconomic excesscapacitytheorem(L1) Change,Cambridge,MA:BelknapPress ThetheoreticaloutcomeofMONOPOLISTIC ofHarvardUniversityPress. COMPETITIONwhichholdsthatprofit-max- exante,expost(E0) imizingfirmschoosealevelofproduction Awidelyuseddistinctioninmacroeco- thatislowerandwithhigheraveragecosts nomics,coinedbyMYRDAL,todistinguish thanunderPERFECTCOMPETITION.Inthe whatisplanned(i.e.exante)fromwhat figure,ATCisAVERAGETOTALCOST,MCis actuallyhappens(i.e.expost).Thesealter- MARGINALCOST,Disdemand,ARisAVER- nativeconceptsareoftenusedindiscus- AGEREVENUE,MRisMARGINALREVENUE,OP sionsofinvestmentandwelfare.If,for istheprofit-maximizingprice,OQ2isthe example,expostinvestmentislessthan profit-maximizingoutputandQ1Q2isthe whatwasplanned,thentheexpectations excesscapacity. oftheinvestorhavenotbeenrealized. References Myrdal,G.(1939)MonetaryEquilibrium, London:WilliamHodge. exantevariables(E0) Measuresofwhatisplannedorintended, e.g.intendedinvestment.Thesehavebeen usedsincetheSTOCKHOLMSCHOOLandKey- nesiansstartedmodernmacroeconomics; increasinglyexantemeasureshavebeen usedtoestimateEXPECTATIONS.Inpractice, surveysofbusinessenterprisesareusedto ascertainintendedlevelsofproduction, investmentandemployment. Seealso:expostvariables excessburdenofatax(H2) TheDEADWEIGHTLOSSfromatax.Thishas Seealso:profitmaximization twomeanings: excess demand (D0) 1Thedeadweightlosssufferedbytax- The amount by which demand exceeds payersinexcessofwhatthegovernment supply at a given price. As excess demand collects. can be positive or negative, it is a useful 2Theamountataxpayerwouldsacrifice way of stating the relationship between inexcessofthetaxesbeingcollectedin demand and supply. When a market is in exchangeortheremovalofalltaxes. equilibrium, excess demand is zero. The Seealso:taxincidence rate of excess demand can be measured as (demand supply)/supply. Markets sub- excesscapacity(D0) ject to maximum price control are usually 1Incompetitivetheory,alevelofoutput characterized by long-term positive excess belowthatlevelofoutputwhichmini- demand which necessitates rationing and mizesaveragetotalcost. encourages the growth of BLACK MARKETS;

© 2002 Donald Rutherford East European countries have provided long needed the support of controls. When many examples of this. exchange controls are in force, BLACK MAR- KETS in currency are tolerated by most excess supply (D0) governments as a means of delaying the Supply less demand at a given price. It can formal announcement of change in the be regarded as negative excess demand. official rate. Seealso:dualexchangerate

exchange cross-rate (F3) The value of one of the world’s leading CURRENCIES against another. The leading ten currencies usually quoted have been the US dollar, sterling, Deutschmark, yen, French franc, Swiss franc, Belgian franc, Dutch guilder, Italian lira and Canadian dollar. These are published daily in leading financial newspapers. This rate can be regarded as the exchange rate between currencies B and C when the exchange rates between A and B and A and C are known already; this cross-rate should be consistent with the other exchange rates.

exchange efficiency (D6) An exchange of goods which makes at least one person better off, without anyone being worse off according to PARETO.

Exchange Equalization Account (E5) The account of the BANK OF ENGLAND exchange (D0) holding UK foreign exchange reserves. 1 The mutual transfer of goods, money or After the UK abandoned the GOLD STAN- something of value between two or DARD from 1932, the establishment of this more parties. account was necessary to provide a me- 2 The sale of one currency to obtain chanism for supporting sterling through another. the sale and purchase of gold and foreign 3 A place for the sale of currencies, currencies: the account sells foreign cur- securities or commodities. rency to buy pounds when there is a desire Seealso:trade to stabilize or improve the sterling ex- change rate. exchange controls (F3) Limitations on the free movement of a exchange rate (F3) national CURRENCY probably first advo- The price of a currency in terms of cated by PLATO. These usually take the another, e.g. how many US dollars can be form of restrictions on the purchases of bought for one pound sterling. Such rates foreign currency and on the export of vary because of changes in the relative capital. The UK had such controls from demand for different countries’ goods and 1939 until 1979 when, helped by North services and because national MONETARY Sea oil revenues, sterling needed no such and FISCAL POLICIES are inconsistent with support. France used exchange controls in each other. Differences in tax rates and in 1981 to defend the franc; the Italian lira interest rates cause capital flows that affect

© 2002 Donald Rutherford acountry’sbalanceofpaymentsand, currency,unlesstherearefrequentrealign- consequently,itsexchangerate.Anover- ments. valuedexchangerateleadstoaCURRENT References ACCOUNTbalanceofpaymentsdeficitand bearishspeculativecapitalmovements;an Giavazzi,F.andSpaventa,L.(1990)The ‘New’EMS,PaperNo.369,London: undervaluedexchangeratecreatesacur- CentreforEconomicPolicyResearch. rentaccountsurplusandaninfluxof capital.Volatileexchangeratesandvola- exchangeratepremium(F3) tileinterestratescoincide. Thedifferencebetweentheforwardex- References changerateandtheexpectedfuturespot exchangerate. Isard,P.(1978)ExchangeRateDetermina- tion:ASurveyofPopularViewsand exchangerateregime(F3) RecentModels,Princeton,NJ:Interna- Thesystemchosenbynationalgovern- tionalFinanceSection,Departmentof mentsforthemutualdeterminationof Economics,PrincetonUniversity. theirexchangerates.Themainchoiceis Stein,J.L.etal.(1997)Fundamentaldeter- minantsofexchangerates,2ndedn, concernedwiththeextenttowhichthere OxfordandNewYork:Clarendon arefixedparitiesbetweendifferentcurren- Press. cies,e.g.undertheBRETTONWOODSsystem Witteveen,H.J.(1982)TheProblemof andundertheEUROPEANMONETARYSYSTEM ExchangeRates,NewYork:Groupof orFLOATINGEXCHANGERATES. Thirty. exchangeratetargetzone(F3) exchangerateagreement(F3) Asofterversionofafixedexchangerate Aforeignexchangehedgingtechnique regimewhichpermitswidebandsforeach requiringonlythenetamountowedat currencyparticipatingprovidedthatthe theendofabankingdaytobepaid. countriesconcernedtakecorrectiveaction Otherwise,purchasesandsalesofafor- whenthevaluesoftheircurrenciescome eigncurrencyatdifferenttimesrequire closetotheirlimits. severaltransactions;thiskindofagree- Seealso:EuropeanMonetarySystem mentrequiresonlyone. References ExchangeRateMechanism(F3) Williamson, J. (1985) The Exchange Rate AcrucialelementoftheEUROPEANMONE- System, Washington, DC: Institute for TARYSYSTEMwhichlinksthevaluesof . participatingEuropeancurrenciesandlim- itstheextentoftheirfluctuationsto2.25 exchange risk (F3) percentagainsttherestinthesystem, The risk of an exchange rate changing and unlessawiderbandhasbeenspecially thereby lowering the value of one’s holding negotiated,e.g.Spain’sandtheUK’s6per of another currency. A MULTINATIONAL COR- cent.Alsoitproducesindicatorsofcur- PORATION, for example, constantly faces the rencydivergenceagainsttheecu,makes risk when doing business in another coun- availableshort-termcredittosupportin- try that the foreign currency it acquires terventioninforeignexchangemarketson there will fall in value. behalfofcurrencieswhichdivergetoofar exchange standpoint epistemology (D4) and,inextremecases,realignscurrencies An approach to studying economics fa- atnewEXCHANGECROSS-RATES.TheERM vouring market and market policy mea- reducesspeculativegainsfromchangesin sures. exchangeratemovementsandconcen- tratesthemindsofinvestorsontheinter- Exchequer (E5) estrateofferedfordepositsinaparticular The UK government’s account held at the

© 2002 Donald Rutherford BankofEngland.Holdingthisaccountis recentlyannouncedandpayableatthat oneoftheactivitiesoftheBankof time. EnglandasaCENTRALBANK. executiveleasing(G2) ExchequerWhite(E5) Theofferingofmanagementservicesby ThedailyinternalBankofEnglandstate- experiencedmid-careermanagersforshort mentwhichshowsitscashneedsby periods,usuallyforlessthanayear. detailingflowsintoandoutofthebank, Leasingisattractivetocompanieswhena chieflyasaconsequenceofthegovern- particulartypeofskillisneededeitherto ment’sreceiptoftaxpaymentsanddis- copewithanunusualtask,e.g.organizing bursementofgovernmentalexpenditures. amerger,orduringaninterregnumuntila Ifthebankisshort,itwillbuybills;if permanentexecutiveisappointed. thereisexcesscashinthebankingsystem, itwillsellthem. executivestockoption(J3,M1) Partoftheremunerationofamanager exciseduty(H2) grantingtherighttopurchasestocks/ Anindirecttaxleviedonaspecificgood, sharesatapreferentialprice.Thisformof especiallypetrol,alcoholortobacco.Du- incentiverewardsexecutiveswhoincrease tiesofthiskindhavebeenanimportant themarketvalueofacompany. sourceofgovernmentrevenueinsome countries,e.g.theUSA,forlongerthan exerciseprice(G1)seeputprice INCOMETAXES.GiventheINELASTICITYof demandforthesegoods,theyprovidea exit–voice(D0) reliablesourceofrevenue.Also,theduties Adistinctionusedtoclassifythephysical havebeenimposedasTARIFFStoprotect orverbalmethodsindividualsuseto domesticindustriesfromthecompetition revealtheirpreferences.‘Voice’cantake ofimports. theformofvoting(asindemocratic politics)orcomplaints(asundergrievance Seealso:directandindirecttaxation procedures);‘exit’ismovementawayfrom alessdesiredsituation,e.g.aparticular excisetax(H2)seeexciseduty employment,regionorcountry.‘Exit– exclusionprinciple(D0) voice’canbeappliedtocollectiveor AmajorcharacteristicofaPRIVATEGOOD: individualchoice. oneperson’sconsumptionexcludesothers’ Seealso:Tiebouthypothesis consumption,e.g.myconsumptionofa pieceoffruitexcludesyourconsumption References ofit.PUBLICGOODSarenon-exclusive,e.g. Hirschman, A.O. (1970) Exit, Voice and myconsumptionofthebenefitofthe Loyalty: Responses to Decline in Firms, nation’sarmedservicesdoesnotreduce Organizations and States, Cambridge yourconsumption. MA: Harvard University Press. exclusivedealing(L4) exogenous expectations (E0) ARESTRICTIVEPRACTICEinamarketwhereby EXPECTATIONS that are given and are thus distributorsagreenottotradewithfirms excluded from an economic model or whicharenotpartytoanagreement.In theory. Few economists would now take returnforloyaltyarebateonpurchasesis this view of expectations. oftengiven. exogenous growth model (O4) exdividend(G2) A process of ECONOMIC GROWTH driven by AnORDINARYSHAREwhichdoesnotbear an outside factor, especially technical theentitlementtoreceivethedividend change or foreign trade.

© 2002 Donald Rutherford exogenousvariable(C1,C6) expenditurefunction(E2) Aneconomicvariablewhosevaluesare Anequationusedtodescribethecon- notdeterminedbytheothervariablesof sumptionpossibilitiesforaconsumerata aneconomicmodel. givensetofprices. Seealso:endogenousvariable expendituretax(H2) expectations(D0,E0) Ataxbasedontheamountactuallyspent Theviewsofhouseholdsorfirmsor byaconsumer.Proponentsofsuchtaxa- governmentsaboutthefuture.Theyare tionarguethatthetaxmightbeeasierto basedeitheronthesimpleviewthatthe collectthancapitalorincometaxesand futurewillbelikethepastoronamore thatthegrowthofpersonalsavings(which sophisticatedviewthatthefuturewillbe wouldescapethetax)isencouraged.There partlylikethepastandpartlydifferent havebeenmanysupportersofthistypeof becauseofresponsestopreviousforecast- taxation,includingJohnStuartMILL,MAR- ingerrors.Thisisnowthedominant SHALL,IrvingFISHER,KALDORandthe themeofmuchofmacroeconomics.The MEADECommittee. studyofexpectationshasbecomemuch Seealso:doubletaxationofsavings moreelaboratethanitwasinthehandsof References MYRDALandKEYNES. Kaldor,N.(1955)AnExpenditureTax, Seealso:adaptiveexpectations;exante London:Allen&Unwin. variables;exogenousexpectations;extra- polativeexpectations;Keynesexpecta- expensepreference(M1) tions;rationalexpectations;regressive Amanager’sweightedpreferencefora expectations particulartypeofcost.Asmanagersoften preferanexpansionofstaff(asameansof expectedmonetaryvalue(E4) beinginchargeofalargerestablishment), Theproductoftheprobabilityoftheith theywillpreferextraexpenditureonstaff outcomeandthevalueoftheithoutcome: tootherformsofexpenditure. Xn EMV= p :X i i expenseratio(M2)seecostratio i¼1 expectedutility(D0) expensiveeasymoney(E4,G2) Theproductoftheprobabilityoftheith OKUNregardedthisascreditextensively outcomeandtheutilityoftheithout- available,andthereforeeasy,butofferedat come: higherinterestratesandthusexpensive.

Xn experiencegood(D0) : EU= pi Ui AGOODusuallypurchasedfrequentlybya i¼1 consumerwhoacquiresinformationabout Seealso:Bernoullihypothesis;prospect itthroughtherepeatpurchases. theory Seealso:searchgood References Savage,L.J.(1954)FoundationsofStatis- (C9) tics,NewYork:Wiley. The study of simulated markets in order to test microeconomic theory. This attempt expeditedfundsavailability(G2) to give economic theory firm foundations Thepromptavailabilityofcheckdeposits has always been methodologically contro- byUScommercialbanks. versial.

© 2002 Donald Rutherford References firmswillnotbediscouragedfromexport- Hey,J.(1991)ExperimentsinEconomics, ingbytheriskofbuyers’defaulting. Oxford:Blackwell. Exportsnetofimportsareincludedinthe Kagel,J.andRoth,A.(eds)(1995)The GROSSDOMESTICPRODUCT. HandbookofExperimentalEconomics, Princeton,NJ:PrincetonUniversity Seealso:import Press. ExportImportBank(G2) expertsystem(M1) Washingtonbanksetupin1934asan Computersoftwarethatreproducesthe agencyoftheUSfederalgovernmentto expertiseofaspecialistbyprovidingaset facilitateandfinanceexports,e.g.byissu- ofrulesandaknowledgebasesothata ingguarantees,directloansandinsurance userisaskedasetofquestionsbeforethe programmestominimizebuyers’default. computerprogramgivesadvice.Themany applicationsofthesesystemsincludecon- exportpromotion(F3) trollingproductionplantsandinsurance Asetofmeasures,usuallytakenbya underwriting. nationalgovernment,tosubsidizethe marketingoverseasofdomesticallypro- explicitcontract(D0) ducedgoodsandtoguaranteeforeign Anagreementwhosetermsarestated paymentsforthem. clearlybytheparties.Thisisusuallyin writingandlegallyenforceable. exportrequirement(F2) Aruleimposedbyahostgovernmenton Seealso:implicitcontracttheory foreigninvestorstoexportaminimum explicitcost(D0) percentageoftheiroutput.Thisisapolicy Actualmoneyexpenditureincurredto responsetothepracticeofaMULTINA- obtainafactorofproductionoragood TIONALcompanyofdivertingtoother orservice. marketstheoutputofadomesticproducer ithastakenovertothedetrimentofthe Seealso:implicitcost hostcountry’spatternoftrade. exploitation(J7,Q2) exportsubsidy(F1,H2) 1Usingormisusinganaturalresource. Areductioninthecostofexportsbrought Extractionofmineralsconstitutesuse; aboutbyagovernmentgrant.Therecan misusearisesfromcausinglong-term bereductionsinthecostsoflabour,of damagetotheenvironment. capitalorofexportfinancing,aswellas 2Treatinglabourunjustlybyeitherpay- morefavourabletaxtreatment.SMITHre- ingitlessthanitsMARGINALPRODUCTor ferredtosuchsubsidiesas‘bounties’. extractingSURPLUSVALUEfromit. expostvariables(E0) export(F3) Variableswhichshowactualeconomic Thesaletoaresidentofanothercountry outcomes,e.g.theamountoffixedinvest- ofadomesticallyproducedgoodorser- mentwhichhasbeenundertaken.Inthe vice.Unlessaneconomyisself-sufficient, 1930stherewasmuchdiscussioninmacro- itwillbenecessaryforittoexportinorder economicsofhowexantesavingsand tobeabletopayfortheimportsde- investmentthatweredifferentinamount mandedbyitsresidents.Thevolumeofa becameequalexpost.Onepossibilitywas country’sexportshasmanydeterminants, fortheretobesavingateachroundof includingtheexchangerate,marketing incomegeneratedfromanexanteinvest- methods,deliverytimes,productdesign mentexcessoverexantesaving. andgovernmentsubsidization,especially theguaranteeofexportfinancesothat Seealso:exantevariables

© 2002 Donald Rutherford extendedequilibrium(D5) 2Thereliabilityofacountryinservicing AnexpansionoftheconceptofGENERAL itsexternaldebttobanksandother EQUILIBRIUMtoincludethenaturalenviron- countries. ment. externaldebt(F4,H6) extendedfundfacility(F3) Thedebtacountryowestoforeignbanks AtypeofINTERNATIONALMONETARYFUND andgovernmentswhichaccumulates loanintroducedin1974whichisgranted throughitspersistentBALANCEOFPAYMENTS toacountrywhichagreestoaneconomic deficits.Anattempttoachieveeconomic adjustmentprogrammeoverathree-year growthinashorttimeperiodisoftenthe period.Repaymentbeginsfourandahalf causeofsuchindebtedness.Inextreme yearsaftertheloanisgrantedandis casesofforeignindebtedness,national extendedoverasix-yearperiod.Thefacil- governmentswillattempttoreschedule itywasusedtotheextentofabout$100 theirdebtsand,inacrisis,applytothe millionannuallyinthe1970s,andbythe INTERNATIONALMONETARYFUNDforloans. mid-1980shadrisentoover$2billionper year.Itcanbeusedinconjunctionwitha Seealso:internaldebt SUPPLEMENTARYFINANCINGFACILITY. externaleconomyofscale(D0) externalaccount(F4,G2) AreductionintheAVERAGECOSTSofafirm 1TheBALANCEOFPAYMENTSaccountsofa asaresultoftheexpansionofthewhole nation. industryofwhichitispart.Amajor 2Abankaccountofapersonwhoisnot exampleoftheseeconomiesoccursinthe aresidentofthecountry. caseofthetrainingoflabour:thegeneral expansionofanindustryrequiresmore externalbalance(F4) skilledlabourtoprovideapoolofsuitable Thestateofacountry’sBALANCEOFPAY- labourforotherfirms. MENTSsuchthatitisneitherindeficitnor insurplus.Inaccountingterms,thebal- Seealso:internaleconomyofscale anceofpaymentsalwaysbalancesbecause externality (D0, Q0) oftheprinciplesofdouble-entrybook- The benefit or cost to society or another keeping.However,ineconomicterms,for person of a private action (e.g. production acountrytohaveanexternalbalance or consumption); a third-party effect. theremustbeanequalitybetweenthe Since PIGOU’s discussion of the distinction flowsofpaymentsandreceiptsbetween between SOCIAL AND PRIVATE COST, it has been thatcountryandtherestoftheworldina a central concept of WELFARE ECONOMICS. giventimeperiod. ‘Internalizing an externality’, in the case of Seealso:internalbalance an external cost, can be achieved by a government levying taxes equal to the References difference between a private cost and a Meade,J.E.(1951)TheTheoryofInterna- social cost. tionalEconomicPolicy,Vol.I,The BalanceofPayments,ch.10,London external labour market (J4) andNewYork:OxfordUniversityPress. A market consisting of competing employ- Swan,T.W.(1963)‘Longerrunproblemsof ers and competing workers. Workers can thebalanceofpayments’,inH.W.Arndt and will enter firms at different pay and andW.M.Corden(eds)TheAustralian Economy,Melbourne:F.W.Cheshire. status levels but often with lower remu- neration than in oligopolistic firms with externalcreditrating(F4,G2) INTERNAL LABOUR MARKETS. Much of the 1Theratingaccordedtoabankofits external labour market is coterminous exposuretorisk. with the SECONDARY LABOUR MARKET.

© 2002 Donald Rutherford externalshock(E6) cludingtheUSA,propertywasheldinthis Alargeunanticipatedchangeinworld waybyoccupationratherthanestablished economicconditionswhichimpactsupon title.Alsoknownasinformalownership. aparticularnationaleconomy.Shockscan extrapolativeexpectations(D0,E0) takemanyforms,includingashiftinthe EXPECTATIONSbasedonthepastlevelofan TERMSOFTRADE,aslowdowninthegrowth economicvariableandwhetherthatvari- ofworldexportdemandandanincrease ableisincreasingordecreasinginvalue. intheinterestratessetbyworldfinancial markets.However,themajorshocksofthe References 1970s,particularlytheincreaseintheprice Metzler,L.A.(1941)‘Thenatureand ofoil,hadanunevenimpactonthe stabilityofinventorycycles’,Reviewof prosperityofparticularnationswithpro- EconomicsandStatistics23:113–29. ducingcountrieswelcomingtheshocks extremevaluetheory(C8) andconsumershavingtomakemajor Anaccountoftheprobabilitiesassociated adjustments. withextremeandrareevents.Itisusedin Seealso:structuraladjustmentpolicy; financialeconomicstomodelthemaxima supply-sideshocks andminimaofaseries.Inferenceshaveto bemadeaboutthelevelsofaprocessfor extralegalproperty(P0) whichthereisnodata.TheMARKOVCHAIN Assets,especiallyhouses,whichlacka MODELhasbeenusedtoexamineextremes. legaltitlebecauseoftheabsenceofa systemofPROPERTYRIGHTSinthatcountry. extremum(C1,C6) Oftenthisoccursindevelopingcountries Anextremevalue,i.e.amaximumora withtheconsequencethatthedefacto minimum. ownerscannotusetheirpropertyascol- Seealso:optimizationproblem lateralforloans.Inmanycountries,in-

© 2002 Donald Rutherford F

Fabian Society (P2) include a calculation of the amount of Founded in 1883 by Edith Nesbit and HUMAN CAPITAL it has and the replace- Hubert Bland to promote socialism. It ment cost value of its physical capital. contributed to the ideological development 2 The ratio of one factor to another. This of the UK Labour Party and had as its indicates the extent to which the coun- earliest members Beatrice and Sidney try’s production is predominantly CAPI- Webb and George Bernard Shaw. In its TAL INTENSIVE or LABOUR INTENSIVE. many pamphlets on economic and related HECKSCHER and OHLIN made factor en- issues it has advocated gradualist, rather dowment central to their international than revolutionary, socialism. trade theory by examining the extent to which a country’s trade is a reflection of factor-augmenting technical progress the scarcity or abundance of particular (O2) factors of production. Technical progress arising from an in- crease in factor PRODUCTIVITY in the ab- Seealso:stockandflowconcepts sence of an increase in the stock of capital factorial terms of trade (F1) or the size of the labour force. The NET BARTER TERMS OF TRADE multiplied factor cost (D0) by the PRODUCTIVITY change in a country’s export industries (single factorial terms) or 1 The cost of employing a FACTOR OF PRO- by the ratio of the index of productivity DUCTION. change of the country’s export industries 2 A method of valuing the NATIONAL IN- to the corresponding index for the foreign COME. This valuation at factor cost excludes indirect taxes, is net of sub- export industries producing its imports sidies and indicates what factors of (double factorial terms). This modification production are actually received. of the net barter terms of trade is made to show the welfare effects of the terms of factor endowment (Q0) trade, because an increase in productivity, 1 Quantities of land, labour, capital and for example, which worsens a country’s entrepreneurs owned by a particular terms of trade indicates that it is sharing country. This uses a stock approach to its productivity gain with another country. consider the total WEALTH of a country. Seealso:termsoftrade The crudest measures of the size of a country would be in terms of its land factor income (D3) area, population and labour force; more Part of the national product distributed to elaborate estimates of its wealth would a particular factor of production. The

© 2002 Donald Rutherford factor labour receives wages and salaries, the PRODUCTIVITY of one factor of produc- the factor land receives rent, and capital tion requires holding other factors’ inputs earns interest and profits. constant – a difficult task, especially in the case of CAPITAL. factoring (G2) The sale at a discount of debts due to a factor tax (H2) firm. The factor purchasing these rights is A tax levied on a particular income-earn- entitled to collect the amount due. Factor- ing FACTOR OF PRODUCTION. Taxes on capital, ing can be used to increase the short-term taxes on residential and commercial prop- funds available to a business enterprise or erty and taxes on employment are impor- to finance exporting. tant examples. Seealso:billofexchange fad (D1, G0) 1 A speculative BUBBLE. factor market (D4) 2 A demand arising from a passing fash- A market for a FACTOR OF PRODUCTION. The ion which causes the price of a good or most prominent of these markets are the service to be temporarily much higher labour market and the capital market. In than its intrinsic value. such markets the buyers are firms and the sellers are households – a reversal of the fair division problem (C7) roles of firms and households in PRODUCT The division of a set of goods among a set MARKETS. The principal task of such mar- of players to obtain an equitable distribu- kets is to arrive at a MARKET CLEARING PRICE. tion such that no other distribution would Factor markets are linked to product improve the welfare of one player without markets because the demand for a factor reducing the welfare of another. of production is derived from the demand for its product. fair price (D4) 1 A benchmark export price used to factor of production (D0) ascertain whether there has been DUMP- An input to a productive process produ- ING. It reflects full costs, including cing a good or service. Before the eight- transport costs. eenth century it was common to classify 2 A product price which achieves a mini- all factors as either land or labour; later, mum return for labour and capital. CAPITAL and the ENTREPRENEUR were consid- 3 A competitive price fixed by a market ered as separate factors of production. In and not by administrators. many modern economics models, only 4 A price in a market where neither produ- labour and capital are included as factors cers nor consumers have excessive power. of production. Seealso:justprice factor price equalization theorem (F1) This asserts that free trade in final goods fair trading (F1, M3) brings about the equalization of factor 1 Genuine free trade in which there are prices, especially of labour and capital, no attempts to have hidden subsidies to throughout the world. export industries and protection of do- mestic industries to prevent imports, References e.g. by imposing rigorous quality con- Lerner, A.P. (1952) ‘Factor prices and in- trols. Without fair trading in the EU, the ternational trade’, Economica 19: 1–15. Single Market will be impossible. 2 Selling under a system of free competi- factor productivity (D2) tion. Output per unit of a factor input, e.g. output per person employed. To measure Seealso:dumping

© 2002 Donald Rutherford fair value (G1) through investment abroad. Thomas De In stock market trading, a suggested for- Quincey (1785–1859) in his Logic of Poli- mula for fair value is tical Economy (1944) argued that the tendency of the rate of profit is to fluc- FV = S +[I -(1- D)] tuate. where FV is fair value, S is the STANDARD false trading (D4) AND POOR 500 stock index, I is the interest to Making exchanges at non-equilibrium a stockbroker to borrow in order to buy prices in an attempt to find the MARKET all the stocks in the index, and D is the CLEARING PRICE. amount of dividends from all the stocks in the index owned. Fair value is thus the Family Expenditure Survey (C8, D1) adjusted value of the S&P index and was UK sample survey of the characteristics of devised by Hans Stoll of Vanderbilt Uni- households, including earnings, education, versity. unemployment and consumption. This survey, published annually by the UK Fair Wages Resolution (J3) Department of Employment, reports on: A resolution of the UK House of Com- mons, first passed in 1891 (and followed . Household characteristics by many local authorities), which stipu- . Expenditure lated that government contractors should . Income not employ workers under terms and . Regional characteristics conditions less favourable than those ne- . Regional expenditure gotiated under collective bargaining for . Regional income. that trade or industry. In recent years many of the cases which raised wages Farm Credit System (H2, Q1) concerned cleaning firms. The Conserva- US federation of thirty-seven banks con- tive government, consistent with its belief sisting of 387 lending associations owned that the setting of minimum wages under by the farmers who borrow from them; wages councils contributed to unemploy- established by US Congress in 1916–33. ment, successfully repealed the resolution There are three banks in each of the in 1983. twelve districts of the FEDERAL RESERVE SYS- TEM and another bank specializing in the (G1) falling knife sale of bonds to Wall Street institutions. A stock exchange security experiencing a The purpose of the system is to provide rapid fall in price. credit to farmers and ranchers during their Seealso:deadcatbounce ‘growing season’. Before the establishment of the Farm Credit System, it was hard for falling rate of profit (D3, O1) farmers to borrow because money was The tendency of the rate of profit to fall. very scarce in most rural areas. The SMITH attributed this to a competition of federal government’s guarantee of the capitals leading to an increase in the WAGE farm credit system’s bonds gives the banks FUND and in real wages with the conse- of the farm credit system ‘agency status’ quence that profit rates declined. RICARDO on Wall Street. The excessive borrowing noted an inverse relationship between by farmers when farm land values were wages and profits so that when population high in the early 1970s and 1980s led to expanded and food prices and wages rose the creation of large farm debts. profits fell. MARX predicted that falling profits in a domestic market would encou- References rage capitalists to seek higher profits Gifford Hoag, W. (1976) The Farm Credit

© 2002 Donald Rutherford System, Danville, IL: Interstate Printers levels of government, (2) the extent to and Publishers. which a federal government imposes limits on the power of lower levels of govern- fast-track trade procedure (F1) ment to borrow and (3) the degree of A procedure of the US Congress to independence of a federal budget from legislate for trade agreements at the re- those of sub-federal governments. quest of the president, who promised to keep to the agreed procedure. Seealso:USfederalfinance fat cat (M1, J3) References An executive with large total remuneration. Hughes, G.A. (1987) ‘Fiscal federalism in the UK’, Oxford Review of Economic featherbedding (J2) Policy 3: 1–23. Work practices advocating low labour Pechman, J.A. (1977) Federal Tax Policy, productivity methods to maintain employ- 3rd edn, Washington, DC: Brookings ment. These include payment for time Institution. when no work is performed. federal funds (E5) Seealso:demarcation The reserve deposits of banks and other financial institutions of the USA held in a Federal Cartel Office (L4) FEDERAL RESERVE BANK. Since these deposits US agency engaged in monitoring mer- earn no interest, banks want to minimize gers, thus making a major contribution to the size of their holdings and increase their the running of US ANTITRUST policy. investment in assets, e.g. loans, which will Federal Deposit Insurance Corporation increase their profitability. (G2) federal funds market (G1) US regulatory body founded in 1933 to US money market in which commercial insure depositors against bank failures and banks sell short-term financial assets. to take on the role of chartering national COMMERCIAL BANKS. It is largely financed by federal funds rate (E5) assessments on the deposits held by in- The rate at which the member banks of sured national and state banks. When an the FEDERAL RESERVE SYSTEM trade reserves insured bank fails, each depositor can with each other. Banks with more reserves claim up to $100,000 from the FDIC. To than required lend their surplus to other protect depositors, the FDIC can also banks with a deficiency. Although this rate facilitate bank mergers through loans and is determined by the demand for and the purchase of assets from insured banks. supply of excess reserves in the banking Its three directors include the COMPTROLLER system, the Federal Reserve can influence OF THE CURRENCY. Critics of the principle of it. deposit insurance assert that it encourages Seealso:primerateofinterest banks to have imprudent lending policies. Federal Home Loan Board (G2) federal finance (H7) US independent federal agency established Public finance arrangements between cen- in 1932 to provide a credit reserve for tral and state governments in a country member savings institutions specializing in with a federal constitution, e.g. the USA, home mortgage lending, i.e. savings and Germany, Canada, Australia and Switzer- loan associations, co-operative banks, land. There can be REVENUE SHARING of homestead associations and insurance money raised from taxation or different companies. types of taxation at each level of govern- ment. Federal finance systems vary in (1) Seealso:FederalSavingsandLoanIn- the degree of fiscal autonomy of lower suranceCorporation

© 2002 Donald Rutherford Federal Open Market Committee (E5) Council. The seven governors are ap- A committee of the US FEDERAL RESERVE pointed by the US president, with US SYSTEM which sets the policy for the use of Senate approval, and serve for fourteen the principal instrument of US monetary years: they appoint the directors of the policy, OPEN MARKET OPERATIONS. The New twelve district banks, fix RESERVE and MAR- York Federal Reserve Bank executes the GIN requirements and determine DISCOUNT policy. The committee consists of seven of RATES and major banking regulations. The the board’s governors plus five of the principal tasks of the district banks are to presidents of the regional Federal Reserve supervise member banks in their respective Banks, one of whom is always the Pre- regions, to provide cheque collection ser- sident of the Federal Reserve Bank of New vices, to supply coin and currency, to lend York. It was given its statutory authority to member banks at the discount rate and under the BANKING ACT 1933 but it had to act as the fiscal agent of the US existed as an informal investment commit- Treasury, collecting taxes, marketing and tee of the Federal Reserve Banks from redeeming US Treasury securities and 1922. During and after the Second World paying interest on them. Fewer than 60 War until 1952, the committee had a per cent of US commercial banks have policy of maintaining interest rates at low membership of the Federal Reserve: if levels, whilst in the 1970s, a policy of they do, they have the advantages of attempting to achieve target rates of cheaper banking services but the disadvan- growth for monetary aggregates. tage of losing profits through having to meet tougher reserve requirements. Federal Reserve Bank (E5) see Federal The changing monetary policies of the Reserve System Federal Reserve reflect the dominant eco- nomic policy thinking of the decades of its Federal Reserve Note (E5) history. The Roosevelt and Truman Ad- US financial instrument issued by the ministrations of the 1930s and 1940s gave Federal Reserve Banks which is legal it the task of maintaining FULL EMPLOYMENT tender and used to be backed by gold or and pegging interest rates at a low level. silver. It is the major form of US currency. The Reagan Administration of the 1980s Federal Reserve System (E5) asked it to consider MONETARY AGGREGATES The US banking system established in as its principal targets. 1913 to execute the functions of a CENTRAL References BANK for the USA. The original aims of Beckhart, B.H. (1972) Federal Reserve the system were to give the country an System, New York: American Institute elastic currency, to provide facilities for of Banking. DISCOUNTING COMMERCIAL PAPER and to im- Moore, C.H. (1990) The Federal Reserve prove the supervision of banking. Heading System: A History of the First 75 Years, the system is a Board of Governors in Jefferson, NC: McFarland. control of twelve district reserve banks with banking responsibility for a region Federal Savings and Loan Insurance of the USA. District 1 is the Federal Corporation (G2) Reserve Bank of Boston, District 2 is the Founded in 1934 to insure shareholders in Federal Reserve Bank of New York and federal savings and loan associations District 12 the Federal Reserve Bank of (THRIFTS). Its overseer is the FEDERAL HOME San Francisco. Member banks are below LOAN BANK BOARD. It insures savings up to the reserve banks in this pyramid of $100,000 in amount and is financed by authority with the Board of Governors as the premiums paid by insured financial its apex. There are also a FEDERAL OPEN institutions and by interest received on its MARKET COMMITTEE and a Federal Advisory own investments. It is also authorized to

© 2002 Donald Rutherford borrow from the US Treasury. By 1987 it Seealso:utilitarianism had run out of funds to reimburse deposi- female economists (B1, B2) tors and needed to be recapitalized by the In the period of CLASSICAL ECONOMICS Jane savings bank industry. The higher deposit MARCET, author of Conversations on Politi- insurance premiums charged by the Fed- cal Economy (1816), Harriet MARTINEAU, eral Saving and Loan Insurance Corpora- author of the bestselling Illustrations of tion caused many thrifts to change to the Political Economy (issued monthly in FEDERAL DEPOSIT INSURANCE CORPORATION 1832–4), and Harriet Taylor, later to be scheme. the wife of John Stuart MILL, were well Seealso:ResolutionTrustCorporation known. University courses were opened to women in the late nineteenth century and Federal Trade Commission (L5) Mary PALEY, who married Alfred MAR- US federal commission established in 1914 SHALL, was one of the first to teach to maintain competitive enterprise in the economics at Cambridge. In the twentieth USA and formulate competition policy. It century the important works of Rosa LUX- seeks to prevent general trade restraints EMBURG, Joan ROBINSON, Barbara WOOTTON, and price discrimination and to ensure Anna SCHWARTZ, Edith PENROSE, Margaret accurate credit cost disclosure. The com- REID, Phyllis DEANE and Anne O. KRUEGER mission enforces its judgements through have killed the myth that economics is an voluntary co-operation with the offending exclusively male subject. parties or through litigation. (D1) Seealso:antitrust The economic analysis of women’s issues, Federal Trade Commission Act 1914 especially the economics of the family, (L5) participation in the labour market and This federal statute of the USA both welfare benefits. It is usually assumed that established the FEDERAL TRADE COMMISSION women are oppressed according to INTER- as an independent agency and gave it PERSONAL UTILITY COMPARISONS and ought to authority to investigate and declare illegal be compensated. The concepts of scarcity, ‘unfair’ and ‘predatory’ competitive prac- selfishness and competition are the main tices. ideas that feminist economists seek to challenge. Fedfunds(E5)seefederalfunds See also: female economists Feldstein, Martin, 1939– (B3) feudalism (N4) US economist who is an authority on The hierarchical medieval system of power public finance and welfare policies. He and production in European countries was educated at Harvard and Oxford with the monarch at the top and serfs tied Universities, returning to the former to be to the land at the bottom. More recently professor of economics from 1967. His the term has been loosely used to describe quantitative work on fiscal programmes private agricultural estates in Latin Amer- has shown their effect on employment ica and Japanese industrial companies, and investment and interaction with with varying degrees of justification. macroeconomic policy. He became presi- dent of the influential NATIONAL BUREAU FOR References ECONOMIC RESEARCH in 1977. Strayer, J.R. (1965) Feudalism, New York: Van Nostrand Reinhold. felicific calculus (D0) BENTHAM’s method of judging the worth of FF curve (F4) an action by calculating the likely pleasure A curve showing the combinations of or pain which would result. national income and the rate of interest

© 2002 Donald Rutherford forwhichthetradebalanceiszero.Itis planningforaparticularsectorextendsto usuallypositivelyslopedbutwithfull planningbothfortheindustryconcerned internationalcapitalmobilityitbecomes andfortheindustrieslinkedtoit. horizontal. Seealso:linkage Seealso:Mundell–Flemingmodel filtering(R2) Thedowngradingofresidentialproperty, eitherbysplittingitintosmallerunits affordabletolowerincomegroupsorby themovementofmoreprosperousresi- dentstooutersuburbs.Urbaneconomists usethistoexplainthecreationofinner cityslums.Chicagoisamajorexampleof thisprocess. finaldemand(R2) Thedemandforgoodsandservicesbythe ultimateconsumers,domesticandforeign households. finalgood(D0) Agooddirectlyusedbyitsultimate consumer,unlikeanINTERMEDIATEGOOD. Thedistinctionbetweenfinalandinter- fiatmoney(E5) mediategoodsiscrucialtotheconstruc- Anythingdeclaredtobeacceptableas tionofanINPUT–OUTPUTtable. MONEYbyaCENTRALBANKorfinance ministryinchargeofthecurrency.Itis finalincome(E2) thisdeclaration,ratherthantheintrinsic Theamountofdisposableincomeavail- valueofthemoneyasagood(asisthe abletoahouseholdforexpenditureand casewithgoldandsilvercoinage),which saving.Itismeasuredasgrossearnings givesitvalue.Fiatmoneymostlytakesthe minustaxationandsocialsecuritycontri- formofbanknotes. butionsplushousingbenefitsandtrans- fers. Seealso:tokenmoney finalofferarbitration(J5)seependulum fiduciaryissue(E5) arbitration Aninconvertibleissueofbanknotesnot backedbygold:asthenamesuggests, final salary pension (J3) thesenotesareissuedinfaith.Inthe A retirement income calculated according nineteenthcenturywhenbanknotescon- to a formula based on a person’s final stitutedalargerproportionoftheMONEY employment salary and years of service. SUPPLYthannow,controllingthesizeofthe financeconstraint(E4)seecash-in- fiduciaryissuewasimportant;thisisno advanceconstraint longerso. financial accounting (M4) Seealso:BankCharterAct1844;fiat The recording of the business transactions money of a firm in a manner ordered by the filie`reconcept(D2,L0) legislation of the country of domicile of AFrenchtermforverticallinesofproduc- that firm. The main elements of it are the tionintimatelylinkedtogether.Whenap- construction of a balance sheet to measure pliedtoindustrialplanning,itmeansthat the assets and liabilities of a firm on a

© 2002 Donald Rutherford particular day, and the construction of a THRIFTS have increasingly followed the profit and loss account to show revenue, practice of COMMERCIAL BANKS by diversify- expenditure and profit over a period of ing into new areas of financial services, time, usually three, six or twelve months. aiming to offer customers a wide range of financial products and services. By becom- Seealso:accounting;managementaccou- ing conglomerates they have become ex- nting posed to risks of a kind they have not financial architecture (F3) been used to, and this, together with the The framework and set of measures, in- increased number of participants in so cluding EXCHANGE RATE REGIMES, in which many financial markets, has threatened national ECONOMIES conduct their activities. profit margins. This architecture is constructed with a References view to avoiding currency crises. The Benston, G. (ed.) (1983) Financial Services, WORLD BANK has devised codes on corpo- Englewood Cliffs, NJ: Prentice Hall. rate governance, financial standards and accounting. financial contagion (G2) financial asset (G1) The spread of the consequences of shocks A piece of paper entitling its holder to affecting only a few financial institutions interest or dividends. In the past the major to the rest of the financial sector and the types of financial asset were stocks and wider economy. shares of governments and companies. References Recent innovations in financial markets Allan, F. and Gale, D. (2000) ‘Financial have produced more sophisticated versions contagion’, Journal of Political Economy of these, including a variety of types of 108: 1–33. equity. financial crisis (G1, G2) financial capital (G1) The simultaneous collapse of related fi- The money invested in a business to nancial institutions brought about by the establish and extend it. In the case of a attempts of investors, speculators, lenders company or corporation it can take var- and depositors to liquidate their assets. ious forms, including fixed interest DEBEN- This liquidation occurs because of a TURES, PREFERENCE SHARES and ORDINARY change from optimistic to pessimistic EX- SHARES. PECTATIONS. An exogenous event such as a financial centre (G2) major war or a natural disaster can A cluster of different financial institutions destabilize markets and create a crisis. A at one geographical location. The growth speculative investment boom with the of population and business encouraged promotion of many dubious schemes and banking, insurance and other types of OVERTRADING are also common causes of financing. The large amounts of capital crises. These crises can occur within one required to conduct these institutions have economy or in several which are inter- inevitably led to mergers within the finan- linked, as happened in 1929. The role of a cial sector of the same or related types of CENTRAL BANK in restoring liquidity and institution, as well as the disproportionate general business confidence is crucial. growth of cities such as New York, Lon- Seealso:bubble don and Tokyo as financial centres. References financial conglomerate (G2) Altman, E.I. and Sametz, A.W. (eds) A bank or other depository institution (1977) Financial Crises: Institutions and offering a wide range of lending and credit Markets in a Fragile Environment,New facilities. UK BUILDING SOCIETIES and US York: Wiley.

© 2002 Donald Rutherford Bordo, M. (1991) Financial Crises, Alder- financial investment (G1) shot: Edward Elgar. The purchase of financial assets, e.g. Galbraith, J.K. (1955) The Great Crash, stocks and shares. As most of the financial Boston, MA: Houghton Mifflin. assets traded represent claims to past Kindleberger, C.P. (1978) Manias, Panics investment in fixed capital and inventories, and Crashes, London: Macmillan; New York: Basic Books. financial investment is different from ‘IN- Kindleberger, C.P. and Laffargue, J.P. (eds) VESTMENT’. (1982) Financial Crises: Theory, History (G0) and Policy, Cambridge: Cambridge Uni- financial journalism versity Press. The specialized reporting of financial and economic news. It had its origins in the financial deepening (G2) reporting of prices in Antwerp and Venice An increase in the ratio of financial assets in the sixteenth century and in Lloyd’s to REAL ASSETS. This will depend on the List, founded in 1734. Newspaper articles number and range of financial institutions on financial matters probably began in and household savings. Great Britain, as London was the first major financial centre. Thomas Massa financial economy (P1) Alsager became the first financial editor An ECONOMY using a variety of financial of The Times in 1817, although the Weekly assets and services, other than money, for Register of Baltimore was a pioneer of US the purposes of exchange and storing business journalism from 1811. Early re- value; a ‘post-money’ economy. ports concentrated on stock movements References and banking liquidity but, with the parti- Podolski, T.M. (1986) Financial Innovation cipation of major economic writers in and the Money Supply, Oxford: Basil journalism, the financial press broadened Blackwell. its interests to an examination of home and foreign economies. The Economist was ‘financial engineering’ (G2, G3) founded in 1843 by James Wilson (a 1 The making of major deals, especially former Financial Secretary to the Treas- mergers and underwriting, rather than ury), The Statist in 1873 by Sir Robert daily trading in major financial centres Giffen, Financial News in 1884 and the such as Wall Street, New York. As a Financial Times in 1888 (the last two consequence the structure of ownership merging in 1945). of industries is radically changed. Many leading economists, including 2 The use of financial instruments to KEYNES, SAMUELSON and GALBRAITH have solve problems. Risk management, trad- regularly contributed to the press. This is ing, investment management and struc- one of the most demanding forms of tured finance are all within its ambit. journalism as a great deal of technical financial intermediary (G2) expertise is required, as well as personal An institution collecting deposits and integrity to resist the demands of many making loans. Apart from the prominent businesses and interest groups wanting example of banks, there are many finan- favourable coverage. cial intermediaries today including build- References ing societies (savings and loans institutions), Parsons, W. (1989) The Power of the Press, insurance companies and hire-purchase Aldershot: Edward Elgar. finance houses. The creation of many new types of institution has made the task of financial leverage ratio (G2, G3) monetary control more difficult for central Total debt as a proportion of total assets; banks and finance ministries. also known as gearing. This is an indication

© 2002 Donald Rutherford of the extent to which a firm has to meet ceilings, rules about the composition of interest payments. If a firm suffering a bank balance sheets, foreign exchange downturn in its gross profits has high regulations and burdensome taxation of leverage, it could face insolvency. the financial sector. Seealso:leverage;leveragedmanagement Seealso:deregulation buyout Financial Services Act 1986 (G2, K2) financial liberalization (G2) This UK statute set out the regulation of The removal of government regulations, as investment business in the UK and also happened in the USA in the 1980s, to regulated the business of insurance com- permit the prices and availability of finance panies and friendly societies. (THE BANK OF to be market determined. Principal forms ENGLAND, LLOYD’S and CLEARING HOUSES are of liberalization include deregulation of exempt from its provisions.) It made provi- interest rate fixing and barriers to capital sion for the Secretary of State to recognize flows between countries and industries. ‘SELF-REGULATING ORGANIZATIONS’ to regulate the carrying on of investment business by financial panic (G2) enforcing rules on their members and to A lack of confidence in a banking system recognize ‘professional bodies’ to regulate causing depositors to reclaim their depos- professions. The Act controls the promo- its, thereby bringing about the collapse tion and advertising of investment schemes they fear. In a centralized banking system, and can ban persons as unfit to conduct a collapse in part of the system can be investment business. overcome by a CENTRAL BANK helping to restore liquidity. References Seealso:bubble;financialcrisis;runona Anderson, R.W. (1986) ‘Regulation of futures trading in the United States and bank United Kingdom’, Oxford Review of financial policy (G3) Economic Policy 2: 41–57. For a firm, this will include its attitude Financial Statement and Budget Re- towards raising capital, distributing divi- port (H6) dends, structuring its debt and investing its An annual report of the UK Treasury on surplus funds. the UK’s recent economic performance financial regime (G2) and forecasts for the next year. The major The set of laws, government guidelines and sections of the report detail output and policies which set the boundaries to the expenditure aggregates, movements in the activities of financial institutions. retail price index, the growth of money, gross domestic product at market prices, Financial Reporting Council (M4) the current account balance of payments UK council set up in 1990 to replace the and the public sector borrowing require- Accounting Standards Committee. With ment. This report is colloquially referred its subsidiaries, the Accounting Standards to as the ‘Red Book’. Board and Review Panel, it can make regulations on the form of company ac- financialsupermarket(G2)seefinancial counts to standardize the treatment of, for conglomerate example, goodwill and off-balance-sheet financial system (G2) finance. Interrelated institutions engaged in collect- financial repression (G2) ing savings and distributing them to bor- The limitation of banking and other rowers, making possible the separation of financial sector activity by regulations the ownership of wealth from the control such as RESERVE REQUIREMENTS, interest rate of physical capital. The more developed an

© 2002 Donald Rutherford economy is, the greater its range of finan- partly because those using it believed that cial instruments; for example, since 1960 disturbances were caused by AGGREGATE the US and UK financial systems have DEMAND and not by supply shocks. The produced a large range of new instru- problems of ignoring supply shocks be- ments, e.g. derivatives, in order to meet came vividly clear after the oil-price in- the different needs of savers and bor- creases of 1974. rowers. New financial facilities contribute firm (L2) to economic growth. 1 The basic unit for organizing produc- Seealso:disintermediation tion which performs the crucial role of References linking product, factor and money mar- kets. Drake, P.J. (1980) Money, Finance and 2 An administrative organization utilizing Development, Oxford: Robertson. a pool of resources. Financial Times Actuaries All-Share 3 A business organization under a single Index (G1) management with one or more ESTAB- A London stock market price index de- LISHMENTS. signed by actuaries and compiled by the A firm can be classified according to the Financial Times, which began in 1962. The number of persons owning it or according purpose of this index is to indicate the to the extent of the liability of its owners level of the whole UK equity market by for the firm’s debts. A sole trader is the including over 700 shares, more than 80 single owner with unlimited liability; a per cent of market capitalization. partnership has joint ownership but un- Financial Times Industrial Ordinary limited liability; companies and corpora- Share Index (G1) tions are owned by many shareholders A price index of thirty leading industrial with limited liability. shares traded on the INTERNATIONAL STOCK Seealso:limitedpartnership EXCHANGE of London which was first published in 1935. This valuation of stock References market shares is made at the beginning of Putterman, L. and Kroszner, R.S. (eds) each trading day, hourly throughout and (1996) The Economic Nature of the at the end of the day. Firm: A Reader, Cambridge and New York: Cambridge University Press. Financial Times Stock Exchange 100 Share Index (G1) firm consumption (L2) A price index of the shares of the 100 The proportion of a firm’s production it largest companies traded on the INTERNA- consumes itself, e.g. the electricity a power TIONAL STOCK EXCHANGE of London. It was station consumes to run its own opera- introduced in 1984 as a means of basing tions. futures contracts on the UK equity mar- Seealso:intermediategood ket. Popularly known as ‘Footsie’. firm-specific asset (L2) fine-tuning (E6) Tangible and intangible property of use The frequent use of monetary and fiscal only to a particular firm. These assets policies to avoid prolonged recessions and enhance the uniqueness of a firm and its inflation by keeping a national ECONOMY competitiveness but affect its ability to steadily on course. The over-ambitious borrow as specific assets cannot be rede- attempts of the US Administration to ployed so are unsuitable as collateral for achieve precise goals prompted Walter loans. Heller to describe such a policy as ‘fine- tuning’. As a policy it ran into difficulties Seealso:specifictraining

© 2002 Donald Rutherford first best economy (P0) is used weekly by the US Treasury when it An abstract model of a real economy in issues its short-term securities, and also by which resources are allocated according to Scottish solicitors for the sale of houses. the rules of PARETO OPTIMALITY. Seealso:auction first-degree price discrimination (D4) Selling different units of output at different First Welfare Theorem (D6) prices so that each price is the maximum The assertion that every competitive equi- amount of money a consumer will pay. librium is PARETO-efficient in that markets clear, consumers maximize utility and Seealso:pricediscrimination firms maximize profits. EXTERNALITIES are absent and the price mechanism is super- First Development Decade (O1) ior to other forms of co-ordination of A name given to the 1960s by President demand and supply. John F. Kennedy when he launched the USA’s Peace Corps. First World (P1) Developed free market ECONOMIES which first economy (P2) were early to industrialize and, until the A socialist economy following the dictates emergence of large oil revenues in devel- of the national plan. It consists of govern- oping countries, had the highest per capita mental agencies, state-owned firms, co- incomes. operatives and other officially registered institutions. Seealso:SecondWorld;ThirdWorld

Seealso:secondeconomy fiscal approximation (H2) First Industrial Revolution (N1) Bringing the tax rates of different countries The bunching of innovations, introduction into line, e.g. the different rates of value- of steam power and establishment of added tax in the EUROPEAN COMMUNITY,asa factories chiefly in Great Britain from preparation for the SINGLE MARKET of 1992. 1760 to 1830. Seealso:taxharmonization

Seealso:industrialrevolution fiscal crisis (H2, H3) References A shortage in the tax revenues needed to Ashton, T.S. (1948) The industrial revolu- finance a desired level of public expendi- tion, 1760–1830, London: Oxford Uni- ture. Marxists and others have asserted versity Press. that there is a built-in tendency for mod- ern fiscal systems to head for crisis as the first-in, first-out (M4) increasing demands for EGALITARIANISM and A method of valuing physical stocks more public services are not matched by a which, by assuming the oldest stocks will desire to pay more taxation. A concern for be used first, values at historic cost. The the disincentive and allocative effects of method has largely been abandoned in higher rates of tax makes it difficult to favour of the LAST-IN, LAST-OUT principle. raise extra tax revenue, making a fiscal The FIFO method has the effect of crisis incurable. including in profits the effects of stock appreciation, thus giving an unrealistic fiscal dividend (H2) picture of a firm’s financial state. Tax reductions and/or increases in govern- ment expenditures. first-price auction (D4) A method of selling whereby the buyers fiscal drag (H3) submit sealed written bids with the item 1 The reduction in personal disposable going to the highest bidder. This method income resulting from tax rates not

© 2002 Donald Rutherford being adjusted for INFLATION. making explicit the financing of every 2 The increase of tax revenue at a faster government programme, the size of a fiscal rate than public expenditure. stimulus cannot be properly measured. Illusion can only be cured by identifying The spending power of taxpayers is for each fiscal instrument its direct effect ‘dragged’ down by an increase in average on the economy and its indirect effects tax rates: for example, if pre-tax incomes through the changing of household budget rise by 10 per cent and personal allowan- constraints. ces are not increased then many taxpayers will be pushed into higher tax bands. The fiscalincidence(H6)seebudgetincidence ROOKER–WISE AMENDMENT of 1975 attempted to reduce much of fiscal drag in the UK; fiscal indicators (H3) in the USA, the Tax Reform Act of 1980 Measures of the fiscal effects of a govern- indexed the US individual income tax for ment which include national and regional the same reason. Fiscal drag can be expenditures and net lending. remedied by a FISCAL DIVIDEND. fiscalist (H3) References An economic policy-maker preferring FIS- Council of Economic Advisers (1962) CAL to MONETARY POLICIES. Many Keyne- ‘Automatic stabilizers and fiscal drag’, sians tend to favour a fiscal approach on in Annual Report of the Council of the grounds that it can be used to pursue a Economic Advisers, Washington, DC: greater range of policy aims than mone- US Government Printing Office. tary policy. fiscal federalism (H7) fiscal military state (P0) The system of sharing tax revenues and A state in which wealthy corporations and public expenditure commitments between individuals together with the armed forces a central government and state govern- have dominant political power. ments. By making grants to lower levels of government, a national government can Seealso:military–industrialcomplex determine the standard of provision of fiscal mobility (H3) public services, especially education. Dif- The geographical movement of taxpayers ferent levels of government can be fi- from high-tax to low-tax areas. The extent nanced by different types of tax, e.g. an of this movement depends on several income tax for the national level but sales factors including the availability of hous- and property taxes for the state and local ing and employment and the non-tax levels, or by the different governments of a attractions of different places. country sharing in the revenues from the same range of taxes. Seealso:Tiebouthypothesis Seealso:federalfinance fiscal neutrality (H3) References The nature of a government’s public finance policy which does not favour one Barnett, R.R. and Meadows, J. (1989) The group of persons, type of consumption or Political Economy of Fiscal Federalism, Aldershot: Edward Elgar. behaviour over another. The extent of Oates, W.E. (1972) Fiscal Federalism, New neutrality is apparent from a study of a York: Harcourt Brace Jovanovich. country’s tax and benefit structure. As a policy, neutrality is recommended because fiscal illusion (H3) its non-interventionist character gives An unawareness of actual fiscal policy greater freedom to individuals. A way of because of the poor definitions used of implementing it is by abolishing most tax ‘taxes’, ‘spending’ and ‘deficits’. By not allowances.

© 2002 Donald Rutherford Seealso:neutralbudget;taxstructure Seealso:harmonization fiscal policy (H3) fiscal year (H3) The taxation and expenditure policy of a The twelve-month period chosen by a government. Prior to KEYNES, public fi- government or a business organization for nance economists were chiefly interested accounting purposes. In 1974 the starting in TAX INCIDENCE; subsequently, they ac- date for the US government’s fiscal year corded fiscal policy a more active role, was changed from 1 July to 1 October, making it a major part of STABILIZATION partly to enable US Congressional appro- POLICY in the 1950s and 1960s. The extent priations to be made by the start of the to which fiscal policy can be employed fiscal year. depends on what a government can ob- serve of economic behaviour (thus it can- Fisher effect (E5) not tax the black economy), on An effect of MONETARY POLICY that causes behavioural responses to fiscal changes nominal interest rates to rise to a level and on time lags. which reflects price changes. Seealso:fine-tuning;fiscalneutrality Fisher equation of exchange (E5) A famous statement of the QUANTITY THE- fiscal rectitude (H3) ORY OF MONEY as MV = PT. M is the stock A strict fiscal policy of cutting public of money, P the general price level, V the expenditure and reducing the amount of velocity of circulation and T the volume of government borrowing, usually with the transactions. aim of keeping a national budget in balance or surplus for several years. This Fisher, Irving, 1867–1947 (B3) policy has often been recommended by the The celebrated US economist who made INTERNATIONAL MONETARY FUND to correct major contributions to capital, interest balance of payments deficits. and monetary theory. During his long career as student and professor at Yale fiscal stance (H3) University (1892–1935), he published 1 The combination of taxation and ex- many influential works. His doctoral the- penditure chosen by a government. sis, Mathematical Investigations in the The- 2 The effect of the public sector on the ory of Value and Price (1892) advanced level of aggregate demand, often mea- general equilibrium theory; his The Nature sured by the size of a government’s of Capital and Income (1906) and The Rate deficit. This is only valid if there has of Interest (1907) introduced the important been no change in economic conditions. distinctions between real and nominal Seealso:publicfinance interest rates and between stocks and flows. Many works on monetary econom- fiscal union (H2) ics, including The Purchasing Power of A group of separate countries, or states Money (1911) and Booms and Depressions within them, subject to the same taxing (1932) showed a progression from an and spending authority. These unions exposition of the QUANTITY THEORY OF MONEY provide mutual insurance and ECONOMIES to a concern with stabilization policies. OF SCALE in the provision of PUBLIC GOODS. His contribution to in There is a greater chance of redistribution The Making of Index Numbers (1927) is the greater the geographical scope of the well known. His other writings on nutri- union, but a large union is likely to create tion, prohibition and pacifism made him more taxpayer discontent as it is difficult known to a wider public. He also earned a to aggregate the preferences of a great great deal from inventing a visible card range of people. index system widely used by businesses.

© 2002 Donald Rutherford References for a minimum period of time, e.g. man- Schumpeter, J.A. (1948) Ten Great Econo- agerial staff. In the long term, all costs mists from Marx to Keynes, Oxford: become variable as fixed capital can be Oxford University Press. changed and contracts revised. five-star mutual fund (G2) Seealso:averagetotalcost;circulating A US fund achieving the best return to capital;humancapital;quasi-fixedfactor; capital employed relative to the return on variablecost a treasury bill for a given amount of risk (based on a comparison with other funds’ fixed exchange rate (F3) performance) in a particular time period. An exchange rate whose value is tied to gold With hundreds of funds achieving this or a major currency or basket of currencies. rating, this form of assessment has begun The GOLD STANDARD was not used after the to be questioned. Second World War, being replaced by a DOLLAR STANDARD under BRETTON WOODS five-year plan (P3) until 1971. Later in Europe a fixed ex- A medium-term national economic plan, change rate regime tied several currencies first used in the USSR in 1928 and to other European currencies under the subsequently followed by many developing EXCHANGE RATE MECHANISM of the EUROPEAN countries including India and China. MONETARY SYSTEM. Currencies with a fixed These plans set targets for the economy parity are permitted to vary only within a as a whole and for particular sectors. Early narrow range above and below par value. plans used principally physical output Fixed exchange rates promote stability in targets but subsequent plans have set more international trade but carry the cost of goals, sometimes in conflict with each holding greater reserves of foreign curren- other. The broad framework of the five- cies and other reserve assets. A revaluation year plan is supplemented by an annual or devaluation of a fixed exchange rate operational plan setting detailed goals for creates considerable problems of adjust- individual enterprises. ment in the national economy concerned. Seealso:centralplanning;development fixprice (D0) A price determined exogenously outside the fix (G1) model of a market. KEYNESIAN ECONOMICS Twice daily fixing of the price of gold by with its assumptions of a floor to the rate the London gold market. of interest and to money wages employs fixed capital (E2) this method. In an economy with much Investment in buildings and equipment. oligopolistic industry, firms fix their prices Demand for fixed capital is determined independently of market forces and can be within the framework of a firm’s plan, in a state of DISEQUILIBRIUM for a consider- including its sale projections and the cost able time by increasing or decreasing their of finance. stocks. Some would argue that there was a fixprice economy as early as 1890. Seealso:grossdomesticfixedcapitalfor- mation Seealso:flexprice fixed cost (D0) References A cost to an enterprise which is incurred Hicks, J.R. (1965) Capital and Growth, ch. even when that enterprise’s output is zero. 7, Oxford: Clarendon Press. These costs occur in the short run. The flatgrant(H2)seegrantinaid principal examples of them are equipment costs and the costs of FACTORS OF PRODUC- flat pay-off (C7) TION which a firm has contracted to pay A situation when there are few financial

© 2002 Donald Rutherford penalties for departing from an optimum house gas emissions. These methods in- position. clude investing in reductions in other countries, especially by joint implementa- flat rate tax (H2) tion, EMISSION REDUCTIONS BANKING and 1AnINCOME TAX levied at the same rate clean development mechanisms. for every level of income. The justifica- tion for a tax of this kind is its flexprice (D0) simplicity and lack of the disincentive A price freely fluctuating in order to equate effects inherent in some forms of tax demand with supply, e.g. a price deter- progression. However, a flat rate tax is mined at an AUCTION. Such a view of prices likely to be an unfair burden on low- is central to MARSHALLIAN economics. income groups if its rate is high. Seealso:fixprice 2 In 2000 Russia introduced a 13 per cent income tax flat rate in place of a sliding References scale of 12 per cent to 39 per cent. Hicks, J.R. (1965) Capital and Growth, ch. 7, Oxford: Clarendon Press. Seealso:progressivetax flight from money (E4) flat tax (H2) see flat rate tax A reduction in the flawed marketplace (D4) because of an expectation of rising prices 1 A competitive market which generates or a fall in nominal interest rates. multiple prices for the same thing. flip-floparbitration(J5)seependulum 2 A market requiring social action to arbitration protect resources, people, capital and human values. floating exchange rate (F3) A market-determined exchange rate which flexible exchange rate (F3) see floating can change continuously as it is not exchange rate pegged to another currency or to gold flexible firm (L2) by a CENTRAL BANK. Canada, after the A firm with a core of permanent employ- Korean War, floated the Canadian dollar ees and a periphery of temporary workers in 1950–62 and again in 1970 after the whose labour force fluctuates in size ac- Vietnam War; Lebanon from 1950 and cording to the demand for its products. In Japan and some West European countries Japan, many industries have this type of from August to December 1971 also organization through the extensive use of floated their currencies. In practice, an subcontractors who themselves have the exchange rate can be stabilized by spec- flexibility which comes from employing ulation or central bank intervention, the temporary workers. latter being ‘a dirty float’. Although lower reserves of gold and hard currencies flexible working-time schemes (J2) are needed under a floating exchange rate Non-standard distributions of working regime, this regime has disadvantages, hours with several starting and finishing including a greater amount of uncertainty times. These proliferate in the service amongst exporters. sector and have been important in the recruitment of women with domestic re- References sponsibilities and others who want to MacDonald, R. (1988) Floating Exchange combine labour market activity with Rates: Theories and Evidence, London: equally demanding pursuits. Unwin Hyman. flex mex (Q2) floating rate note (G1) Methods rich countries employ to attempt A long-term SECURITY whose rate of inter- to achieve reduction targets for green- est is linked to short-term interest rates.

© 2002 Donald Rutherford Some of these notes are perpetuals with no satisfy both producers and consumers by maturity date. Changes in the US and UK purchasing quantity AB. rules concerning the definition of banks’ flotation (G1) PRIMARY CAPITAL has substantially reduced The market debut of a company when its the demand for these notes, although their shares are offered to the public for the first yields, which are higher than those for time. The motives for a flotation include commercial paper and certificates of de- the desire of the original owners to reduce posit, will continue to make them attrac- their financial stake in that company as tive to many money market investors. well as the wish to obtain more finance. floor (E3, E4) flow(E0)seestockandflowconcepts 1 The trough of a business cycle or trade cycle after which production, employ- flow of funds account (E1) ment and prices rise. A component of a system of NATIONAL 2 The minimum rate of interest which an INCOME accounts showing financial trans- issuer of a floating rate security is actions between the major sectors of the required to pay. economy. The transactions analysed are purchases and sales, and transfers such as Seealso:cap;ceiling;collar taxes and dividends. The sectors used are different types of business, non-profit or- flooring (G2) see floor planning ganizations, central and local government, banks, savings institutions, insurance, floor planning (G2) other finance and the rest of the world. Inventory financing by US commercial banks, e.g. to contribute to the purchase References by dealers in CONSUMER DURABLES of the Bain, A.D. (1973) ‘Flow of funds analysis: goods they have on display. a survey’, Economic Journal 83: 1055–93. National Bureau of Economic Research floor price (D4, K2) (1962) The Flow of Funds Approach to Social Accounting: Appraisal, Analysis A minimum controlled price, e.g. a MINI- and Applications. Studies in Income and MUM WAGE or agricultural product prices. Wealth, Vol. 261, Princeton, NJ: Prince- Minimum wage laws are enforced by ton University Press. inspectorates; agricultural prices are pre- vented from falling below pre-set minima flypaper effect (H7) by government purchases of excess pro- The effect of giving grants, particularly FEDERAL FINANCE duction. If P1 is the floor price and Pe is under a system of ,to the equilibrium price the government can governments and not individuals. The grants ‘stick’ to their use as expenditure and cannot be used to reduce taxation as could happen if individuals directly re- ceived these grants. Seealso:dedicatedbudget;earmarking; ringfencing Fogel, Robert William, 1926– (B3) Educated at Columbia and Johns Hopkins Universities,hetaughtatRochester,Chicago and Harvard Universities before being appointed Charles R. Wargreen Professor of American Institutions at Chicago in 1981. His renowned works on economic

© 2002 Donald Rutherford history include Railroads and American continue. Since 1978 in the UK a player Growth: Essays in Econometric History can negotiate a move to a new club on the (1964), which asserted that railways made expiry of a one- to five-year contract. only a small contribution to the growth of References the US gross national product, and Time on the Cross: the Economics of American Carmichael, F., Forrest, D. and Simmons, R. (1999) ‘The labour market in Asso- Slavery (1974, with Stanley Engerman), ciation Football: who gets transferred which stated that slavery was economically and for how much’, Bulletin of Eco- efficient although morally repugnant. In nomic Research 51: 125–50. 1993 he shared with NORTH the NOBEL PRIZE Sloane, P. (1971) ‘The economics of pro- FOR ECONOMICS. fessional football: the football club as a utility maximiser’, Scottish Journal of Food and Agriculture Organization Political Economy 18: 121–46. (Q1) Rome-based United Nations agency footloose industry (L0) founded in 1945. It aims (1) to raise An INDUSTRY locatable anywhere without nutrition levels, (2) to improve the effi- incurring extra locational costs. Heavy ciency of the production and distribution industries, e.g. steel and shipbuilding, are of all agricultural products and (3) to not footloose; new industries using micro- improve the condition of rural populations. chip technology can locate in many places FAO provides an information service, tech- without increasing their costs, although nical assistance and the promotion of proximity to large markets and the avail- national and international action, includ- ability of regional subsidies will guide ing international COMMODITY AGREEMENTS. them to particular locations. food chain (Q1) Seealso:locked-inindustry The linked stages of production of food footloose knowledge (O3) from the original farmer to the ultimate Technical knowledge not specific to any consumer. production process and which is inter- football pool (D1) changeable between industries. A method of gambling on the outcome of Seealso:locked-inknowledge a number of football matches on the same day. The fixed stakes of the punters are Footsie (G1) accumulated in a fund out of which Slang for FINANCIAL TIMES STOCK EXCHANGE dividends are paid to those who have 100 SHARE INDEX. successfully predicted the outcome of forced labour (H2) matches, with most points going to a Taxation of employment earnings causing prediction of teams which score the same a person to work longer hours than is number of goals as each other. The bal- necessary to obtain a given income. NOZICK ance of the weekly fund is acquired by the advances this argument in his discussion pools promoter. of redistribution. football transfer system (J4) References The method of selling professional foot- ballers from one club to another. The fee Nozick, R. (1974) Anarchy, State and Utopia, ch. 7, Oxford: Basil Blackwell; is paid to bind the player to play exclu- New York: Basic Books. sively for the new club. Both the transfer- ring club and the transferred player forced saving (E2, H3) financially benefit. The fee is proportional 1 Involuntary saving arising in an econ- to the previous performance of the player omy when it is at FULL EMPLOYMENT and with the expectation that excellence will has an excess supply of loans. That

© 2002 Donald Rutherford excess supply pushes down the market Fordism (L6, P1) rate of interest and stimulates an in- A late, and successful, stage of CAPITALISM creased demand for investment finance, characterized by large-scale production, bringing about general inflation. As a semi-skilled labour, easy credit and mass consequence of a rise in prices, those consumption. This concept is based upon with fixed incomes can consume less the production methods of the Ford Mo- and so savings are ‘forced’ out of them: tor Company, particularly its use of as- this extra saving finances the extra sembly lines for automobile production. investment. This view was widely held by members of the Classical School, foreign aid (H2, O0) including BENTHAM, THORNTON, MALTHUS Grants, loans on favourable terms or the and John Stuart MILL; in the twentieth supply of services by governments or century, ROBERTSON and PIGOU were also charitable bodies to less developed coun- adherents of this doctrine. A crucial tries. In its favour, it has been argued that part of KEYNES’s transition in thinking, aid creates the notion of an international which resulted in his General Theory of human community, reduces political ten- Employment, Interest and Money, was to sion within countries by encouraging ba- reject this doctrine. lanced development and increases the 2 Compulsory saving as part of a tough priority of development within less devel- fiscal policy. KEYNES recommended this oped countries. A shortage of domestic as a method of financing the Second savings and balance of payments problems World War. He argued that this taxa- in the early stage of expansion, when tion of current incomes was needed to imports exceed exports, will retain the match current consumption and domes- need for aid. As it is difficult to decide tic production and imports as a means the basis for selecting aid recipients, it has of preventing inflation. This ‘deferred been suggested that poverty, a good record pay’ would accumulate at compound in economic and social policies or a good interest in friendly societies and the Post performance in raising the share of savings Office Savings Bank. The scheme was and taxes in the national income should be adopted. Forced savings were gradually used as alternative criteria. repaid as post-war credits after 1945 in Aid is given for many purposes includ- line with the improvement of the na- ing relief (often consumer goods are sent tional economy. to alleviate a short-term supply deficiency, e.g. famine relief to Ethiopia), reconstruc- References tion (as in the rebuilding of an economy Corry, B.A. (1962) Money, Saving and after a war, e.g. the MARSHALL PLAN), Investment in English Economics 1800– stabilization (especially short-term help 1850, ch. 3, London: Macmillan; New with a country’s balance of payments until York: St Martin’s Press. Hayek, F. von (1932) ‘A note on the adjustments are made to its economy) and development of the doctrine of forced long-term development to raise the level of saving’, Quarterly Journal of Economics per capita incomes permanently. Critics of 47: 123–33. aid programmes point out that aid can Keynes, J.M.(1940) How to Pay for the War have the defects of creating economic or (reprinted in his Collected Works, Vol. 9, political dependence, introducing inap- pp. 367–439, London: Macmillan). propriate technology or spending dispro- Machlup, F. (1943) ‘Forced or induced portionately on urban populations. saving: an exploration into synonyms and homonyms’, Review of Economics Seealso:bilateralaid;multilateralaid; and Statistics 25: 26–39. tiedaid

© 2002 Donald Rutherford References Singapore 11 per cent, Hong Kong 11 per Casson, R. (1986) Does Aid Work?, Oxford: cent, Zurich 7 per cent, Tokyo 6 per cent, Oxford University Press. Paris 5 per cent and Frankfurt 4 per cent. Mosley, P. (1986) Overseas Aid: Its De- As the most important influence on these fence and Reform, Hemel Hempstead, markets is company cash flows, this in a Harvester Wheatsheaf. sense makes MULTINATIONAL CORPORATIONS foreign direct investment (F2) mini-banks through their CORPORATE FI- Investment in the businesses of another NANCE activities. Central banks intervene country which often takes the form of the to achieve a desired exchange rate for setting up of local production facilities or their own currencies. If they force their the purchase of existing businesses. It is to exchange rates down, speculators will leave the market. A stable exchange rate be contrasted with PORTFOLIO INVESTMENT, which is the acquisition of securities. FDI at the desired level usually requires active has been much criticized, in the case of use of MONETARY and FISCAL POLICIES. MULTINATIONAL CORPORATIONS,asaformof Seealso:forwardmarket;spotmarket neo-colonialism. In its favour it can be said that it increases the level of invest- foreign trade multiplier (E6, F1) ment in countries which otherwise would The ratio of a change in income to the be undercapitalized and, as dividends vary change in exports and domestic invest- with the prosperity of an industry (and a ment which have generated that extra high proportion is reinvested in the local income. It is measured for an open econ- economy), it can be less burdensome than omy without taxation as 1/(1 – MPC + the servicing of fixed interest borrowing. MPM), where MPC is the MARGINAL PRO- For political reasons in the past, a dis- PENSITY TO CONSUME and MPM is the MAR- proportionate amount of direct invest- GINAL PROPENSITY TO IMPORT. The multiplier ment in Third World countries went to is crucial to explanations of the path to Brazil, Mexico and South Africa, as well BALANCE OF PAYMENTS equilibrium and to as to the EUROPEAN COMMUNITY to escape the transmission of cyclical fluctuations the COMMON EXTERNAL TARIFF. Some ad- throughout the world. vanced economies fear the takeover of Seealso:multiplier their industries by stronger, foreign econo- mies, e.g. the USA is anxious about foreign trade organization (F1, P3) Japanese investment in many parts of the A state agency of a COMECON country US economy. which exported and imported on behalf foreign exchange (E5) of state enterprises of a particular sector The CURRENCIES or short-term monetary of a national economy. From the 1920s, it claims of foreign countries. was a major organization of the Soviet economy. However, with Hungary as an References example, enterprises in Comecon countries Douch, N. (1989) The Economics of For- increasingly allowed the choice of trading eign Exchange, Cambridge: Woodhead directly or through foreign trade organiza- Faulkner. tions. foreign exchange market (G1) Seealso:statetradingorganization A market where currencies are exchanged for each other. Both spot and forward foreign trade zone (F1) trading are used. In 1991, the top banking A tariff-free area, often around a port or centres measured as a percentage share of an airport, which, by allowing the duty- Reuters currency quotations were: Lon- free import and export of goods, can make don 17 per cent, New York 15 per cent, manufactures flourish.

© 2002 Donald Rutherford forex (E5) Seealso:blueeconomy;underground Foreign exchange, or forward foreign ex- economy change. formal indexation (H2) forex trading (G1) Automatic adjustments to income tax Foreign exchange trading which is a major allowances in line with rises in retail determinant of exchange rates. This vola- prices at regular intervals. The nature of tile trading, sensitive to political events this mechanism for protection against and movements in ECONOMIC INDICATORS,is inflation is decided by legislative enact- conducted in financial centres throughout ments. the world. HEDGING is continuously prac- Seealso:bracketcreep;Rooker–Wise tised to reduce currency fluctuations. The Amendment growth of MULTINATIONAL CORPORATIONS has greatly increased the volume of business in forms of integration (P0) foreign exchange markets. Karl POLANYI’s description of various economies in terms of redistribution, reci- forfaiting (F3) procity and exchange. A method of financing exporting. The exporter’s bank assumes the risk of the References buyer not paying by advancing the value Polanyi, K. (1957) The Great Transforma- of the exports to the exporter and dis- tion, Boston: Beacon Press. counting a BILL OF EXCHANGE or PROMISSORY NOTE in a secondary financial market Fortune 500 (L0) where the market rate of interest is The annual listing by Fortune, the US charged for the period until the buyer has business magazine, of the 500 largest paid in full. This originated as a method world corporations ranked by revenue. of financing West German exports to forward integration (L1) Eastern Europe but now is used to finance The expansion through merger of the both exports and specific capital projects; productive activities of manufacturers only a minuscule amount of world trade is into wholesaling and distribution. This financed in this way. was made possible by advances in trans- Seealso:exportpromotion port and information systems and re- sulted in greater production ECONOMIES OF forfait system (H2) SCALE as manufacturers’ markets ex- A system of taxation which uses indirect panded. indicators of income, e.g. a sole proprie- tor’s lifestyle or average profit margins, to Seealso:verticalintegration assess a person for payment of a lump- forwardlinkage(L0)seelinkage sum tax. This system is used in France to assess taxes on the incomes of farmers, forward market (G1) unincorporated businesses and the profes- A market in currencies, commodities or sions. It has many applications in less securities which fixes prices for future developed countries. delivery. The forward rates determined are linked to SPOT RATES by SPECULATION and formal economy (P0) HEDGING. 1 The range of economic activities which are officially recorded. fountain pen money (E5) 2 That part of an economy in which Money created by a banker who uses a labour is predominantly supplied by pen to approve a loan. This increases the employees of firms and public enter- bank deposit of the borrower and adds to prises. total bank credit.

© 2002 Donald Rutherford Fourier, Charles, 1772–1837 (B3) has made possible a major increase in Born at Besanc¸on, France, the son of a credit in many countries in the past linen draper. After an education at a Jesuit hundred years. school he studied law at the local univer- fragmentation (D2) sity before being forced to become a Division of a production process into draper as a condition of an inheritance. component parts so that production can His experience in a cavalry regiment in occur at several domestic or foreign loca- 1794–5 gave him a lifelong horror of social tions. turmoil. He collected ideas on the nature of society to create a total science based Seealso:divisionoflabour on gratifying and harmonizing all human passions. His ideal community, the Pha- framing effects (D8) lanstery, was tried near Paris but failed The effects of representing or framing through lack of finance. He opposed the problems of choice, including deciding on principle of the division of labour as he a reference point. believed everyone has a passion for variety References and pointed out the oppression of women. Machina, M.J. (1987) ‘Choice under un- His leading work was The Theory of the certainty: problems solved and unsolved’, Four Movements (1808). Journal of Economic Perspectives 1: 121–54. Seealso:Owen,Saint-Simon References franchise (M3) A legal privilege allowing a firm under Beecher, J. (1986) Charles Fourier. The Visio- licence to sell another firm’s products and nary and His World, Berkeley, CA, and London: University of California Press. use its trade name. In return for the use of a famous name and much free marketing Fourth World (O0) promotion, an initial payment and often a The poorest least developed countries of royalty of 5–10 per cent of gross sales are the world, about twenty-five in all. requested. As it is a condition of some franchises that supplies be obtained from Seealso:FirstWorld;SecondWorld; the franchising company, competition law ThirdWorld in the USA and Western Europe has tried fractal Brownian motion (C6) to prevent such agreements. The arrange- A mathematical model used to generate ment is widespread in the fast food trade. random numbers, originally noticed by franchise financing (F3) Robert Brown in 1827 when studying The financing of public works such as botanical processes. ‘Fractal’ means that bridges, airports and power stations by it is independent of scale. It has been used foreign private investment. Examples in- to analyse optimal production processes clude the Anglo-French Channel Tunnel and the movement of share prices. and various public works in Turkey, Ma- fractional reserve banking (G2) laysia and Jordan. A typical implementa- A banking system using HIGH-POWERED tion of the method would be the creation MONEY as only a fraction of its total assets of a JOINT EQUITY VENTURE COMPANY owned rather than ONE HUNDRED PER CENT RESERVE by the contractor, the operator and the BANKING. According to the country and customer utility. Borrowing from banks phase of banking evolution, cash, and and credit agencies for the financing of assets which can be quickly converted into construction is on the security of revenue cash without capital loss, can be as little as from the project. When the loan is repaid, a third or a quarter of the total volume of the host government owns the new, public commercial banks’ deposits. This system work.

© 2002 Donald Rutherford franchise gap (G1) with note-issuing power, thus ending the A band around the value of a currency in monopoly of the Bank of England. which it can be bought and sold. Seealso:BankingSchool Seealso:CommonAgriculturalPolicy References fraud (K4, M4) White, L.H. (1984) Free Banking in Brit- 1 Deceitful accounting. ain: Theory, Experience and Debate, 2 Misappropriation of funds. 1800–45, Cambridge: Cambridge Uni- versity Press. Seealso:creativeaccounting;longfraud free cash flow (D3, M4) free alongside ship (F1) A firm’s intake of cash in excess of what is A type of exporter’s price quotation, required to fund all profitable activities. including delivery to a designated vehicle Managers try to invest it in risky projects; of the importer who then pays for subse- shareholders ask for a distribution of it. quent transportation. free depreciation (M4) free banking (G2) The amount of depreciation of an asset A LAISSEZ-FAIRE monetary system in which permitted by a taxation authority before banks compete freely without state control actual wear and tear has taken place. All, and have the power to issue their own or part, of the value of an asset is written banknotes. However, even the most ardent off at the beginning of its life as a form of supporters of this freedom would admit investment grant to a firm. In general, that some restrictions are necessary to depreciation allowances are generous if the guarantee the liquidity of the banking notional life of the asset for tax purposes system and price stability. In the USA, is longer than its true life. free-banking laws were passed in the early free good (D0) nineteenth century, beginning with Michi- A good with a zero price. This is possible gan in 1837 and New York and Georgia in because its supply is either abundant or 1838. Anyone could set up banks subject rationed. A free good is the opposite of an to the minimum capital requirements pre- ECONOMIC GOOD. scribed by each state, and their note issues had to be backed by bonds deposited with free list (F1) a state auditor and redeemable on de- Those goods that can be imported into a mand. There was free banking in Scotland country without being subject to tariffs from 1810 to 1845. and licences. References free market (D4) Dowd, K. (1989) The State and the Mone- A market in which buyers and sellers are tary System, Hemel Hempstead: Philip free to contract on whatever terms they Allan. wish without governmental interference. Glasner, D. (1989) Free Banking and Monetary Reform, Cambridge: Cam- free on board (F1) bridge University Press. A measure of the value of trade excluding Rockoff, H. (1975) The Free Banking Era: insurance and transport costs. Exports are A Reconsideration, New York:Arno Press. usually valued this way as it is assumed that importers will pay such costs. Free Banking School (B1) A group of early nineteenth-century Eng- freeport (F1) lish writers on monetary matters who An enclave in which imported goods are argued that England should follow the processed and then re-exported. This pro- Scottish principle of having several banks duction arrangement has been a great

© 2002 Donald Rutherford success in many places, including Ham- most strenuously advocated by major burg, South Korea and the Caribbean, but countries with trade surpluses, e.g. the less so in the UK in which six freeport UK in the nineteenth century and the schemes were launched in 1984. Freeports USA in the 1950s and 1960s. were popular as far back as the Middle Seealso:Cornlaws;protection;Smoot– Ages, when they were known as ‘staples’. HawleyTariffAct1930 Seealso:in-bondmanufacturing References free rider (D1, J5) Bhagwati, J. (1988) Protectionism, Cam- An individual who does not pay for the bridge, MA: MIT Press. goods or services he or she consumes. Free Corden, W.M. ( 1974) Trade Policy and Economic Welfare, Oxford: Clarendon riders include non-residents using the pub- Press. lic services of a city and non-unionized workers who gain wage increases achieved free-trade area (F1) under COLLECTIVE BARGAINING, without pay- A group of independent nations with free ing dues to a union to represent them. In trade among them, but not necessarily the case of public goods the free-rider with a joint trading policy for the rest of problem has resulted in the finance of the world. such goods by general taxation; under Seealso:EuropeanFreeTradeAssocia- trade unionism, the existence of free riders tion has led to demands for a UNION or CLOSED SHOP. Free Trade Area of the Americas (F1) An ambitious proposal to extend NAFTA free trade (F1) to encompass all American countries from International trade, unhindered by TARIFFS, the Bering Strait to Cape Horn. The area other restrictions on imports and export would cover thirty-four countries with a subsidies. This freedom was strongly re- population of 800 million and, in 2000, a commended by the CLASSICAL ECONOMISTS joint GDP of $11 trillion. on the basis of ABSOLUTE ADVANTAGE, in the case of SMITH,orCOMPARATIVE ADVANTAGE in freezing assets/an account (K2) the cases of RICARDO and TORRENS. Today, it Making the owner of an asset or a is recommended as a means of achieving depositor unable to use or transfer the international specialization of production amounts deposited with a financial institu- and maximization of world economic wel- tion because of a court or other order fare. In practice, completely free trade is against the order. The assets become ILLI- rare. There are always particular interest QUID. groups and industries within a country French Circuit School (B1, B2) demanding PROTECTION, with varying de- Writers who have studied the economic grees of success. Even within a CUSTOMS process as a monetary circuit. QUESNAY’s UNION there can be disguised protection, Tableau Economique is an early example of e.g. within the EUROPEAN COMMUNITY this approach; WICKSELL and SCHUMPETER through the imposition of quality and favoured this too. From the 1960s there other controls. In the post-1945 period, has been a resurgence of interest in this the GENERAL AGREEMENT ON TARIFFS AND approach, especially in publications such TRADE has attempted to prevent a return as Monnaie et Production. POST-KEYNESIANS to the extensive protectionism characteris- have also taken up this type of analysis. tic of the 1930s. In the 1980s there was some support for protectionism, especially frequency curve (C1) in the USA and in NEWLY INDUSTRIALIZED A curve constructed from a FREQUENCY DIS- COUNTRIES. Free trade has always been TRIBUTION which can be obtained from a

© 2002 Donald Rutherford FREQUENCY POLYGON. The different shapes of Friedman’s long advocacy of monetar- these curves include SYMMETRICAL, SKEWED, ism has consisted of a powerful revival of J-SHAPED, REVERSE J-SHAPED, U-SHAPED, BIMO- the QUANTITY THEORY OF MONEY, reasserting DAL and MULTIMODAL. that changes in the MONEY SUPPLY explain changes in the levels of prices and eco- frequency distribution (C1) nomic activity. He is also noted for his An arrangement of RAW DATA into classes which are then tabulated: for example, the contributions to economic methodology prices of houses can be classified as (1953), his PERMANENT INCOME approach to $100,000–$149,999, $150,000–$199,999, the CONSUMPTION FUNCTION and his explana- etc., and presented in two columns of tion of (1968) which modified house prices and the number of houses in the PHILLIPS CURVE (by the inclusion of EX- each price range. PECTATIONS) and introduced the concept of the NATURAL RATE OF UNEMPLOYMENT. frequency polygon (C1) Although much of Friedman’s economics A graph of the frequency of classes of a is anti-Keynesian in character, like KEYNES distribution often constructed by joining he ignores many micro-issues in favour of the midpoints of the tops of the rectangles a heavy reliance on economic aggregative HISTOGRAM in a . analysis. His distinctive approach to ECO- Seealso:frequencycurve NOMIC METHODOLOGY is to argue that the fruitfulness of an economic theory must be frequency table (C1) see frequency judged by predictions that are empirically distribution corroborated. Using FISHER’s theory of frictional unemployment (J6) capital, Friedman was able in his study of Short-period unemployment brought the CONSUMPTION FUNCTION to use the con- about by workers changing jobs. This cept of permanent income, allowing ex- minimum level of unemployment, which pectations of future income to be a coexists with job vacancies, occurs even determinant of current expenditure. He when an economy is at FULL EMPLOYMENT reinstated the quantity theory of money and is a feature of all types of national by turning it into a theory of the demand ECONOMY. Frictional unemployment is of- for money as the k of the Cambridge ten measured by the number of people equation M = kPY, with k, according to unemployed for less than a short period, Friedman, a variable, not a constant. He e.g. eight weeks. Labour market policies was able to extend the Keynesian liquidity can reduce this type of unemployment by preference theory into a more modern making job information more available portfolio approach. In his monetary his- and accurate and by subsidizing search tory with Schwartz, he attributed the costs. to the FEDERAL RESERVE SYSTEM’s reducing the US money stock in Friedman, Milton, 1912– (B3) the period 1929–33 by one-third. In the US economic prophet of CAPITALISM and stock market crashes of October 1987, MONETARISM and leading libertarian econo- mist. After an education at Rutgers, Chi- many monetary authorities were anxious cago and Columbia Universities, he was to avoid the same mistake. professor at Chicago from 1948 to 1979. References His pronounced LIBERTARIAN ECONOMICS led De Marchi, N. and Hirsch, A. (1988) to his appointments as adviser to Barry , Brighton: Harvester Goldwater (unsuccessful US presidential Wheatsheaf. candidate in 1964) and President Richard Friedman, M. (1953) Essays in Positive Nixon. He was awarded the NOBEL PRIZE Economics, Chicago: Phoenix Books. FOR ECONOMICS in 1976. —— (1956) Studies in the Quantity Theory

© 2002 Donald Rutherford of Money, Chicago: University of Chi- founded the Econometric Society in 1930 cago Press . and was awarded the first NOBEL PRIZE FOR —— (1957) A Theory of the Consumption ECONOMICS (with TINBERGEN) in 1969. His Function: A Study by the National Bu- advice to the Norwegian Labour Party in reau of Economic Research, New York, the 1930s and 1950s, to adopt central Princeton, NJ: Princeton University Press. planning for key industries, applied his —— (1982) Capitalism and Freedom, Chi- econometric ideas; his fiscal advice was cago and London: University of Chi- similar to KEYNES’s. His early work on cago Press. demand theory rigorously derived a con- Friedman, M. and Schwartz, A.F. (1963) sistent theory from basic axioms. Later he Monetary History of the United States, devoted much attention to the creation of 1867–1960, Princeton, NJ: Princeton a logical national accounting system, to University Press. economic planning and to the application —— (1982) Monetary Trends in the United of decision modelling to economic policy States and the United Kingdom: Their making. He was a pioneer in the develop- Relation to Income, Prices and Interest Rates 1867–1975, Chicago: University ment of dynamic economic theory. of Chicago Press. References Thygessen, N. (1975) ‘The scientific con- Arrow, K.J. (1960) ‘The work of Ragnar tributions of Milton Friedman’, Scandi- Frisch, econometrician’, Econometrica navian Journal of Economics 79: 56–98. 28: 175–92. fringebankingcrisis(G2)seesecondary front-end loading (G2) bankingcrisis The inclusion of administrative charges fringe benefits (J3) into the first payment by a customer. This Benefits in kind which constitute part of can apply to a unit trust price, an insur- the remuneration of many employees, ance premium or interest on a loan. especially managers. These additions to fronting loan (G2, G3) wages and salaries can be provided either A loan from a parent corporation to a collectively, e.g. sports and leisure facil- local foreign subsidiary using the ‘front’ of ities, or individually, e.g. a company car, a an international bank to channel the loan. low-interest mortgage, free health insur- There is more chance of repayment to an ance, etc. In the USA they amounted to 17 international bank in times of political per cent of the compensation of blue- turmoil as many countries are reluctant to collar workers in 1951 and 30 per cent (in upset major financial institutions. some large corporations, 50 per cent) in 1981. Their incidence is higher for union- frostbelt (L0) see snowbelt ized than for non-unionized workers and F test (C1) are usually worth more to higher income The ratio of the VARIANCES of two indepen- groups because many fringe benefits are dent samples of the variance of one not subject to taxation. population which has a NORMAL DISTRIBU- Seealso:labourcost TION. This SIGNIFICANCE TEST is used to test joint hypotheses with two or more regres- Frisch, Ragnar Anton Kittil, 1895–1973 sion PARAMETERS. (B3) A Norwegian economist who did much to full-cost pricing (D4) establish ECONOMETRICS as a separate aca- A theory of pricing first advanced in demic subject. After training under his Oxford studies in 1938 by Hall and Hitch father as a goldsmith and an education in as a challenge to MARGINALISM. Prices, Oslo and France, he was professor of according to their observation of business- economics in Oslo from 1931 to 1965. He men’s behaviour, were calculated on the

© 2002 Donald Rutherford basis of average variable cost plus a gross calculation of the underlying FISCAL STANCE. profit margin (which would finance fixed Such budget balances are regularly pub- costs) or average total cost with a net lished in the USA. profit margin. Many questioned the view Seealso:structuraldeficit that such a rigid pricing policy would be followed if there were great changes in full insurance (G2) demand either making possible higher Coverage of all the perceived RISK of a prices and greater profits or necessitating client. price cuts so that at least variable costs full-set industrial structure (L1) would be covered. Out of the theory came A complete range of all industrial sectors the assertion that oligopolists have a at a high level of development. Japan KINKED DEMAND CURVE. achieved this range and level, unlike the References more specialized countries of Europe. Hall, R.L and Hitch, C.L. (1939) ‘Price Seealso:autarky theory and business behaviour’, Oxford Economic Papers 2: 12–45. functional financing (H5) A framework for public finance policies full employment (E0, G2) proposed by Lerner which would require The maximum use of a FACTOR OF PRODUC- the government to use every policy instru- TION, especially labour. In the labour mar- ment available to contribute to the preven- ket, full employment occurs when tion of inflation and deflation and the unemployment has fallen to an irreducible promotion of the general interest, rather minimum, approximately the level of FRIC- than following traditional goals of govern- TIONAL UNEMPLOYMENT. In the USA, the ments such as balancing the budget. EMPLOYMENT ACT 1946 made government re- sponsible for economic stability and References growth; in the UK, BEVERIDGE’s Full Em- Lerner, A.P. (1943) ‘Functional finance ployment in a Free Society (1944) intro- and the Federal debt’, Social Research duced the same goal explicitly. Many 10 (February): 38–51. governments have only paid lip service to functional income distribution (D3) it as a goal, letting control of inflation The distribution of the NATIONAL INCOME take precedence. Many would argue that it between the factors of production, usually is a dangerous goal, unsettling the labour land, labour and capital. Statistics on this market and bringing about lower PRODUC- indicate, for example, the proportion of TIVITY as a strong desire to maintain the national income going to wages and employment can overheat an economy. salaries. Seealso:naturalrateofunemployment Seealso:labour’sshareofnationalin- References come Ginsburg, H. (1983) Full Employment and fundamental contradiction of capital- Public Policy: The United States and ism (F1) Sweden, Lexington, MA: Lexington The conflict in industrial development Books; Toronto: D.C. Heath. between the need for national planning and the fragmentary nature of the indivi- full-employment budget (H6) dual plans of each capitalist. MARX as- The budget of a central government ad- serted that this contradiction leads to justed by deducting expenditure relating to CRISES. unemployment and by adding the extra tax revenues the unemployed would con- fundamental equilibrium (F4) tribute if in employment. This permits the For a BALANCE OF PAYMENTS this occurs

© 2002 Donald Rutherford whenthecurrentandcapitalaccountsare haveagapofthiskindasafallinincomes bothinbalanceandtheeconomyis reducestaxrevenuesandariseinunem- internallybalancedatafull-employment ploymentincreaseswelfareexpenditures. level.Adeparturefromequilibriumcan Seealso:budgetarypolicy;Gramm– resultinanunderuseofresources,infla- Rudman-HollingsAct tionandinefficiency. Seealso:externalbalance;internalbal- fungibleasset(D0) ance Anassetwhichlosesitsidentitythrough use.WORKINGCAPITAL,unlikeFIXEDCAPITAL, fundamentals(E6) isfungible. Thekeyeconomicstatisticsusedtojudge thestateofanECONOMY.Atthesimplest future(D0,G1) level,thesearetheinflation,growthand Anagreedcontractforthesaleorpur- unemploymentrates.Adeeperanalysis chaseofanASSET,CURRENCYorCOMMODITY includestheratesofsavingsandproduc- atafuturedate. tivity,externaldebtandcurrentbalanceof payments. Seealso:option;spotprice fundamentalvalue(G1) futuregoods(D0) ThatpriceofasecurityinaLIQUIDMARKET TheproductofINVESTMENT.Bythesacrifice equaltothepresentvalueofitsfuture ofpresentconsumption,itispossibleto earnings. devoteresourcestocapitalgoodswhichby Seealso:efficientmarket aROUNDABOUTMETHODOFPRODUCTIONcreate agreatervolumeoffuturegoodsthanthe funding(H6) presentgoodsnotavailableforconsump- Conversionofshort-termdebttolong- tiontoday. termdebt.Beforegovernmentshadcon- Seealso:Bo¨hm-Bawerk troloverCENTRALBANKS,fundingwasseen asameansofprotectingatreasuryagainst futuresmarket(G1) ashort-termcollapseofconfidencein Acurrency,commodityorsecuritymarket governmentsecuritiesleadingtoheavy whichpermitspresentdealingforfuture salesofTREASURYBILLSandGOVERNMENT delivery.Centresforfuturestradingin- BONDS.Fundingcanalsobepractisedbya cludeChicago,London,NewYork,Paris firm,e.g.itcanraisecashtopayoffshort- termliabilitiessuchasbankloansby andToronto.The‘products’includecom- issuingshares,therebylengtheningits modities,currenciesandSTOCKMARKET debt. PRICEINDICES.Tradingisdone‘onthe margin’,i.e.onlyasmallpercentageof fundinggap(H6,M2) thevalueofthecontracthastobepaidby Ashortageofrevenuetomeettheexpen- thebuyerorseller,butfurtherMARGIN dituredemandsonafund.Thisproblemis CALLSaremadeifthereisanadverse oftenencounteredinthepublicsector marketmovementagainstthecontracting sinceavarietyofforces,e.g.demographic party.Fallsinthevalueoffuturescon- changes,canleadtoexpandingpro- tractsintheautumnof1987prompted grammes;also,forideologicalandother furthercallstobemade.Inthe1980sthere reasonstheremaybeareluctanceto wasaconsiderableincreaseinfutures increasetaxes.ECONOMIESinrecessionoften marketsforfinancialassets.

© 2002 Donald Rutherford G

gains from trade (F1) economist who has espoused the mixed The increase in output or welfare received economy: this approach is not without its by a country, or the world as a whole, critics as modem economists are often through international trade making possi- irritated by his avoidance of the empirical ble specialization of production. The the- testing of his theories. But it is greatly to ory of demonstrates his credit that one of his most thorough how this is possible. books is his late survey of economic thought in 1987. Seealso:absoluteadvantage References Galbraith, John Kenneth, 1908– (B3) Galbraith, J.K. (1938) Modern Competi- A Canadian–American liberal economist tion and Business Policy, Boston, MA: who has achieved astounding publishing Houghton Mifflin; London: Hamish success in his books on capitalism, the Hamilton. Great Depression, the affluent society and —— (1952) American Capitalism: the Con- the industrial state. With a training in cept of Countervailing Power, London: agriculture in Ontario and in agricultural Hamish Hamilton. economics at Berkeley, California, he has —— (1952) A Theory of Price Control, taught at Harvard University since 1949. Cambridge, MA: Harvard University Press. His early work on industrial price rigidities —— (1954) The Great Crash 1929, Boston: and on price controls made use of his Houghton Mifflin; London: Hamish wartime experience as head of the Price Hamilton. Section of the US Office of Price Admin- —— (1958) The Affluent Society, London: istration. In 1952, American Capitalism Hamish Hamilton. launched his career as a best-selling eco- —— (1967) The New Industrial State, nomic guru. His works contain strikingly Boston: Houghton Mifflin; London: novel analyses, e.g. of consumers’ COUNTER- Hamish Hamilton. VAILING POWER to large oligopolists, of the —— (1973) Economics and the Public contrast between private affluence and Purpose, Boston: Houghton Mifflin; London: Hamish Hamilton. public squalor and of the managerial —— (1987) A History of Economics: The nature of modern capitalism. Outside the Past as Present, London: Hamish Ha- university, he was a leading adviser to milton. President John F. Kennedy and his ambas- Reisman, D.A. (1980) Galbraith and Mar- sador to India. Much of his writing has ket Capitalism, New York: New York the broad sweep of an eighteenth-century University Press.

© 2002 Donald Rutherford gallopinginflation(E3)seehyperinflation tries to increase the level of minimum consumption, lower the prices of neces- (C7) saries and raise the prices of luxuries. The The study of the ‘behaviour of indepen- goal is to replace riches in material goods dent decision makers whose fortunes are with the wealth of being surrounded by linked in an interplay of collusion, conflict caring people. and compromise’ (Shubik). The theory is central to much formulation and testing of Seealso:altruism;Schumacher models in economics as it studies multi- References lateral decision making. The Gandhi, M.K. (1957) Economic and Indus- earliest exponents of the art were COURNOT, trial Life and Relations, Ahmedbad: EDGEWORTH, Bo¨HM-BAWERK and ZEUTHEN. Navjivan Publishing. Much of the theory recognizes UNCER- Narayan, S. (1970) Relevance of Gandhian TAINTY; recently it has taken into account Economics, Ahmedbad: Navjivan Pub- ignorance of rules, incomplete information lishing. and indefinite time horizons. Important (O0) solution concepts utilized are the NASH Gang of Four The Republic of Korea, Taiwan, Hong EQUILIBRIUM, the CORE, the Neumann–Mor- Kong and Singapore. genstern stable set and the SHAPLEY value. Major applications include BILATERAL Seealso:newlyindustrializedcountry MONOPOLY, DUOPOLY, planning processes, WELFARE ECONOMICS and the study of mar- gang system economy (P4) kets and monetary institutions. A slave ECONOMY practising the subdivision of labour. This was a principal character- References istic of the sugar colonies of the Caribbean. Neumann, J. von and Morgenstern, O. (1983) Theory of Games and Economic gap analysis (G1) Behaviour, Princeton, NJ: Princeton The amount of assets with variable rates University Press. financed by fixed rate liabilities. This is Schotter, A. and Schwodiauer, G. (1980) used in the analysis of the relationship ‘Economics and the theory of games: a between the interest rates and maturities survey’, Journal of Economic Literature of assets and liabilities. 18: 479–527. Shubik, M. (1983) Game Theory in the Garn St Germain Depository Institu- Social Sciences: Concepts and Solutions, tions Act 1982 (G2, K2) Cambridge, MA, and London: MIT The sequel to the DEPOSITORY INSTITUTIONS Press. DEREGULATION AND MONETARYCONTROL ACT 1980 gamma stock (G1) which continued the deregulation of the The least active stock or share quoted on US banking industry, particularly through the STOCK EXCHANGE AUTOMATED QUOTATION the removal of interest rate ceilings. SYSTEM. Gastarbeiter (F2) Seealso:alphastock;betastock;delta German word for GUESTWORKER. stock gazumping (R2) Gandhian economics (B2, P4) Breaking an agreement to sell a house A spiritual approach to economics invol- because another prospective buyer has ving self-reliance in a local environment, offered a higher price in the period honesty, equality, surrender of private between an oral promise to sell and the property for the sake of all, and a distinc- exchange of contracts. A sharp practice tion between ‘stranger-defined work’ and prevalent in England in the 1970s and ‘self-defined work’. This type of economics 1980s.

© 2002 Donald Rutherford GDP deflator (E0) only domestic taxation on imports from The ratio of the GROSS DOMESTIC PRODUCT at treaty partners; Articles 11 to 15 stated current prices to gross domestic product at that quantitative restrictions on imports constant prices multiplied by 100. It is the were permitted, after consultation, for weighted average of the detailed price balance of payments reasons. Trade has indices used to deflate the gross domestic gradually been liberalized in a number of product: the weights used reflect the im- rounds of negotiations. portance of each category of output in the Most disputes between members have gross domestic product. been solved, with the exception of the problem of the subsidization of agricul- gearing (G0) tural products. But it can be argued that The ratio of a bank or other company’s the continued existence of VOLUNTARY EX- total borrowings of a fixed term or perpe- PORT RESTRAINTS and deals such as market tual nature to its shareholders’ funds and sharing have retained PROTECTION in a minority interests. modern guise. genderdiscrimination(J7)seesexual Seealso:DillonRound;KennedyRound; discrimination TokyoRound;UruguayRound;World gender division of labour (J2) TradeOrganization The traditional assignment of particular References occupations or tasks with men continuing Hoekman, B.M. and Kostecki, M.M. to have a wide range of job opportunities, (1995) The political economy of the world and women restricted to a narrow range. trading system: from GATT to WTO, Oxford and New York: Oxford Univer- General Accounting Office (H1) sity Press. An independent US agency, outside the Oxley, A. (1990) The Challenge of Free Executive Office, directly responsible to Trade, Hemel Hempstead: Harvester the US Congress for seeing that the funds Wheatsheaf. voted by Congress are spent as enacted in General Agreement to Borrow (E5, F3) legislation. The credit line set up by the GROUP OF TEN General Agreement on Tariffs and for the INTERNATIONAL MONETARY FUND in Trade (F1) 1962 to provide loans to the group’s A multilateral trade agreement signed in members. The facility was enlarged in 1947. It covers all major trading countries January 1983 when other IMF members with the exceptions of the Soviet republics were permitted to contribute to it and and China. It was originally intended to make use of it in emergencies. be part of the International Trade Organi- general competitive bidding (M2) zation, a body intended to police interna- A method of selecting a contractor for a tional transactions, and, together with the large investment. Typically an outline of a INTERNATIONAL MONETARY FUND and the construction project is announced. Any- WORLD BANK, constituted a new interna- one can participate in the bidding and the tional economic system. As the INTERNA- bidder offering the lowest price wins the TIONAL TRADE ORGANIZATION was never contract. Also known as the ‘open bidding established, the General Agreement on system’. Tariffs and Trade remains as a treaty. Under Article 1, each contracting party general equilibrium (D5) to the agreement pledged to offer most The state of an economy in which all its favoured nation treatment to the others; markets for consumer goods, capital Article 3 challenged trade discrimination goods, labour services, financial assets by requiring contracting parties to charge and money are in equilibrium and the

© 2002 Donald Rutherford economy is in overall balance. The leading disturbance concerned before applying the MARGINALIST WALRAS was the first economist LEAST SQUARES METHOD. to set out the conditions for general generalized medium (E4) equilibrium. Today, the basic questions Something generally acceptable for the about a general equilibrium always include purpose of making many transactions. whether the solution proposed exists, MONEY performs this in modern economies whether it is unique and whether it is as it can be used to effect exchanges in stable. General equilibrium analysis has numerous markets and measure the value the advantage of being flexible enough to of millions of different types of goods and be able to incorporate many goals and services. resources in a model. It is contrasted with MARSHALL’s PARTIAL EQUILIBRIUM ANALYSIS and Seealso:mediumofaccount;mediumof is a half-way house between microeco- exchange;money nomics and macroeconomics. generalized system of preferences (F1) Seealso:Arrow–Debreumodel A proposal made at the 1964 meeting of References UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, and accepted in 1968, that Allingham, M. (1975) General Equilibrium, developed countries grant preferential tar- New York: Wiley; London: Macmillan. Kornai, J. (1971) Anti-Equilibrium and the iff treatment for imports of manufactures Tasks of Research, Amsterdam: North- and semi-manufactured products from de- Holland. veloping countries. Those granting prefer- Weintraub, E.R. (1974) General Equili- ential treatment include the USA, the brium Theory, London and Basingstoke: EUROPEAN COMMUNITY, Canada, Australia Macmillan. and Japan. general fund (H6, M2) Seealso:mostfavourednation Part of a budget providing finance for a variety of purposes. general market equilibrium (D5) The EQUILIBRIUM of a market with several Seealso:dedicatedbudget interdependent commodities traded with, for each commodity, the quantity deman- general government net worth (H6) ded being equal to the quantity supplied. The fixed capital stock of central or local government less its net financial liabilities. Seealso:isolatedmarketequilibrium This BALANCE SHEET approach to the study References of government finance has been suggested as a framework for assessing a govern- Dorfman, R., Samuelson, P.A. and Solow, ment’s ability to sustain its economic R.M. (1958) Linear Programming and Economic Analysis, ch. 13, New York: policies. It also has the useful function of McGraw-Hill. making governments distinguish produc- tive investments from debt servicing. general sales tax (H2) An INDIRECT TAX levied on the sales of most General Household Survey (C8, H1) consumer goods and services, usually ex- A sample survey used in the UK to collect pressed as a percentage of the value of the data on the labour force and on household purchases. expenditure. Seealso:expendituretax generalized least squares (C1) An improved method of estimating rela- general strike (J5) tionships between economic variables. Simultaneous STRIKES in most major indus- Each observation is weighted by the re- tries of a country: famous examples in- ciprocal of the STANDARD DEVIATION of the clude that in the UK in 1926 and several

© 2002 Donald Rutherford in Poland and Sweden in the 1980s. These generative city (R1) strikes often start in a major sector and A city whose existence and growth are a become general through sympathetic ac- major cause of the growth of a region. The tion. best example in most countries is the capital city. GeneralTheory(E0)seeKeynes’sGeneral Theory Seealso:parasiticcity general training (J2) gentrification (R2) Training of members of a labour force in Improvement of older working-class inner skills of use to many employers, e.g. word city housing by rich professionals, e.g. in processing. There is a case for education San Francisco and south London. of this kind to be provided by an educa- geographical trade structure (F1) tional institution, or financed by an in- Analysis of a nation’s international trade dustry as a whole, to avoid an employer showing the countries of origin of its gaining no return to the investment made imports and the countries of destination in a worker’s training because the worker for its exports. This structure reflects moves to another job. international trading agreements and the Seealso:humancapital;specifictraining extent of economic interdependence among countries. In the UK, for example, general union (J5) membership of the EUROPEAN COMMUNITY A TRADE (LABOR) UNION which organizes from 1972 has brought about a switch workers from different occupations and from trade with the Commonwealth to industries, e.g. the Teamsters (USA), the trade with major European economies, Transport and General Workers’ Union especially Germany. (UK). General unions are often so large as to dominate a national trade union move- Seealso:commoditytradestructure ment. geometric mean (C1) Seealso:craftunion;industrialunion The nth root of a set of numbers which have been multiplied together, e.g. the generational accounting (H6) geometric mean of 2, 4, 8 is the third root The construction of accounts showing the of 64, i.e. 4. taxes paid less transfer payments received over a person’s lifetime in order to execute Seealso:arithmeticmean;harmonic long-term fiscal planning and analysis. mean Lifetime net fiscal burdens are calculated geometric progression (C6) by summing the net taxation of all genera- A series of numbers which increases by a tions living at a point in time. In most constant, or common, ratio, e.g. 2, 4, 8, major OECD countries, often in central 16, where 2 is the common ratio. MALTHUS banks or treasuries, these accounts are asserted that population grows according produced. This analysis examines the fiscal to this progression. burden on future generations created by current policies to see if they are sustain- Seealso:arithmeticprogression able and achieving a balance in the fiscal George, Henry, 1839–97 (B3) burden between generations. At the end of US economist and politician famous for the 1990s the USA, Germany and Japan advocating that all taxation should be raised had serious generational imbalances. from a single tax on land, an idea which References had its origins in the writings of the PHYSIO- Kotlikoff, L.J. (1992) Generational accoun- CRATS and the classical DIFFERENTIAL THEORY ting, New York: Free Press. OF RENT. He regarded increases in land

© 2002 Donald Rutherford values in the nineteenth century as a major In a largely agrarian society, the base year cause of inequality and injustice in society. chosen will determine the rate of growth His famous work, Progress and Poverty exhibited by that index. This was origin- (1879), which was very popular in the USA ally applied to the Soviet economy by the in the 1880s and 1890s, is still closely Austro-American economic historian studied in the many Schools Alexander Gerschenkron (1904–78). of Economics which provide expositions of References the master’s ideas throughout the world. The Henry George Foundation of Amer- Gerschenkron, A. (1947) ‘The Soviet in- dices of industrial production’, Review ica, founded in 1926 and based at Colum- of Economics and Statistics 29: 217–26. bia, Maryland, still researches into land value taxation and site value taxation. gestation period (E2) The time it takes for production or a German capitalism (P1) capital project to be completed. CLASSICAL An economic system noted for high wages, ECONOMISTS, e.g. RICARDO, asserted that the high international competitiveness and a average period was twelve months, as in promotion of social cohesion through agriculture where there is only one harvest strong trade unions, labour–management per year. co-operation and high levels of spending on health care and welfare. Gibrat’s law (L2, R1) The relationship between size and rate of German Historical School (B1, B2) growth of an entity such as a firm or a city. Successive generations of German econo- mists in the nineteenth and early twentieth Seealso:Zipf’slaw centuries who took a holistic approach to References economics, attempting to examine all eco- Sutton, J. (1997) ‘Gibrat’s legacy’, Journal nomic phenomena, using material from of Economic Literature 35: 40–59. social history. Their researches included fiscal policy, administration, industrial or- Giffen good (D0) ganization, cities, bank credit, government A good increasingly demanded as its price and private enterprise. The earliest writers rises. GIFFEN noted this exception to the of this school were Bruno HILDEBRAND normal demand curve inverse relationship (1812–78), Wilhelm ROSCHER (1817–94) between price and quantity demanded of a and Karl KNIES (1821–98), the leader was good in the case of an essential foodstuff. Gustav von SCHMOLLER (1838–1917) and the later writers were Arthur Spiethoff Giffen paradox (D0) (1873–1957), Werner SOMBART (1863–1941) An exception to the normal inverse rela- and Max Weber (1864–1920). tionship between price and quantity de- manded made famous by GIFFEN.He References noticed in the case of bread consumption Pearson, H. (1999) ‘Was there really a that the quantity demanded rose when the German Historical School of Econom- price did, an exception to the general law ics?’, History of Political Economy 31: of demand. If a poor family spends its 547–62. income on bread and meat, a rise in the Shionoya, Y. (ed.) (2001): The German price of bread would make it impossible Historical School: the historical and ethical approach to economics, London for it to afford a discrete amount of meat, and New York: Routledge. with the consequence that there would be an excess of income after maintaining the Gerschenkron effect (C1, N0, F2) same level of bread consumption which The effect of the choice of a particular would be used to purchase more bread – base year on an index of industrial output. hence an increased consumption of bread

© 2002 Donald Rutherford despite a rise in its price. INCOME AND SUB- ment and then Assistant Secretary until he STITUTION EFFECTS analysis is used to ex- retired in 1897. A founder of the Royal plain this paradox: the income effect Economic Society and famous for the GIF- outweighs the substitution effect and there FEN PARADOX. is a change in the sign of the income effect References from positive to negative. Giffen, R. (1904) Economic Inquiries and In the figure, I1 and I2 are the indiffer- Studies, London: G. Bell. ence curves of a particular consumer faced Mason, R.S. (1989) Robert Giffen and the with the choice between goods F and G. Giffen Paradox, Hemel Hempstead: Phi- There is a fall in the price of good G lip Allan. (more of it can be obtained for a fixed amount of F) expressed by a shift in the gifts tax (H2) budget line from AC to AD, but there is A tax on the transfer of personal capital to also a fall in the quantity demanded of it someone else, often a close relative. The from Or to Oq as the income effect yz is tax is imposed to prevent persons from more than the substitution effect xz. avoiding inheritance taxes by transferring ownership before death; small gifts of a single year are usually exempted.

gilt-edged security (E5) see gilts

gilts (E5, G1) UK government security with a guarantee that interest will be paid and capital repaid on its redemption day (if any). The term arose because of the high value of these bonds.

Gini coefficient (C1, D3) A measure of income distribution, devised by the Italian demographer and statisti- cian Corrado Gini (1884–1965). It is the ratio of the area between a LORENZ curve and the line of absolute equality (shaded in the figure) to the area of the entire References triangle below that line (ABC). It has also Boland, L.A. (1977) ‘Giffen goods, market prices and testability’, Australian Eco- nomic Papers 16: 72–85. Stigler, G.J. (1947) ‘Notes on the history of the Giffen paradox’, Journal of Political Economy 55: 152–6.

Giffen, Sir Robert, 1837–1910 (B3) Born in Strathaven, Scotland. After ca- reers in law and journalism (he was assistant editor of The Economist from 1868 to 1876 and city editor of the Daily News from 1873 to 1876), he became a civil servant working at the Board of Trade as Chief of the Statistical Depart-

© 2002 Donald Rutherford beenappliedtothemeasurementofINDUS- shares sold internationally through the TRIALCONCENTRATION. foreign branches of a bank.

GinnyMae(G3)seeGovernment Seealso:AmericanDepositoryReceipt NationalMortgageAssociation global deregulation (F3) giro (G3) The abolition of exchange controls, tax A system for transferring bank deposits barriers, fixed dealing commissions and long used in most European countries and limitations on overseas investment to- offered as a service by the UK Post Office gether with the creation of new financial from 1968 and by UK CLEARING BANKS instruments which foreigners can use. shortly afterwards. Instead of a transfer More and more countries are heading being effected by a cheque, the holder of a down the path of deregulation. Since giro account instructs the bank concerned 1979, the UK, Japan, Germany and many to make a change in its ledgers to pay other countries have abolished their ex- another giro account-holder a particular change controls. Japan, long reluctant to amount of money. allow foreigners to invest in the country, has allowed more foreign access to its GLAM (J1) financial markets. Also, the New York Grey, leisured, affluent, married: the key and London Stock Exchanges have under- socioeconomic group of the late twentieth taken massive deregulation. century, aged between 45 and 59 years. Seealso:BigBang;Mayday Glass–Steagall Act 1933 (G2, K2) Banking Act 1933 (USA) which separated globalization (F0) INVESTMENT BANKING from deposit-taking The expansion of domestic markets and banking with the aim of discouraging activities into a world-wide system. As speculation and conflicts of interest, e.g. long ago as the Roman Empire trade was between underwriting new share issues and encouraged internationally. In the seven- normal COMMERCIAL BANK lending. It teenth century companies trading to the banned the payment of interest on de- East Indies from Western Europe not only mand deposits and allowed the Federal exported and imported but established Reserve System to set RESERVE REQUIRE- factories in distant countries. From the MENTS. Since 1980, there have been US late nineteenth century major industrial calls for the repeal of the Act so that US and banking companies set up foreign banks can have as wide a range of subsidiaries. Today globalization does financial products as European banks. mean that increasingly economic activity Japan’s version of Glass–Steagall (Article takes place within world-wide markets, 65 of its Securities and Exchange Law) often electronically. BRANDING has pro- was also much criticized. duced more homogenization of tastes and References reduced the scope for local production. Benston, G.I. (1990) The Separation of With globalization national governments Commercial and Investment Banking. become less important: large corporations The Glass-Steagall Act Revisited and and world markets dictate the distribution Reconsidered, London: Macmillan. of production and of incomes. Critics point out the threat to democracy posed glidingrate(F3)seeslidingparity by the establishment of institutions not subject to national governments. global depository receipt (G1) A bank certificate referring to domestic Seealso:multinationalcorporation

© 2002 Donald Rutherford References firm, expected to continue to operate for Turner, A. (2001) Just capital: the liberal the foreseeable future because of its stable economy, London: Macmillan. financial condition. global monetarism (F3) going rate (J3) A proposed regime of fixed exchange rates A wage rate regarded as the acceptable pay with a collective MONETARY POLICY for parti- at a particular time for an occupational cipant countries. The aim of this form of group. Often it is the pay set by a major MONETARISM is to stabilize the average price employer or bargaining group. of traded goods. Seealso:keyrate;wageround glut (E3) goldbug (G0) Excess supply of all or most goods and Someone in favour of a return to the GOLD services. CLASSICAL ECONOMISTS regarded a STANDARD. glut as a general , characterized by failing output, employ- gold bullion standard (F3) ment and prices – it was only temporary A fixed exchange rate system which ex- as price changes were expected to restore isted in its purest form from 1880 to 1914. the economy to a full-employment equili- National currencies were valued in terms brium. of weight units of gold, and exchange rates were fixed through the medium of Seealso:effectualdemand;Malthus;Mill, gold. If international transactions were JohnStuart;Say’slaw not in balance then internal adjustment gnomes of Zurich (E3) was needed in the debtor country. Cur- A description of the Swiss bankers alleged rencies on the gold standard were con- to be speculating against sterling in the vertible into each other merely with the 1960s used by Harold Wilson, then prime cost of shipping gold from one country to minister of the UK. another. The key player of the system was the CENTRAL BANK of each country as it goal equilibrium (D0) had the tasks of contracting the internal An EQUILIBRIUM that attempts to achieve a money supply – in the case of a balance particular aim, e.g. the maximization of of payments deficit to produce a credit consumers’ utility. contraction, and the reverse in the case of Seealso:non-goalequilibrium a balance of payments surplus. Both domestically and internationally, gold was goal system (H2) ideal because of its unique qualities as a A method of raising tax revenue which standard of value and as a medium of requires each tax office to achieve a quota exchange. It applied the ONE-PRICE LAW of tax revenue. throughout the world, permitting gold to Seealso:taxfarming flow according to the price specie-flow mechanism. But too little co-operation goal variable (E6) between the central banks (many of whom A policy objective forming part of the were reluctant to follow the harsh rules of objective utility function of a policy-ma- the system) weakened the automatic ef- ker, e.g. price stability, a balance of pay- fects of the gold standard. The gold ments equilibrium. standard was in force in the UK from 1717 to 1931 (apart from the Napoleonic Seealso:instrumentvariable;targetvari- Wars and the First World War). Before able the First World War the BANK OF ENGLAND, going concern (M1) as the CENTRAL BANK of the creditor coun- A commercial organization, usually a try of the world, operated according to

© 2002 Donald Rutherford the rules, but the USA did not do so to a potential employee to induce him or when it had a similar task after 1918: it her to join a firm. had a great inflow of gold, but it did not allow domestic prices to rise. When golden parachute (J3) A financial arrangement made by a com- debtor countries introduced EXCHANGE CON- TROLS and entered into trade wars, the gold pany director to secure future income, e.g. standard was at an end. a consultancy in the event of a company takeover. Seealso:commodityreservecurrency; dollarstandard;goldexchangestandard golden rate (J3) An excessive rate of pay for overtime References which is several times the normal rate for Bordo, M.D. and Schwartz, A.J. (eds) working contracted hours. (1984) A Retrospective on the Classical Gold Standard 1821–1931, Chicago: golden rule (O4) University of Chicago Press. Equating the rate of profit with the rate of growth. In the theory of ECONOMIC GROWTH, gold coinage (E5) it is the optimal growth path for an Coins now used chiefly for investment or economy such that the maximum level of collecting purposes. Leading examples in- consumption per head of a population is clude the BRITANNIA, the KRUGERRAND and sustained. the MAPLE LEAF. References gold demonetization (F3) Phelps, E.S. (1961) ‘The golden rule of Ceasing to use gold as the basis for accumulation: a fable for growthmen’, valuing a currency. The major example American Economic Review 51: 638–43. of this was when the US dollar replaced gold after the collapse of the BRETTON golden share (G1, M1) WOODS system as the peg for many curren- A voting share in a company, especially cies. one which has been privatized, which can prevent the company from being taken Seealso:dollarstandard over and gives the holder the power to golden age (O4) insist that the company be run in a A period of steady growth with continuous prescribed way. The UK government re- full employment. In this age, the WAR- tained such shares when it privatized NA- RANTED RATE OF GROWTH is equal to the TIONALIZED INDUSTRIES. NATURAL RATE OF GROWTH. Seealso:privatization References Golden Triangle (R1) Robinson, J. (1962) Essays in the Theory of 1 Thailand, Laos and Burma: the most Economic Growth , London: Macmillan. important opium-producing region in golden handcuffs (J3) the world. A gratuity or deferred benefit given to an 2 The megalopolis of North West Europe. employee to discourage him or her from 3 The business centre of Pittsburgh, Penn- moving to another employer. sylvania. golden handshake (J3) gold exchange standard (F3) A gratuity given to an employee on retir- The linking of a currency to a currency ing from a firm. which is on the gold standard so that it acquires a stability making it useful as a golden hello (J3) reserve currency. This substitute for the A gratuity of a substantial amount offered gold standard was in force in the 1920s (in

© 2002 Donald Rutherford the UK from 1925 to 1932) and in effect European authorities to separate private in the 1960s. and monetary gold markets, creating a two-tier market. The USA wanted South Seealso:dollarstandard;goldbullion Africa to sell all its gold to the private standard market so that the price would come down gold franc (F3) to $30 or $32 to shake central banks’ An ARTIFICIAL CURRENCY used by the confidence in gold. However, world infla- International Telecommunications Union tion made gold a popular private holding (Geneva) to express telecommunications and so its price approached $70 by mid- charges of different countries in the same 1972; by September 2001 the price had ‘currency’. In 1865, the Telegraph Conven- exceeded over $290. The London Gold tion adopted the French franc as the Market was run by five firms since 1919, monetary unit to be used in calculating namely N.M. Rothschild, Samuel Mon- international tariffs as it was a major hard tagu, Mocatta and Goldsmid, Sharps, currency. In 1928, to avoid the problem of Pixley and Westpac (formerly Johnson fluctuations in the value of the franc, a Matthey Bankers). Internationalization of standardized ‘gold franc’ equal to 10/31 of financial markets brought about proposals a gram of gold was the basic unit chosen. to admit foreign traders. There is now the In 1947, many countries were dissatisfied London Bullion Market Association with with the system but the proposal to seven clearers. devalue the gold franc was rejected as it meant a reduction in international tele- gold plating (K2) graph and telephone rates. Lacking an The practice of the UK Civil Service of alternative, the system continued. How- converting EUROPEAN UNION directives into ever, the gold franc was never a reserve longer and more onerous legislation and currency (accounts are settled in national statutory instruments. currencies) but merely a unit of account: gold reserves (E5) thus it has only one of the functions of Gold holdings of a CENTRAL BANK used only money. Since the floating of currencies in for transactions with other central banks. 1971, the conversion of gold francs into The amount of gold reserves in the world national currencies has produced divergent at any time is equal to the amount results. Also, gold francs of different produced less the private demand for values are used for different types of jewellery, dentistry and hoarding, together transactions, e.g. the value for shipping with past accumulations. tolls is different from that for telegrams. In 1987, the value of the gold franc was fixed Seealso:goldbullionstandard with 3.0061 gold francs equal to 1 special drawing right. gold shortage (N2) The world shortage of gold in 1900–72. In goldilocks economy (N0, P0) this period, US wholesale prices rose 300 The US economy in the late 1990s when it per cent, a much greater rise than in the enjoyed high growth without inflationary monetary gold price (up only 75 per cent). pressures. It was noted for its low rate of The shortage was brought about to a large household saving and rising trade deficit. extent by the small margin between the Seealso:softlanding production cost and the selling price of gold, a disincentive to producers. An gold market (G1) increase in the price of gold pushed up The market with official and private deal- US Treasury holdings from $7 billion in ings in gold coin and bullion. In March 1934 to $20 billion in 1939, but the short- 1968, US monetary authorities persuaded age continued, exacerbated by the Second

© 2002 Donald Rutherford World War and the post-war demand for value of a firm to be in excess of its BOOK gold. VA LU E . goldsmith banking system (G2) Goodwin growth cycle (E3) The seventeenth-century beginnings of A model relating employment, profits and modern commercial banking in the City wages in order to explain economic CYCLES. of London. Goldsmiths who accepted Cycles occur because at a time of high personal and business gold holdings also employment and low unemployment there lent out such deposits until they discov- is a rise in wages that causes profits to fall. ered that only a certain proportion of As a consequence investment declines and deposits would be reclaimed in a particu- in turn employment and wages fall. With lar period and so it was possible to lend by low wages, profits and investment rise granting loans in the form of deposit causing an upswing. The theory owes receipts. This was, in effect, the beginning much to theories advanced by RICARDO of the FRACTIONAL RESERVE BANKING system. and MARX. gold standard (E5) References A basis for the value of a national Goodwin, R.M. (1972) ‘A growth cycle’, in currency which can take the form of a C.H. Feinstein (ed.) Socialism, capital- GOLD BULLION STANDARD or a GOLD EXCHANGE ism and economic growth, Cambridge: STANDARD. Cambridge University Press. References Gordon model (G1) Gold Standard Commission (1982) Report A model of stock market prices: to Congress of the Commission on the Role of Gold in the Domestic and Inter- Pt ¼ Dtðr gÞ national Monetary System, Washington,

DC: US Government Printing Office. where Pt is price in time t, Dt is dividend in period t, r is the constant rate of return good (D0) and g is the constant dividend growth rate. 1 A tangible output rather than a SERVICE. 2 Something which bestows UTILITY on the Gosplan (P3) person possessing it. The Soviet central planning organization Seealso:bad;browngood;consumer which had the task of collecting economic durable;illth;wealth;whitegood data from all the republics of the USSR and their subordinate organizations to Goodhart’s law (E5) draw up medium five-year plans and This states that any measure of the MONEY annual operational plans. Its well-known SUPPLY behaves differently when it becomes five-year plans began with a plan for an official target by the very act of industry covering the years 1923–4 to targeting it. Named after Charles Good- 1927–8. It also had to audit enterprises to hart, formerly chief monetary adviser at check that plans had been followed. It had the Bank of England, who reached this the important task of material balancing, conclusion after studying the monetary i.e. matching expected demand with ex- events of the period 1971–3 in the UK. pected supply. goodwill (M2) Gossen, Hermann Heinrich, 1810–58 An intangible asset of a firm adding to its (B3) worth. A major example is ‘a good reputa- An early MARGINALIST educated in law and tion’ resulting from a firm having estab- government in the Universities of Bonn lished good relations with customers or and Berlin. After a spell as an indolent suppliers. Goodwill causes the market civil servant from 1834 to 1847, he worked

© 2002 Donald Rutherford in the insurance industry. His short work guarantees of the securities backed by a of 1854 expounded the law of DIMINISHING pool of Federal Housing Administration MARGINAL UTILITY, analysed market ex- and Veterans Administration mortgage change, examined the nature of RENT and loans; known as ‘Ginny Mae’. provided the basis for a theory of LABOUR SUPPLY. JEVONS and MARSHALL acknowledged government procurement practice (F1, their debt to him. L3) The purchasing method a governmental Gossnab (P3) organization or agency uses to choose its The central supplies committee of the suppliers of goods and services. Preference USSR which had the task of allocating for a domestic supplier is a type of NON- materials to enterprises. In the 1990s, its TARIFF BARRIER. role was to change to being a wholesaler of capital goods. government role (H1) The economic functions carried out by government bond (E5, G1) governmental organizations, together with A long-term stock market security issued the range of policies affecting the eco- by a central, state or local government nomic behaviour of firms and households. which is either irredeemable or to be Under LAISSEZ-FAIRE principles, a govern- repaid after a stated number of years. ment’s role will be minimal – not much See also: gilts more than defence and law and order – so that market forces will not be curbed. The government broker (G1) earliest lists of the functions of govern- The stockbroker dealing in financial ment in the works of PETTY, SMITH and John markets on behalf of a government. In Stuart MILL were slightly longer. Petty London, the senior partner of Mullens & approved of state financing for clergy and Co. participated in gilts for the Bank of doctors, Smith of the building of bridges England. and the provision of schools, Mill of some government participation in the running government intervention (H1, H2, L5) of industry. In the nineteenth and twenti- A series of measures undertaken by a eth centuries, the growth of trade unions government to achieve goals not guaran- and socialist parties together with the teed by a market system, i.e. fairer income theory of ECONOMIC PLANNING have per- and wealth distribution, PUBLIC GOODS, suaded many governments to extend their MERIT GOODS, improved SOCIAL WELFARE, functions and to influence the pattern of appropriate infrastructure investment and production and the distribution of in- a full equilibrium for the economy. Inter- comes. Only in the SOVIET ECONOMY before vention can avoid chaos by establishing the 1960s was there an attempt to give PROPERTY RIGHTS, controlling access to eco- governments so large a role as to leave nomic activities and regulating monetary little decision-making power in the hands operations. But intervention has its short- of other economic agents. comings: the use of price controls and the limiting of competition have often dis- government security (G1) torted markets. A BILL or BOND issued by a local, regional Seealso:fine-tuning;fiscalpolicy;in- or central government. Lower levels of comespolicy;monetarypolicy;prices government tend to borrow for shorter policy periods than central governments. The ultimate guarantor of the payment of Government National Mortgage Asso- interest and the repayment of the sum ciation (G2) borrowed is usually the central govern- US association responsible for issuing ment.

© 2002 Donald Rutherford grace(G0)seedaysofgrace projected deficit of $318 billion was an- nounced. This draconian measure has gradualistmonetarism(E3) given questionable powers to the OFFICE OF AformofMONETARISMthatacceptsthat MANAGEMENT AND BUDGET and CONGRESSIONAL theassociationbetweenmoneysupply BUDGET OFFICE as well as necessitating un- increasesandpriceincreasesisalong- popular spending cuts in successive years. termphenomenon.Thus,intheshortrun, In 1986, the US Supreme Court ruled the thereisalimitedroleforthestimulation automatic SEQUESTRATION provision of the ofaggregatedemandthroughtheuseof Act unconstitutional. fiscalandmonetarypolicies.However, monetaristsofthiskindwouldpreferthere grandfather clause (F1, K2) tobenoDEMANDMANAGEMENTbecauseof An item in an agreement permitting the theirbeliefthat,asaneconomyisbasically retention of laws in conflict with the self-adjusting,manipulationofaggregate essence of the agreement. GATT con- demandwouldcausefluctuations.FRIED- tained such clauses. MAN(USA)andLaidler(UK)havead- heredtothisview;theNEWCLASSICAL grandfathering (Q0) ECONOMICSwritersareinstantmonetarists. Distributing tradable permits to pollute according to countries’ existing levels of Seealso:instantmonetarism emissions of pollutants. graduated income tax (H2) Granger causality (C1) A tax on income with a different rate for A statistical technique which uses phase different bands of income. correlations between two variables to pre- Seealso:bracketcreep;progressivetax dict future values of one of the variables. A popular use of this has been in correlat- graduate tax (H2) ing GDP and stock market prices. A tax on the earnings of graduates imposed to recover the public expenditure incurred grant-back clause (O0) in financing college or university educa- The right in a contract granting the owner tion. The tax is related to future earnings of a patent the right to all improvements but there can be a ‘tax holiday’ covering the and modifications in the technology dis- first few years of employment or until a covered by the licensee. In the European threshold level of income has been reached. Union the licensee grants back the right to Proponents of the tax argue that it makes the licensor of the use of these modifica- possible a greater expansion in the number tions in another place. In some countries of students; opponents assert that this the licensor owns the modifications as increase in taxation will discourage partici- intellectual property. pation in higher education. grant in aid (H7) Gramm–Rudman–Hollings Act (H6) US federal grant to state or local govern- The Balanced Budget and Emergency ments. It can be a flat grant (equal to the Deficit Control Act 1985 (US federal sum raised by a state government), a statute). This set a legal target for the proportionate grant (proportional to the federal budget deficit of $171.9 billion in contribution of the recipient government) 1986, with the contradictory requirement or a percentage grant (percentage of the that automatic spending cuts should be cost to the recipient government for main- limited to $11.7 billion, making the deficit taining a particular programme). The pur- target unattainable without an increase in pose of these grants is to ensure that a tax revenues. After 1986, the deficit target desired level of public service is reached in was $144 billion in 1987, falling to zero in all the states whatever the ability or will- 1991. But at the beginning of 1991, a ingness of individual states to finance it.

© 2002 Donald Rutherford grants economics (H3) partly through PROTECTION and the cau- A type of economics examining both two- tious FISCAL POLICIES of national econo- way transfers (exchanges) and one-way mies, suppressed the level of economic transfers (grants). To understand grants is activity. to be able to comprehend the nature of Seealso:beggar-my-neighbourpolicy;de- much of fiscal policy, as it is concerned pression;recession;slump with providing TRANSFER INCOMES for per- sons who exchange nothing for them, and References of expenditure programmes which create Bernstein, M.A. (1988) The Great Depres- social goods. This type of economics is sion, New York and Cambridge: Cam- also useful in the analysis of international bridge University Press. aid. Friedman, M. and Schwartz, A.I. (1966) The Great Contraction, Princeton, NJ: References Princeton University Press. Boulding, K.E. (1973) The Economy of Kindleberger, C.P. (1986) The World in Love and Fear: A Preface to Grants Depression, 1929–39, London: Allen Economics, Belmont, CA: Praeger. Lane (reprinted Harmondsworth: Pen- guin, 1987). gravity model (R1) Saul, S.B. (1969) The Myth of the Great A method of predicting the amount of Depression, London and Basingstoke: interaction between two places. It asserts Macmillan. that interaction is directly related to the Temin, P. (1976) Did Monetary Forces product of the two populations and in- Cause the Great Depression?, New York: versely to the distance between the places W.W. Norton. concerned. A familiar version of these = 2 Great Leap Forward (N1, P2) models takes the form Mij ¼ PiPj dij China’s attempt in its Second Five-Year where Mij is the amount of movement Plan of 1958–62 to replace Soviet-type between i and j, Pi is the population of planning with its own over-ambitious de- place i, Pj is the population of place j and dij is the distance between places i and j. velopment schemes. A system of large- The interaction Mij can be the number of scale rural communes in the agricultural migrants, the volume of goods trans- sector and the use of labour-intensive ported, the number of letters and tele- methods and decentralization of produc- phone calls, etc. Distance can be measured tive activities were introduced. A symbol in various ways, including route miles or of this change was the installation of a kilometers and transport cost. More so- small steel furnace in each village. Con- phisticated models include the character- tinued economic failure, natural disasters istics of the populations, weighting them and the withdrawal of Soviet technical accordingly. assistance brought the experiment to an end in 1960. References Carrothers, G.A.P. (1956) ‘An historical Great Society (I3) review of the gravity and potential con- The visionary programme of President cepts of human interaction’, Journal of Lyndon B. Johnson announced in 1964 to the American Institute of Planners 22: 94–102. move beyond the goals of a rising GROSS NATIONAL PRODUCT and FULL EMPLOYMENT to Great Depression (N1) a more moral and spiritual society. In 1 The period 1873–96 in the English practice, it meant a set of complex federal economy when agriculture was espe- programmes, in many respects similar to cially depressed. the New Deal, which included action on 2 The period 1929–36 when world trade, poverty, education, housing, Medicare and

© 2002 Donald Rutherford equal opportunities. President Nixon an- World countries since 1945 by irrigation, nounced its demise in 1973. the use of fertilizers and better seeds. It was hoped that substantial increases in the Greenbury Code (G3, J3) yields of wheat and rice would reduce Recommendations of The Study Group on many world food shortages as well as Directors’ Remuneration (also known as hunger in the less developed countries. the Greenbury Committee) in 1995 on pay Radical critics of the green revolution for executive directors. This UK group assert that the technology used is often proposed that independent outsiders would monopolized by large commercial farmers constitute a compensation committee with who come to dominate agriculture and the task of preventing excessive executive create a landless proletariat. pay, instituting employment contracts last- ing more than a year, creating new long- References term incentive plans in place of existing Cleaver, H.M. (1972) ‘The contradictions stock option plans and reporting annually of the Green Revolution’, American on all aspects of pay, including pensions. Economic Review 62: 176–86. Poleman, T.T. and Freebairn, D.K. (eds) Seealso:corporategovernance (1973) Food, Population, and Employ- green conditionality (Q2) ment. The Impact of the Green Revolu- tion, New York: Praeger. The rule that lending and expenditure are subject to the condition that the environ- green stripe price (G1) ment is not harmed. A stock market price on a visual display unit of the STOCK EXCHANGE AUTOMATED QUO- green currency (F3) TATION SYSTEM showing the best price The exchange rate for converting the quoted by any market-maker for small agricultural prices of the EUROPEAN COMMU- transactions in a particular stock. NITY into the domestic prices of a particu- lar member country, originally expressed Gresham’s law (E4) in EUROPEAN UNIT OF ACCOUNTS. ‘Bad money drives out good.’ A maxim of Sir Thomas Gresham (1519–79), the foun- greenfield (Q2) der of the Royal Exchange, London, who Land previously used only for agriculture asserted it in 1560 with reference to base or a wilderness with the potential for silver coin. The contemporary experience housing or other building. of coinage being debased through CLIPPING Seealso:brownfield prompted this observation. The law oper- ates because of the public’s propensity to greenhouse effect (Q0) hoard more valuable currency, thereby The entrapment of the sun’s energy near withdrawing it from circulation. the earth’s surface by the atmosphere. This natural phenomenon becomes hazardous grey area (R5) when pollutants, especially carbon dioxide, Part of a country in declining prosperity. enter the atmosphere. grey belt (J1) greenmail (G3) An area with a high proportion of retired A method of preventing the takeover of people in its population. In many coun- one’s company by the purchase of holdings tries, the grey belt is situated on the made by possible predators and ARBITRAGE. coastline with the best climate. green pound (G3) Seealso:ageingpopulation The GREEN CURRENCY used by the UK. grey good (D2) green revolution (Q1) A woven or knitted fabric before it is The transformation of agriculture in Third bleached or dyed.

© 2002 Donald Rutherford Seealso:browngood;whitegood distinguished from investment in inven- tories and in financial assets. grey knight (G3) A second bidder who enters uninvited into gross domestic product (E0) a takeover battle and is able to benefit The total output of goods and services from knowing the outcome of the first produced within a given country in a round of the battle. particular time period. It is equal to the sum of the VALUE ADDED by each industry, grey market (G1) net of all inputs, including imported INTER- Unofficial market in newly issued shares MEDIATE GOODS: this is equal to the FACTOR prior to official dealings in them. It exists INCOMES of all persons engaged in domestic in European financial centres but not in production. Gross domestic product to- the USA. Only the orders of large institu- gether with net property income from tions are handled. abroad constitute gross national product. Grey Monday (G1) Seealso:nationalincome The date 16 October 1989 when the Financial Times Stock Exchange 100 gross federal debt (H6) share index dropped by 70.5 points on the The broadest definition of the US federal London market. This was less drastic than debt. It includes the borrowings of the US BLACK MONDAY’s fall of 500. Treasury and of various federal agencies. grey society (J1) Seealso:totalpublicdebt A society whose population has a high gross national product (E0) proportion of elderly persons. The decline The total value of the economic activity of in the birth rate and increased life expec- a country in a given time period, including tancy experienced by many industrialized replacement investment, valued at factor countries have produced increasingly age- cost or market prices. It is used as a crude ing populations. The principal economic measure of ECONOMIC WELFARE. Its growth problems for an economy arising from this can be divided into real growth and change in the age distribution are the growth due to inflation. financing of pensions and the reduction in the size of its labour force with the Seealso:growthdomesticproduct;mea- consequence of a declining or stationary sureofeconomicwelfare;nationalincome NATIONAL INCOME. gross social product (E0, P2) Seealso:ageism Gross national product of a centrally planned socialist economy. gross dividend yield (G1) The return to, or income from, a stock gross state product (H7) market investment before the deduction of The GROSS DOMESTIC PRODUCT of the labour any tax. and property located in a particular state of the USA. Seealso:dividendnet Group of Five (F3) gross domestic fixed capital formation The finance ministers of the USA, UK, (E2) France, Germany and Japan who meet National expenditure in a given time informally to discuss international mone- period on physical productive assets, e.g. tary problems and to set the agenda for buildings, civil engineering works, machin- the Group of Ten. ery, equipment and vehicles. It consists of both NET INVESTMENT and REPLACEMENT IN- Group of Seven (F3) VESTMENT to maintain the capital stock A grouping of finance ministers and CEN- intact. This form of investment is to be TRAL BANK governors of the leading

© 2002 Donald Rutherford Western economies – Canada, France, growth(O4)seeeconomicgrowth Germany, Italy, Japan, the UK and the growth accounting (M4, O4) USA. They signed the LOUVRE ACCORD and in December 1987 continued with their 1 The decomposition of economic growth search for international monetary stability into the consequences of changes in by recommending the elimination of large factor inputs and the SOLOW RESIDUAL. international payments deficits through a This accounting is used to explain clarification of national economic objec- differences in the GDP growth rates of tives, especially for fiscal policy. Since various countries. November 1975 they have held annual 2 The analysis of NATIONAL INCOME figures to ascertain the relative contribution to ECONOMIC SUMMITS attended by heads of government and finance ministers. growth made by increased quantities of factor inputs, increased PRODUCTIVITY Group of Seventy-seven (F1) and TECHNICAL PROGRESS. The group of LESS DEVELOPED COUNTRIES at References the United Nations: all of these countries attended the first meeting of the UNITED Denison, E. (1967) Why Growth Rates Differ, Washington, DC: Brookings In- NATIONS CONFERENCE ON TRADE AND DEVELOP- stitution. MENT in 1964. Group of Ten (F3) growth pole (R1) A group of leading capitalist countries 1 The massing of a population in a great founded informally as the ‘Paris Club’ in urban concentration of 10 million or 1956 and formally in 1982. It consists of more to achieve external ECONOMIES OF the USA, the UK, West Germany, France, SCALE, with the object of reviving a Belgium, the Netherlands, Italy, Sweden, depressed region. Canada and Japan, together with Switzer- 2 The establishment of a group of indus- land in an honorary capacity. It agreed in tries in a cluster around an expanding 1962 to lend its currencies to the INTERNA- industry. TIONAL MONETARY FUND under the GENERAL AGREEMENT TO BORROW. The group also Although this was a new approach to discusses international monetary arrange- regional policy in Western Europe in the ments, usually at the BANK FOR INTERNA- 1960s, it can be traced back to PETTY who TIONAL SETTLEMENTS. wanted the English economy to reach the levels of Dutch productivity by the reloca- Group of Thirty (F3) tion of population into a confined area of The Consultative Group on International England. Economic and Monetary Affairs Incorpo- rated set up in 1978 with the aim of growth recession (E3) studying in depth the international dimen- A downturn in an economic CYCLE when sions of economics and finance. The an ECONOMY is still enjoying modest eco- group’s distinguished individual members nomic growth. are joined in six-monthly meetings by growth theory of the firm (L1) invited outsiders. It was originally fi- A hypothesis stating that a firm attempts to nanced by the Rockefeller Foundation, maximize its growth, subject to a takeover now by banks and corporations. restraint. Marris and PENROSE advanced this Group of Twenty-four (F3) theory as a plausible explanation of man- The inner circle of the GROUP OF SEVENTY- agerial behaviour. Penrose argues that SEVEN. It conducts many negotiations on there is an internal process of development behalf of LESS DEVELOPED COUNTRIES at the in firms which leads to cumulative move- United Nations. ments of growth or decline: this argument

© 2002 Donald Rutherford is then expanded to take into account depression of the 1930s contributed to its mergers and acquisitions. It is essentially demise. an optimistic account that regards large References DISECONOMIES OF SCALE as unlikely. Cole, G.D.H. (1972) Self Government in Seealso:managerialmodelsofthefirm Industry, London: Hutchinson. Glass, S.T. (1966) The Responsible Society: References The Ideas of the English Guild Socialist, Marris, R. (1964) The Economic Theory of London: Longman. Managerial Capitalism, London: Mac- millan. guinea (E5) Penrose, E.T. (1959) The Theory of the UK gold coin first minted in 1663 from Growth of the Firm, Oxford: Basil gold shipped by the Royal African Com- Blackwell. pany from the Guinea Coast to England. It was not used as a unit of account, despite guestworker (F2) many prices being quoted in guineas. The A foreign worker with a short-term work pound sterling remained the unit. permit and fewer employment rights than resident workers. Countries such as Ger- Gulf Co-operation Council (F0) many and Switzerland with severe labour A council consisting of representatives shortages in the 1960s recruited many from six countries of the Persian Gulf – workers from Turkey and other less devel- Bahrain, Kuwait, Oman, Qatar, Saudi oped countries. Arabia and the United Arab Emirates. guild socialism (P2) Gulf Plus (Q4) A UK movement of the 1920s and 1930s The basis for pricing crude or refined oil which emphasized WORKERS’ PARTICIPATION. secretly agreed in 1928 between the major It was proposed that each industry should oil companies. Wherever oil was exported be run by its own national guild and that from, it would be priced as if it had these guilds should be co-ordinated by a travelled from the Gulf of Mexico. This supreme council. S.G. Hobson in The anti-competitive price was intended to National Guilds – An Inquiry into the Wage equalize the prices of all oil available to a System and the Way Out (1914) was a particular consumer. leading thinker of the movement, as were Seealso:basing-pointpricing;posted G.D.H. Cole and other early members of price the Fabian Society. Guild socialists re- jected market systems of allocation in gunslinger (G1) favour of ECONOMIC PLANNING. However, A fund manager seeking high returns by the movement’s lack of policy towards the investing in high-risk stocks.

© 2002 Donald Rutherford H

Haavelmo, Trygve, 1911– (B3) of GENERAL EQUILIBRIUM theory; in the A major founder of ECONOMETRICS who was other, he synthesized business cycle the- awarded the NOBEL PRIZE FOR ECONOMICS in ories, providing a basis for the empirical 1989. He was educated at the University of testing of hypotheses about economic fluc- Oslo where he was professor of economics tuations. Later in his career he made many from 1948 to 1979. In 1946–7 he was at proposals for the reform of the INTERNA- the COWLES COMMISSION. His important con- TIONAL MONETARY SYSTEM, discussing the tributions to quantitative economics include conditions under which a DEVALUATION of the formulation of economic theories in a currency in a pegged exchange rate probabilistic terms and the study of inter- regime improves a country’s balance of dependence problems. payments.

Habakkuk thesis (N0, O3) References The proposal that technological progress Bhagwati, J.N. and Chipman, J.S. (1980) in the USA in the nineteenth century in ‘Salute to Gottfried Haberler on the manufacturing making use of interchange- occasion of his 80th birthday’, Journal able parts was stimulated by high wages of International Economics 10: 313–18. Haberler, G. (1936) Theory of International and labour scarcity. Trade, with its Application to Commer- References cial Policy, London: William Hodge. Habakkuk, J. (1962) American and British —— (1937) Prosperity and Depression, 5th technology in the nineteenth century, Cam- edn, London: Allen & Unwin. bridge: Cambridge University Press. Hahn, Frank Horace, 1925– (B3) Haberler, Gottfried, 1900–1995 (B3) Born in Berlin, the son of a celebrated An Austro-American economist, educated German philosopher and mathematician, at the University of Vienna, and lecturer he came to the UK as a teenager and and later professor of economics and sta- graduated from the London School of tistics there from 1928 to 1936. He worked Economics. Subsequently, he taught at the at the Finance Division of the League of universities in Birmingham from 1948 to Nations in 1934–6, crowning his career as 1960 and Cambridge from 1960 to 1967 Professor of International Trade at Har- before holding chairs at the London School vard from 1936 to 1971. His books of the of Economics in 1967–72 and at Cambridge mid-1930s are his principal monument. In in 1972–92. The leading theme of his works one, he brilliantly restated the classical has been MATHEMATICAL ECONOMICS, particu- doctrine of COMPARATIVE ADVANTAGE in terms larly in its applications to GENERAL EQUILI-

© 2002 Donald Rutherford BRIUM theory. His first interest was in in intellectual transformation’, History income distribution; then his concerns of Political Economy 19: 191–205. were to build on the foundations of HICKS’s hansom cab economy (P0) Value and Capital and to study stability. An ECONOMY that strives to keep its tradi- Also, his joint work with ARROW, General tional industries in production, regardless Competitive Analysis (1971), is a landmark of market demand. in modern economics. In his works, Hahn has rigorously set out the conditions for hard commodity (D0, L7) order in a competitive market, a line of A mineral such as copper or iron ore. enquiry justified in his Cambridge Inaugu- ral Lecture, ‘On the Notion of Equili- hard currency (E5, F3) brium in Economics’ (1972). A currency that retains a high value against others for long periods of time, References usually because of a favourable BALANCE OF Hahn, F. (1985) Money, Growth and Stabi- PAYMENTS year after year. Such currencies lity, Cambridge: Cambridge University are very popular as RESERVE CURRENCIES. Press. Major hard currencies of the world have included the yen, the Deutschmark and Haig–Simons definition of income (D3) the Swiss franc. Personal income regarded as the sum of the market values of rights expressed in Seealso:softcurrency consumption and the change in the value hard ecu (F3) of assets in a given time period. A version of the ecu proposed by the UK References initially as a COMMON CURRENCY to be used Simons, H.C. (1938) Personal Income in the EUROPEAN COMMUNITY for all mone- Taxation: the Definition of Income as a tary transactions alongside existing na- Problem of Fiscal Policy, Chicago: Uni- tional currencies. The hope was that this versity of Chicago Press. ecu would become a single currency. hard landing (E6) Hansen, Alvin Harvey, 1887–1975 (B3) A major downward adjustment in a na- US economist, educated at Yankton Col- tional economy or in a stock market. lege, Dakota, and the University of Wis- Prices, incomes and employment sharply consin; professor at Harvard University move towards a state of RECESSION. from 1937 to 1962; previously Director of Research for President Roosevelt’s Com- Seealso:softlanding mittee of Inquiry on National Policy in harmonic mean (C1) International Relations, 1933–4. For forty This is calculated for a set of values by years he was a leading US exponent of taking the ratio of the number of values to Keynesian theory and of FISCAL POLICY. His the sum of the reciprocals of each value. frequent use of IS–LM CURVES, a synthesis of The harmonic mean of 5, 12 and 16 is 3 classical and Keynesian economics, led to divided by 1/5 + 1/12 + 1/16. the diagram being named after both him and HICKS. Although he originally had a Seealso:arithmeticmean;geometricmean negative reaction to KEYNES’S GENERAL THE- harmonization (E6, F0) ORY, by the age of 52 he had become an avid Keynesian. The process of aligning government regu- lations or practices to eliminate differences References between parties to an agreement. A major Barber, W.J. (1987) ‘The career of Alvin H. example is the attempt to harmonize taxa- Hansen in the 1920s and 1930s: a study tion within the EUROPEAN UNION.

© 2002 Donald Rutherford harmonized index of consumer prices Oxford. He participated in most of the (E3) major price theory debates of his time, A chain price index required by the MAAS- both at Cambridge on IMPERFECT COMPETI- TRICHT TREATY and used by the EUROPEAN TION and at Oxford on FULL-COST PRICING. COMMISSION and EUROPEAN CENTRAL BANK for He was a close adviser to Churchill in the comparisons of the economic performance Second World War. of EUROPEAN UNION member states. It has a References base of 1996 = 100 and is calculated by EU countries, apart from Luxemburg, Harrod, R.F. (1936) The Trade Cycle, Oxford: Clarendon Press (reprinted Norway and Iceland. As consumption New York: Augustus M. Kelly, 1965). patterns differ from state to state, a —— (1948) Towards a Dynamic Econom- smaller range of consumer items is repre- ics: Recent Developments of Economic sented in these indices than in national theory and their Application to Policy, consumer price indices. London: Macmillan. Phelps-Brown, E.H. (1980) ‘Sir Roy Har- Harrod–Domar model (O4) rod: a biographical memoir’, Economic A major model of economic growth in- Journal 90: 1–33. dependently asserted by both HARROD and Domar in 1948. It uses the concepts of the Harsanyi, John Charles, 1920–2000 (B3) NATURAL RATE OF GROWTH and the WAR- Educated at Budapest, Sydney and Stan- RANTED RATE OF GROWTH. ford Universities. After teaching at Buda- pest, Queensland, Stanford and Wayne References State Universities, he became professor of Domar, E.D. (1957) Essays in the Theory business administration at the University of Economic Growth, pp. 70–82, New of California at Berkeley from 1964 to York: Oxford University Press. 1990. He examined what it means for rational persons to make ethical judge- Harrod neutral (O3) ments, and the games theory problem of A type of technical change which relatively establishing appropriate behaviour for ra- increases the amount of labour input. tional persons, companies and nations in Seealso:Hicksneutral;Solowneutral conflict with each other. His major works include Rational Behaviour and Bargaining Harrod, Sir Roy Forbes, 1900–78 (B3) Equilibrium (1977) and A General Theory Oxford economist from 1922 to 1967, as of Equilibrium Selection in Games (1988, well as philosopher, biographer and proli- with Reinhard Selten). He shared the NO- fic economic journalist. In his training at BEL PRIZE FOR ECONOMICS in 1994 with NASH Oxford he was greatly influenced by EDGE- and SELTEN. WORTH but subsequently he learned much from KEYNES, becoming a leading disciple Havana Charter (F1) and expositor, as well as his official The written agreement to set up the INTER- biographer. NATIONAL TRADE ORGANIZATION in 1947–8 As an economist, he was best known agreed by most Western countries. It for his contributions to the debates leading sought to promote balanced growth by to Keynes’s General Theory, for his works the abolition of EXCHANGE CONTROLS, trade on the TRADE CYCLE which introduced the barriers (with the exception of protection novelty of combining the multiplier with for INFANT INDUSTRIES) and discrimination. the accelerator, for his path-breaking It advocated FULL EMPLOYMENT throughout growth theory in his London School of the world. All signatories had to grant Economics lectures of 1948 and for his MOST FAVOURED NATION treatment to the work on international economics, for others. The Havana Charter is doctrinally which he was awarded a readership at connected with the INTERNATIONAL MONE-

© 2002 Donald Rutherford TARY FUND in its opposition to trade and Production in 1931, took the unpopu- restrictions and to monopoly. lar view of the TRADE CYCLE that high levels of consumption would cause falling invest- Seealso:GeneralAgreementonTariffs ment and depression. As professor at the andTrade;WorldTradeOrganization London School of Economics from 1932 hawala(G2)seeundergroundbanking to 1950, he wrote on capital theory in Profits, Interest and Investment (1939) and Hawtrey, Sir Ralph, 1879–1971 (B3) in The Pure Theory of Capital (1941); his UK civil servant and monetary theorist. respect for John Stuart MILL is evident in After graduating in mathematics from John Stuart Mill and Harriet Taylor Trinity College, Cambridge, he was a (1951). Subsequently, he became a profes- Treasury civil servant from 1904 to 1945 sor at Chicago from 1950 to 1962 and at and then professor of international eco- Freiburg from 1962 to 1965. nomics at Chatham House, London, from He argued that information can always 1947 to 1952. He learned his economics in be used more efficiently in a decentralized the course of his work, not at university. economy than in a centralized planning He was a leading monetary theorist of system. This stance was based on his the first half of the twentieth century using observation that the competitive market an income approach to integrate monetary system generates information on demand theory with general economics. His theory and supply by changes in product prices of the TRADE CYCLE attributed fluctuations and consequently factor prices, providing to the instability of bank credit: he argued incentives for factors to move to the best that short-term, not long-term, interest uses. In his macro-theory Hayek went rates should be used to regulate credit. beyond a simple QUANTITY THEORY OF MONEY His traditional attitude to running the in aggregate terms to considering the economy meant that he agreed to PUBLIC effects on relative prices of monetary WORKS being used to revive a depressed economy. His most important works were disturbances. Combining that approach Currency and Credit (1919), Capital and with the Austrian theory of the trade cycle, Employment (1937) and The Art of Central he demonstrated that credit affects prices Banking (1930). and production. He long opposed Key- nesian-style macroeconomic management References as it relies on economic omniscience: a free Davis, E.G. (1981) ‘R.G. Hawtrey’, in D.P. market can generate better information. O’Brien and J.R. Presley (eds) Pioneers Parallel to his economics writing was a of Modern Economics in Britain, Lon- series of works on psychology and liber- don: Macmillan. tarian political philosophy. A central theme of his attack on SOCIALISM was his Hayek, Friedrich A. von, 1899–1992 (B3) exposition of the role of information in Libertarian moral philosopher and econo- economic decision making. mist born and educated in Vienna, where References he graduated with doctorates in jurispru- Barry, N.P. (1979) Hayek’s Social and Eco- dence and economics. His long academic nomic Philosophy, London: Macmillan. career, culminating in the NOBEL PRIZE FOR Butler, E. (1983) Hayek: His Contribution ECONOMICS shared with MYRDAL in 1974, to Political and Economic Thought, Lon- began as Director of the Austrian Institute don: Temple Smith. for Business Cycle Research in 1927 and Hayek, F.A. (1944) The Road to Serfdom, privatdozent at the University of Vienna London: Routledge. in 1929. His guest lectures at the London —— (1963) The Sensory Order: An Inquiry School of Economics, published as Prices into the Foundations of Theoretical

© 2002 Donald Rutherford Psychology, Chicago: University of Chi- study of the options available for financing cago Press. such services. —— (1976) The Constitution of Liberty, London: Routledge & Kegan Paul. Seealso:quality-adjustedlifeyears —— (1982) Law, Legislation and Liberty: References A New Station of Liberal Principles, London: Routledge & Kegan Paul. Drummond, M.F. (1980) Principles of Wood, I.C. and Woods, R. (1991) Frie- Economic Appraisal in Health Care, drich A. Hayek. Critical Assessments, Oxford: Oxford University Press. London: Routledge. Folland, S., Goodman, A.C. and Stano, M. (2001) The economics of health and hazard (D0, Q0) health care, 3rd edn, Upper Saddle 1 A venture. River, NJ: Prentice Hall. 2 A risk or what is risked. McGuire, A., Henderson, J. and Mooney, 3 In , the prob- G. (1987) The Economics of Health Care, London: Routledge. ability of a potentially destructive nat- Smith, G.T. (1987) : ural phenomenon occurring in a given Prospects for the Future, London: place at a given time. Croom Helm. Zweifel, P. and Breyer, F. (1997) Health headline rate of inflation (E4) economics, New York and Oxford: Ox- The rate of UK price inflation as stated by ford University Press. the RETAIL PRICE INDEX which includes mort- gage interest, value-added tax, local taxa- heavy industry (L6) tion and excise duties. It is the most An industry using raw materials heavy in publicized inflation rate. weight, and a great amount of fixed capital, e.g. shipbuilding. The decline of Seealso:underlyinginflationrate such industries in the twentieth century headtax(H2)seepolltax has produced DE-INDUSTRIALIZATION in many Western countries. health care indicators (I1) The World Health Organisation ranks Seealso:lightindustry health care in each major country by five heavy share (G1) indicators. These are overall level of health UK company share whose price is high (number of years of healthy life a person relative to the average for similar compa- can expect), child mortality rates, levels of nies. As a consequence, companies some- patient satisfaction, how well persons with times issue bonus shares to their different economic status are served by shareholders to reduce the share price. their country’s health care arrangements, and the distribution of the health system’s Seealso:pennyshare financial burden measured by a house- hold’s capacity to spend on health care Heckman, James Joseph 1944– (B3) directly or through the state and private Born in Chicago and educated at Color- insurance. ado College and Princeton University. His professorial career at the University of health economics (I1) Chicago began in 1974. He has developed Evaluation of the effectiveness of health statistical methods for handling selective care, particularly by examining the social samples and applied the methods to the OPPORTUNITY COSTS of alternative forms of evaluation of public sector labour market treatment. The peculiar nature of the and educational programmes. For this market for health care – that doctors have work on micro-data he was awarded the a major influence on both demand and NOBEL PRIZE FOR ECONOMICS with Daniel supply – has attracted attention, as has the MCFADDEN in 2000.

© 2002 Donald Rutherford Heckscher, Eli Filip, 1879–1952 (B3) References Swedish economist and economic histor- Spady, R. and Friedlaender, A.F. (1978) ian who was professor at the Stockholm ‘Hedonic cost functions for the regu- Business School from 1909 to 1929. His lated trucking industry’, Bell Journal of monumental historical works on MERCANTI- Economics 9 (Spring): 59–79. LISM and population are as famous as his hedonic price (D0) contribution to international trade theory, The shadow price of the characteristic of a now known as the HECKSCHER–OHLIN TRADE commodity, e.g. the value of a good view THEOREM. from a house. The concept is much used in Heckscher–Ohlin trade theorem (F1) COST–BENEFIT ANALYSIS and in environmental An explanation of international trade in economics, e.g. for valuing the level of amenities such as good air quality. terms of the relative FACTOR ENDOWMENTS of different countries. A country, for exam- References ple, with an abundance of labour would Rosen,S. (1974)‘Hedonic prices and implicit export goods produced by labour-intensive markets: product differentiation in pure methods more than capital-intensive competition’, Journal of Political Econ- goods. In the absence of transport costs omy 82: 34–55. and specialization, trade would eventually hedonic pricing method (D4) bring about factor price equalization. Em- This relates the price of a marketed good pirical examination of this theory has not to its characteristics by establishing how awarded it very high marks – hence the much a consumer is willing to pay for each LEONTIEF PARADOX. characteristic. This is used extensively as References an evaluation method in environmental Heckscher, E. (1949) ‘The effect of foreign economics, especially to discover the effect trade on the distribution of income’, in of environmental features on house prices. H.S. Ellis and L.A. Metzler (eds) Read- It is a cheaper method than CONTINGENT ings in the Theory of International Trade, VALUATION. Philadelphia: Blakiston. Ohlin, B. (1967) Interregional and Interna- See also: characteristics theory of demand tional Trade, Cambridge, MA: Harvard University Press. hedonic wages (J3) The factor payment offered by an em- hedge ratio (G1) ployer for a bundle of job characteristics, The ratio of the number of OPTION con- including status, training opportunities tracts to the position in the underlying and working conditions. This wage is instrument being hedged against. determined by the interaction between the demand of and supply for both worker hedging (G1) characteristics and job characteristics. Dealings in FUTURE MARKETS to cover spot positions to reduce the risk of price move- References ments, especially in commodity and cur- Lucas, R.E.B. (1977) ‘Hedonic wage equa- rency markets. Hedging permits producers tions and psychic wages in the returns to stabilize their incomes because selling to schooling’, American Economic Re- futures protects a producer against a price view 67: 549–58. fall. hegemonic cycle (E3, N0) Seealso:spotmarket A systematic shift in economic activity between a period dominated by one power hedonic output (D2) and a period unstable because of rivalry Output measured in terms of both quan- between world powers. These cycles last tity and quality. about 100 years.

© 2002 Donald Rutherford Seealso:Kondratieffcycle;logisticcycle similar criteria to those employed by stock market analysts. References Arrighi, G. (1994) The Long Twentieth Seealso:M-form;U-form;X-form Century, London: Verso. Hickscharts(E1)seeIS–LMcurves helicopter money (E4) An unanticipated increase in the nominal Hicksian demand function (D1) stock of money leading to an increase in Consumer demand as a function of price demand for goods and a rise in the general assuming consumer utility is held con- price level of an economy. stant. Also known as a compensated demand curve as a price change does not Herfindahl–Hirschman index (L1) change a consumer’s utility. A measure of market CONCENTRATION.Inan industry with i firms, the index is calcu- References lated as follows: Hicks, J. (1956) A Revision of Demand X Theory, Oxford: Clarendon Press. H ¼ s2 i Hicksian income measure (D3) i ‘The maximum value which [a man] can consume during a week, and still expect to where s is the market share of the ith firm. i be as well off at the end of the week as he The index reflects both the number of was at the beginning.’ This measure, sug- firms and their relative size. The value of gested in Hicks’s Value and Capital (1939, the index will be 1 if there is only one firm ch. 14), relies on the concept of EXPECTA- in the industry and tend towards unity if TIONS. It can be contrasted with the there are only a few firms or some firms of approach of MEADE and STONE who defined much greater size than others. money income as the sum of the money heterogeneous agent model (O3) value of consumption plus the increase in Used by SCHUMPETER in his account of the money value of one’s capital assets. innovation. Individual decision rules influ- Hicks neutral (O3) ence each other. TECHNICAL CHANGE which does not affect heteroscedasticity (C1) the MARGINAL RATE OF SUBSTITUTION between The property of a LINEAR REGRESSION model two inputs. with a changing VARIANCE of its disturbances. Hicks, Sir John Richard, 1904–89 (B3) Seealso:homoscedasticity The greatest Oxford economist of the twen- tieth century. His Oxford education in heuristic (C1) mathematics and philosophy, politics and Using a process of discovery, of trial and economics led to a lectureship at the Lon- error, to discover the truth. This approach don School of Economics from 1926 to is central to the use of computation in 1935 where he contributed to an alternative economics. to contemporary Cambridge economics by H-form (L2) joining with ROBBINS and HAYEK to build on A type of enterprise organized as a hold- WICKSELL’s ideas, although an increasing ing company: each of its divisions will be interest in Keynesian ideas drove him to affiliated with the parent company as a Cambridge, 1935–8, at the height of the subsidiary company. Corporate staff of a General Theory debate. Much of the rest of holding company are principally con- his life, as a professor at Manchester from cerned with financial evaluation, using 1938 to 1946, as a fellow of Nuffield

© 2002 Donald Rutherford College, Oxford, from 1946 to 1952 and in References the senior Oxford chair as Drummond Baumol, W.J. (1972) ‘John R. Hicks’s Professor of Political Economy from 1952 contribution to economics’, Swedish to 1965, he was to be a major extender Journal of Economics 74: 503–27. and clarifier of Keynesian ideas. Hahn, F. (1990) ‘ the theorist’, The breadth of Hicks’s gigantic contri- Economic Journal 100: 539–49. bution to economics, much of it now the Helm, D. (1984) The Economics of John Hicks, Oxford: Basil Blackwell. bread and butter of economics teaching in Hicks, J.R. (1979) ‘The formation of an the West, is evident in his long series of economist’, Banca Nazionale del Lavoro books and articles since 1932, recognized Quarterly Review 130: 195–204. in the award of a NOBEL PRIZE FOR ECONOM- Hicks, Sir J. (1991) The Status of Econom- ICS, shared with ARROW, in 1972 for his ics, Oxford: Basil Blackwell. early work on WELFARE ECONOMICS. His first work, A Theory of Wages (1932), went hidden reserves (G2) beyond traditional to Bank reserves allowed by law to be kept consider the ELASTICITY OF SUBSTITUTION and off a bank’s published balance sheet to the relative income shares of labour and increase its perceived strength. All UK capital. His Value and Capital (1939) CLEARING BANKS prior to 1968 had this expounded consumer theory by using IN- privilege; after then only UK MERCHANT DIFFERENCE CURVES. His careful reaction to BANKS. Keynes’s General Theory was in his cele- brated article of 1937 in Econometrica hidden unemployment (J6) (‘Mr Keynes and the Classics’) which 1 Underemployed labour. A comparison introduced IS–LM analysis into macroe- of PRODUCTIVITY or wage levels of differ- conomics, clarifying the contrast between ent sectors of an economy indicates goods and money markets and between how much employed labour is working what was old and new in Keynesian below its capacity. SOVIET-TYPE ECONOMIES theory. Subsequently, Hicks, seeing the were noted for their low wages and low overuse of the apparatus, regarded it as productivity: the state’s FULL-EMPLOY- an albatross. His Social Framework (1942), MENT policy and willingness to pay the unusually for an introductory economics wage bill gave managers no incentive to textbook, used NATIONAL INCOME accounting economize in the use of labour. as a starting point. In the post-war period, Although the Soviet labour force en- his range was considerable: economic dy- joyed easy, secure employment, the namics in A Contribution to the Trade economy suffered from chronic labour Cycle (1950), a development of revealed shortages and poor product quality. PER- preference theory in A Revision of Demand ESTROIKA sought to reduce this problem. Theory (1956), growth theory in Capital East European economies still have and Growth (1965) and in Capital and considerable labour reserves in their Time: a Neo-Austrian Theory (1973) and agricultural sectors. historical development in A Theory of 2 Part of a population excluded from a Economic History (1969). With his wife measure of unemployment because of Ursula, he was co-author of works on the definition of unemployment used. PUBLIC FINANCE. Throughout his long aca- demic career his many applications of GEN- hiding hand (D0, E0) ERAL EQUILIBRIUM theory enabled him to An economic mechanism allowing under- provide a powerful synthesis of microeco- estimated difficulties to be offset by the nomics and macroeconomics. unestimated creative response to them.

© 2002 Donald Rutherford hierarchical decomposition principle of bank deposits because of the operation (L2) of the MONEY MULTIPLIER, e.g. a central An analysis of an organization into a bank in an open market operation buys vertical slice of operating activities and a bonds from the public thereby increasing horizontal slice of strategic planning cor- the amount of cash available to banks. responding to the lower and higher parts Seealso:fractionalreservebanking of the hierarchy. References high-technology industry (L6, O3) An INDUSTRY, usually CAPITAL INTENSIVE, Simon, H.A. (1962) ‘The architecture of complexity’, Proceedings of the Ameri- requiring a high level of RESEARCH AND can Philosophical Society 106 (Decem- DEVELOPMENT to maintain its international ber): 467–82. standing. Leading examples are the aero- —— (1973) ‘Applying information technol- space, pharmaceutical and computer in- ogytoorganizationdesign’,Public Admin- dustries. stration Review 33 (May–June): 268–78. high-yield financing (G1, M2) hierarchy theory (J3) A type of financing based on JUNK BONDS. An attempt to explain the wage structure through taking into account the fact that hire purchase (G2) managers are arranged in hierarchies ac- The hiring of a good, especially a CONSU- cording to their relative decision-making MER DURABLE, by a customer who, on the power. An application of the THEORY OF THE completion of paying instalments equal to FIRM. the full price of the good plus interest, owns it. high-consumption society (P0, P1) A country with an AVERAGE PROPENSITY TO Hirschman, Albert Otto, 1915– (B3) CONSUME approaching one. It has a low A leading development economist. Born in rate of household saving and high level of Berlin and educated at the Sorbonne, the consumer debt. The USA is cited as a London School of Economics and Trieste, major example. before emigrating to the USA in 1941. He was financial adviser at Columbia Univer- high employment surplus (H6) sity from 1952 to 1956, and subsequently An estimate of the excess of tax revenues professor at Yale from 1956 to 1958, over government expenditures at a FULL- Columbia from 1958 to 1964 and Harvard EMPLOYMENT level of NATIONAL INCOME. This from 1964 to 1974. His work as a devel- is used as a yardstick of a government’s opment economist took the unusual path FISCAL STANCE. of advocating unbalanced economic devel- Seealso:structuraldeficit opment, based on key industries produ- cing intermediate products. His EXIT–VOICE high-leveraged takeover (G3) analysis provided a new method of exam- A takeover mainly financed by fixed inter- ining the organizational response to a est finance, e.g. borrowing from banks. decline of firms, suggesting that a firm high net worth individual (J3) changes rather than go out of business. A rich person. References Seealso:fatcat Hirschman, A.O. (1958) The Strategy of Economic Development, New Haven, high-powered money (E5, G2) CT: Yale University Press. Currency, bankers’ balances at a CENTRAL —— (1970) Exit, Voice and Loyalty: Re- BANK and other eligible reserve assets of sponses to Decline in Firms, Organiza- deposit banks. An increase in the supply of tions and States, Cambridge, MA: this money permits a multiple expansion Harvard University Press.

© 2002 Donald Rutherford —— (1981) Essays in Trespassing: Eco- Seealso:bankholdingcompany;H-form; nomics to Politics and Beyond, Cam- pyramiding bridge: Cambridge University Press. holding gain (M2) histogram (C1) The gain to a business arising from the A method of presenting a FREQUENCY DIS- current market value of its assets being TRIBUTION graphically in a number of more than their historical cost. This gain rectangles varying in size according to the is realized when the asset is sold or, in the number of observations in each class; see case of raw materials, when they are the figure. embodied in a sold finished good. hold-out (J3) The time period between the expiry of an old labour contract and the signing of a new contract. During this period work continues under the old contract but a union may adopt a work-to-rule to strengthen its bargaining position. There are often hold-outs in US collective bar- gaining.

hold-up (D0) A form of economic opportunism occur- ring when assets and investments have a value specific to an exchange, e.g. an employee with SPECIFIC TRAINING can use that HUMAN CAPITAL investment as the basis for demanding higher remuneration. References Goldberg, V.P. (1976) ‘Regulation and historic cost (M4) administered contracts’, Bell Journal of The original valuation of an asset. This Economics 7: 426–48. measure is respected by accountants be- cause of its objectivity and verifiability. hold-up problem (C7) However, in periods of INFLATION, this A problem of contracting arising from the value must be adjusted to take into ac- making of investments prior to concluding count specific price changes for the asset if a transaction and the unknown form of an an accurate current valuation is to be optimal transaction. To reduce UNCER- obtained. TAINTY the possibility of making contracts rigid is considered. Seealso:inflationaccounting;replace- mentcost References Rogerson, W.P. (1992) ‘Contractual solu- hog cycle (E3, Q1) tions to the hold-up problem’, Review of An alternation between excess demand and Economic Studies 59: 777–93. excess supply in the pig market in the USA. The cycle inspired the COBWEB theorem. holism (P4) 1 A theory of the universe as an interact- holding company (L2) ing whole. A company consisting of a parent com- 2 The opposite of atomism. pany and a number of subsidiary compa- 3 The simultaneous consideration of all nies of which it is the majority owner. parts of a system.

© 2002 Donald Rutherford home banking (G2) the labour market. In less developed coun- The use of banking facilities at home by tries it is a common form of production. means of a computer linked to the main References computer of a particular bank. Each home, in a sense, becomes a personalized Gronau, R. (1980) ‘Home production - a forgotten industry’, Review of Economic branch of the single bank. Home banking Statistics 62: 408–16. was first offered by the Nottingham Build- Havrylyshyn, O. (1976) ‘The value of house- ing Society (UK) in November 1983, and hold services: a survey of empirical then by Australia’s Commonwealth Bank- estimates’, Review of Income and Wealth ing Corporation. By September 1984, 22: 101–31. seventy-one US banks and other financial institutions offered such a facility. In homework (J2) France, fifty banks offer the limited ser- Working as a subcontractor at home vice of transmission of bank statements to doing LABOUR-INTENSIVE work, e.g. addres- home television sets. This service is attrac- sing envelopes or tailoring. This type of tive to banks for it is a cheaper method of labour has often been cited as most sub- expansion for a geographically concen- ject to EXPLOITATION. Both trade unions and trated bank than the opening of new wages councils have found it difficult to branches. protect workers. As computers have made it possible to do sophisticated work at home economics (D1) home, the wage levels of these workers The practical study of nutrition and hy- might rise. giene; the examination of the science Seealso:networkingeconomy underlying household production. homo economicus (D0) Seealso:newhomeeconomics ‘ECONOMIC MAN’ – the self-interested eco- homeless (R2) nomic agent. In CLASSICAL and NEOCLASSI- The condition of being without any hous- CAL ECONOMICS the UTILITY-MAXIMIZING ing. This occurs because of insufficient objectives of individual economic agents income to pay the market rates for pur- were taken to be the basis of economic chasing or renting a home or because of activity. an insufficient housing supply. Rent con- Seealso:altruism trols by reducing the supply of private sector housing and insufficient repairs to homogeneous function (C6) the national housing stock magnify this For a function to be homogeneous all the problem. Geographical mobility from variables must be of the same degree, e.g. poorer to richer parts of a country, espe- to the power 3. Homogeneity is a cardinal cially a capital city, produces hordes of property. These functions are used in homeless people who often in desperation economics to explain production, demand, have to use discarded cardboard boxes as cost and utility. shelter. homogeneous good (D0) home production (D2) A good whose units are regarded as Non-market production of goods and identical by consumers. Thus purchasers services in households Allocation of time express, for example, indifference between by home producers will depend on the one bag of homogeneous rice and another. relative values placed on each good or Although there may be differences analy- service produced. Much of this work is sable by chemists and others, consumers carried out by married women outside the regard the differing aspects of several units labour force; it often involves as many as irrelevant to their purchasing decisions. weekly hours as average employment in Under PERFECT COMPETITION, it is essential

© 2002 Donald Rutherford that goods are homogeneous so that in- horizontal integration (L1) dividual firms have no MONOPOLY POWER. The merger of firms in the same industry, usually to reduce competition and to Seealso:branding;productdifferentiation obtain ECONOMIES OF SCALE. Mergers of this homoscedasticity (C1) kind are viewed with great suspicion in The property of a LINEAR REGRESSION model COMPETITION POLICY as they are expected to which has disturbances with constant VAR- increase AGGREGATE CONCENTRATION. IANCE. Seealso:verticalintegration Seealso:heteroscedasticity host region (R5) homo sovieticus (D0) That part of a national economy receiving An altruistic economic agent who will inward investment from a governmental produce without economic incentives. This agency or a private firm. agent is prepared to work for the sake of hot money (F2) the common good, including overall pro- Short-term international capital flows in- duction. At the beginning of the twenty- duced by differences in interest rates, and first century this type of person is more the relative appreciation and depreciation mythical than real: homo economicus is a of national currencies. These flows add to more common species. the volatility of a BALANCE OF PAYMENTS. Seealso:economicman;Soviet-type Seealso:capitalflight economy household behaviour (D1) homothetic function (C6) The behaviour of members of a household, A function which can be decomposed into individually or collectively, in product and an inner function monotonically increas- factor markets. An examination of their ing and an outer function homogeneous of motivations and aims explains consumer degree 1. Homotheticity is an ordinal behaviour, as well as LABOUR SUPPLY and the property. supply of savings. A comprehensive analy- horizontal discrimination (J7) sis of such behaviour includes an examina- The unfair treatment of persons in the tion of personal spending patterns and of same category. In the labour market, for all factor markets. example, men and women in the same household decision making (D1) occupational group can have unequal pay, Choices reflecting individual tastes and despite doing the same work. A great deal influenced by taxation which determine of legislation in the 1960s and 1970s, e.g. behaviour in product and factor markets. the UK’s EQUAL PAY ACT and US civil rights The major decisions made are the choices legislation, attempted to remove discrimi- between work and leisure, and between nation of this kind. saving and spending, as well as about gifts Seealso:discrimination;verticaldiscrimi- and the composition of assets. Such ana- nation lysis is crucial to an understanding of LABOUR FORCE PARTICIPATION and the CON- horizontal equity (D6) SUMPTION FUNCTION, as well as being the The identical treatment of individuals or basis of much of neoclassical theorizing. groups with the same amount of a relevant characteristic, e.g. income. Following this Seealso:labourforceparticipationrate; principle, families of the same size and neoclassicaleconomics income pay the same amount in direct household work (D1, J2) taxes. The production of services and some Seealso:verticalequity goods by members of a family for the

© 2002 Donald Rutherford other members. Cleaning, cooking, nur- —— (1981) A Treatise on the Family,New sing and some education are the principal Haven, CT: Harvard University Press. examples of these activities. This produc- Blaug, M. (1975) ‘The empirical status of tion is not marketed so the producers are human capital theory’, Journal of Eco- nomic Literature 14: 827–55. unpaid. Mincer, J. (1974) Schooling, Experience H share (G1) and Earnings, New York: National Bu- A company share floated and listed on the reau of Economic Research. OECD Centre for Educational Research Hong Kong Stock Exchange. and Innovation (1998) Human capital Seealso:redchip investment: an international comparison, Paris and Washington, DC: OECD. human capital (I2) Psacharopoulos, G. (1981) ‘Returns to The education and training embodied in a education: an updated international human person that gives rise to increased comparison’, Comparative Education 17: future income. Human capital measures 321–41. should include an estimate of formal and informal training, as well as income for- humaneness indicators (D6) gone during the period of training, but in These quality of life measures include practice the measurement of human capi- GDP per capita, education (net primary tal is often restricted to measuring the cost enrolment), mortality (infant mortality, of formal training only. Human capital life expectancy), health (access to safe can be ‘general’, i.e. useful in many occu- water, sanitation, number of doctors per pations such as reading and writing, or 1,000 people), proportion of public expen- ‘specific’, i.e. useful only to employment in diture on social services and private con- a particular firm or job, such as a knowl- sumption per capita. edge of the internal accounting procedures human scale economics (A1) of a TRANSNATIONAL CORPORATION. Although An economic philosophy based on need estimates of human capital were attempted not money. As there is a concentration on as early as PETTY and the concept was simple food and housing needs, it is clearly explained by SMITH, it was not until possible to use BARTER as the means of the 1960s, through BECKER and SCHULTZ, exchange. that the concept was extensively applied in economics. Hume, David, 1711–76 (B3) Critics of this approach have argued Scottish philosopher, historian and econo- that calculations of the rate of return to mist who, within the scope of only nine human capital investments ignore social essays of his Political Discourses (first returns. Also it is difficult to separate published 1752), provided an important human capital investment from personal rejection of MERCANTILIST ideas, heralding consumption as all personal expenditure, the new dawn in economics of which including expenditure on health care, Adam SMITH was to be principal luminary. clothing and social life, has a possible His account of the price SPECIE-FLOW ME- effect on future earnings. However, there CHANISM refuted much of previous mercan- have been useful applications of the con- tilist thought; his praise of manufacturing cept to the study of job search in labour exposed the narrowness of ; his markets, wage differentials and MIGRATION. discussion of taxation showed an early References awareness of TAX INCIDENCE problems. Becker, G.S. (1964) Human Capital: A Although his History of England was im- Theoretical and Empirical Analysis with mensely successful in his day, his philoso- Special Reference to Education, New phical and economic ideas now command York: Columbia University Press. more attention.

© 2002 Donald Rutherford References savings, e.g. in the form of tax-exempt Rotwein, E. (ed.) (1955) David Hume: savings and flat rate capital gains tax. Writings on Economics, London: Nel- son. Seealso:doubletaxationofsavings (E3) Humphrey–Hawkins Act 1978 (E6) A rise in product prices of more than 50 US federal statute, formally known as the per cent per month. In extreme cases, Full Employment and Balanced Growth prices can double in one day. The best Act, which extended the EMPLOYMENT ACT known examples have been Germany in 1946 by stating the priorities for the 1923, Hungary in 1946 and some Latin economic goals set for the US president. American countries in the 1980s. Germa- It also established procedures to improve ny’s inflation rose from a mark valued in the co-ordination between the president, the summer of 1914 at 4.2 to the US dollar Congress and the Federal Reserve System to 4,200,000,000,000 on 15 November with the hope of improving the formula- 1923. This type of inflation forces people tion of economic policy. to abandon the use of money in favour of Hunt Commission (G2, K2) BARTER and INDEXATION. SAVING is discour- The body which investigated the US secu- aged and fixed income groups with little rities industry. It recommended more free- bargaining power, including the RENTIER dom for financial firms to respond to new class, suffer a massive fall in income. technology and the emergence of new Governments, finding it difficult to collect types of financial firm. taxes, often resort to increasing the money supply as a source of income in such Seealso:BigBang;Mayday circumstances. References References Report of the President’s Commission on Siklos, R.K. (1990) War Finance, Hyperin- Financial Structure and Regulation,Wa- flation and Stabilization in Hungary shington, DC: US Government Printing 1938–48, London and New York: Mac- Office, 1971. millan and St Martin’s Press. hurdle rate of return (M2) hypothecation (G1, H2) The minimum rate of return to an invest- 1 Pledging a security without delivering it. ment project to justify it being undertaken. 2 Relating a particular tax revenue to a particular public expenditure. hybrid auction (D4) A method of selling government bonds Seealso:dedicatedbudget;earmarking; used in Japan. Most of an issue is allo- mortgage;ringfencing cated conventionally through a syndicate hysteresis (J6) but the remainder is auctioned. Bidders The hypothesis, applied to the study of make a quantity bid, rather than a price UNEMPLOYMENT, which states that a level of bid, committing themselves to taking a unemployment does not have a tendency certain amount of an issue. The price will to return to an equilibrium rate and be fixed by the subsequent price nego- certainly not the NATURAL RATE OF UNEM- tiated by the syndicate. PLOYMENT. (Originally a term used by James Seealso:auction Ewing in the 1880s to describe the proper- ties of ferric metals.) In the UK, hysteresis hybrid income tax (H2) has been used as an explanation of persist- A combination of a comprehensive INCOME ing unemployment throughout the 1980s. TAX and an EXPENDITURE TAX. It was gradu- It has been noted that when an economy ally introduced in Japan to encourage expands, the increased demand leads to

© 2002 Donald Rutherford higher wages for workers at present em- References ployed rather than to employment for the Cross, R. (1988) Unemployment, Hyster- jobless. Also, a long duration of unem- esis and the Natural Rate Hypothesis, ployment de-skills workers, making it less Oxford: Basil Blackwell. likely that they will be re-employed.

© 2002 Donald Rutherford I

ideal limit (R1) ground variables is it possible to identify a The maximum distance a consumer will demand curve. travel to purchase goods. identity theft (K4) Seealso:centralplacetheory Stealing the identity of a creditworthy person in order to acquire credit fraudu- identification problem (C1) lently. The ECONOMETRIC problem of discovering from data which equation is being esti- Ifo Business Climate Index (E6) mated. A major example of this is the A monthly index published by the Ifo- problem of separating demand from supply Institute for Economic Research, Munich, curves when attempting to construct a which surveys 7,000 businesses to appraise demand curve from raw data. If, over a the business situation as good, satisfactory period of time, there are shifts in a demand or poor and to ascertain whether business curve, different observations A, B, C and D expectations for the next six months are will be on different demand curves X1X1– the same, better or worse. There are X4X4 and so a supply curve (line YY) separate indexes for West Germany and rather than a demand curve has been East Germany calculated as the geometric identified. As this problem arises because mean of survey results. the CETERIS PARIBUS conditions do not hold, ill-being (D6) only by collecting data on such back- A state of deprivation evident in low income, poor health and few opportunities for betterment. The opposite of WELL- BEING. References Srinivasan, T.N. (1994) ‘Destitution: a discourse’, Journal of Economic Litera- ture 32: 1842–55. illiquid (G1) The state of an asset inconvertible into cash. illth (D6) Goods and services giving negative satis- faction; the opposite of wealth. Many

© 2002 Donald Rutherford goodscanberegardedasbothwealthand ductionandexports,broughtaboutbya illth,e.g.tobacco.AtermcoinedbyJohn deteriorationinitsTERMSOFTRADE. Ruskininthenineteenthcentury. References Seealso:bad;wealth Bhagwati,J.N.(1958)‘Immiserizinggrowth: ageometricalnote’,ReviewofEconomic References Studies25:201–5. Ruskin,J.(1985)UntothisLast,essay4, Johnson,H.G.(1967)‘Thepossibilityof London:Penguin;NewYork:Viking incomelossesfromincreasedefficiency Penguin. orfactoraccumulationinthepresence oftariffs’,EconomicJournal77:151–4. immigration(F2,J1) Thepermanentsettlingofpeoplefrom impactmultiplier(E0) othercountries.Immigrantstakeupa Theimpactonanationaleconomyina newresidencetoescapethepovertyor givenyearoftheEXOGENOUSVARIABLESfor persecutionoftheiroriginalcountries,to thatyearandtheENDOGENOUSVARIABLESfor prioryears. increasetheirpersonalandECONOMICWEL- FAREinanewcountryortojoinrelatives References whohavealreadymigrated.Theeffectsof Goldberger,A.S.(1959)ImpactMultipliers immigrationonacountryinclude,atthe andtheDynamicPropertiesoftheKlein- macrolevel,impactsoninflation,technical GoldbergerModel,Amsterdam:North- progressandpublicexpenditureand,at Holland. themicrolevel,achangeinthepatternof imperfectcompetition(L1) demandforgoodsandservicesandextra Thestateofamarket,similartoMONOPOLIS- laboursupplytoparticularlabourmar- TICCOMPETITION,firstidentifiedbyJoanRO- kets.Immigrantsareabsorbedintoan BINSON.Thetermisalsousedinthebroad economyindifferentways:asENTREPRE- sensetorefertoallmarketswithoutallthe NEURS,asmembersoftheSECONDARYLA- characteristicsofPERFECTCOMPETITION. BOURMARKETorintoenclaves. References Seealso:enclaveeconomy;migration Robinson,J.(1933)TheEconomicsofIm- References perfectCompetition,London:Macmillan. Piore,M.I.(1979)BirdsofPassage:Mi- imperialism(P1)seecapitalist grantLaborandIndustrialSocieties, imperialism NewYork:CambridgeUniversityPress. implementation lag (E6) immiseration(P1) The time it takes to institute a discretion- Theincreasingpovertyoftheworking ary change in policy. These lags are classunderCAPITALISM.MARXdidnot usually shorter for MONETARY POLICY than equatethissimplywithafallinrealwages for FISCAL POLICY as in the former case a asimmiserationhasalsopsychological sudden announcement of a change in andspiritualdimensions. interest rates can be made, whereas fiscal changes often need legislation. Seealso:alienation;divisionoflabour Seealso:recognitionlag References Plamenatz,J.(1975)KarlMarx’sPhiloso- implicit (J4) phyofMan,Oxford:ClarendonPress. A labour market theory which asserts that labour contracts can be successfully based immiserizinggrowth(O4) on EXPECTATIONS, e.g. of promotion or AdeclineintheECONOMICWELFAREofa stable employment, instead of on legally country,despiteanexpansionofitspro- binding terms. The theory recognizes that

© 2002 Donald Rutherford in many employment relationships there is implied price index (C1, E3) see implicit a deficiency of information. Typically, an price deflator employment contract is incomplete be- import (F1) cause it omits reference to work effort The purchase of a good or a service that and so an employer has to monitor the has been produced by another country. contract to achieve the exchange of a ‘fair Exports net of imports are included in a day’s pay’ for a ‘fair day’s work’. However, country’s GROSS DOMESTIC PRODUCT.AnECON- it has been argued that some contracts are OMY at the beginning of an expansionary more explicit than originally thought, as phase will often increase its imports of raw evidenced by union resistance to unfavour- materials and semi-finished goods. An able revisions of them. Implicit contract- OPEN ECONOMY will have a high volume of ing explains short-term temporary imports: the smaller or more specialized unemployment. The theory assumes that an economy is, the more it will have to wages are sticky and that employees will import to satisfy consumers’ demand for a accept such contracts because of their wide range of goods and services. aversion to risk. References Seealso:export;inter-industrytrade;in- tra-industrytrade;marginalpropensityto Akerlof, G.A. and Miyazaki, H. (1980) import ‘The implicit contract theory of unem- ployment meets the wage bill argument’, import penetration ratio (E2, F1) Review of Economic Studies 47: 321–38. The ratio of imports to domestic con- Okun, A.M. (1981) Prices and Quantities, sumption for a class of goods of a Washington, DC: Brookings Institution. particular country. This measure reflects Rosen, S. (1985) ‘Implicit contracts: a non-tariff trade restrictions at a particular survey’, Journal of Economic Literature 23: 1144–75. time but does not separate these effects from other reasons for importation (e.g. a (D0, M2) lack of domestic product substitutes) and A cost of production which is not included is not adjusted for overvaluation or under- in the accounts of a business but never- valuation of a currency. theless is incurred. This often happens import substitution (F4, O2) when firms are owned by sole proprietors A development policy encouraging domes- who underestimate the cost of their la- tic production. This is achieved in various bour. ways including the imposition of TARIFFS Seealso:explicitcost to keep out foreign-produced goods and the reduction in the prices of home-pro- implicit marginal income (H2) duced goods through subsidization or a The size of the fall in the amount of a change in their quality. subsidy when income rises. This typically occurs when welfare benefits are stopped Seealso:infantindustry because income has reached a threshold impossibility theorem (D7) level. Arrow’s assertion that under democracy Seealso:povertytrap majority choice produces a stalemate, as an unambiguous social choice cannot be implicit price deflator (E3) achieved if there are more than two The ratio of the at options facing voters. Assume individuals current prices to the gross national pro- A, B and C and options x, y and z. A duct at constant prices 100. This defla- prefers x to y and y to z; B prefers y to z tor is produced as a by-product of and z to x; C prefers z to x and x to y. NATIONAL INCOME accounting. Each option is thus ranked first by one of

© 2002 Donald Rutherford the three individuals, second by another. governmental bodies and private firms Since there is no overall favourite, there is which consists of a fixed part (which is a a stalemate. function of the expected cost) and another part (which is proportional to the differ- References ence between the expected cost and the Arrow, K.J. (1966) Social Choice and actual ex post cost). A private contractor Individual Values, 2nd edn, New York: has the greatest incentive to keep costs Wiley. down if he or she expects to lose most of impost (H2) the difference between the ex ante and ex A tax or duty. post costs. impulse response function (C6) Seealso:exante,expost An equation or graph indicating the re- incentive effect (H2) sponse of a system to a shock, e.g. changes The encouraging effect of a tax on the in output or consumption resulting from supply of an activity, especially work. A an increase in the stock of money. progressive income tax can have incentive impurepublicgood(H4)seemixedgood effects if individuals want to achieve a target post-tax income and can only do imputed income (D3, H2) this by working harder in the face of steep The benefit received from a service not tax progression. measured by a monetary transaction. Some forms of this income are estimated Seealso:disincentiveeffect;impactmulti- to obtain a fuller measure of the GROSS plier;progressivetax NATIONAL PRODUCT. In the USA, national incentive pay scheme (J3) income accounting imputes an income to A wage or salary system that relates all or food grown and consumed by farmers. part of employment earnings to the output Also, to raise more revenue from an of a worker. Manual (blue-collar) workers income tax the imputed income from have often had the opportunity to partici- owner-occupied houses can be added to pate in PRODUCTIVITY schemes, including income actually received by taxpayers. being paid by the number of ‘pieces’ in-bond manufacturing (L6) produced rather than by the amount of The manufacturing of duty-free imported time supplied. Many sales staff have a high raw materials that are processed and proportion of their pay in the form of assembled for re-export. In some cases, commission. Managerial staff in many the VALUE-ADDED TAX of the country ulti- organizations are offered a profit-sharing mately purchasing them is levied. This scheme. Workers are most likely to in- arrangement between Mexico and the crease their productivity when a new USA has flourished since the 1960s. scheme is introduced – hence the sugges- tion that incentive schemes should be Seealso:freeport periodically replaced. incentive compatible (D0) incidence(H2)seetaxincidence A state of affairs under which an indivi- dual has no incentive to change, e.g. under income (D0, E0) PERFECT COMPETITION when a buyer or seller The flow of value, expressed in money or accepts market determination of prices in goods and services, accruing to a and cannot benefit by attempting to influ- government, a firm or an individual over ence them. a specified time period. incentive contract (H5) Seealso:Haig–Simonsdefinitionofin- A type of contract often made between come;Hicksianincomemeasure;money

© 2002 Donald Rutherford income;psychicincome;realincome; These effects are analysed in the study stockandflowconcepts;wealth of consumer behaviour to determine the effect of a price change on quantity References demanded, in the study of TAX INCIDENCE Parker, R.H., Harcourt, G.C. and Whit- as prices are affected and in the study of tington, G. (eds) (1986) Readings in the LABOUR SUPPLY to discover the particular Concept and Measurement of Income, TRADE-OFF between work and leisure cho- 2nd edn, Oxford: Philip Allan. sen by a worker.

(D0) income and substitution effects Seealso:Slutskyeffect;Slutskyequation The effects of a price change. The income effect occurs because a fall in price raises income–consumption curve (D0) real income (or lowers it if the price rises); A graphical representation of the relation- the substitution effect encourages more ship between changing amounts of con- consumption of the good which has be- sumption of alternative goods as real come relatively cheaper (the opposite if the income changes, using INDIFFERENCE CURVES price has increased). Thus, in the figure, and BUDGET LINES. The parallel budget lines when the price of good B falls, this show real income increases as one moves consumer moves from combination x to away from the origin. The income–con- combination y and chooses OQ of B sumption curve joins together the points instead of combination OP. An extra BUD- of tangency between indifference curves I1, GET LINE is inserted to separate the price I2,I3 and I4 and budget lines representing effect into income and substitution effects different income levels. The curve can be z and another combination is discovered. used to demonstrate which of two goods is The price effect is the movement x to y the INFERIOR GOOD. (PQ on the horizontal axis); the income effect is the movement from z to y (RQ on the horizontal axis). The substitution ef- fect is the movement from x to z (PR on the horizontal axis).

Seealso:Engel’slaw;price–consumption curve

income differential (D3, J3) The ratio of the average income of one group of persons to another. Persons can

© 2002 Donald Rutherford be grouped according to occupation, loca- divergence in economic prosperity between tion, industry or type of income giving rise primary producing countries and indus- to occupational, industrial and regional trialized countries increases in periods of wage differentials in the labour market. In world economic growth. Income elastici- capitalist societies, differences between ties are positive for NORMAL GOODS and employment and investment incomes are negative for INFERIOR GOODS. In the figure, also of concern to researchers. In idealistic A is a luxury good as more of it is societies, there is an aversion to large demanded at higher incomes, B is a differentials as EGALITARIANISM is often a normal good and C is an inferior good as major goal, e.g. PLATO believed that the less of it is demanded at higher incomes. richest member of society should not be Seealso:Engel’slaw;priceelasticityof more than four times better off than the demand poorest member of society. Seealso:wagedifferentials income multiple (G2) The amount of a loan divided by the income distribution (D3) borrower’s annual income. In times of A classification of personal incomes ac- inflation multiples rise helping to sustain cording to the FACTOR OF PRODUCTION (land, rising property prices. UK house loans as labour or capital) that has produced it, or a multiple of incomes were on average 1.67 according to its size. in 1980 and rose to 6.0 in 2000. income drawdown scheme (J3) Taking income from a pension fund in- income–offer curve (D0) stead of buying an annuity. Another name for the INCOME–CONSUMPTION CURVE. income elasticity of demand (D0) The ratio of the percentage increase in income-splitting system (H2) demand for a good or service to a percen- A method of taxing the income of married tage increase in income. Thus, if an couples. The aggregated income of the increase in income of 4 per cent is asso- couple is halved and then the income tax ciated with an increase in demand for food is levied on each half. The couple pay of 2 per cent, the income elasticity will be double the amount on the notional equal 0.5. Income elasticities for foodstuffs and incomes. There are several variants of this agricultural raw materials are often less system. than one, with the consequence that the incomes policy (E6) A macroeconomic policy directly control- ling factor incomes. Many Western coun- tries since 1945 have used it as an alternative to FISCAL and MONETARY POLICIES with the hope that, by controlling wage fixing in the labour market, the rate of increase of product prices would be re- duced. The most extreme form is a wages freeze, e.g. the UK’s in 1966. Milder forms include setting a norm for wage increases in line with the rise in PRODUCTIVITY, allow- ing for exceptional increases (e.g. to help low-paid workers, to alleviate a labour shortage or to preserve comparable pay for different occupational groups), or an

© 2002 Donald Rutherford exhortation to pay smaller increases Some observers of incomes policies are (MORAL SUASION). more sympathetic towards them. ROSTOW, Many countries, including the UK and for example, has noted that in 1984 Japan, the USA, have only used incomes policies West Germany and Switzerland were able intermittently, but the Netherlands is ex- by means of incomes policies to have ceptional in achieving the implementation lower prime interest rates, lower unem- of a long-term policy from 1948 to the ployment, lower inflation and large bal- 1960s. Some incomes policies have in- ance of payments surpluses. In sum, to be cluded restrictions on increases in com- successful an incomes policy should pro- pany dividends in order to restrain all vide more helpful economic and financial types of personal incomes: however, this information and education in its use to approach has produced distortions in ca- wage bargainers, as well as an element of pital markets. real wage increases. There were many US experiments in Seealso:collectivebargaining incomes policies in the period 1962–71, some of them inspiring the shape of UK References incomes policies. In January 1962 the US Claudon, M.P. and Cornwall, R.R. An COUNCIL OF ECONOMIC ADVISERS published Incomes Policy for the United States: Guideposts for Non-inflationary Wage and New Approaches, Boston: Nijhoff. Price Behavior in which the trend in Holden, K., Peel, D.A. and Tompson, L.L. productivity was used as the general (1987) The Economics of Wage Control, guidepost for non-inflationary wage settle- Basingstoke: Macmillan. Urquidi, V.L. (ed.) (1989) Incomes Policies, ments. Specific guideposts were abandoned Basingstoke: Macmillan. in 1967 but in 1970 a National Commis- sion on Productivity was set up; inflation incomestatement(M4)seeprofitand alerts were published when there were lossaccount significant wage and price increases. In 1971 there was a ninety-day wage–price income support (H2) freeze: its sequel was the setting up of a A welfare payment in cash. This alterna- tripartite Pay Board and a Price Commis- tive to in-kind benefits gives welfare reci- sion. The effectiveness of this policy has pients more freedom in their spending. long been debated: it is difficult to estab- lish that the guideposts reduced wage income tax (H2) inflation. A tax levied on taxable income. It is a The UK had statutory incomes policies complex tax because of different rates for for the periods 1966–70 and 1972–74, different types of income, exemption of compulsory policies 1975–7 and voluntary some types of income (particularly fringe policies 1948–50, 1961–2 and 1977–9. benefits) and allowances/deductions for There was a tendency to impose an in- various categories of expenditure (e.g. comes policy in a crisis in the most severe expenses related to employment, charitable form – a wage freeze for up to one year – covenants). It was first used in England in and then to relax the policy by permitting 1435, 1450 and 1798–1805 to finance the exceptions to the principle that wage Napoleonic Wars; from 1842, it has been a increases should be in line with general permanent feature of the UK tax system. productivity increases. An innovation of In the USA it was used to finance the the 1970s was to choose as a wage norm a Civil War in 1861–72 but an attempt to flat rate cash increase; this helped the reintroduce it in 1894 failed as it was lower paid but reduced wage differentials, declared unconstitutional, making neces- opening the door to a flood of subsequent sary the 16th Amendment to the US wage claims. Constitution in 1913 to legitimize it. The

© 2002 Donald Rutherford principal theoretical justification advanced incomplete market (D4, G1) for the tax is the SACRIFICE THEORY. A real or financial market with an incom- In all countries, income tax is invariably plete structure. Difficulties arise from the paid on employment income, dividends, conflicting objectives of firms, time and net business income, income from immo- uncertainty. A common example of such vable property and the income of farmers markets is an insurance market in which and small traders. Sometimes it is paid on not all individuals are insured against the some types of fringe benefit, IMPUTED IN- risk of losing income. COME from home ownership, pensions, References unemployment benefit and sickness bene- fits. Hart, O. (1975) ‘On the optimality of equilibrium when the Seealso:directandindirecttaxation;tax is incomplete’, Journal of Economic evasion Theory 11: 418–43. References increasing opportunity costs law (D2) Atkinson, A.B. (1995) in The TRADE-OFF between an increasing action: the basic income/flat tax propo- amount of one good and an increasing sal, Oxford and New York: Oxford amount of another in an economy with University Press. FULL EMPLOYMENT. The opportunity cost of having more of one good is the increasing income terms of trade (F1) cost of losing quantities of the other good. A measure of the purchasing power of This is the principle underlying a PRODUC- exports in terms of imports. The formula TION POSSIBILITY FRONTIER. used for calculating it is increasing returns to scale (D2) Px An increase in output at a faster rate than I ¼ Qx Pm the increase in factor inputs. From SMITH onwards, theorists of ECONOMIC GROWTH where Qx is the volume of exports (I is have been interested in investigating the income, P is price, Q is quantity, x is circumstances in which there can be in- exports and m is imports). This is a more creasing returns to particular industries or useful indication of the effect of interna- a national economy as a whole. CLASSICAL tional trade on a country’s national econ- ECONOMISTS asserted that agriculture was omy than the NET BARTER TERMS OF TRADE subject to diminishing returns and increas- because income terms take into account ing returns were only possible in manufac- both the prices and volumes of trade but turing. net barter terms ignore volume changes. Seealso:Kaldor’slaws;returnstoscale; Seealso:termsoftrade Verdoorn’slaw incomplete contract (D0, K0) References An agreement with insufficient clauses to Young, A. (1928) ‘Increasing returns and anticipate all possible relationships be- economic progress’, Economic Journal tween the contracting parties. To over- 38: 527–42. come the shortage of contingency clauses incremental capital–output ratio (E0) residual rights are often assigned to one of The extra amount of capital needed to the parties. produce one more unit of output. In the References simplest of ACCELERATOR models, the accel- Hart, O. and Moore, J. (1999) ‘Founda- erator coefficient is equivalent to the tions of incomplete contracts’, Review of incremental capital–output ratio. Changes Economic Studies 66: 115–38. in efficiency, rather than in technology,

© 2002 Donald Rutherford can change the ratio. It is always difficult index number (C1) to measure because of the problems of A device for measuring changes in an measuring capital. economic variable, especially NATIONAL IN- COME or prices, over a period of time. The incrementalcost(D0)seemarginalcost value of the variable in the initial year (the ‘base’ year) is set equal to 100 and the value indecomposability (P0) for each subsequent year is calculated as a The interrelatedness of an economic sys- percentage of it. To calculate quantity tem such that the product of each industry changes, e.g. in the GROSS DOMESTIC PRODUCT, is used as an INTERMEDIATE GOOD of at least the components of the GDP are weighted one more industry. If every industry, by the prices of each item; to calculate including itself, uses it as an intermediate price changes, quantity weights reflecting product, then there is perfect indecompo- the relative amounts consumed or pro- sability. duced are used. The best known indices are those of Laspeyres and Paasche. Be- Seealso:input–outputanalysis fore JEVONS and others constructed index indexation (M2) numbers in the 1860s, there was little An adjustment clause in contracts to main- accurate knowledge of the precise degree tain the real value of the items central to of inflation in industrialized economies, the contract. Clauses of this kind are much and there was often a confusion between used in building contracts, labour contracts the causes and amount of INFLATION. (often used in the USA and Israel) and for References government bonds (e.g. in France and the Allen, R.G.D. (1975) Index Numbers in UK in the 1980s to attract savers). As Theory and Practice, London: Macmillan. indexation accepts and institutionalizes in- Stuvel,G.(1989)TheIndex-NumberProblem flation, it has attracted much criticism. and its Solution, London: Macmillan. Seealso:costoflivingadjustment;esca- index-tracking fund (G2) latorclause An investment fund investing in the spe- References cific securities which are included in a Dombusch,R.,Sinionsen,M.H.andVargas, major STOCK MARKET PRICE INDEX. Although F.G. (1983) Inflation, Debt and Indexa- the value of units of the fund rise and fall tion, Cambridge, MA: MIT Press. with the index, the upward trend in these indices gives investors long-term growth. indexing (G1) An investment strategy based on choosing indicative planning (P4) a portfolio of stocks likely to achieve the Central ECONOMIC PLANNING based on influ- total return to the stocks in a stock market ential forecasts that indicate the future index. direction of a national ECONOMY. Fiscal See also: enhanced indexing inducements, rather than governmental direction as in the traditional SOVIET-TYPE index-linked gilt (E5, G2) ECONOMY, are used to encourage private A government bond with a link between a sector firms to carry out sufficient invest- price index and the bond’s capital value ment. Although ROBERTSON argued as early and yield. These GILTS, popular in times of as 1915 that business fluctuations could be inflation, are attractive to unadventurous reduced by the joint forecasting of busi- investors desirous of a low-risk portfolio ness investment, the major implementation and steady real income. Finland intro- of indicative planning has been in France duced these gilts in 1947, France in the since 1946 under the original Monnet Plan 1950s and the UK in 1975. and its many successors. In the UK, the

© 2002 Donald Rutherford NATIONAL PLAN attempted to introduce each combination renders the same utility, this type of planning for nine months in the consumer is ‘indifferent’ as to which 1965–6. bundle of goods to choose. The curves further from the origin represent higher indicators(E3,E6)seecoincident levels of utility. Indifference curves must indicators;economicindicators not intersect for otherwise two different indicator variable (E6) levels of utility are represented at the point An economic statistic which describes the of intersection (X in the figure). Also there current state of an economy and guides a is inconsistency as combination C is pre- policy-maker in his or her actions, parti- ferred to combination A and combination cularly whether to deflate or reflate the B to combination D. economy. indirect cost (D0) Seealso:coincidentindicators;economic Overhead and other costs not directly indicators attributable to the cost of producing one unit of output; a fixed cost. indifference curve (D0) A curve representing many combinations Seealso:directcost of two goods, all of which give the indirect cost recovery (D4, M2) consumer the same level of UTILITY.As Pricing a service or activity so that OVER- HEAD COSTS are covered. indirect factor content (D2) The total amount of the FACTORS OF PRO- DUCTION used in all stages of production prior to the last to achieve a particular output. indirecttax(H2)seedirectandindirect taxation indirect utility function (D3) The total utility of a consumer related to the prices of consumption goods and the consumer’s income. Seealso:directutilityfunction individual income tax (H2) US INCOME TAX introduced in 1913 and now the major source of federal govern- ment revenue. It is a progressive tax with a countercyclical impact. individualism (D1, P4) Seeking to maximize the utility of an individual person rather than a collective entity such as society at large or a corpo- rate body. Individualism is often equated with SELF-INTEREST or even selfishness. The individualist values economic and political freedom but prizes personal responsibility highly. Individualists respond to incentive

© 2002 Donald Rutherford mechanisms and contribute to the dyna- to provide long-term capital for small and mism of an economy. medium-sized businesses. The corporation was thought to be necessary because of Seealso:altruism the so-called ‘MACMILLAN GAP’. indivisibility (D0) industrial capitalism (P1) The nature of a FACTOR OF PRODUCTION or The phase of CAPITALISM beginning with commodity supplied only in discrete the INDUSTRIAL REVOLUTION; the stage of amounts, not increasing or decreasing in economic development following MER- quantity continuously. Energy or liquid CHANT CAPITALISM. raw materials, for example, are divisible, but a piece of capital equipment or a industrial concentration (L1) see skilled employee will be available only in concentration a minimum-sized quantity. Indivisibilities (L2) are responsible for many FIXED COSTS in the industrial democracy short run and give rise to production Participation by employees in the manage- economies of scale at high levels of output. ment and/or ownership of their firms. Varied schemes range from the distribu- induced technical progress (O3) tion of shares (popular in the UK in the The effect on productivity of changes in 1950s and 1980s to prevent renationaliza- relative factor prices. tion), works councils to disseminate man- agement proposals, and producer co- inducement good (D0) operatives. Later there were proposals to A consumer good expected to stimulate have workers’ representation on company producers to make other goods in ex- boards. Germany’s two-tier company change for it. Such goods are of great structure since 1950 (the upper tier with importance in developing countries. David 50 per cent worker representatives but the Hume argued in support of manufacturing lower with executive directors alone) par- that it would induce higher agricultural tially inspired the BULLOCK COMMITTEE’s productivity. recommendations of 1977. The short-lived inducement mechanism (O3) experiments of British Steel and the Post The means of effecting economic change, Office have been the major UK attempts especially a shock to an economy which at worker democracy to date. Some of the brings about technical progress. INVENTIONS co-operatives in older UK small-scale in- and their application to production have dustries such as clothing and footwear been induced by major wars as well as by have had a continuous history in the more minor events such as industrial English Midlands since the 1890s. More strikes. Development economists have of- ambitious, larger unit co-operatives have ten referred to this mechanism. flourished at Mondragon, Spain. industrial action (J5) Seealso:workers’participation 1 STRIKES, go-slows, working-to-rule. References 2 Seizing control of a factory, according Thimm, A. (1980) The False Promise of to the principles of SYNDICALISM. Codetermination: The Changing Nature 3 The donation of a day’s work, in the of Europe in Workers’ Participation, USSR, to celebrate Lenin’s birthday. Lexington, MA: Lexington Books. Thomas, H. and Logan, C. (1982) Mon- Industrial and Commercial Finance dragon, London: Unwin Hyman. Corporation (G2) Variek, J. (1970) The General Theory of A UK financial organization founded in Labor Managed Economies, Ithaca, NY: 1945 jointly by the BANK OF ENGLAND and Cornell University Press. the London and Scottish CLEARING BANKS Witte, L.F. (1980) Democracy, Authority

© 2002 Donald Rutherford and Alienation in Work: Workers’ Parti- the subject is the study of market struc- cipation in an American Corporation, tures and an examination of the implica- Chicago: University of Chicago Press. tions of those structures for pricing, investment and company performance. In industrial dispute (J5) 1 A breakdown in labour–management a sense, industrial organization was started relations usually resulting in the partial by MARSHALL in his Economics of Industry or total withdrawal of labour on the and Principles of Economics (Book IV). instructions of a TRADE UNION. Seealso:structure–conduct–performance 2 STRIKE. model;theoryofthefirm industrialization (O1) References A stage in DEVELOPMENT consisting of shift- Mason, E.S. (1957) Economic Concentra- ing resources from agriculture into manu- tion and the Monopoly Problem, Cam- facturing. It is variously measured by bridge, MA: Harvard University Press. manufacturing’s percentage share of GROSS Stigler, G.J. (1968) The Organization of DOMESTIC PRODUCT, gross industrial output Industry, Homewood, IL: Richard D. per capita, energy consumption per capita Irwin. or industrial exports as a percentage of total exports. To finance industrialization, industrial policy (L5) extra real resources are necessary; these Measures attempting to speed the process can be found by obtaining foreign ex- of resource allocation among or within change through increasing agricultural industrial sectors with the aim of correct- and manufactured exports or by increas- ing market distortions. Much of industrial ing the domestic rate of savings. Although policy is concerned to prevent a complete this is still an issue in Third World international specialization of labour and PROTECTIONIST countries, the countries of the ORGANIZA- is often in character, unless TION FOR ECONOMIC CO-OPERATION AND DEVEL- the policy is part of an international OPMENT are more concerned with DE- agreement. As the alternative to chauvi- INDUSTRIALIZATION and the switch of re- nistic industrial policies, it has been sug- sources into the service sector. gested that the OECD might produce an overall industrial policy for a number of industrial muscle (J5) countries: the specific national industry The ability of a group of workers to press marked out for expansion would develop a demand for increased wages or improved with the help, not the competition, of working conditions because they are in an other advanced countries. The mercanti- industry producing essential goods or lists were among the first to advocate services. Workers in energy and transport industrial policies. industries have usually been more power- In Japan, industrial policy attempts to ful in COLLECTIVE BARGAINING because the anticipate and accelerate response to mar- withdrawal of their labour creates a crisis ket signals. Subsidization of research and in a national economy. development and guidance are offered to Seealso:strike growth sectors. The MINISTRY OF INTERNA- TIONAL TRADE AND INDUSTRY offers differen- industrial organization (L0) tial help to sectors and firms, including tax Also known as industrial economics, this incentives, export–import measures and applied branch of was technology subsidies. In France, industrial partly founded to provide theoretical sup- policy measures are part of the national port for the analysis of ANTITRUST but now and sectoral plans. France’s largest bank, includes the examination of all the func- the Caisse des De´poˆts et des De´signations, tions of management. A major aspect of finances the largest industrial projects. In

© 2002 Donald Rutherford Germany, the three major banks, them- perform. These systems are usually classi- selves with substantial industrial invest- fied according to the degree of their ments, collaborate with the BUNDESBANK in centralization and the extent to which they implementing industrial policy. The Ger- are co-operative (as when there is WORKER’S man Ministry of Economy supports re- PARTICIPATION in management) or adversar- search and development and training. The ial (in the sense that employers and unions industrial policies of the NEWLY INDUSTRIA- oppose each other until a compromise LIZED COUNTRIES attempt to save expendi- settlement can be reached). ture on imports and the pursuit of Seealso:industrialdemocracy;strike regional and industrial balance. In the USA industrial policy is conducted at the References level of states: popular policies have been Clegg, H.A. (1976) The System of Indus- the encouragement of ‘silicon valleys’ and trial Relations in Great Britain, 3rd edn, other concentrations of high-technology Oxford: Basil Blackwell. industries. The establishment of the EUR- Industrial Reorganization Corporation OPEAN COMMUNITY’s single market threatens (L5) the existence of West European national The UK state-financed financial institu- industrial policies. tion in existence from 1967 to 1971 with References the aim of restructuring UK industry. It Adams, R.G. and Klein, L.R. (eds) (1983) provided finance to bring about desirable Industrial Policies for Growth and Com- mergers between firms so as to make them petitiveness, Lexington, MA: D.C. more internationally competitive, British Heath. Leyland being one of its more famous Behrman, J.N. (1984) Industrial Policies: cases. Also, it invested directly in several International Restructuring and Transna- high-technology firms. The subsequent tionals, Lexington, MA: D.C. Heath. Conservative government abolished it be- Bingham, R.D. (1998) Industrial policy American style: from Hamilton to cause of its belief that government-fi- HDTV, Armonk, NY, and London: nanced bodies should not be engaged in Sharpe risky investment activities. Foreman-Peck, J. and Federico, G. (eds) Seealso:NationalEnterpriseBoard (1999) European industrial policy: the twentieth century experience, Oxford References and New York: Oxford University Press. Hague, D.C. and Wilkinson, G.C.G. (1983) The IRC – An Experiment in Industrial industrial relations (J5) Intervention: A History of the Industrial 1 A study of the rules governing the Reorganization Corporation, London: relationships between employers and Allen & Unwin. TRADE (LABOR) UNIONS at national, indus- industrial revolution (N6) try or firm level. A discontinuity in the growth of an 2 An examination of the procedures for economy, taking the form of a rapid rate fixing wages, co-operating in production of technical progress leading to a sus- and deciding workplace discipline. tained increase in per capita real incomes. Industrial relations systems are examined This revolution is usually accompanied by with respect to the ‘actors’ participating in a change in the occupational structure as the system, i.e. employers, unions and factory replaces handicraft production, governments, to the levels at which rela- and urbanization of the population. Ros- tions take place, i.e. national, industrial or tow mentions four industrial revolutions. company, and to the legislative framework The first was in the 1780s associated with within which the actors are allowed to the textile industry, the second the railway

© 2002 Donald Rutherford boom of the 1830s and 1840s, the third, great technological change, industrial based on steel, machine tools and motor training has become central to the survival vehicles, which came to an end in the and successful future of many firms. 1970s and the fourth, which is now taking Seealso:generaltraining place, based on electronics and biology. A disruptive feature of the fourth is the use industrial union (J5) of robots to replace workers in manufac- A TRADE (LABOR) UNION which is the sole turing, creating unpredictable and unde- organizer of labour in a particular indus- sired employment effects. try. Germany has sixteen industrial unions Seealso:Kondratieffcycle;take-off to organize its labour force. Many have suggested a similar structure for UK References unions (who had recommended industrial Deane, P. (1979) The First Industrial Revo- unionism to the Federal Republic of West lution, 2nd edn, Cambridge: Cambridge Germany) but have stumbled on the major University Press. obstacle to such change – the dismember- Rostow, W.W. (1971) The Stages of Eco- ment of powerful GENERAL UNIONS. nomic Growth: A non-communist mani- festo, Cambridge: Cambridge University Seealso:craftunion;enterpriseunion Press. industry (L0) industrial share (G0) A group of firms producing the same An EQUITY forming part of the financial principal product. In a broad classification capital of an industrial company or cor- of industries, all industrial activity of an poration. economy can be divided into only ten or a hundred industries but narrower classifica- industrial society (P0) tions make possible a division into as many A term developed by Marxists in Europe as a thousand or more. Types of industry and the USA in the 1950s to describe a are contrasted as HEAVY or LIGHT, mature or society with large-scale industrial produc- high-tech, smokestack or sunrise. tion. A capitalist or a non-capitalist so- ciety can take this form. The advent of Seealso:StandardIndustrialClassifica- Keynesianism and improved techniques of tion;three-digitindustry;two-digitindus- industrial management, it was hoped, try would produce a stability in society, parti- industry cluster (L0, R1) cularly in the relationship between capital A group of interlinked industries based on and labour. COMPARATIVE ADVANTAGE. References industrysupplycurve(D2)seesupply Kerr, C. (1962) Industrialism and Industrial curve Man: The Problems of Labor and Man- agement, London: Heinemann. inefficient equilibrium (D4) A market balance that excludes some industrial training grant (I2, J2) TRADES which could have been executed. A payment made by central government or by a fund financed by the firms of an inelasticity (D0) industry to pay for vocational training. 1 The unresponsiveness of one economic Without such grants it would be difficult variable to another. for many small firms to finance adequate 2 Demand or supply ELASTICITY less than training and there would be a tendency for unity in value. In product markets, firms undertaking little training to attempt demand is inelastic for essential goods to acquire trained workers by paying and services, including goods that pro- above-market wage rates. In a period of duce addiction. In labour markets, the

© 2002 Donald Rutherford short-term inelastic supply reflects the an economy. This rate is based on histor- lengthy nature of training. ical experience and assumed in contracts. infant industry (L0) inequality (D3) A new industry with a low output and high The character of a particular income or average cost. As it is usually uncompetitive wealth distribution with different rather relative to producers in other countries, it than equal shares for members of a often attracts assistance under an INDUS- population. In developed countries, in- TRIAL POLICY or through PROTECTION. equality arises from WAGE DIFFERENTIALS, the regional distribution of economic ac- Seealso:tariff tivity and accumulations of income-earn- ing assets. Inequality is more severe in less infant industry argument (F1) The case for tariff PROTECTION for a new developed countries because UNEMPLOY- industry with high unit costs (often be- MENT is much greater, unemployment ben- efits are rare, much labour is immobile cause its labour force is untrained, its fixed and often a few families have a dispropor- capital is expensive or it lacks production tionate share of wealth. experience) to enable it to increase its The effects of inequality have long been output and reduce its unit costs until it is debated. Some argue that it leads to internationally competitive. This has often inefficiency as many in a population, been regarded as the most justifiable of seeing little chance of economic advance- reasons for a tariff as the social benefits of ment, are unwilling to sacrifice present setting up a new industry outweigh the consumption to make possible economic private cost of being denied lower priced development and are likely to underinvest imports. However, experience has shown in their children’s education; others point that many of these ‘infants’ have not reached adulthood. to the devastating effects on PRODUCTIVITY and ECONOMIC GROWTH of the lack of References incentives in an EGALITARIAN society. Baldwin, R.E. (1969) ‘The case against Seealso:Ginicoefficient;Lorenzcurve infant industry tariff protection’, Jour- nal of Political Economy 77: 295–305. References inferior good (D0) Atkinson, A.B. (1982) The Economics of 1 A good demanded less as consumers’ Inequality, 2nd edn, Oxford: Clarendon Press. incomes rise. Sen, A. (1997) On economic inequalilty, 2 A good with an INCOME ELASTICITY OF 2nd edn, Oxford and New York: Clar- DEMAND of less than one. Some food- endon Press. stuffs, e.g. potatoes, rice and margarine, Silber, J. (ed.) (1999) Handbook of income are in this category. An inferior good inequality measurement, Boston, Dor- can be distinguished from a normal drecht and London: Kluwer Academic. good in an income demand curve. Townsend, P. (1979) Poverty in the United Kingdom, Harmondsworth: Penguin. Seealso:Giffenparadox infession (E3) inertial effect (E6) World inflation caused by a breakdown in A government’s passive acceptance of an the world monetary system leading to economic condition inherited from a pre- world RECESSION. This concept was intro- vious government, e.g. acceptance of wage duced to provide a better explanation of increases previously negotiated. the STAGFLATION of the 1970s. inertial inflation (E3) inflation (E3) The expected rate of INFLATION built into A general sustained rise in the price level

© 2002 Donald Rutherford that reduces the purchasing power of that GREGATE SUPPLY. This gap is the cause of country’s currency. It has been ascribed to DEMAND-PULL INFLATION and is usually illu- increases in the money supply, excess strated as in the figure. demand, rises in public expenditure (parti- cularly in times of war), the behaviour of the labour market and changes in costs – in the case of the 1970s, oil-price increases. Seealso:coreinflationrate;cost-push inflation;hyperinflation;inertialinflation; inflationaccounting;menucostsofinfla- tion;pureinflation;shockinflation;shoe leathercostsofinflation;structuralinfla- tion;wage-pushinflation References Brown, A.J. (1985) World Inflation since 1950, Cambridge: Cambridge University Press. Fleming, J.S. (1976) Inflation, Oxford: Oxford University Press. inflationillusion(E3)seemoneyillusion inflation accounting (E3, M4) inflationist (E3) Accounts measuring costs, revenue, profit A person advocating inflation as a means and loss at constant prices. Major profes- of stimulating an economy. This is recom- sional bodies of accountants have pro- mended because gross profit margins in- duced conventions to deal with the effects crease in a period of inflation, making of inflation so that a true and accurate possible increased net investment and em- description of the financial state of an ployment. enterprise is achieved. The current cost inflation targeting (E5) approach is used in the UK, Australia, Setting as the goal for a CENTRAL BANK the Canada and New Zealand. In the USA, achievement of price inflation at or below the SECURITIES AND EXCHANGE COMMISSION a prescribed rate. New Zealand in 1990 requires large corporations to use the was the first to adopt this policy; Canada, replacement cost approach, stating both the UK, Sweden and Australia were next specific price changes and movements in to adopt targeting. In the USA the FED- the general price index. ERAL RESERVE under the EMPLOYMENT ACT 1946 Seealso:currentcostaccounting;Sandi- has a broader remit which includes both landsReport economic growth and the control of infla- tion. References Tweedie, D.P. and Whittington, G. (1984) Seealso:MonetaryPolicyCommittee The Debate on Inflation Accounting, (UK) Cambridge: Cambridge University Press. inflation tax (H2) 1 A tax that fines employers and/or work- inflation-adjusted deficit (H6) ers who permit wages to rise faster than That part of a government’s fiscal deficit desired by a government. Its aim is to deflated by a price index. make labour more competitive through bringing about a reduction in unem- inflationary gap (E0) ployment. The excess of AGGREGATE DEMAND over AG- 2 A reduction in the resources of house-

© 2002 Donald Rutherford holds and firms because a government and activities of an organization. For a has sanctioned an increase in the money company, much disclosure is a legal re- supply and caused inflation. quirement, but there is also voluntary release of information to appease inquisi- Seealso:forcedsaving;marginalemploy- tive shareholders, attract more investment, mentsubsidy;seignorage;tax-basedin- achieve political acceptability and the gen- comespolicy eral approval of society. (P0) information externality (D8) Part of an economy consisting of unrec- The supply of a PUBLIC GOOD by a private orded and often illegal economic activities. individual; for example, the activity of a In developing economies the informal sector pioneer that indicates to successors is the subsistence agricultural sector, in whether a venture is worthwhile. developed economies subcontracting activ- ities such as tailoring. The dynamic of this information technology (O3) sector, springing from the avoidance of gov- Methods of generating, processing and ernmental regulation, produces well-known communicating information, especially consequences – long hours, a disregard for using computer hardware and software. EX- safety, do-it-yourself activities and barter. PERT SYSTEMS, data networks and electronic Also known as the unofficial economy. mail have revolutionized many functions of management and made possible the Seealso:blackeconomy;timebudgetsur- globalization of financial markets. In mod- vey ern economies it has become central to the References working of most firms and could be respon- Alessandrini, S. and Dallago, B. (eds) sible for the beginning of a new LONG WAVE. The Unofficial Economy: Conse- (1987) References quences and Perspectives in Different Economic Systems, Aldershot: Gower. Zorkoczy, P. (1982) Information Technol- Thomas, J.J. (1989) Informal Economic ogy. An Introduction, London and Activity, Hemel Hempstead: Philip Al- Marshfield, MA: Pitman. lan; Cambridge, MA: MIT Press. information theory (D8) informalownership(K0)seeextralegal The principles underlying the criteria used property to select summary statistics which describe empirical distributions. Information is used information agreement (L1, L4) to revise previous probabilities. A RESTRICTIVE PRACTICE consisting of the circulation of prices and/or costs to mem- References bers of a business association with a view Kullback, S. (1959) Information Theory to encouraging them to restrict competi- and Statistics, New York: Wiley. tion by setting similar product prices. In information trap (D4) the UK such agreements, some of which An equilibrium state in which prices fail to have existed throughout the twentieth cen- reveal all the information in the market. tury, have been within the scope of restric- Mistaken beliefs about the information tive trade practices legislation since 1968. possessed by other market participants Seealso:competitionpolicy produce this trap. information cost (M2) infraco (L2) The cost to an organization of obtaining An INFRASTRUCTURE company such as an knowledge of its business environment. operator of railways. information disclosure (K2) infrastructure (H4) The publication of facts about the state The basic services or SOCIAL CAPITAL of a

© 2002 Donald Rutherford country, or part of it, which make eco- in-kind transfer (H2) nomic and social activities possible by Provision of a good or service by a govern- providing transportation, public health ment, often freely or at less than market and education services and buildings for prices, to low-income individuals and fa- community activities. Railways, airports, milies. The aim of these ‘gifts’ is to increase hospitals, schools, roads, sewerage systems the welfare of persons with low incomes and reservoirs constitute the major types of and few resources to obtain food, housing social capital. Although in the nineteenth and medical care. The transfers can take century many of these were financed pri- various forms including food stamps, hous- vately (e.g. the railways), after 1945 in ing vouchers and free access to medical many countries most infrastructure invest- services or subsidized medical insurance. ment has been the responsibility of the Seealso:transferincome public sector. Countries with the poorest infrastructures are either those with low per innovation (O3) capita incomes, i.e. the less developed The application of an INVENTION to a countries, or those with governments prac- process of production or the introduction tising LAISSEZ-FAIRE policies which seek to of a new product. A method of measuring minimize the role of the state. an innovation is by estimating the extent to which an industry uses the new process inheritance tax (H2) or product. Innovations occur more in A tax on WEALTH transferred after the concentrated industries as PRODUCT DIFFER- decease of an individual person. This tax ENTIATION, necessitating frequent product aims to raise revenue and bring about an changes, is a major market strategy of intergenerational shift in wealth dist- . ribution. Inheritance taxes have long had their advocates, e.g. John Stuart MILL,asa Seealso:diffusionrate;invention;re- major method of reducing INEQUALITY in searchanddevelopment society. References in-homebanking(G2)seehomebanking Freeman, C. (1982) The Economics of Industrial Innovation, 2nd edn, London: initial public offering (G1) Pinter. The first sale of shares of a company to the public when it decides to offer a stake innovation possibility frontier (O3) in its ownership to outside investors. A line showing the trade-off between Usually an investment bank advises a company on coming to market and might guarantee the sale through a firm commit- ment to buy all the shares and then resell to other investors. Seealso:primaryoffering injection (E0) A stimulus to AGGREGATE DEMAND, e.g. net investment or exports, which raises the level of the NATIONAL INCOME by causing a MULTIPLIER expansion of incomes. Injections are exogenous in character. Seealso:exogenousvariable;leakage; withdrawal

© 2002 Donald Rutherford labour-augmenting and capital-augmenting the technique, LEONTIEF, first produced an technical progress. It is assumed that firms input–output table for the US economy in seek to maximize the instantaneous rate of 1936, although QUESNAY produced a flow unit cost reduction. table for the French economy in 1758. In its static form, this analysis shows input–output analysis (C1, L0) how much the n industries of an economy A tabular summary of the flows of goods have to produce to satisfy the total de- and services between industries and the mand for each particular product. It is final demand of an economy with the assumed that in each industry there are output of each sector being the inputs of constant returns to scale, a fixed input– other sectors (see typical table below). The output ratio and a homogeneous product. technology of the economy determines the The model is ‘open’ if there are both n ratios (or coefficients) of each input to the industries and a sector, e.g. households, output it helps to produce. In the case of which exogenously determines final de- inter-industry trade, institutional factors, mand; it is closed if the model shows including custom, will determine the in- relationships only between the n industries. put–output ratios for the household sec- Simultaneous equations are used to deter- tor. The static version of input–output mine the inputs required for final demand analysis can be solved by ordinary linear to be satisfied. Dynamic versions of input– equations; the dynamic version (which output analysis can take into account time includes, as well as flows, stocks of goods lags in production, the adjustment of out- and fixed capital) uses linear difference put to excess demand and the accumula- equations for its solution. The pioneer of tion of inventories and fixed capital.

© 2002 Donald Rutherford References employee of the mergers and acquisitions Leontief, W.W. (1951) The Structure of the department of a MERCHANT/INVESTMENT BANK American Economy, 2nd edn, New York: trading in the stock of the client company Oxford University Press. using the veil of a NOMINEE ACCOUNT or even —— (1986) Input-Output Economics, 2nd a company set up for such transactions in edn, New York: Oxford University Press. a country noted for its secrecy, e.g. Liech- input trade (F1) tenstein. A large stockholding is built up International trade in labour and other by carefully timed transactions of a mag- FACTORS OF PRODUCTION. nitude not to attract attention and then sold well before a bid is announced. References Insider trading is investigated in the USA Jones, R.W. (2001) Globalization and the by the SECURITIES AND EXCHANGE COMMISSION theory of input trade, Cambridge, MA: and in the UK by the Department of MIT Press. Trade and Industry, with a view to the inside lag (E6) prosecution of offenders. In the UK, it A time lag occurring either because it was made an offence subject to criminal takes time to recognize the state of an proceedings under the Companies Act 1980 economy or because it takes time to take and subsequently under the Company action to remedy an undesired state of Securities (Insider Dealing) Act 1985. affairs. A lag of this kind is either a RE- References COGNITION LAG or an IMPLEMENTATION LAG. Rider, B.A.K. (1983) Insider Trading, Bris- Such lags can be reduced by AUTOMATIC tol: Jordan. STABILIZERS which, by their nature, operate without any decision- making response to insider wage setting (J3) a change in an economy. Wage determination within a firm result- Seealso:outsidelag ing in the gain from increased PRODUCTIV- ITY being passed on as increased wages for inside money (E4) the existing labour force. If the ‘insiders’ A type of money arising from private were concerned with the labour force as a sector debt. The principal modern exam- whole they would be willing to accept a ple of this is the commercial bank deposit lower rate of pay which their employers matched by a loan to another person in would be able to offer also to persons the private sector. outside the firm, thereby expanding em- Seealso:outsidelag ployment. References Seealso:outsiderwagesetting Gurley, J.G. and Shaw, E.S. (1960) Money References in a Theory of Finance, Washington, DC: Brookings Institution. Lindbeck, A. and Snower, D.J. (1989) The Johnson, H.G. (1969) ‘Inside money, out- Insider-Outsider Theory of Employment side money, income, wealth and welfare and Unemployment, Cambridge, MA, in contemporary monetary theory’, and London: MIT Press. Journal of Money, Credit and Banking 1 Solow, R.M. (1985) ‘Insiders and outsiders (February): 30–45. in wage determination’, Scandinavian Journal of Economics 87: 411–28. insider trading (G2) Stock market trading based on financial insolvency (K0, M2) information gained improperly from inside The condition of a legal person with a firm. A typical situation is that of an liabilities in excess of assets. This inability

© 2002 Donald Rutherford to meet the demands of creditors usually institutional economics (A1) leads to BANKRUPTCY. An approach developed by a succession of US economists, beginning with VEBLEN, instant monetarism (B2) who have used a variety of social science The school of thought, usually identified disciplines to analyse the structure of as the New Classical, which believes that economies, the process of economic wage and price adjustment are almost change and the nature of economic deci- instantaneous as the wages and prices set sion making. Prominent contributors to are expected to be at the equilibrium level. this approach include John COMMONS and Seealso:gradualistmonetarism AYRES. GALBRAITH is the last major figure of the school. Institute for Fiscal Studies (H0) References An independent, privately financed, Lon- don-based institute founded in 1971 which Samuels, W.J. (1988) Institutional Econom- prepares regular assessments of UK fiscal ics, 3 vols, Aldershot: Edward Elgar. policy and also undertakes many detailed institutional investor (G2) studies of particular aspects of public A pension fund, insurance company, bank finance. or other institution with a large portfolio of securities. After 1950, these investors Institute for International Economics diversified their portfolios by increasingly (F0) purchasing equities. Founded in 1981 and based in Washing- ton, DC. It studies international econom- instrument variable (E6) ics in the widest sense to include trade An economic variable directly controllable policies, exchange rates, Japan’s role in the by a governmental authority responsible world and the Third World debt. for an economic policy. These variables include bank reserve ratios and short-term Institute for International Finance (F0) interest rates. Founded in 1984 and based in Washing- ton, DC. COMMERCIAL BANKS set it up to Seealso:goalvariable;targetvariable collect information on developing coun- References tries and their debts. Although its main Tinbergen, J. (1970) On the Theory of role is still data collection, it has co- Economic Policy, Amsterdam: North- ordinated debt rescheduling. Holland. Institute of Economic Affairs (A1) insurance (D0) An independent educational trust founded A method of sharing risks. Originally it in 1957 and situated in London. Academic was chiefly concerned with insuring ship- economists, as well as major politicians, ping, the riskiest of business ventures in have produced hundreds of pamphlets, earlier centuries, but the principle was and some books, on policy issues, espe- extended to cover all types of risk, includ- cially in its Hobart Papers series. It has ing damage to property, personal injury consistently advocated the application of and death. The fairest type of insurance is market principles to the major economic where the cost to the insured of premiums problems of the day. It was founded by and the cost to insurers of administration Anthony Fisher and Ralph Harris; Arthur do not exceed the total payout on risks Seldon was its most famous director. which have occurred. However, the MONO- Seealso:AdamSmithInstitute;David POLY POWER of many insurers permits them HumeInstitute to make excessive profits. The government insures some risks in the public sector and institution(A1)seeeconomicinstitution should, it is argued, underwrite personal

© 2002 Donald Rutherford injury compensation in the private sector. Intellectual Property. Rights in Science, Insurance against risk is not universal. Its Technology and Economic Performance, absence can be explained on the grounds Boulder, CO: Westview Press. of MORAL HAZARD as insurance induces Inter-American Development Bank recklessness and of adverse selection as (G2) only the worst risks apply for insurance. Founded in 1960 by the USA and nineteen References Latin American countries to provide fi- Borch, K. (1988) Economics of Insurance, nance for development projects in South Amsterdam: North-Holland. America largely from private sources. Ori- ginally only the countries of the Organiza- insurance market (G2) tion of American States were members. In A market that arranges the sharing of a 1983 it established the Intermediate Finan- large risk amongst many individuals. The cing Facility to defray up 5 per cent per best example is LLOYD’S of London, noted annum of interest charges paid by bor- for marine and aviation insurance but rowers on certain loans from the bank. prepared to consider any risks except standard life cover. Seealso:developmentbank Insurance Ombudsman Bureau (G2) inter-dealer broker (G1) A regulatory body for the UK insurance A London broker who enables market- industry covering the insurance groups makers in GILTS to record anonymously on and companies who have volunteered to an electronic noticeboard their requests to come under its jurisdiction. buy or sell blocks of government stocks. Seealso:self-regulatoryorganization interdependent economy (P0) An ECONOMY with close trading links with intangible wealth (D0) another economy. An asset generating income because of its owner’s legal rights or trading reputation. Seealso:openeconomy This wealth includes patents, trademarks, interest (E4) copyrights, FRANCHISES and goodwill. 1 The income paid to the owner of capital Seealso:tangiblewealth for its use. 2 A legal title to property. integrated fare (D4, R4) A charge enabling a passenger to use one Seealso:rateofinterest ticket for several forms of transport. interest-bearing eligible liabilities (G2) integrated pollution control (Q2) Customer’s interest-bearing deposits with A system of pollution licences covering a UK CLEARING BANKS. wide range of industries intended to con- Seealso:eligibleliability trol the overall levels of air and water pollution in a particular area. interest elasticity of savings (E2) The responsiveness of SAVINGS to a change Seealso:EnvironmentalProtectionAg- in the RATE OF INTEREST. As in many ency;pollutioncontrol empirical studies savings appear to be intellectual property (D0, O3) interest INELASTIC, other savings theories Intangible property resulting from inven- have been advanced, especially the LIFE- tive activity, e.g. patents, trademarks and CYCLE approach. copyrights. interest equalization tax (H2) References US federal tax introduced in July 1963 Rushing, F.W.and Brown, C.G. (eds) (1990) which increased the cost of foreign portfo-

© 2002 Donald Rutherford lio borrowing on the US market by 1 per than EQUITY will face greater financial cent. This fiscal measure was designed to charges when interest rates suddenly rise. reduce the capital outflow from the USA. Seealso:exchangerisk interestrate(E4)seerateofinterest intergenerational distribution of in- come (D3) interest rate agreement (E4, G2) 1 The relationship between the incomes An agreement for one party to pay an of persons alive today and their descen- initial premium to another party in return dants. One way of effecting an inter- for receiving at specified time intervals the generational transfer is for a generation difference between a reference market to increase the income of its successors interest rate and a predetermined level of through abstaining from consumption interest. If the difference is specified to be now and undertaking long-term invest- greater, the agreement is an interest rate ments. If individuals are reluctant to cap; if smaller, an interest rate floor. These make such sacrifices, governments can agreements are used in asset-liability man- raise taxation to effect long-term im- agement to reduce the risk arising from provements in economic welfare; this is interest rate movements. often cited as a major justification for interest rate cartel (G2) state educational expenditure. An agreement between London CLEARING 2 The relationship between the incomes BANKS to prevent competition in interest of workers currently in the labour force rates of both borrowers and lenders; and those retired from it. abolished in 1971. Seealso:overlappinggenerationsmodel interest rate risk (G1) intergenerational equity (H2) The RISK to a borrower of the lender Fairness, particularly in public finance, increasing the interest rate on a loan. between this and future generations. Ac- cording to the BENEFIT APPROACH TO TAXATION interest rate smoothing (E5) each generation should pay its own ex- Small changes in interest rates in the same penses, but in practice capital projects are direction, either up or down, carried out often financed, as are wars, by public debt by a CENTRAL BANK often by using OPEN which burdens future generations. MARKET OPERATIONS. This attempt to stabi- lize output and control inflation has often References been criticized for making too modest a Ferguson, J.M. (ed.) (1964) Public Debt response to macroeconomic changes. and Future Generations, Chapel Hill, NC: University of North Carolina Press. interest rate swap (G2) An exchange of a fixed for a variable intergenerational loan (G2, R2) interest rate arrangement. Despite the high A means of financing house purchase over risk of these swaps, in practice the return a period as long as 100 years. The children on the deal can be as low as one-twentieth of the original mortgagor continue to of 1 per cent. This form of rescheduling service their parents’ mortgage. In times debts was used in the 1980s by UK local of high property prices property becomes authorities and led to great losses when affordable as annual payments are lower interest rates rose. than under conventional mortgage ar- rangements. interest risk (D0, E4) Seealso:equityreleasescheme A risk arising from unexpected changes in the rate of interest. A business, for exam- interim management (M1) ple, which is financed by bank loans rather Short-term management often to deal with

© 2002 Donald Rutherford a specific problem, or to cover before a Seealso:bundling;tyingcontract;upsel- more permanent member of staff is re- ling cruited or to cope with a seasonal upsurge References in demand. As these stop-gap managers are often self-employed, the companies Bardhan, D.K. and Rudra, A. (1978) ‘Interlinkage of land, labour and credit using their services can save many employ- relations: an analysis of village survey ment costs. data in East India’, Economic and Poli- tical Weekly 13: 367–84. inter-industry trade (F1) Trade in different goods and services be- interlocking directorship (L4, M1) tween different industries, e.g. the exchange A directorship held by a person who is of agricultural products for machines. also on the board of other companies or Trade of this kind occurs most often corporations. The holding of the financial between ECONOMIES at different stages of stock of several firms by one person can development, especially between countries lead to collusive behaviour. Sections 7 and of the FIRST and THIRD WORLDS. Increasingly 8 of the CLAYTON ACT forbid such director- trade between developed countries, e.g. ships if competition is lessened substan- within the OECD, has become INTRA-IN- tially or another antitrust provision is DUSTRY TRADE. Within a national economy, violated as a consequence. inter-industry trade flows are shown in an INPUT–OUTPUT ANALYSIS. Intermarket Trading System (G2) The US electronic stock market which INTERLINK (C5) links US regional stock exchanges with An economic forecasting model of the the two New York exchanges and the twenty-three OECD countries plus eight National Association of Securities Dealers regions with 7,000 equations based on a Automated Quotation System. The Inter- Keynesian expenditure approach, provid- market Trading System’s display terminals ing short- and medium-term forecasts for state the current prices of that trader’s the world economy. It enables policy- market, together with the best price avail- makers to examine the relationship be- able elsewhere. Despite the convenience of tween national MONETARY and FISCAL poli- the system, it is not a threat to the New cies by considering international feedback York Stock Exchange. effects. Only broad macroeconomic factors are taken into account. intermediate good (D0) A good used in the production of another, Seealso:linkagemodels e.g. steel used in electrical goods indus- References tries. Intermediate goods can be identified OECD (1982) OECD Interlink System: by an INPUT–OUTPUT ANALYSIS. Structure and Operation, Vol. 1, Paris: Seealso:finalgood OECD. intermediate target (E6) interlinked transaction (L1) A guide to the policy strategy needed to The tying of a purchase in one market reach an ultimate policy goal, e.g. a rate of with one in another, e.g. the purchase of growth of the money supply designed to equipment and raw materials or the servi- achieve inflationless economic growth. cing of it. In developing countries, it is common to find the provision of credit intermediate technology (D2) tied to a tenancy or to the provision of Production methods using simple tools agricultural labour. Interlinking reduces and LABOUR-INTENSIVE techniques. This ap- transactions costs but has long been a proach was a reaction to large-scale devel- method of monopoly exploitation. opment schemes which attempted to

© 2002 Donald Rutherford convert traditional societies rapidly into Balance of Payments, ch. 10, Oxford: modern industrialized societies, with all Oxford University Press. the consequential unemployment and en- internal capital (M2) vironmental problems. Capital accumulated within a firm from Seealso:appropriatetechnology;Schu- past earnings. A firm should charge itself macher the market rate of interest to ensure it uses its resources well. (G2) intermediation internal debt (H6) The bringing together of lenders and The debt a government owes to the firms borrowers (savers and investors) by a bank and households of the country it rules. or other financial institution. This activity This is the result of a government spend- attempts to reduce market imperfections ing more than it taxes. which have arisen from uneven amounts of information in the market and ECONOMIES Seealso:externaldebt OF SCALE, provides insurance against risk internal economics of the firm (J4, M2) and responds to the different preferences see internalization theory; internal labour of lenders and savers for holding a finan- market cial asset. internal economy of scale (D0) Seealso:disintermediation An ECONOMY OF SCALE occurring within a firm or other organization and benefiting internal balance (E0, F4) it alone. An example is the fall in unit The FULL-EMPLOYMENT level of AGGREGATE costs brought about by spreading the DEMAND for a country, assuming that there initial tooling costs for a production line. is complete mobility of labour and con- In a SOVIET-TYPE ECONOMY, most economies stant money wage rates. This is contrasted are internal as all enterprises, agencies and with EXTERNAL BALANCE. It is the task of industrial ministries are linked together macroeconomic policy-makers to achieve into a monolithic organization. internal and external balances simulta- neously. (See the figure.) Seealso:externaleconomyofscale internalization theory (L2) A theory of the firm attempting to explain why companies prefer internal markets within themselves to the external market. Inspired by COASE, this has been used to explain the existence and growth of multi- national companies. Trading costs are re- duced. internalizing an externality (D0) see externality internal labour market (J4) A labour market existing within a large firm. In such markets, most recruitment is of young workers as most senior positions are filled through the internal promotion References of employees trained by the firm. There is Meade, J.E. (1951) The Theory of Interna- a proliferation of job grades and a salary tional Economic Policy, Vol. 1, The system based on seniority to encourage

© 2002 Donald Rutherford workers to remain within the firm. Most revenues established in 1862. It has sixty- examples of these markets are within two district offices and 60,000 tax agents. monopolistic and oligopolistic firms. The It enforces all internal revenue laws except phenomenon was noted by Clark Kerr for alcohol, tobacco, firearms and explo- when he discussed the ‘balkanization’ of sives. Its cost-effectiveness is high as its labour markets. costs are only 1 per cent of the total tax revenue it raises. Seealso:externallabourmarket References internal search (J6) The job search by an employer limited to Kerr, C. (1959) ‘The balkanization of labor markets’, in E.W. Bakke (ed.) his/her own labour force. This method of Labor Mobility and Economic Opportu- recruitment operates either by inducing nity, Boston: MIT Press; New York: existing workers to switch from their pre- Wiley. sent to different jobs or by getting their —— (1969) Marshall, Marx and Modern present employees to pass on to friends Times: The Multidimensional Society, and relatives notice of internal vacancies. London: Cambridge University Press. This approach to hiring has become more common through the growth of INTERNAL internal labour market contracting (J4) LABOUR MARKETS. seeemploymentcontract internal market (F0, L2) International Accounting Standards 1 The market gradually created in the Committee (M4) A private organization independent of EUROPEAN UNION from 1992 with no barriers to trade or economic mobility. government founded in 1973 to harmonize Some would like this increased degree accounting standards and financial report- of integration to lead to the creation of ing throughout the world. By 2000 it had a single European bank, issuing a single 153 professional accounting bodies from currency for all member countries. 112 countries as members and had devised 2 The trading relationships between the 41 International Accounting Standards (IAS1, IAS2, . . . ). Core accounting stan- parts of a large firm. MULTINATIONAL COR- dards for matters as diverse as deprecia- PORATIONS are noted for such markets. tion accounting, events after balance sheet Seealso:DelorsPlan;Eurofed;single date, the effects of changes in foreign market exchange rates and intangible assets have been agreed. internal rate of return (E2, M2) The DISCOUNT RATE making the NET PRESENT International Air Travel Association VA LU E of an investment project equal to (L9) zero. This is a widely used method of Founded in 1945 in Havana, covering most investment appraisal as it takes into ac- scheduled airlines, whose aims include pro- count the timing of cash flows. In COST– moting safe, regular and economical air BENEFIT ANALYSIS it is measured by the transport. In practice, it has been a major formula example of an international cartel that has kept fares high on many international Xn Bj Cj routes by licensing few operators. Licences j j¼0 ð1 þ iÞ were awarded for operating lucrative routes, especially across the Atlantic, if the where i is the internal rate of return. same airline undertook to fly on loss- making routes. State-owned airlines have Internal Revenue Service (H1) been avid to maintain such protection. The principal office for collecting US tax However, such a restriction on competition

© 2002 Donald Rutherford is increasingly challenged in the case of cor credit balances, with the approval of flights between the countries of the EUR- central banks in credit, would be used to OPEAN COMMUNITY. finance debtor countries. Overdraft facil- ities would give countries time for adjust- International Bank for Economic Co- ment. Each country would have a ‘quota’, operation (P3) i.e. a maximum debit balance, equal to the A COMECON organization founded in 1964 sum of the country’s exports and imports to help the non-capitalist world in a way on the average of the three pre-war years. similar to the WORLD BANK’s financing of If the quota was exceeded by more than the development of other countries. one-quarter, then the country would be entitled to devalue up to 5 per cent with- International Bank for Reconstruction out the consent of the ICU. If the quota and Development (F3) see World Bank was exceeded by more than one-half, then the ICU would require a stated devalua- International Banking Act 1978 (G2, tion, control of outward capital transac- K2) tions and the surrender of a suitable US federal statute, the first after 1945 to percentage of gold or other liquid reserve deal with the overseas activities of banks. assets. If the quota was exceeded by more It gave EDGE ACT CORPORATIONS authority to than three-quarters, then a country could engage in a wider range of activities. The be declared in default and no longer Federal Reserve was allowed to authorize entitled to draw on its account without the creation of international banking facil- the approval of the governing body of the ities in the form of loan accounts for non- ICU. Thus, this proposal was a step US purposes to be used by US overseas towards a world central bank operating in affiliates or foreign parties. Parity of treat- an international currency. ment was given to foreign and domestic banks, especially in interstate operations: See also: International Monetary Fund; thus the same rules on bank branching WorldBank applied. Under the Act, foreign banks are required to have federal deposit insurance international comparisons (E6, F0) on deposits over $100,000. Assessment of the relative performance of different national economies. Since 1945 International Clearing Union (F3) the advent of NATIONAL INCOME accounting A set of international institutions proposed has led to GROSS DOMESTIC PRODUCT and by KEYNES at BRETTON WOODS. The ICU was GROSS NATIONAL PRODUCT measures being to be the world’s banker by setting up a frequently used for this purpose. Micro- World Bank which would be able to make economic institutions are also compared adjustments of exchange rates, as well as with a view to remodelling them in the providing a Board for International In- light of foreign experience. Before the vestment, a scheme of commodity controls systematic and regular collection of eco- and an International Economic Board. nomic statistics, international comparisons Keynes hoped that this new set of institu- in the form of travellers’ accounts of tions would combat the evils of the TRADE foreign countries were often used by econ- CYCLE. Exchange rate stabilization was to omists, e.g. PETTY, SMITH and MALTHUS. be achieved by fixing each exchange rate in terms of a new international bank international comparisons of the cost money, BANCOR, which would itself be fixed of living (D6, F0) in terms of gold. CENTRAL BANKS would The cost of purchasing the same represen- keep their accounts with the ICU to settle tative bundle of goods and services in outstanding balances at the par value of different countries of the world. Regular their currencies expressed in bancor. Ban- surveys are carried out to ascertain the

© 2002 Donald Rutherford proper levels of remuneration for execu- International Labour Organization (J0) tives employed by international firms and Founded in 1919 with its constitution organizations. Japan is relatively expensive derived from Part XIII of the Versailles and Spain quite inexpensive. Peace Treaty after demands from an inter- national meeting of trade unions at Berne. international competitiveness (F0) Its General Conference works on the prin- A comparison of the prices of goods of ciple of tripartite representation from each different countries, or of unit labour costs, country – of two government delegates, one expressed in the same currency. To avoid workers’ delegate and one employers’ dele- the problems of translating one currency gate. The worker and employer representa- into another, sometimes the comparison is tives on the governing body are elected made in terms of the amount of labour internationally. It collects statistics on time needed to produce a particular good, working conditions, passes conventions e.g. a car with a 2-litre engine. and receives annual reports on whether International Development Associa- they have been implemented. Member tion (F3) states have a duty to enact domestic legisla- Formed in 1960 as an affiliate of the tion to make effective a convention or International Bank for Reconstruction recommendation within twelve months of its enactment. The ILO’s constitution was and Development (WORLD BANK) to provide rewritten by the Philadelphia Charter of SOFT LOANS to developing countries which are unable to borrow because of their low 1946 to take into account its twenty-five credit standing. years of experience and to make it part of the United Nations Organization. Its basic International Energy Agency (Q4) principles were stated as follows: Vienna-based organization of the OECD 1 labour is not a commodity; countries (with the exception of Finland, 2 freedom of expression and association France and Ireland) founded in 1974 to for all; develop policies for the conservation of 3 redistribution of international income energy and the production of energy alter- to poorer countries; natives to oil. 4 war against want within countries by International Finance Corporation (F3) the promotion of common welfare; Affiliate of the WORLD BANK founded in 5 lasting peace in the world through 1956 and based in Washington, DC. It justice. seeks to further the economic growth of Member states play a lesser role in the less developed countries by supplementing ILO than in many other international the investment of private capital in private organizations because of the workers and enterprises. employers representatives. National Minis- tries of Labour have been accorded an international illiquidity (F4) enhanced and international importance The state of a particular country’s finan- through the existence of the ILO. The cial system in which its short-term foreign Nobel Peace Prize was awarded to it in currency obligations are less than its short- 1969 in recognition of its efforts. By 1988, term access to foreign currency. it had 150 members. International Investment Bank (P3) international liquidity (F3) A bank set up by COMECON in 1971 to Internationally acceptable means of paying finance long-term capital projects. for the goods and services supplied by any See also: development bank country in the world. Under the GOLD BUL-

© 2002 Donald Rutherford LION STANDARD, gold was used for the IMF cover the major areas of the world, purposes of international settlement. stabilization programmes, research on in- Now, in addition to gold, the major ternational monetary economics and the currencies of the world, particularly the provision of advice on public finance and US dollar, the euro the yen and the pound central banking. sterling, are used as well as SPECIAL DRAW- See also: additional facilities ING RIGHTS of the INTERNATIONAL MONETARY FUND. The growth of EUROCURRENCY MAR- International Monetary Market (G1) KETS has also increased liquidity. A Chicago-based market established in References 1982 for dealing in money futures. Williamson, J. (1973) ‘Surveys in applied international monetary system (F3) economics: international liquidity’, Eco- The financial arrangements between sover- nomic Journal 83: 685–746. eign states in force at a particular time. International Miners’ Organization (J5) These consist largely of agreements for the Paris-based federation of national miners’ fixing of exchange rates and the settlement trade unions. of debts, particularly balance of payments deficits. Countries have a choice between International Monetary Fund (F3) market mechanisms under FLOATING EX- International agency founded at Bretton CHANGE RATES or an order managed by an Woods in 1945 and now located in Wa- international body. The most famous in- shington, DC, with 151 member countries ternational monetary systems have been providing a pool of currencies, gold and the GOLD STANDARD, BRETTON WOODS and the SPECIAL DRAWING RIGHTS to stabilize curren- EUROPEAN MONETARY SYSTEM. cies. The only major countries outside it References have been the USSR and Switzerland. It Solmon, R. (1977) The International was set up to end the BEGGAR-MY-NEIGHBOUR Monetary System, 1945–76: An Insider’s policies of the 1930s by establishing an View, New York and London: Harper & exchange rate regime. KEYNES had wanted Row. an INTERNATIONAL CLEARING UNION providing Tew, B. (1982) The Evolution of the Inter- automatic credit to countries in difficul- national Monetary System, 1945 to 1981, ties, but the US view that it should be a London: Hutchinson. small, tightly controlled fund, obeying the rules of US capitalism, prevailed. Origin- international reserves (E5) ally, under Article 1 of its Charter, the A CENTRAL BANK’s holdings of foreign IMF’s broad objectives included facilitat- currencies, gold and SPECIAL DRAWING ing the balanced growth of free interna- RIGHTS which can be used in foreign tional trade according to the principle of exchange markets to change the value of a currency. COMPARATIVE ADVANTAGE. In practice, it has been principally concerned with broad International Securities Regulatory Or- macroeconomic policies designed to re- ganization (G1) duce the BALANCE OF PAYMENTS deficits and The partner of the INTERNATIONAL STOCK currency difficulties of member countries. EXCHANGE since 1986 in regulating the Criticisms of its policies include the view market activities of UK stock exchanges. that it forces adjustment on the countries in difficulty, rather than on those who International Standard Classification of have caused balance of payments deficits, Occupations (J2) e.g. by contributing to a change in the The INTERNATIONAL LABOUR OFFICE’s standar- TERMS OF TRADE. The departments of the dized description of occupations based on

© 2002 Donald Rutherford the type of work performed, the degree of internationals are affiliated to the AFL– specialization and the skills required to CIO. perform particular jobs. This is a hierarch- ical classification with four layers. It has international union federation (J5) inspired a number of national occupa- An association of national TRADE (LABOR) tional classifications. UNIONS concerned with all the issues affect- ing the labour of one industry world-wide. References Statistics on wages, bargaining and work International Labour Office (1990) ISCO conditions are collected and, occasionally, International Standard Classification of industrial action is undertaken to help the Occupations, Geneva: ILO. bargaining of trade unions, especially in their dealings with MULTINATIONAL CORPORA- International Trade Commission (F1) TIONS. The industries with these federations An independent, quasi-judicial US federal include coal, chemicals, motor manufac- agency which advises the US Congress turing and printing. and Executive on trade matters and directs actions against unfair trade practices. international wage levels (J3) Comparisons of the average earnings of International Trade Organization (F1) workers of the major industrial countries. An international organization recom- These are used in conjunction with PRO- mended by the HAVANA CHARTER but never DUCTIVITY figures to calculate unit labour established. The UNITED NATIONS CONFERENCE costs as a guide to the international ON TRADE AND DEVELOPMENT, founded in competitiveness of national economies. 1964, achieved what was intended to be the role of the International Trade Orga- inter-nation equity (F1, H2) nization. 1 Fairness in the world-wide distribution See also: General Agreement on Tariffs of tax revenues by attempting to ensure and Trade; that each national treasury receives the tax yield it deserves. A crude method of international trade theory (F1) achieving this is by international trea- A succession of attempts to explain why ties which reciprocally agree that all nations trade particular goods with each income is taxed at source. The consid- other. The best-known early theories are erable growth of TRANSNATIONAL COR- of ABSOLUTE ADVANTAGE and COMPARATIVE AD- PORATIONS has made this a major policy VANTAGE; later theories include the issue. HECKSCHER–OHLIN factor endowment theory. 2 The equal economic treatment of differ- Many of these theories assume that com- ent nations, e.g. by free trade. modities are mobile but factors of produc- See also: transfer pricing tion are not. References interpersonal utility comparisons (D0) Comparisons of the amount of UTILITY (or Jones, R.W. and Kenen, P.B. (1984) Hand- satisfaction) acquired by different persons. book of International Economics, Vol. 1, Amsterdam: North-Holland. The consequence of the difficulty of mak- ing such comparisons is that schemes of international union (J5) redistribution which are proposed as a An association of US LOCAL UNIONS and means to increasing economic welfare can their affiliates abroad. The largest is the in many cases be justified only on political famous Teamsters union, which organizes grounds. In the twentieth century WELFARE a considerable range of occupations from ECONOMICS has attempted to validate com- truck drivers to nurses. The majority of parisons of this kind.

© 2002 Donald Rutherford intersection price (D4) See also: new home economics The unique price where demand and supply price schedules cross. intra-industry trade (F1) International trade between countries in See also: equilibrium price the same type of good with both countries Interstate Commerce Commission (L5) being exporters and importers. This has US federal commission set up in 1887 by happened increasingly in the EUROPEAN COM- the Interstate Commerce Act to regulate MUNITY, e.g. in the car industry. The growth rail traffic across state boundaries. This of TRANSNATIONAL CORPORATIONS and the was one of the earliest US attempts to consequent increased international specia- control monopoly and achieve fair prices, lization of production have made this type together with an adequate standard of of trade flourish. The greatest degree of service across the nation. This Washing- intra-industry trade is when there is an ton-based commission today also regulates equal amount of exports and imports in trucks, buses, oil pipelines and inland that good; the lowest is when a country water transportation. predominantly imports primary products interval estimate (C1) and exports manufactures. The formula An estimate in a range between two used to measure this type of trade is numbers of a population PARAMETER. jXi Mij Bi ¼ðXi þ MiÞ See also: point estimate Xi Mi intervention currency (E5, F3) A currency, often a RESERVE CURRENCY, used It shows the extent to which the absolute by CENTRAL BANKS for intervening in ex- amount of the commodity exports (X)ina change markets to affect the price of a particular industry or a commodity group- currency. ing is offset by imports (M) in the same grouping. intervention price (Q1) The price of an agricultural commodity at See also: border trade; cyclical trade which a governmental agency begins to purchase that commodity in order to References maintain its price at that level and to Greenaway, D. and Milner, C. (1986) stabilize farmers’ incomes. In the EUROPEAN Economics of Intra-Industry Trade, Ox- COMMUNITY, under the COMMON AGRICUL- ford: Basil Blackwell. TURAL POLICY, intervention prices are guar- anteed minimum prices that attempt to intrapreneur (L2) stabilize individual commodity markets. A company employee who is financed by his/her employer to set up an independent See also: Common Agricultural Policy company and become a subcontractor. in-the-money (G1) This financial arrangement gives talented Referring to an OPTION where the UNDER- persons greater independence than regular LIER is above the STRIKE PRICE for a CALL work in a large organization would pro- OPTION or below that price for a PUT OPTION. vide. intra-household economics (D1) References A new microeconomics, pioneered by Lessen, R. (1987) Intrapreneurship: How to BECKER, which examines the determinants be an Enterprising Individual in a Suc- of production of goods and services within cessful Business, Aldershot: Wildwood the household. House.

© 2002 Donald Rutherford intra-product specialization (D2) see price (if all CROSS PRICE ELASTICITIES OF DE- fragmentation MAND are ignored). Thus the margin be- tween price and cost is large when intrinsic value (D0) see value in use elasticity is small: under MONOPOLY, there invention (O3) will be a very INELASTIC demand and the A discovery of a new product or process of ability to make SUPERNORMAL PROFITS. production which is often crudely mea- See also: Lerner index sured by PATENT statistics. Economists have analysed the rate of invention as a func- investment (E2, G0) tion of the business cycle, the type of 1 An addition to the stock of capital market or the organization of scientific goods in the public or private sector research. over a given time period. Gross invest- See also: innovation; research and devel- ment includes both this net investment opment and the replacement investment to keep the stock intact. Theories of the deter- inventory (M2) mination of the volume of investment The stocks of goods held by a firm for the include the ACCELERATOR PRINCIPLE and purposes of production or final sale. An MARGINAL EFFICIENCY OF CAPITAL AP- increase (or decrease) in an inventory will PROACHES. be a form of investment (disinvestment). 2 The purchase of a FINANCIAL asset. Because of fluctuations in final demand, See also: capital theory; financial invest- unintended investment (or disinvestment) ment; human capital often occurs and is frequently the most volatile component of national output. References See also: Kitchin cycle Junanker, P.N. (1972) Investment: Theories and Evidence, London: Macmillan. inventory cycle (E3) Fluctuations in the stocks of raw materi- investment appraisal (M2) als, semi-finished goods and goods avail- The calculation of the prospective return able for sale within an ECONOMY. Changes to an investment project with a view to in inventories occur more frequently than ascertaining whether it is worthwhile. The fluctuations in fixed investment. Antici- different methods used by firms include pated and unanticipated changes in final calculating the RATE OF RETURN, THE DIS- demand, changes in the cost of financing COUNTED CASH FLOW and the NET PRESENT stockholdings and errors in the planning VA LU E . Large-scale investments in the pub- of production all generate inventory cycles. lic sector often make use of COST–BENEFIT ANALYSIS. See also: Kitchin cycle References inverse demand function (D4, M3) Lumby, S. (1982) Investment Appraisal and This indicates market price as a function Related Decisions, Wokingham: Van of the quantity demanded, reversing the Nostrand Reinhold. usual sequence of causality. Often, for Merrett, A.J. and Sykes, A. (1986) Capital marketing reasons, a firm chooses an out- Budgeting and Company Finance, Lon- put level before a product price. don and Harlow: Longman. inverse elasticity rule (D0) investment banking (G2) This states that the PRICE ELASTICITY OF DE- A specialist type of US banking concerned MAND for a good is inversely proportional with CORPORATE FINANCE, ARBITRAGE in sec- to price minus marginal cost divided by ondary markets and the underwriting of

© 2002 Donald Rutherford and dealing in securities. It consists of of pre-tax profits in non-interest-bearing either executing the orders of other inves- Bank of Sweden accounts in return for tax tors or proprietary trading when a bank reductions: after five years, 30 per cent of deals on its own account. The GLASS–STEA- a deposit can be used at the request of the GALL ACT ordered the separation of invest- company tax-free and at other times, in ment from deposit-taking banking, recessions, the government can authorize thereby preventing the growth of FINAN- the release of these funds tax-free to CIAL CONGLOMERATES to the extent which stimulate the economy. In addition, since has subsequently become possible in the the mid-1960s, these funds can be used to UK. In the USA the TOP ‘BULGE-BRACKET’ help depressed regions whatever the state FIRMS are virtually an , having 80 of the national economy. per cent of the business in debt and other Seealso:countercyclicalpolicy securities markets. Seealso:merchantbank investment trust (G2) A company whose capital is invested in the investment climate (E6) stocks and shares of other companies. It The mood or level of business confidence. offers the investor the opportunity of ben- This will affect the rate of investment in an efiting from a spread of different invest- economy. ments. This type of trust was invented by Seealso:animalspirits;economicclimate Foreign and Colonial in 1886 (still a market leader). Compared with UNIT TRUSTS, they investment dollar pool system (F3) have the advantages of GEARING in that A method of exchange control. Under this loan capital can be used for the benefit of system the people of a non-dollar country shareholders, of lower costs and of being wishing to purchase US securities are only able to retain their underlying shares dur- allowed to acquire them by buying them ing a stock market panic. from another local resident or by borrow- ing them. A tougher version of this system Seealso:mutualfund used in the UK prior to 1979 required 25 investor sentiment (G1) per cent of foreign currency proceeds from The psychological biases of investors caus- the sale of assets to be sold in the official ing them to value securities at prices other market; also dividends on dollar invest- than their FUNDAMENTAL VALUES. These in- ments had to be repatriated through the vestors are also known as noise traders. official exchange market. invisible foot (D3) investment fundamentals (E2, M2) A reduction in redistribution caused by Cash flow; cash stock. political competition. Invisibility comes investment reserve system (E3, E6) about because of the difficulties of obser- A method of encouraging countercyclical vation, quantification and measurement. private sector investment. In prosperous An example of an invisible foot would be times, tax incentives encourage firms to the movement of people between locations accumulate reserves that are in later years to obtain a better mix of taxes and public spent on capital projects when the econ- expenditure, thereby invisibly creating an omy is heading for recession. efficient resource allocation. Since 1938 in Sweden there has been a Seealso:fiscalmobility;Tiebouthypoth- policy of influencing the timing of capital esis expenditures by fiscal incentives to reduce fluctuations in the national economy. invisible hand (D0) Companies can set aside up to 50 per cent The underlying mechanism of a MARKET

© 2002 Donald Rutherford ECONOMY that causes self-interested eco- for identifying this type of UNEMPLOY- nomic agents through exchange to pro- MENT, partly because he prescribed an mote the general good of society. The idea increase in AGGREGATE DEMAND to elim- originated in the discussion of natural law inate it. by the English philosopher John LOCKE but Seealso:voluntaryunemployment is usually associated with Adam SMITH who, in his Theory of Moral Sentiments IOU money (E4) and less so in his Wealth of Nations, Money in the form of a promise to pay developed this PHYSIOCRATIC notion. Smith’s based on the debt of a firm or an use of the principle was less sensational individual. Much of this money is in the than MANDEVILLE’s that described how pri- form of bank deposits. vate vices promote public virtue. Ahmad Seealso:billofexchange;commercial has identified four functions of the ‘invisible paper hand’: to limit the size of the landlord’s stomach, to curb the residual selfishness of iron law of wages (B1, J3) a landlord, to optimize production and to The SUBSISTENCE theory of wages used by preserve the natural order. many CLASSICAL ECONOMISTS. It was argued References that if workers are paid more than sub- sistence there will be an increase in popu- Ahmad, S. (1990) ‘Adam Smith’s four lation which, with a short time lag given invisible hands’, History of Political Economy 22: 137–43. that child labour was used, will increase the labour force, in turn pushing wages invisible handshake (J5) back to the subsistence level. Conversely, An informal understanding between an wages below the subsistence rate will employer and workers, or between a firm reduce the population, cause excess de- and its customers, whose terms are not mand for labour and push wage rates back legally binding because of their implicit up to subsistence. The law, in essence, nature. Employers make such tacit agree- described a long-run equilibrium wage ments as part of their pursuit of long-term rate. Adam SMITH challenged the law on profitability. This concept was inspired by the empirical grounds that food prices and OKUN’s study of STAGFLATION in the 1970s. wages often move in different directions. Growing real wages in the nineteenth Seealso:implicitcontracttheory century also refuted the law. invisible trade (F1) IS (E1, F1) International trade in services, particularly 1 The equilibrium of investment and sav- banking, insurance, shipping, tourism and ings, usually expressed as one of the professional advice. This is the principal curves in the IS–LM diagram. An increase economic activity of the City of London in government expenditure, through its and other leading financial centres. MULTIPLIER effects, will cause the IS Seealso:balanceofpayments curve to shift outwards from the origin. 2 IMPORT SUBSTITUTION. involuntary unemployment (J2, J6) 1 Not wanting to work at a given wage Isard, Walter, 1919– (B3) but still doing so. US authority on regional science, of Ger- 2 Lack of jobs. man descent, who was educated at Temple 3 Being unable to obtain employment at a and Harvard Universities and taught at given wage rate. Harvard, Philadelphia (1956–79) and Cor- 4 A case of DISEQUILIBRIUM in the labour nell Universities. His revival of LOCATION market. KEYNES was particularly noted THEORY led to his founding regional science

© 2002 Donald Rutherford which placed location theory in the wider Maal al-Islami, the House of Islamic economic context of GENERAL EQUILIBRIUM Funds, was founded in Geneva in 1981: theory by using INPUT–OUTPUT ANALYSIS and although it has some short-term funds in REGIONAL MULTIPLIERS and linked it to other cash and commodities, it invests chiefly in social sciences. property and equities. The expansion of Islamic banks into Seealso:regionaleconomics competition with traditional banking is References difficult as they cannot be accepted as Isard, W. (1956) Location and Space Econ- commercial banks in Western countries omy, Cambridge, MA: MIT Press. until they have Western government secu- —— (1971) Methods of Regional Analysis, rities as part of their assets; their lack of Cambridge, MA: MIT Press. official status prevents them from solicit- Isard, W. and Langford, T.W. (1971) Re- ing for deposits from the public. Although gional Input-Output Study: Recollec- Islamic banks are often regarded as a new tions, Reflections and Diverse Notes on development in banking, Islamic authors the Philadelphia Experience, Cambridge, argue that many banking principles, in- MA: MIT Press. cluding the use of bank deposits and Islamic banking (G2) cheques, have been practised from the A distinctive type of banking which at- early days of Islam. tempts to avoid the Koranic prohibitions References concerning riba (usury). Usury was ob- Abdeen, A.N. and Shook, D.N. (1984) The jected to both for exploiting the poor who Saudi Financial System in the Context of needed to borrow and for giving a reward Western and Islamic Finance, Chichester: unrelated to productive effort. Later med- Wiley. ieval Islamic thinkers devised intricate Mills, P.S. and Presley, J.R. (1999) Islamic hiyal (stratagems) to circumvent this pro- finance: theory and practice, New York: blem. Today, Islamic banks impose service St Martin’s Press; London: Macmillan. charges, instead of interest, on bank loans; Rodinson, M. (1974) Islam and Capitalism, these charges, based on a percentage of the London: Allen Lane. value of the loan, resemble interest. Also, Saleh, N.A. (1986) Unlawful Gain and money lenders often lend in kind, e.g. Legitimate Profit in Islamic Law: Riba, Gharar and Islamic Bartering, Cam- purchasing a piece of equipment and then bridge: Cambridge University Press. leasing it to the borrower who pays instal- Wilson, R. (1983) Bankingand Finance in the ments which, in total, are in excess of the Arab Middle East, London: Macmillan. original purchase price. There have been Arab-owned banks (B0) since the 1920s, the period in which the A study of the economic teachings of Banque Misr of Egypt and the Arab Bank Islam and an Islamic critique of modern of Palestine were founded. After the oil- Western economic theory and policy. Its price rise of 1973–4, new banks operating central themes include the idea that prop- according to strict Islamic principles have erty is to be held in trust for God, that been established. The largest are in Saudi economic activity should have social ob- Arabia: the Islamic Development Bank jectives, that the return to capital should founded in 1975 as a specialist develop- only be a reward for risk taking and that ment assistance agency not dealing with the quality aspects of economic growth the general public, the Al-Baraka Group should be considered. There is a distinctive founded in 1982 and the Al-Rajhi Com- Islamic contribution to taxation, compara- pany founded in 1985. To allow riba-free tive economic systems, co-operatives, in- participation in Western markets, Dar al- come distribution, business cycles,

© 2002 Donald Rutherford business finance and poverty. Although an economy. A version of the MUNDELL– much of Islamic economics is capitalistic FLEMING MODEL. in tone, there is also some overlap with socialism. This literature is published in IS–LM curves (E1) Arabic, Urdu and the major European Investment–savings and liquidity–money languages. curves. An apparatus invented by HICKS References (who originally called them IS and LL curves) and HANSEN to synthesize the Key- Rahman, A. (1975, 1976) Economic doc- nesian macroeconomic system; Hicks was trines of Islam, Lahore: Islamic Publica- tions. to regret its excessive use by other econo- mists. The IS curve, plotting the rate of Islamic fiscal policy (H2) interest i against national income Y, joins The application of the principles of the together all combinations of i and Y for Koran, particularly the avoidance of us- which I = S, shows equilibrium in the ury, to the financing of a government’s goods market; the LM curve, plotted on expenditure. Islamic governments aim to the same axes, shows equilibrium in the balance their budgets to avoid borrowing; money market as at each point on the curve if borrowing is needed, government secu- the demand for money is equal to its supply. rities can be issued at less than their KEYNESIANS believe that the IS curve is steep, redemption value as a means of disguising with the consequence that fiscal policy is an interest payment. Also, there are severe more powerful than MONETARY POLICY; MON- problems in raising revenue as purchase ETARISTS suggest a steep LM curve with tax exploits the needy and incomes are too CROWDING OUT the consequence of fiscal low to have a broad-based income tax. expansion (i increases; Y is unchanged). Even the special tax under Islamic law, the ‘zakat’, which is an annual wealth tax, can only be used to finance social purposes, mainly at the local level. island (J2, J4) A location of jobs or employers such that at a point in time firms cannot move but workers can. On each island, the competi- tive labour market there sets wages equal to the MARGINAL PRODUCT OF LABOUR on that island; as productivity differs from island to island, so do wage offers. Workers engage in job search to find islands with better wages. Seealso:jobsearch References Lucas, R.E., Jr and Prescott, E.C. (1974) ‘Equilibrium search and unemploy- ment’, Journal of Economic Theory 7: 188–209. IS–LM–BP model (E1) The IS–LM MODEL with the addition of a balance of payments curve to indicate both internal and external equilibrium for

© 2002 Donald Rutherford Changes in government expenditure shift References the IS curve and raise or lower national Hicks, J.R. (1937) ‘Mr Keynes and the income and the interest rate; an expansion ‘‘Classics’’: a suggested interpretation’, of the money supply effects a shift in the Econometrica 5: 147–59.

LM curve (from LM1 to LM2 say) and Young, W. (1987) Interpreting Mr Keynes, reduces interest rates but increases income. Cambridge: Polity Press.

© 2002 Donald Rutherford isocost (D0) isoquant (D2) A straight line showing different combina- A curve showing different minimum com- tions of two factors of production for the binations of two factors of production same cost. The slope of the line will alter if producing the same level of output; also the relative prices of the factors change. known as an isoproduct curve. In the figure each isoquant shows the output which results from different combinations of two inputs, capital and labour: C is the isoquant for complements; S is the iso- quant for substitutes; P is the isoquant for perfect substitutes.

isolated market equilibrium (D0) A market for one good or one service in which the quantity demanded equals the quantity supplied. Israel–US Trade Free Trade Area (F1) Seealso:generalmarketequilibrium Founded in 1985 to create free trade between the two countries. isolated state (R1) Von THUNEN’s model of a closed economy issuing house (G2) which showed optimum locations for agri- A financial institution concerned with cultural activities. arranging the issue of new shares in accordance with the current regulations of Seealso:locationtheory the International Stock Exchange. isoproduct(D0)seeisoquant Seealso:underwriter

© 2002 Donald Rutherford J

Jackson Amendment (F1) under the control of the Ministry of An amendment to US trade law proposed Finance, and employment practices based in 1975 by Senator Jackson: it denies MOST on the socialist principles of lifetime em- FAVOURED NATION status to countries not ployment and seniority systems. permitting free emigration. References Jamaica Agreement (F3) Takeuchi, Y. (1998) ‘Japan’s transition from An agreement made by members of the socialism to capitalism’, The Japanese INTERNATIONAL MONETARY FUND in 1974 Economy 26: 3–24. whereby the IMF sold one-third of its Japanese tax system (H2) gold stock, making the profits of the sale A tax system after 1945 with many of the the basis of a special trust fund which characteristics of the US tax system, i.e. provides balance of payments assistance the use of income tax as a major source of on soft terms to the poorest countries. revenue, no VALUE-ADDED TAX and with most Seealso:softloan collection of taxes by central government with local government reliant on central Japanese auction (D0) government grants. Japan’s income tax An ENGLISH AUCTION that does not accept was first introduced in 1887, assuming its any new bidders after the bidding starts. modern form in 1940. The present system The bidders must indicate whether they was to a large extent designed by the want to continue to bid, or drop out. SHOUP MISSION. Japanese capitalism (P1) References A set of economic institutions founded Ishi, H. (1989) The Japanese Tax System, during the US occupation of the late Oxford: Clarendon Press. 1940s. There are also a strong amount of Tax Advisory Commission (1960 onwards) government intervention in industry, pa- Proposals (in Japanese). ternalism in the labour market and high levels of personal savings. jawbone (E6) Attempting to achieve voluntarily by per- Japanese socialism (P2) suasion the goals of MONETARY or INCOMES A managed form of CAPITALISM with reg- POLICIES as an alternative to statutory ulations to restrict new entrants to indus- controls. Also known as MORAL SUASION. tries and to protect weak firms and industries. Also there is a welfare state J-curve (F3) promoting social equity, a financial sector A curve showing the effects of the

© 2002 Donald Rutherford DEVALUATION of a currency with a fixed His principal works were A Serious Fall exchange rate on the BALANCE OF PAYMENTS in the Value of Gold Ascertained and its current account. It is based on the ob- Social Effects Set Forth (1863) which servation that initially after devaluation, introduced a new method of measuring before there can be responses to the price changes, The Coal Question: An changed import and export prices, the Inquiry Concerning the Progress of the total cost of imports will be higher and Nation and the Probable Exhaustion of the the total value of exports lower. An Coalmines (1865) which caused a national appreciation of a currency, conversely, will scare and his Theory of Political Economy produce an inverted J-curve. The curve (1871) which was regarded by Keynes as plots the balance of payments current ‘the first modern book on economics’. account balance against time (in the fig- Jevons’s theory of exchange was the focal point of his Theory: by switching from ure, td is the date at which devaluation occurs). cost to subjective UTILITY as the basis of value he was able to begin the precise theorizing which constitutes NEOCLASSICAL microeconomics. His theory of the RATE OF INTEREST made a contribution to the devel- opment of marginal productivity theory. His influence on the development of eco- nomics in England was profound. Seealso:marginalism;Menger;Walras References Collison Black, R.D. and Konckamp, R. (eds) (1972) Papers and Correspondence of , Vols 1–7, London and Basingstoke: Macmillan. Schabas, M. (1990) A World Ruled by Jevons, William Stanley, 1835–82 (B3) Number: William Stanley Jevons and the Rise of Mathematical Economics, Prin- A leader of the MARGINALIST School who ceton, NJ: Princeton University Press. was educated at the Mechanics Institute Stigler, G.J. (1946) Theories of Production High School, Liverpool, and University and Distribution: The Formative Period, College, London. His university studies ch. 11, New York: Macmillan. began with chemistry and mathematics and were interrupted by four years in job acceptance schedule (J6) Australia as assayer to the Sydney Mint The relationship between a real wage rate before he returned to study political econ- and the number of persons prepared to omy and logic. In Australia, his first accept jobs. Changes in the ratio of real researches were into climate and the effects wages to unemployment benefit can cause of railways on land values and rent; also shifts in this schedule. there he acquired the habit of ‘pricking off Seealso:voluntaryunemployment curves’ on squared paper to study fluctua- tions in economic time series. He held jobber (G1) academic posts at Owen’s College, Man- A specialized dealer on UK stock ex- chester, and Queen’s College, Liverpool, changes who, from 1908 until 1986, before becoming professor of political bought and sold stocks and shares from economy at University College, London stockbrokers, but not from the general from 1876 to 1881. He drowned in 1882. investing public. This system of separating functions was peculiar to the UK and was

© 2002 Donald Rutherford supported on the grounds that it separated result of the closure of the whole or part the risk of unsold stock (jobber’s risk) of a firm. from the risk of unpaid accounts (broker’s risk). This distinctive arrangement of the job evaluation (J2) London market was replaced by a system A hierarchical ordering of a set of jobs of MARKET-MAKERS. according to their characteristics or content. Seealso:BigBang job generation (J6) The expansion of employment in either job centre (J6) the public or private sector. In the former, UK advice centre provided by the govern- regional and other policies are used to ment to assist in job search by providing create jobs; in the latter, new jobs are information on vacancies. Originally they preceded by an expansion in a market. were intended to separate the two princi- pal functions of the former employment job hopping (J5) exchanges: the payment of unemployment Movement from job to job to acquire benefit and the placement of the unem- employment information, e.g. about the ployed with employers notifying vacancies. characteristics of employers, of other It was hoped that an improved public workers, of working conditions. This is a employment service would make it more common practice of young workers in attractive to employers and would reduce times of low unemployment. the amount of frictional unemployment in Seealso:searchunemployment the economy. Re-merger of them with benefit offices occurred in 1987. job lock (J3) Being kept in a particular employment job cluster (J4) because the alternative employment does The occupations of an INTERNAL LABOUR not have the same range of benefits, MARKET which are subject to the same wage especially health insurance. determination process because of custom, technology or an administrative process. Seealso:goldenhandcuffs For each cluster, there is a key rate. jobs-based analysis (J0) job control unionism (J5) A mixed approach to the study of work, A form of TRADE (LABOR) UNIONISM which wages and labour markets using a cluster insists on strict DEMARCATION for each job of theories, including TOURNAMENT MODELS, and a particular wage rate being linked to hierarchies, HEDONIC WAGE analysis, job a highly defined job. There are examples investment, insurance and work sharing. of this in both the US and UK labour References markets. Lazear, E.P. (1995) ‘A jobs-based analysis Seealso:featherbedding of labor markets’, American Economic Review 85: 260–5. job destruction (J6) Reduction in the labour force of a firm, job search (J6) industry, region or country. Declining All the activities by employers and workers markets and technical change are the to fill vacant jobs. Advertisements, infor- principal determinants of these job losses. mal recommendations, head-hunting by specialized personnel agencies and publicly job displacement (J6) financed employment agencies are the An individual person’s loss of a job as the principal channels used.

© 2002 Donald Rutherford Seealso:searchcost;searchunemploy- bustling life wrote 41 books and pamph- ment lets and 526 learned articles and edited 5 leading journals, covering the whole range job security (J2) of economics. He was educated at the Guaranteed tenure of a job. This TRADE Universities of Toronto, Cambridge and (LABOR) UNION goal is realizable in only Harvard. In his industrious career, he was certain types of employment, particularly a fellow of King’s College, Cambridge, public sector white-collar jobs and em- from 1949 to 1956, professor of economics ployment in major oligopolistic firms. The at Manchester from 1956 to 1959, and Japanese system of PERMANENT EMPLOYMENT was a leading case, although even that was professor at Chicago from 1959 to 1977, less prevalent than imagined by foreign combining that chair with other academic observers. posts, particularly one at the London School of Economics from 1966 to 1974 Seealso:flexiblelabourmarket;white- which he relinquished, in a blaze of pub- collarworker licity, because of UK taxation. A central job seeker’s allowance (J6) interest of his career was international A welfare payment to an unemployed economics, to which he often returned, as person. It can be related to income and well as monetary theory, development savings, or to accumulated contributions. economics and the major economic policy This was introduced in the UK in October issues of the day. His much-used pen 1996 in succession to unemployment ben- attacked vulgar applications of Keynesian- efit and income support. It is so called ism and collectivism. because the qualification for being an References unemployed member of the labour force, Johnson, H.G. (1958) International Trade rather than a non-participant, is job search and Economic Growth: Studies in Pure activity. Theory, London: Allen & Unwin. —— (1967) Economic Policies towards Less job separation (J6) Developed Countries, London: Allen & A voluntary or involuntary termination of Unwin. a person’s employment. —— (1969) Essays in Monetary Economics, job sharing (J2) 2nd edn, London: Allen & Unwin. The splitting of full-time jobs so that each —— (1971) Aspects of the Theory of Tariffs, London: Gray-Mills. job is performed by two persons. This type —— (1972) Macroeconomics and Monetary of scheme is primarily proposed as a Theory, London: Allen & Unwin. means of reducing unemployment by con- verting full-time jobs into part-time jobs. joint cost (D0) The occupations for which this has been The cost of producing two or more goods tried include teaching and social work. It or services which arise from the same is always feared that sharing will lead to inputs. Joint costs are not divisible into an increase in total labour costs, especially the separate costs for each good or service. social security contributions, recruitment Many managerial and research costs are of and training costs. However, shorter hours this nature. John Stuart MILL in his Princi- raise productivity as the division of jobs ples of Political Economy, Book III, ch. 16, reduces the boredom which comes from laid down the rule that the sum of the long hours spent on the same task. prices of joint products must equal their Johnson, Harry Gordon, 1923–79 (B3) joint cost. Today, joint costs are often A prolific Canadian economist, who in his arbitrarily allocated between products

© 2002 Donald Rutherford using an indirect measure, e.g. an analysis such companies gradually replacing part- of the time of a manager. nerships in many industries,

Seealso:indivisibility joint venture (L2) The creation of a new firm by at least two joint demand (D1) private or public enterprises for the pur- The demand for COMPLEMENTS, e.g. for pose of carrying out a particular project. computers and software, which is such This type of organization made possible that an increase in the demand for one the gradual introduction of private capital leads to an increase in the demand for the into communist countries, e.g. Yugoslavia dependent complement. There is often an and China. inverse relationship between the price of one good and the demand for its comple- See also: joint equity venture company ment, e.g. cheaper cameras encourage an References increase in the demand for photographic Morris, R.M. (1987) Joint Ventures: An supplies, because consumers allocate so Accounting Tax and Administrative much of their incomes to a particular Guide, New York: Wiley. activity which requires several related goods to pursue it. Jones Act 1920 (L5, R4) US federal CABOTAGE statute, ‘The Mari- Seealso:crosspriceelasticityofdemand time Marine Act’, which required sea transportation of cargo and passengers joint equity venture company (L2) between US ports to be in ships US built, A firm jointly owned by a public authority US owned and US crewed. Although there or government and a private company. is some political support for this form of This is a popular way for foreign compa- protectionism, the Act is increasingly ob- nies to invest in countries with substantial solete as so many goods are shipped under public sectors or state planning. Some- foreign flags. times the company only exists as long as it takes to undertake a major project, e.g. the Seealso:NavigationActs building of a bridge. J-shaped frequency curve (C1) Seealso:venturecapital A frequency curve with a positive slope. joint products (D2) Products which are the inseparable conse- quence of a single production process, e.g. cattle farming yields milk, meat and hides, coal mining produces coal, coke, gas and a variety of chemicals. In many cases, the rate of production for each of the products is the same. joint stock company (L2) A firm permitted under company legisla- tion to be a distinct legal personality with its members subscribing shares of the capital and having limited liability. By the mid-nineteenth century in the UK the need for large amounts of capital led to

© 2002 Donald Rutherford Jubilee 2000 (F3, O0) USA in the 1920s; by 1990 over $200 An international movement in sixty-five billion in 1,000 issues of these securities countries to cancel by the end of 2000 the were outstanding. Such bonds have en- unpayable debts of developing countries abled non-blue-chip US corporations to who jointly had a population of one raise very large sums of money, originally billion. The purpose of this crusade was through the principal broker Drexel Burn- to allow poor countries to divert expendi- ham Lambert, which handled half of such ture on servicing debts into spending on new issues until its collapse in 1990. health and education. This crusade was Investors willing to buy them included inspired by the ancient Jewish idea of specialized MUTUAL FUNDS, the US govern- ‘jubilee’, a year of emancipation and ment, insurance companies and SAVINGS restoration occurring every fifty years. It AND LOANS ASSOCIATIONS. An effect of the started with a resolution in 1990 of the All junk bond has been to draw to the African Council of Churches to cancel attention of COMMERCIAL BANKS the need Africa’s debts. for more finance for small firms. Juglar cycle (E3) Seealso:bluechip A cycle in economic activity lasting seven References to eleven years. It was first identified by Rubin, S.M. (1990) Junk Bonds: After the Clement Juglar (1819–1905) in 1862. He Crises, London: Euromoney. noticed such cycles in prices, interest rates Yago, G. (1991) Junk Bonds: How High and central bank balances. Securities Restructured Corporate Fi- Seealso:Kitchincycle;Kondratieffcycle; nance, New York: Oxford University Press. Kuznetscycle References junk of junk status (G1) Low grade of a bond. Juglar, C. (1862) Les Crises Commerciales et leur Retour Pe´riodique en France, en Jurgensen Report (E5, F3) Angleterre et aux Etats Unis, English A report to the World Economic Summit trans. by W. Thorn from the 3rd edn, in Williamsburg, Virginia, in 1983 on 1916 (reprinted Farnborough: Gregg Press, 1968). central bank intervention in currency mar- kets. jump (G1) A sudden and unexpected fall, or even just-in-time production (D2) crash, in a financial market which cannot A method of reducing stocks by producing be hedged against. goods only when they are wanted. This approach to the scheduling of production junior debt (G0) reduces the costs of holding inventories/ A loan of lower rank than SENIOR DEBT in stocks and increases the pace of production. the event of a company defaulting. It is extensively used in Japan and is increas- ingly being followed by UK manufacturers. junk bond (G0) High-yielding, high-risk bonds rated be- just price (D0) low the investment grades assigned by the The price giving labourers a just recom- top US bond CREDIT RATING agencies Stan- pense and in the estimation of buyers and dard & Poor and Moody’s. Although the sellers, or of magistrates with price-fixing risk of default is great, their high yield has powers, is fair. This approach to price made them very popular. Also, they have theory was central to the economic think- provided a vehicle for entrepreneurs to ing of AQUINAS and his contemporaries. It take over slumbering corporations. Junk contains elements of both the LABOUR THE- bonds first made their appearance in the ORY OF VALUE and the concept of UTILITY.

© 2002 Donald Rutherford References lastic contemporaries expounded this Demant, V.A. (ed.) (1930) The Just Price: ethical view of wages. Today, Islamic An Outline of the Mediaeval Doctrine scholars argue that the just wage is un- and an Examination of its Possible related to time spent as time is valueless. Equivalent Today, London: Student Also, modern writers on WAGE DIFFEREN- Christian Movement. TIALS and INCOMES POLICIES have implicitly Hollander, S. (1965) ‘On the interpretation used concepts of fairness and justice. of the just price’, Kyklos 18: 615–34. References just wage (J3) Fogarty, M. (1961) The Just Wage, Lon- The wage which reflects a worker’s con- don: G. Chapman. tribution to society. AQUINAS and his scho-

© 2002 Donald Rutherford K

Kahn, Richard Ferdinand, 1905–89 (B3) the UN Economic Commission for Eur- Famous in the development of Keynesian ope from 1947 to 1949, after which he was economics for his influential article on the a fellow of King’s College, Cambridge employment MULTIPLIER. Educated at until 1986, rising to a chair of economics King’s College, Cambridge, where he re- which he held from 1966 to 1975. He was mained a fellow from 1929 to his death; awarded a peerage in 1974. professor of economics from 1951 to 1972. He wrote prolifically on taxation, His Making of Keynes’ General Theory growth and distribution. He was a pre- (1984) illuminated the development of cocious Keynesian who turned to growth Keynes’s thought from 1923 to 1936. He theory and the study of increasing returns, was opposed to modern NEOCLASSICAL ECO- emphasizing the importance of the manu- NOMICS in the USA and MONETARISM. facturing sector as the impetus to the expansion of the economy. His long career Kaldor–Hicks compensation principle as a tax adviser to the UK, Indian and (D6) various Third World governments pro- A compensation test of WELFARE ECONOMICS duced a range of tax proposals, including stating that there will be a net gain in the SELECTIVE EMPLOYMENT TAX which was in SOCIAL WELFARE if those who have welfare force in the UK from 1966 to 1970. He gains can both compensate losers and still served as Special Adviser to the UK have a net gain for themselves. Chancellor of the Exchequer in 1964–8 References and 1974–6. His clear disapproval of the Hicks, J.R. (1939) ‘Foundations of welfare policies of THATCHERISM was evident in his economics’, Economic Journal 49: 696– The Scourge of Monetarism (1982). 712. References Kaldor, N. (1939) ‘Welfare propositions of economics and interpersonal compari- Kaldor, N. (1978–80) Collected Economic sons of utility’, Economic Journal 49: Essays, London: Duckworth. 549–52. Thirlwall, A.P. (1987) Nicholas Kaldor, Brighton: Wheatsheaf. Kaldor, Nicholas, 1908–86 (B3) A Hungarian economist, at school in Kaldor’s laws (L6, O4) Budapest and at university in Berlin and The laws relating to economic growth set at the London School of Economics where out by KALDOR in his Cambridge inaugural he was subsequently a lecturer and reader lecture of 1966. These three laws state that from 1932 to 1947. He served as Director there is a strong relationship between the of the Research and Planning Division of growth of manufacturing output and the

© 2002 Donald Rutherford growth of total output, that the growth of Marx’s scheme of REPRODUCTION and the manufacturing output is a powerful cause MULTIPLIER. of the growth of the productivity of References manufacturing industry and that a faster rate of growth of manufacturing output is Feiwel, G.R. (1975) The Intellectual Capi- tal of Michal Kalecki, Knoxville, TN: positively related to the rate of industrial University of Tennessee Press. labour mobility from non-manufacturing Kalecki, M. (1954) Theory of Economic to manufacturing industry. Dynamics: An Essay on Cyclical and Seealso:Verdoorn’slaw Long-run Changes in the Capitalist Economy, London: Allen & Unwin. References —— (1969) Introduction to the Theory of Thirlwall, A.P. (1987) Nicholas Kaldor, ch. Growth in a Socialist Economy, trans. 7, Brighton: Wheatsheaf. from 2nd Polish edn by Z. Sadowski, Oxford: Basil Blackwell. —— (1987) Selected Essays on Economic Kalecki, Michal, 1899–1970 (B3) Planning, Cambridge: Cambridge Uni- A Polish economist who independently versity Press. discovered many of the key concepts of Osiatinsky, J. (1990 onwards) The Col- Keynesian theory. After studying engineer- lected Works of M. Kalecki, Oxford: ing at the Polytechnics of Warsaw and Oxford University Press. Gdansk, he became a freelance economic Sawyer, M.C. (1985) The Economics of Mic- journalist and analyst at the Polish Re- hal Kalecki, Basingstoke: Macmillan. search Institute for Business Cycles and Prices from 1929 to 1937. At the Oxford Kalman filter (C1) Institute of Statistics, from 1940 to 1955, A recursive procedure used for calculating he worked on wartime rationing schemes the least squares method. and refined his study of economic dy- namics and cycles. From 1955 to 1970 he Kantorovich, Leonid Vitalievich, 1912– was economic adviser to the Polish gov- (B3) ernment and then Polish representative at Russian mathematician and economist, the the United Nations. His major contribu- principal originator of LINEAR PROGRAM- tion to macroeconomics was late in being MING. After graduating in mathematics acknowledged (the translation from Polish from Leningrad University in 1930, he taught in Leningrad before becoming pro- was delayed) despite Joan ROBINSON’s fre- fessor at the University of Leningrad in quent praise. With MARX as his starting point, he developed a long-run model of 1934. From 1939 he concerned himself equilibrium growth integrating it with his with major applications of mathematics business cycle theory. He believed that to economics. His many achievements merited the Lenin Prize in 1965 and, with FULL EMPLOYMENT was a short-lived phe- nomenon. He has been a great inspiration KOOPMANS, the NOBEL PRIZE FOR ECONOMICS in 1975. Much of his work was concerned for the POST-KEYNESIANS. He provided an account of the for with improving socialist economic plan- ning, recommending decentralization and macroeconomics in his theory of MARK-UP pricing (the mark-up reflecting the relative the use of shadow pricing; he has lived to power of an oligopolistic firm in an see many of his recommendations incor- industry). This pricing theory is then porated into Soviet planning reforms. applied to both the distribution and level References of the national income as the prices of Kantorovich, L.V. (1960) ‘Mathematical oligopolists will have a crucial effect on methods of organizing and planning cyclical movements of national output. production’, Management Science 6: His model of the economy combines 363–422.

© 2002 Donald Rutherford —— (1965) The Best Use of Economic Kennedy Round (F1) Resources, trans. P.F. Knightsfield, Ox- A set of tariff reductions arranged under ford and New York: Pergamon. the auspices of the GATT conducted from Ward, B. (1960) ‘Kantorovich on eco- 1964 to 1967. This sixth round of multi- nomic calculation’, Journal of Political lateral trade negotiations reduced tariff Economy 68: 545–56. rates by up to 50 per cent across the kappa (G1) board, except for items such as steel, The ratio of the change in the price of an textiles, clothing and footwear where there OPTION to a 1 per cent change in the were considerable employment implica- expected price volatility. tions. President J.F. Kennedy was author- ized to make this reduction under the US Katona effect (E2) Trade Expansion Act of 1962. The effect of creeping inflation on saving. Katona argued that in such inflationary Seealso:DillonRound;TokyoRound; times there would still be expectations of UruguayRound rising real incomes so individuals would kerb market (G1) continue to invest in fixed interest secu- The unofficial trading of a stock market rities: the rate of inflation would be outside the building after the exchange has sufficiently low for money still to be closed for the day. regarded as ‘safe’. In times of runaway inflation, there would be scare buying and Seealso:after-hoursdealing hoarding of goods. key currency (E5, F3) References A major international medium of ex- Katona, G. (1960) The Powerful Consumer: change. A country whose currency is in Psychological Studies of the American great demand because of being a key Economy, ch. 12, New York: McGraw- currency has the advantage of being able Hill. to finance its balance of payments deficits easily, as the USA has found since 1951. Keidanven (J5) Federation of Economic Organizations Seealso:sterlingarea (Japan). Keynes effect (E3) keiretsu (L1) The indirect effect on the demand for A confederation of loosely related Japa- commodities resulting from a change in nese companies based on having a com- the general price level. This price level will mon banker or supply network. affect the price of bonds and hence inter- est rates, the level of net investment and so Seealso:zaibatsu the demand for commodities. A shift in the LM curve shows that this effect is in Kemp–Wan theorem (F1) operation. A study of the welfare gains from the formation of CUSTOMS UNIONS. These unions References are not harmful to any country if there is a Ackley, G. (1951) ‘The wealth-saving rela- costless redistribution of trade between tionship’, Journal of Political Economy partners of a union after its formation. 59: 154–61. Also the COMMON EXTERNAL TARIFF has to be Keynes expectations (E0) at an appropriate level. Expectations in the short term about the References price a producer expects to get for his or Richardson, M. (1995) ‘On the interpreta- her product and in the long term about tion of the Kemp-Wan theorem’, Oxford the returns to extra capital expenditure. Economic Papers 47: 696–703. The latter, crucial to his concept of the

© 2002 Donald Rutherford MARGINAL EFFICIENCY OF CAPITAL, was re- applied Keynesianism. The Major govern- garded by Keynes as a central innovation ment in the UK, 1992–7, is a more recent of his General Theory. Unlike other the- case of deficit spending. Just as MARX is ories of expectations, the concept is not reputed to have said ‘Je ne suis pas une used as a central element in a theory of marxiste’, Keynes would have been an inflation. uneasy member of the Keynesian School.

Keynesian cross diagram (E1) References A simple macroeconomic model of the Coddington, A. (1976) ‘Keynesian eco- national ECONOMY derived from Keynes’s nomics: the search for first principles’, General Theory which can be used to Journal of Economic Literature 14: 1258–73. expound the theory of aggregate demand Hall, P.A. (ed.) (1989) The Political Power and demonstrate the effects of fiscal policy of Economic Ideas: Keynesianism across and the MULTIPLIER. Planned expenditure is Nations, Princeton, NJ: Princeton Uni- plotted against national output to indicate versity Press. various levels of national output for which Hamond, O.F. and Smithin, J.N. (eds) the economy can be in equilibrium or (1988) Keynes and Public Policy After disequilibrium. It cannot cope with the Fifty Years, Aldershot: Edward Elgar; problems of inflation and monetary policy, New York: New York University Press. unlike IS–LM curves. Hicks, J. (1974) The Crisis in Keynesian Economics, Oxford: Basil Blackwell. Seealso:equilibrium Hutton, W. (1986) The Revolution that Never Was: An Assessment of Keynesian Keynesian economics (E0) Economics, London: Longman. A distillation of the ideas in Keynes’s Leijonhufvud, A. (1968) On Keynesian General Theory into a macroeconomic Economics and the Economics of Keynes, theory and policy consisting principally of New York: Oxford University Press. a model of aggregate income and expendi- Patinkin, D. and Clarke Leith, J. (1977) Keynes, Cambridge and the General The- ture using IS–LM curves, an emphasis on the ory, London: Macmillan. importance of the investment MULTIPLIER, Wattel, H.L. (ed.) (1986) The Policy Con- an assertion that the LIQUIDITY preference sequences of , Ba- schedule is stable in the long run and singstoke and London: Macmillan. unaffected by the actions of CENTRAL BANKS, and an insistence on the major Keynesian equilibrium (E0) importance of fiscal policy so that money A short-term equilibrium in a static model and the rate of interest are of little of an economy which is not necessarily a importance to the management of the FULL-EMPLOYMENT equilibrium. economy. Keynesian policy is most popu- larly regarded as the use of national Keynes, John Maynard, 1883–1946 (B3) budget deficits to maintain full employ- The most influential Western economist of ment. Although it was frequently praised the twentieth century. With the benefit of in the 1950s and 1960s, it is doubtful an academic background (his father John whether many Western governments have Neville Keynes wrote an important book pursued such policies for sustained periods on economic methodology before becom- of time. Heller cites the 1964 US tax cut of ing a university administrator), a brilliant the Johnson Administration that he claims degree in mathematics and tuition from created 7 million jobs, doubled profits and MARSHALL in economics, he passed second increased gross domestic product by one- in the Civil Service examinations. He third. Other popular examples, e.g. the worked in the India Office from 1906 to New Deal, have subsequently been chal- 1908, before returning to lecture in eco- lenged as only ephemeral exercises in nomics at Cambridge from 1908 to 1920,

© 2002 Donald Rutherford and was a fellow of King’s College, Cam- mended the extinction of the RENTIER class bridge, until his death. Despite his major and the of investment. His economic writing and editorship of the parents attended his funeral. Economic Journal (1911–45), the leading Seealso:CambridgeCircus UK economics journal, he had time to advise the Treasury in two world wars, References serve on the Royal Commission on Indian Harrod, R.F. (1951) The Life of John Finance and Currency (1913–14), the Maynard Keynes, London: Macmillan. Macmillan Committee on Finance and Johnson, E. and Moggridge, D. (eds) Industry (1929–31) and the Economic (1971–87) The Collected Writings of Advisory Council (1930–39), chair an John Maynard Keynes, 30 vols, London insurance company, be a patron of the and New York: Macmillan. Keynes, M. (ed.) (1975) Essays on John arts, be a leading bibliophile and write Maynard Keynes, London and New extensively and entertainingly on many York: Cambridge University Press. aspects of public affairs. Lawson, T. and Pesaran, H. (eds) (1985) His early works were not confined to Keynes’s Economics: Methodological Is- economic theory, although he wrote a sues, London: Croom Helm. monograph on Indian currency. His attack Skidelsky, R. (1983, 1990, 2000) John on the Versailles Peace Treaty in The Maynard Keynes, 3 vols, London: Mac- Economic Consequences of the Peace millan. (1919) showed great skill for attacking the Wood, J.C. (1963) Critical Assessments of core of bad policy; his A Treatise on John Maynard Keynes, London: Croom Helm. Probability (1921) indicated that, like his Bloomsbury Group friends, he was cap- KeynesPlan(F3)seeInternational able of tackling a tough philosophical ClearingUnion issue. In a series of three books, he groped Keynes’s General Theory (E0) towards a theory which was to dominate The General Theory of Employment, Inter- Western macroeconomics for over thirty est and Money, first published in 1936, is years. His trilogy A Tract on Monetary often regarded as the most influential Reform (1923), Treatise on Money (1930) economics book to have been written in and supremely The General Theory of the twentieth century. It begins with an Employment, Interest and Money (1936) attack on the postulates of CLASSICAL ECO- contain the major Keynesian contribution NOMICS and an assertion of the principle of to economics. Connected together are EFFECTIVE DEMAND, lists definitions and theories of the CONSUMPTION FUNCTION, AG- ideas, and then discusses the propensity GREGATE DEMAND, the MULTIPLIER, the MAR- to consume, the inducement to invest, GINAL EFFICIENCY OF CAPITAL, LIQUIDITY money wages and prices before an epilo- PREFERENCE and EXPECTATIONS. Keynes had, gue relating the General Theory to the he believed, dealt a mortal blow to the TRADE CYCLE, MERCANTILISM and future so- complacent depression-inducing econom- cial philosophy. Keynes accepted the sum- ics of CLASSICAL ECONOMICS. Soon after his mary of the General Theory made by 1936 triumph his health deteriorated; but Harrod in a letter of 30 August 1935: he was able to advise on the financing of ‘Your view, as I understand it is broadly the war and the setting up of a new this: – Volume of investment determined international economic order (BRETTON by marginal efficiency of capital schedule WOODS) to avoid the crises of the interwar and the rate of interest. Rate of interest period. Although he was a member of the determined by the liquidity preference Liberal Party and described by Lenin as ‘a schedule and the quantity of money. Vo- bourgeois of the first water’, he recom- lume of employment determined by the

© 2002 Donald Rutherford volume of investment and the multiplier. of them raises prices. Thus a demand Value of the multiplier determined by the curve results which consists of the joining propensity to save.’ together of two demand curves – the Admirers of Keynes have seen a devel- demand curve of the firm which raises its opment of the theory of the rate of interest prices and the industry demand curve. The and the crucial use of expectations in this theory, although suspect empirically, has grand theory, but critics, including LUCAS, been used to account for price rigidity in have disliked the tone of the book and the oligopolistic markets. In the figure the decision of Keynes to work in units of demand curve D up to output OK is money and labour alone to discuss eco- ELASTIC and so, if a firm raises its price, nomic aggregates; also, it has often been total revenue will fall; beyond output OK stated that the theory is not as ‘general’ as the demand curve of the firm, which is Keynes declared, that it is crippled by the also the industry’s demand curve, is in- use of the COMPARATIVE STATICS method and elastic and so a decrease in price will lower that it needed later growth theory to total revenue also (AR is average revenue, complement it. MR is marginal revenue and MC is References marginal cost). Clarke, P. (1988) The Keynesian Revolution in the Making, 1924–36, Oxford: Clar- endon Press. Keynes, J.M. (1936) The General Theory of Employment, Interest and Money, Lon- don: Macmillan. Vicarelli, F. (ed.) (1985) Keynes’s Rele- vance Today, London: Macmillan. key rate (J3) A wage rate set by an INTERNAL LABOUR MARKET linking it to the EXTERNAL LABOUR MARKET. A key rate is associated with each JOB CLUSTER of a particular firm’s internal market. kibbutz (P3) A type of egalitarian community set up in Israel. These largely agricultural societies References were strictly controlled by oppressive rules Hall, R.L. and Hitch, C.L (1939) ‘Price to stamp out INDIVIDUALISM and pay was theory and business behaviour’, Oxford according to need. Kibbutzim were aban- Economic Papers 2: 12–45. Reid, G.C. (1975) The Kinked Demand doned by many of their members towards Curve Analysis of Oligopoly: Theory and the end of the twentieth century. Evidence, Edinburgh: Edinburgh Uni- Seealso:utopia versity Press. Sweezy, P.M. (1939) ‘Demand under con- kickback(J3)seesweetener ditions of oligopoly’, Journal of Political Economy 47: 568–73. kinked demand curve (L1) A curve shaped like a mansard roof kinked supply curve (D4) describing the behaviour of non-collusive A conjectural supply curve reflecting sup- oligopolists. It is based on the idea that ply rigidities that arise from a discontinuity these oligopolists will follow each other in in the underlying cost function. A labour cases of price decreases but not when one supply curve often begins with a horizontal

© 2002 Donald Rutherford portion from the vertical axis and then (1921), is a classic of twentieth-century rises sharply, especially if a MINIMUM WAGE economics. It stated that profit ‘arises out law is in force. Kinks have also been of the inherent, absolute unpredictability observed in supply curves for regulated of things, out of the sheer brute fact that markets such as for rented property and in the results of human activity cannot be the long-run Keynesian aggregate supply anticipated’. His social philosophy is ex- curve. pounded in The Ethics of Competition (1935). His other contributions include an Kitchin cycle (E3) onslaught on the Austrian measurement of A cycle in general economic activity of capital in terms of a period of production, three to five years’ duration, mostly caused PIGOU’s notion of SOCIAL COST and post-war by changes in inventories (stocks). Kitchin social engineering. first identified this type of fluctuation in 1923. When economists refer to the ‘busi- Kondratieff cycle (E3) ness cycle’ they often mean this cycle. A long wave in economic activity identi- Seealso:Juglarcycle;Kondratieffcycle; fied in 1926 from index numbers of Kuznetscycle commodity prices by N.D. Kondratieff, who was born in 1892 and died sometime References after his arrest in 1930. This wave lasts Kitchin, J. (1923) ‘Cycles and trends in forty-five to sixty years and is associated economic factors’, Review of Economics with cycles in investment in basic capital and Statistics 5: 10–16. goods, e.g. transportation systems. Com- Klein, Lawrence R., 1920– (B3) modity prices rise in the upswing and fall A celebrated US econometrician noted for in the downswing. For England, he noted his leadership of the research groups that troughs in 1789, 1849 and 1896 and peaks produced influential large-scale econo- for 1814, 1873 and 1920; for France, peaks metric models of the UK and US econo- in 1873 and 1920 with a trough in 1896; mies in the period 1955–75. He is also well for the USA, peaks in 1814, 1866 and known as an interpreter of KEYNES. After a 1920 with troughs in 1849 and 1896. (Each university education at Berkeley, Califor- cycle is measured from peak to peak or nia, and the Massachusetts Institute of trough to trough.) It is difficult to justify Technology, he was at the Oxford Institute the use of price data in the manner of of Statistics from 1954 to 1958 and then Kondratieff for later in the twentieth professor at the University of Pennsylva- century as the ending of the GOLD STAN- nia from 1958 to 1968. He was awarded DARD, the growth of OLIGOPOLY, major the NOBEL PRIZE FOR ECONOMICS in 1980. changes in AGGREGATE DEMAND and INDEXA- References TION of wage contracts have changed the relationship between prices and general Klein, L.R. (1968) The Keynesian Revolu- economic activity. tion, 2nd edn, London: Macmillan. —— (1983) The Economics of Supply and References Demand, Oxford: Basil Blackwell. Kondratieff, N.D. (1935) ‘The long waves in economic life’, Review of Economics Knight, Frank Hyneman, 1885–1973 and Statistics 17: 105–15. (B3) Mager, N.H. (1986) The Kondratieff A founder of the Chicago School, being Waves, New York and London: Praeger. professor at Chicago from 1927 to 1955 Solomou, S. (1987) Phases of Economic after an education at Tennessee and Cor- Growth, 1850–1973: Kondratieff Waves nell Universities. His doctoral thesis, pub- and Kuznets Swings, Cambridge: Cam- lished as Risk, Uncertainty and Profit bridge University Press.

© 2002 Donald Rutherford Koopmans, Tjalling Charles, 1910–84 —— (1967) Mathematical Planning of (B3) Structural Decisions, Amsterdam: Dutch econometrician and economist who North-Holland. —— (1971) Anti-Equilibrium on Economic shared the NOBEL PRIZE FOR ECONOMICS with Systems Theory and the Tastes of Re- KANTOROVICH in 1975 for his work on LIN- search, Amsterdam: North-Holland. EAR PROGRAMMING. Although educated in —— (1980) The Economics of Shortage, mathematics and physics at the Universi- Amsterdam: North-Holland. ties of Utrecht and Leiden, he turned to —— (1982) Growth, Shortage and Effi- econometrics and economics when he ciency: A Microdynamic Model of the worked at the League of Nations in Socialist Economy, Oxford: Basil Black- Geneva from 1936 to 1940. Subsequently, well. he was at the COWLES COMMISSION, Univer- Krueger, Anne Osborn, 1934– (B3) sity of Chicago, from 1944 to 1955 and a Educated at Oberlin College and the Uni- professor at Chicago from 1946 to 1955 versity of Wisconsin. After teaching eco- and then Yale from 1955 to 1984. His nomics in the Universities of Wisconsin major contributions to activity analysis and Minnesota from 1955 to 1982, she () were used to solve became Vice-President, Economic Re- transport problems in the Second World search, of the WORLD BANK from 1982 to War and during the 1948 Berlin airlift. 1986; subsequently professor at Duke and References Stanford Universities. Her contributions to Koopmans, T.C. (1937) Linear Regression international trade theory include an ex- of Economic Time Series, Haarlem: De amination of the relationship between Aerren F. Bohn. income differentials and factor endow- —— (1957) Three Essays on the State of ments and applications of RENT SEEKING. Economic Science, New York: McGraw- Her applied work includes trade studies of Hill. Turkey, India and Korea. Kornai, Janos, 1928– (B3) krugerrand (E5) Hungarian mathematical economist, edu- South African gold coin weighing one troy cated in science at the Hungarian Acad- ounce (31.1 g). emy of Science and in economics at the University of Economics, Bu- kursmakler(G1)seespecialist dapest. He has been professor of econom- kurtosis (C1) ics at the Hungarian Academy from 1955 The extent to which a distribution is and at Harvard from 1986. Apart from his peaked relative to a NORMAL DISTRIBUTION. mathematical modelling of the planning A highly peaked distribution is leptokur- process, he has been famous for his attack tic, a flat-topped distribution platykurtic on Walrasian GENERAL EQUILIBRIUM theory and for his demonstration of how quan- tity, not price, balances supply and de- mand. Later he considered the similarities between communist and capitalist econo- mies. His ideas have had considerable influence in the West. References Kornai, J. (1959) Overcentralization in Economic Administration: A Critical Analysis Based on Experience in Hungar- ian Light Industry, London: Oxford University Press.

© 2002 Donald Rutherford seven years with high unemployment in most years. In the case of the USA, immigration stimulated the steady growth phase. The cycle has been less pronounced since 1945. Seealso:Juglarcycle;Kitchincycle;Kon- dratieffcycle References Kuznets, S.S. (1967) Secular Movements in Production and Prices: Their Nature and Their Bearing on Cyclical Fluctuations, Boston and New York: A.M. Kelly.

Kuznets, Simon S., 1901–85 (B3) US economist and statistician of Russian origin. After emigration to the USA in 1922, he was educated at Columbia Uni- versity and began his distinguished career in a project with Wesley MITCHELL on national income at the US NATIONAL BU- REAU OF ECONOMIC RESEARCH. He was profes- sor at the Universities of Pennsylvania and a low-peaked distribution mesokurtic (1930–54), Johns Hopkins (1954–60) and (see figures). Harvard (1960–71). His work on statistical data earned him the NOBEL PRIZE FOR ECO- (D3, O4) Kuznets curve NOMICS in 1971. This shows the relationship between ECO- His major contributions to economics NOMIC GROWTH and INCOME DISTRIBUTION, include a reconstruction of US NATIONAL plotting income per capita against percentile INCOME accounts from 1869, discovering or decile shares of different income groups. cycles of fifteen to twenty years in the The share of top income groups is constant economy, which he described in Secular but income inequality falls for other income Movements in Production and Prices groups as per capita income rises. (1930), and investigating the relationship References between growth and income distribution. In Kuznets, S.S. (1955) ‘Economic growth his long, 929-page book National Income and income inequality’, American Eco- and its Composition, 1919–38 (1940), he nomic Review 45: 1–28. showed his great care in the use of account- ing concepts and the refining of raw data. Kuznets cycle (E3) His approach to the study of economic A cycle in economic activity lasting fifteen growth led him to examine productivity to twenty-five years first identified by KUZ- and SOCIAL COSTS and to formulate the NETS in 1930. Changes in residential and thesis that the dominating factor in eco- other types of construction, particularly nomic growth is the proportion of labour brought about by large-scale immigration, and capital of a country devoted to its create these cycles. Each cycle consists of growth industries. He noted that income three phases: the rebound from DEPRESSION inequality increased with economic growth taking three to see years; steady growth at in poor countries and the reverse in rich FULL EMPLOYMENT lasting seven to eleven countries. Although regarded as the father years; depression or stagnation of four to of NATIONAL INCOME analysis, he has been

© 2002 Donald Rutherford the most wary critic of its use as an on climate change which elaborated the indicator of ECONOMIC WELFARE. UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE. It committed the signa- Seealso:Stone,JohnRichardNicholas tories to cutting 1990 levels of greenhouse References gas emissions, mainly carbon dioxide, by Lundberg, E. (1971) ‘’ con- on average 5.2 per cent by 2012. Although tribution to economics’, Scandinavian the treaty covers developing countries, Journal of Economics 73: 444–61. they are excluded from meeting the targets for economic reasons. Kyoto Summit (Q0) A summit meeting held in Japan in 1997

© 2002 Donald Rutherford L

L (E4) government, employers and labour con- A measure of the US money supply cerning labour market rules, working con- consisting of M3 + non-bank public hold- ditions and pay. This is more evident in ings of US savings bonds + short-term European countries than in the USA. treasury securities + commercial paper + labour cost (J2) bankers’ acceptances (net of money mu- All the costs of employing a person. In tual market fund holdings of these assets). addition to wages or salaries, FRINGE BENE- Labor Management Relations Act 1947 FITS and group facilities are often financed (J5)seeTaft–HartleyAct by an employer. In countries such as the USA where COLLECTIVE BARGAINING covers a Labor Management Reporting and wide range of issues, total labour costs can DisclosureAct1959(J5)seeLandrum– be considerably greater than the total wage GriffinAct1959 and salary bill. laborunion(J5)seetradeunion;US labour disutility theory (D0) laborunion A LABOUR THEORY OF VALUE expounded by labour (J0) SMITH. It asserts that value is proportional A FACTOR OF PRODUCTION consisting of the to the ‘toil and trouble’, or DISUTILITY,of effort and time of human beings engaged producing a good. in the production of goods or services. The Seealso:labourtheoryofvalue notions of HUMAN CAPITAL and ECONOMIC RENT blur the distinction between this labour force (J2) factor and the others, CAPITAL and LAND. All the persons of a country who are employed for a minimum number of hours Seealso:forcedlabour;laboursupply per week, e.g. twelve, or are self-employed labour-augmenting technical progress or are unemployed. The most difficult (O3) problems of labour force measurement Technical progress which raises output arise from counting the unemployed and with the same number of hours of labour those engaged in economic activity within input as at full employment. households. Some countries, including the USA, use JOB SEARCH as an indicator of an Seealso:capital-augmentingtechnical unemployed person’s attachment to the progress labour force. The size of a national labour labour compact (J0) force will be determined by permanent The unwritten implicit agreement between international IMMIGRATION and a combina-

© 2002 Donald Rutherford tion of natural increase and LABOUR FORCE countries short of capital, especially in the PARTICIPATION RATES. Third World, such methods are wide- spread in many sectors. But in advanced See also: homework; unemployment countries goods made by craft workers and personal services, e.g. hairdressing, labour force participation rate (J2) The proportion of the population or a are always labour intensive. section of the population belonging to the Seealso:appropriatetechnology;capital labour force. If a country has 20 million intensive women aged 25 to 44 years of whom 15 million are in the labour force, the labour labour-managedfirm(L2)seeindustrial force participation rate for those women is democracy 75 per cent. In many advanced countries, labour market (J0, J4) most of labour force growth is attributable A factor market consisting of firms as to changes in labour force participation buyers and workers as sellers which exists rates. to match job vacancies with job applicants Labour force participation has been and to set wages. It is linked to the studied as a product of the decision mak- product market because the demand for ing of a household and regarded as being labour is derived from the demand for determined by wages, unemployment, edu- goods and services. Much of the notion of cation and attitudes to work. In the the demand for labour is derived from twentieth century, the most noticeable MARGINAL PRODUCTIVITY THEORY; the determi- change in labour force participation in nants of LABOUR SUPPLY have attracted more industrialized countries has been the in- attention. It is often difficult to analyse creasing participation by married women. labour markets because it is not clear who This has occurred because a reduction in is participating in a particular market, SEXUAL DISCRIMINATION has opened higher especially one international in scope, e.g. education and most occupations to wo- a market for financial dealers. men, and the reduction in the birth rate, changing attitudes to women’s abilities and See also: dual market; external market; the rise in real wages have increased the internallabourmarket;locallabourmar- OPPORTUNITY COST of not working. There has ket;searchcost been a slight decline in male labour force References participation. In the UK, labour force participation rates are usually referred to Addison, J.T. and Siebert, W.S. (1979) The Market for Labor: An Analytical Treat- as ‘activity rates’. ment, Santa Monica, CA: Goodyear. See also: additional worker hypothesis; labour market intermittency (J2) discouraged worker hypothesis Interrupting a career before retirement as References happens with many female workers who Bowen, W.G. and Finegan, T.A. (1969) take time off to rear children. The Economics of Labor Force Participa- tion, Princeton, NJ: Princeton Univer- labour market policy (J6) sity Press. Attempts to improve the clearing of la- bour markets. Central to the policy is the labour intensive (D2) role of governmental agencies in reducing A method of production employing a the SEARCH COSTS of employers and workers greater amount of labour than capital by providing free information. Many compared with other methods. Typically, countries, e.g. Sweden and the UK, offer only simple machines are used so that the services of employment agencies freely. most production costs are labour costs. In However, the roles of private agencies and

© 2002 Donald Rutherford press advertising have always been impor- Seealso:functionalincomedistribution tant. A successful labour market policy References will remove the coexistence of unemploy- Phelps Brown, E.H. and Browne, M.H. ment and unfilled vacancies (i.e. DISEQUILI- (1968) A Century of Pay: The Course of BRIUM) as well as contributing to the Pay and Production in France, Germany, reduction of wage inflation. Sweden, the United Kingdom and the Seealso:jobcentre United States of America 1860–1960, ch. 4, London: Macmillan; New York: labour market rigidities (J6) St Martin’s Press. Barriers to the free fixing of wages by each labour standard (E4) firm and region of a country and to the The value of money in terms of labour. free movement of workers between occu- HICKS asserted that after the abandonment pations, regions and industries. Rigidities of the GOLD STANDARD in 1931, which had are particularly caused by national wage determined wages within a given monetary fixing, APPRENTICESHIP schemes and housing framework, MONETARY POLICY adjusts the policies that make it very costly to change equilibrium level of wages to the actual residence. Divergent regional unemploy- level. Thus the value of money is the ment rates and high wage inflation are consequence of the behaviour of the symptoms of such rigidities. wage-fixing institutions of a state. The Seealso:EuropeanSocialCharter;mobi- labour standard is a national standard, litytrap unlike the international GOLD STANDARD. Hicks’s long interest in LABOUR ECONOMICS labourmobility(J6)seemobilityof ensured that he took into account both labour economic and social determinants of labour power (J0) wages. 1 The capacity of a worker to work for a Seealso:commodityreservecurrency given period of time. 2 Potential labour services, according to References MARX, regarded by capitalists as com- Hicks, J.R. (1955) ‘The economic founda- modities with both use and exchange tions of wage policy’, Economic Journal values. 65: 389–404. Seealso:humancapital labour supply (J2) The supply of persons, hours or effort for labour process theory (J0) the production of goods and services. The Marxist theory which shows the changing labour supply includes both those em- forms of the submission of labour to ployed and those not employed but desir- capital by analysing social relationships ous of being so. More persons are supplied between workers and capitalists to indicate through increases in the population (NAT- how SURPLUS VALUE is created and values URAL INCREASE or by IMMIGRATION) and are transformed into prices. through increases in LABOUR FORCE PARTICI- labour’s share of national income (E0, PATION RATES; more hours are typically J2) supplied through overtime working; more The ratio of total wages and salaries of an effort is encouraged by productivity-based economy to NATIONAL INCOME. In the twen- bonus schemes. tieth century, there were increases in some Seealso:labourforce Western countries in labour’s share, possi- bly because of growth in the HUMAN CAPI- labour theory of value (D0) TAL stock, and PRICES AND INCOME POLICIES One of the oldest VA LU E theories, suggested responsible for a squeeze in profits. even by ARISTOTLE, but not clearly ex-

© 2002 Donald Rutherford pounded until the CLASSICAL ECONOMISTS after Professor Arthur Laffer, a prominent made it a central feature of their theory. economic adviser to US President Reagan Both SMITH and RICARDO attempted to in the 1980s and a popular leader of the relate long-term equilibrium value to the SUPPLY-SIDE school of economics. Although labour input of production but MARX is Laffer’s supporters are eager to specify best known as an adherent of this view. more clearly the shape of the curve, it still Labour theories have a variety of forms. has the curious feature of associating each Smith’s three versions were labour quan- tax revenue with two tax rates, one high tity (the value of a good is proportional to and the other low, except at point X where the amount of labour needed to make it), government revenue is at a maximum (tm labour command (the value of a good is is the tax rate which maximizes tax reven- proportional to the amount of labour of ues). The curve implies that, as there is a others obtained in exchange) and labour ceiling to the amount a government can disutility theory (value is proportional to raise, there is a limit to the level of public the toil and trouble incurred in produc- goods which can be provided. DUPUIT in tion). Neoclassical economists firmly dis- 1844 stated the same principle. missed such theories in favour of a MARGINAL UTILITY approach. JEVONS stated that once labour is expended in produc- tion it no longer enters into value but is lost and gone for ever. References Meek,R.(1973)Studies in the Labour Theory of Value, London: Allen & Unwin. Lachmann, Ludwig, 1906–90 (B3) Educated at the University of Berlin. He fled in 1933 from Germany to work at the London School of Economics where con- tact with HAYEK allowed him to develop his economics in the tradition of the AUSTRIAN SCHOOL; in 1948 he became professor of lag (E6) economics and economic history at Wit- The period of time elapsing between the watersrand University, South Africa, change in value of an economic variable where he taught a wide range of econom- and the appearances of the effects of that ics and encouraged the study of major change, e.g. the time lag between an economics texts. In his Capital and Its income tax cut and an increase in con- Structure (1956) he viewed capital as being sumer spending. These lags can be techno- in a ceaseless state of mutation. His work logical, psychological or institutional. on knowledge and expectations antici- They are a common feature of most pated SHACKLE. economic relationships, especially relating lacking (E2, E3) to FISCAL POLICY, because a lapse of time is ROBERTSON’s term for SAVINGS. necessary before legislation and institu- tional behaviour can be adjusted: it takes Laffer curve (H2) time to change tax law, to pay out incomes A graphical representation of the relation- and to spend money. ship between AVERAGE TAX RATES and total tax revenues which asserts that above a Seealso:administrationlag;implementa- certain average rate of tax, total tax tionlag;insidelag;Lundberglag;outside revenue will decline. The curve is named lag;Robertsonianlag

© 2002 Donald Rutherford lagged variable (C1) In practice it is difficult conceptually to A dependent variable in an equation separate land from other factors of pro- referring to a period previous to the time duction: its return is merged with that of associated with the independent variable. the return to the capital expended upon it and other factors of production can be lagging indicator (E3) as fixed in supply for long periods of A series of economic statistics registering a time. change after the turning point of a refer- ence cycle. The principal indicators of this Seealso:differentialtheoryofrent;eco- kind are consumer income and spending, nomicrent;rent and interest rates. References Seealso:coincidentindicators;economic Barlowe, R. (1978) Land Resource Econo- indicators;leadingindicators mics and the Economics of Real Estate, Englewood Cliffs, NJ: Prentice Hall. laissez-faire (H0) The doctrine, first propounded by the PHY- land bank (G2) SIOCRATS, that economic activities should A commercial bank that lends on the follow their natural course, being sub- security of the landholding of the bor- jected to few, if any, governmental regula- rower. In countries short of gold and silver tions in order to encourage production this form of banking enabled an expansion and give consumers complete freedom. of credit. The Scottish financier John LAW Thomas Carlyle described it as ‘anarchy was an early advocate of land banks. plus the constable’. As new roles for the Today these banks exist in many countries, state have been widely acknowledged, including the USA and Egypt. there are few adherents of the doctrine in (Q0) its purest form. land economy The study of property valuation and the Seealso:minimalstate economic factors determining the capital References costs of land and buildings within an ECONOMY. This study comprehends the ex- Viner, J. (1960) ‘The intellectual history of amination of the development of bare land laissez-faire’, Journal of Law and Eco- nomics 3: 45–69. to meet the market demands of the econ- omy for accommodation, supply and Lamfalussy Report (F0, G2) property investments, ranging from those A set of proposals for creating a free of agricultural land through to the optimal market in financial services in the EUROPEAN development of urban properties, e.g. of- UNION produced in 2001. It recommended fices and retail developments. Land econ- an EU Securities Regulators Committee. omy matches demand for accommodation with the needs of the property investor land (D2, Q3) and the restrictions of planners. 1 The fixed FACTOR OF PRODUCTION de- scribed by RICARDO as ‘the original and landownership (Q0) indestructible powers of soil’. The distribution of the land of a country, 2 All natural resources. a product of its land tenure system, much 3 A source of VA LU E . PETTY and CANTILLON of which is based on custom enshrined in both regarded it as the basis, with a country’s property laws. Countries that labour, of value, the latter asserting a have undergone a socialist revolution often par between land and labour as a have transferred much land to the state or particular quantity of land is necessary to small peasant proprietors. The pattern to provide subsistence to a worker, e.g. 1 of landownership is a crucial determinant worker = X acres. of agricultural efficiency: too much divi-

© 2002 Donald Rutherford P p q sionoflandintosmallfarmingunits P 0 1 affectstheproductivityofmosttypesof p0 q0 agriculturalproduction. where q1 are the quantities produced in the Landrum–GriffinAct1959(J5) later year, q0 are the quantities produced USfederallabourstatutewhichre- in the base year and p0 are the prices of spondedtocasesofcorruptioninseveral the base year being used throughout to labourunionsbygivingunionmembersa value quantities. BillofRightswhichguaranteedparticipa- tioninthedeterminationofduesand Lassalle’s law of wages (J3) initiationfees,protectionoffreedomof The view of the socialist Ferdinand Las- speechandinformationonthefinancial salle (1825–64) that wages under capital- statusoftheirunion.Rulesforthefiling ism would tend to fluctuate around the ofunionconstitutionsandunioncommit- subsistence level providing bare physiolo- teedecisionsandelectionofunionoffi- gical existence. He proposed that the state cialsandtheexclusionofCommunist should give capital to workers to enable Partymemberswerealsofeaturesofthe them to found producers’ co-operatives. Act. last-in, first-out (J2, M2) Seealso:Norris–LaGuardiaAct1932; 1 A principle for the rotation of inven- Taft–HartleyAct1947;WagnerAct1935 tories/physical stocks. In UK NATIONAL INCOME accounting conventions it en- large-scalemodels(C5) ables all items to be valued at current Aneconometricmodelofanational prices; a firm using this principle is able ECONOMYthatuseshundredsofequations to finance the replacement of stocks in toestimatetherelationshipbetweenkey inflationary periods. economicvariables.Thesetrytosimulate 2 The employment policy of firms which differentgovernmentpoliciesandarethe lay off first the workers who have been basisofmajoreconomicforecasts. recruited most recently. Seealso:linkagemodels Seealso:first-in,first-out laserbanking(G2) Bankingspecializinginthefinancialneeds late capitalism (P1) ofaparticularregionortypeofcustomer, The LONG BOOM in Western capitalist econo- orwithanarrowrangeoffunctions. mies after the Second World War regarded by Mandel and other Marxist writers not Seealso:nichebank as a new epoch in capitalist development but as a further development of MONOPOLY Laspeyres index (C1, E3) CAPITALISM. It could be analysed according A price or output index which uses the to the laws of capitalist development set weights of the original year. The price out by MARX in Das Kapital. index will be P References p q P 1 0 Mandel, E. (1972) Late Capitalism, trans. Joris De Bres, rev. edn 1975, London: p0 q0 Verso; New York: Routledge, Chapman and Hall. where p1 are the prices of the later year, p0 are the prices of the base year and q are 0 latent entrepreneurship (M1) the ‘weights’ of the base year. The output The unfulfilled desire to set up one’s own index will be business.

© 2002 Donald Rutherford Latin American Free Trade Associa- late nineteenth century. With WALRAS and tion (F1) PARETO as its leaders it developed GENERAL An association of Argentina, Brazil, Chile, EQUILIBRIUM analysis and set out the cri- Mexico, Paraguay, Peru and Uruguay teria for welfare optima. There are many created by the Montevideo Treaty in 1960 prominent descendants of this school, (Colombia, Bolivia and Venezuela subse- including HICKS, SAMUELSON, ARROW and quently joined) with the aim of creating HAHN. completely free trade between these coun- Lautro (G2) tries by 1980. Failing to achieve its objec- Life Assurance and Unit Trusts Regula- tive, LAFTA was superseded by the Latin tory Organization, a London-based SELF- American Integration Association in 1980. REGULATORY ORGANIZATION. One of its ear- Lauderdale (James Maitland), Eighth liest policies, in 1987, was to recommend a Earl of, 1759–1830 (B3) cut in the commission of independent British political economist and politician agents on the sale of life bonds from 5.2 educated at Edinburgh and Oxford Uni- per cent to 3 per cent over a four-year versities. He was Member of Parliament period, harmonizing the commission with for Newport from 1780 until he succeeded the rate for the sale of UNIT TRUSTS. to his father’s peerage in 1789. He is noted Seealso:FinancialServicesAct1986 for being one of the first economic writers to consider macroeconomic issues. In his lawandeconomics(K0)seeeconomics important work, Inquiry into the Nature oflaw and Origin of Public Wealth and into the Means and Causes of its Increase (1804), Law, John, 1671–1729 (B3) he praised extra spending as a means of BorninEdinburgh,Scotland.Afterim- increasing public wealth and attacked both prisonment in London for murder, he saving and sinking funds as ways of escaped to France where he soon became diminishing it. He also provided the first its leading banker. He proposed the estab- integrated theory of PROFIT and CAPITAL and lishment of a Bank of France to issue proposed UTILITY in place of labour as the paper money on the security of land. He basis of value. set up his General Bank in 1716 and References founded companies in Louisiana and Mis- sissippi whose stock was used to redeem Paglin, M. (1961) Malthus and Lauderdale: the French national debt. After his scheme The Anti-Ricardian Tradition,NewYork: Augustus M. Kelly. collapsed at a time of wild stock market speculation he fled to Venice. His principal laundering money (K4) work was Money and Trade Considered: The transfer of cash or bank deposits With a Proposal for Supplying the Nation through several banks in order to disguise With Money (1705). the ownership of it and its place of origin. law of diminishing marginal utility (D0) This technique, long used by criminals to seediminishingmarginalutilitylaw disguise ill-gotten gains, is extensively used by the world’s drug barons today. law of diminishing returns (D2) see diminishingreturnslaw Seealso:drugeconomy lawofoneprice(D4)seeone-pricelaw (B1) A group of economists of the MARGINALIST law of reciprocal demand (F1) see School who worked in Switzerland in the reciprocaldemandlaw

© 2002 Donald Rutherford law of reflux (E5) leads and tags (F4) A banking ‘law’ expounded by SMITH and The advancing (leading) of payments and later by the BANKING SCHOOL that there the delaying (lagging) of receipts, particu- could not be a permanent over-issue of larly in international trade. If the view is notes as any excess would return to the taken that a country’s currency is about issuing bank, being of no use. to depreciate, or to be devalued, then traders of that country, in order to protect Seealso:realbillsdoctrine themselves against losses, will pay earlier law of satiable wants (D0) for imports and will delay converting The general tendency for people to derive export receipts into the depreciating cur- UTILITY from only a limited quantity of a rency. It has been argued that in the past good or service. DEVALUATIONS of currencies were precipi- tated by a change in the timing of pay- Seealso:diminishingmarginalutilitylaw ments, e.g. the devaluation of the pound law of value (D0, P1) sterling in 1967. The mechanism in a CAPITALIST SOCIETY for leakage (E0) distributing total LABOUR POWER between branches of production via the prices of A withdrawal from the circular flow of products. A consequence of the law is that NATIONAL INCOME, especially savings, im- the pattern of investment is determined ports or taxation. The MULTIPLIER effect of according to the deviation of specific rates leakages is to reduce the level of the of profit from the average rate of profit. national income. Seealso:injection law of variable proportions (D2) The DIMINISHING RETURNS LAW. leaky bucket (H2) Seealso:returnstoscale The partial failure to redistribute the entire yield from taxes on the rich through Lawson boom (E3, N0, N1) TRANSFER INCOMES to the poor. OKUN,who The period of high inflation in the UK in invented the term, ascribed leakages to the late 1980s when Nigel Lawson was administrative and COMPLIANCE COSTS and Chancellor of the Exchequer. It occurred distortions in working, investing and sav- in the upswing of an economic cycle when ing behaviour. Anti-poverty programmes the economy was also suffering the effects often suffer from this problem. of the COMMUNITY CHARGE. leadingfirmsratio(C1,L1)seeN-firm learning-by-doing (O3) concentrationratio The increase in PRODUCTIVITY resulting from repeated performance of a particular leading indicators (E3) activity. SMITH recognized this in his dis- A series of economic statistics that cussion of the DIVISION OF LABOUR principle. changes prior to a change in the REFER- Modern theorists of growth and interna- ENCE CYCLE of an ECONOMY. The principal tional trade have considered this form of leading indicators are the index for the learning as an explanation of technical construction industry, the index for indus- progress independent of the scale of pro- trial materials prices, new orders for in- duction. dustrial durable goods, profits, business References failures and common stock prices. Arrow, K.J. (1962) ‘The economic implica- Seealso:economicindicators;laggingin- tions of learning by doing’, Review of dicator Economic Studies 29: 155–73.

© 2002 Donald Rutherford learning-by-helping (J2) legal tender (E5) The process of mentoring in an organiza- The money decreed by a central bank or a tion which enables the transfer of firm- currency commission that must be ac- specific human capital. By a sponsor cepted for the discharge of any debt in connecting prote´ge´s to a network and that country. This makes token money acquiring fuller information on them, the acceptable. Bank of England notes are promotion of newer members of a firm is legal tender in England and Wales but enhanced. not in Scotland and Northern Ireland, but £1 and £2 coins are acceptable for unlim- learning curve (O3) ited amounts. In the USA the Coinage Act A graphical representation of the relation- 1965 made all US notes and coins legal ship between cumulative productivity and tender. cumulative output. The relationship, ob- leisure (J2) served in several manufacturing industries, The alternative to work. LABOUR FORCE PAR- states that productivity increases through TICIPATION decisions are determined by the the experience of production. trade-off between work and leisure. Lei- sure confers UTILITY. leisure class (P0) VEBLEN’s term for the wealthy classes who live off investment income and use sport and socializing as a substitute for labour market activity. References Veblen, T. (1905) The theory of the leisure class: an economic study of institutions, New York: Macmillan. Leibenstein, Harvey, 1922–92 (B3) US economist educated at Northwestern and Princeton Universities. In his career he was professor at Berkeley from 1951 to 1967 and then Professor of the Economics of Population at Harvard from 1967 to 1992. His studies of business decision Seealso:Kaldor’slaws;Verdoorn’slaw making inspired him to invent the concept of X-EFFICIENCY. least squares method (C1) References A method of obtaining the best-fitting line Leibenstein, H. (1966) ‘Allocative effi- to a set of observations by minimizing the ciency versus X-efficiency’, American squares of the deviations of the values Economic Review 56: 392–415. plotted from a line going through the values. The line can be described by the lemonade stand capitalism (P1) equation Y = a + bX, where a and b are An ideal type of CAPITALISM consisting of constants, Y is the dependent variable and small one-person businesses operating un- X is the independent variable and is the der PERFECT COMPETITION. regression curve of Y on X. lemons market (D8) Seealso:scatterdiagram The market for used cars of less than

© 2002 Donald Rutherford average quality: the famous example used INTENSIVE and its imports CAPITAL INTENSIVE, by AKERLOF to illustrate ASYMMETRIC INFOR- despite the capital abundance of the US MATION. As sellers have more . than buyers, quality uncertainty about the References cars will have the effect, in the manner of Leontief, W.M. (1956) ‘Factor proportions GRESHAM’S LAW, that good cars leave the and the structure of American trade: market so that only lemons are traded. further theoretical and empirical analy- This principle is applicable to insurance, sis’, Review of Economics and Statistics the employment of minorities, the costs of 38: 386–407. dishonesty and credit markets in under- developed countries. Guarantees, brand Leontief technology (O3) names and the licensing of professionals A technology employing factor inputs as can be used to protect against such un- fixed proportions of outputs so that no certainty. substitution between inputs is possible in References the PRODUCTION FUNCTION. Akerlof, G. (1970) ‘The market for lem- ons: quality uncertainty and the market Leontief, Wassily W., 1906–99 (B3) mechanism’, Quarterly Journal of Eco- The pioneer of INPUT–OUTPUT ANALYSIS.He nomics 84: 488–500. was born in St Petersburg, Russia, where his father was a professor of labour lender of last resort (E5) economics at the city’s university from The chief function of a CENTRAL BANK –to which he himself graduated before further guarantee the LIQUIDITY of a banking sys- study in Berlin. After a period as eco- tem by always being the ultimate source of nomic adviser to the government of credit. Thus in the UK, the BANK OF ENG- China, he emigrated to the USA, spending LAND is always prepared to lend to the 1931 to 1932 at the NATIONAL BUREAU OF money market by discounting the bills ECONOMIC RESEARCH, Washington, before held by the discount houses; in the USA, beginning his long tenure of a Harvard the twelve FEDERAL RESERVE BANKS will dis- professorship, from 1932 to 1975. He was count the bills of member banks. awarded the NOBEL PRIZE FOR ECONOMICS in 1973. lender’s risk (G0) His work on input–output analysis The chance of financial harm plus the started with a paper and input–output chance that a borrower will renege owing table for the US economy in 1925. Later to MORAL HAZARD. he developed his model by incorporating lending rate (E4) the effects of excess capacity, price changes The RATE OF INTEREST on bank loans. It and technical progress. In 1973, he ambi- varies according to the type of customer. tiously began the modelling of the world In the UK, major quoted companies are economy using input–output methods. His charged base rate plus 1 per cent, small studies led him to advocate five-year plan- companies base rate plus 2 per cent and ning for the USA as a means of reducing personal borrowers base rate plus 5 per the costs of labour and capital being cent. unemployed in phases of the BUSINESS CY- CLE. Another celebrated study in applied Leontief paradox (F1) economics was his attack on the An empirical contradiction of HECKSCHER– HECKSCHER–OHLIN theorem of international OHLIN international trade theory that inter- trade in 1954. Leontief objected to many national trade is based on the relative aspects of KEYNESIAN ECONOMICS, particu- factor endowments of different countries. larly its methodology which, because it It was found that US exports are LABOUR relies so much on the definitions used,

© 2002 Donald Rutherford produces inevitable conclusions and policy money or public debt claims, leading to a prescriptions. FULL-EMPLOYMENT equilibrium level of pub- lic debt. References Leontief, W.W. (1951) The Structure of the References American Economy, 1919–39, 2nd edn, Lerner, A.P. (1948) ‘The burden of the New York: Oxford University Press. national debt’, in Income, Employment —— (1966) Input-Output Economics, New and Public Policy – Essays in Honour of York: Oxford University Press. AlvinH.Ransen,NewYork:W.W.Norton. —— (1966, 1977) Essays in Economics: Theories, Facts and Policies, Oxford: Lerner index (L2) Basil Blackwell. The measure of the degree of MONOPOLY using the formula [(price minus marginal leptokurtic(C1)seekurtosis cost) divided by price]. This measure follows directly from the standard treat- Lerner, Abba Ptachya, 1903–82 (B3) ment of monopoly with an INELASTIC de- Anglo-American economist, born in Bes- mand curve showing a divergence between sarabia (Romania), who emigrated as a PRICE and MARGINAL COST at the profit- child to the UK. After working as a maximizing level of output. Under PERFECT businessman,hestudiedandtaughtatthe COMPETITION, this index will be zero for London School of Economics from 1929 firms in a state of long-run equilibrium. to 1939. In 1939 he emigrated to the USA, where he was to teach in nine universities, Seealso:concentration;Herfindahl– including Berkeley from which he retired Hirschmanindex in 1979. His measure of monopoly power less developed country (O0) published in 1934 helped to found the A country with a low per capita income, a MARGINAL COST PRICING rule of applied WEL- large agricultural sector and often little FARE ECONOMICS. His London School of industrialization, high population growth, Economics doctoral thesis was published low life expectancy and able to export only as The Economics of Control in 1944: it a few products. Previously called ‘an sets out the basic principles to be followed underdeveloped country’. by an economic policy-maker, including PARETO OPTIMALITY, equal distribution of Seealso:economicdevelopment;poverty income and budgeting with reference to letter of credit (G2) employment and price effects. He was an A document issued by a bank to guarantee early convert to KEYNESIANISM which he payment of sums due under BILLS OF EX- enhanced by his work after 1945 on the CHANGE and cheques. In most cases, these problem of controlling inflation, including letters are requested by importers to make the construction of his anti-inflation plan. them sufficiently creditworthy to be able to Seealso:marketanti-inflationplan order goods from foreign exporters. References letter stock (G2) Colander, D.C. (ed.) (1983) Selected Eco- Common or preferred stock sold through nomic Writings of Abba P. Lerner, New an investment letter obliging the purchaser York: New York University Press. not to sell until there is a public sale. Their Scitovsky, T. (1984) ‘Lerner’s contribution prices are lower than those of registered to economics’, Journal of Economic stock. Literature 22: 1547–71. level of significance (C1) Lerner effect (E2) The maximum probability at which a Type An upward shift in the CONSUMPTION FUNC- I error is risked. Usually the levels chosen TION caused by an increase in the level of are 0.01 (1 per cent) or 0.05 (5 per cent).

© 2002 Donald Rutherford leverage (E0, G0) References 1 The ratio between a company’s long- Fei, J.C.H. and Ranis, G. (1965) Develop- term debt and the total capital it ment of the Labor Surplus Economy, employs. Homewood, IL: Richard D. Irwin. 2 GEARING. Lewis, W.A. (1954) ‘Economic develop- 3 The difference between the actual level ment with unlimited supplies of labour’, Manchester School 22: 139–91. of GROSS DOMESTIC PRODUCT and the hy- pothetical level which would result in Lewis, William Arthur (Sir Arthur), the absence of receipts and expenditures 1915–91 (B3) of the public sector. The Musgraves A West Indian economist educated at the measured it as London School of Economics and Man- 1 chester University where he was professor L= ½ð1 gÞP ðc mÞðR TrÞ of economics from 1948 to 1958 before 1 c þ m becoming Principal and Vice-Chancellor of the University of the West Indies from 1958 where P is government purchases, R is its to 1963, President of the Caribbean Devel- receipts, Tr are transfers, g is the govern- opment Bank from 1970 to 1973, and ment’s propensity to consume, c is the professor at Princeton University from private propensity to consume and m is 1963 to 1970 and 1973 to 91. With SCHULTZ, the private propensity to consume imports. he was awarded the NOBEL PRIZE FOR ECO- References NOMICS in 1979 for his work in DEVELOP- Musgrave, R.A. and Musgrave, P.B. (1968) MENT ECONOMICS. His early work was on ‘Fiscal policy’, in R.E. Caves and associ- price theory and PUBLIC UTILITIES but his ates (eds) Britain’s Economic Prospects, fame was established by a celebrated ch. 1, Washington, DC: Brookings In- article, published in the Manchester School stitution; London: Allen & Unwin. in May 1954, which inspired the study of developing countries as DUAL ECONOMIES. leveraged management buyout (G3) The purchase of a company by its man- References agement using fixed interest loans, which Datta, A. (1986) Growth and Equity: A increases the leverage of the newly con- Critique of the Lewis-Kuznets Tradition stituted company. The need to service the with Special Reference to India, Calcutta loans often makes managers more cost and New York: Oxford University Press. conscious, thereby increasing the profit- Lewis, W.A. (1955) Theory of Economic ability of the company. Growth, London: Allen & Unwin. —— (1966) Development Planning: The Seealso:managementbuyout Essentials of Economic Planning, Lon- don: Allen & Unwin. Lewis–Fei–Ranis model (O2) —— (1978) Growth and Fluctuations, A model of economic development for a 1870–1913, London: Allen & Unwin. two-sector closed ECONOMY. The growth of —— (1978) The Evolution of the Interna- the industrial sector increases demand for tional Economic Order, Princeton, NJ: the agricultural sector’s produce and at- Princeton University Press. tracts labour from the low-productivity agricultural sector, thus raising overall liability management (G0) output and productivity of the economy Using interest rate changes to attract as a whole. As there are few developing deposits. economies which are isolated from the effects of international trade, the applica- liberalcollectivism(P4)seesocial tion of the model is limited. liberalism

© 2002 Donald Rutherford Liberman, Yevsei, 1912– (B3) working life saving is accumulated which Soviet economist and professor at the is spent in retirement. A reverse life-cycle Institute of Engineering and Economics, hypothesis asserts that at the beginning of Kharkov University, whose proposals for one’s working life there is DISSAVING to reforming the planning system, published finance education, house purchase or con- as Plan, Profit and Premium in 1962, led sumer durables: expenditure precedes sav- to major changes in the running of Soviet ing in these cases. enterprises set out in the Enterprise Sta- tute of 1965. He criticized the use of gross output as the key performance target and suggested that some notion of ‘profit’ acceptable to socialist theory should be employed. It was hoped that this change would lead to more efficient use of factor inputs and would make possible the set- ting up of incentive funds in each enter- prise to reward more productive managers and workers. libertarian economics (B2) A school of economics which emphasizes the importance of markets and the limited role of governments. Although the PHYSIO- CRATS and some CLASSICAL ECONOMISTS preached this laissez-faire approach, it is particularly associated with the AUSTRIAN, References CHICAGO and NEOCLASSICAL SCHOOLS, making HAYEK and FRIEDMAN its gurus. Ando, A. and Modigliani, F. (1963) ‘The life cycle hypothesis of saving: aggregate lifeboat operation (E5, G2) implications and tests’, American Eco- The rescue of UK SECONDARY BANKS in nomic Review 53: 55–84. 1973–4 by the BANK OF ENGLAND, assisted lifetimeaveraging(H2)seelong-term by London and Scottish CLEARING BANKS. incomeaveraging Imprudent lending by non-clearing banks during the property boom caused many of lifetime client value (M3) these minor banks to have an increased The benefit to a firm from retaining the number of bad debts. The nature of the loyalty of a client. Marketing costs includ- Bank of England’s help was compared ing advertising will be lower and the with a rescue of the shipwrecked. market will be more stable. life-cycle hypothesis (E2) light industry (L6) Ando and Modigliani’s theory of saving An industry using raw materials and and the CONSUMPTION FUNCTION which re- components light in weight and noted for cognizes that for each age group there is a great amount of VALUE ADDED, e.g. the an associated AVERAGE PROPENSITY TO CON- computer assembly industry. SUME with the consequence that a change Seealso:heavyindustry;industry in a country’s age distribution will affect aggregate saving and consumption. This limited arbitrage (G0) hypothesis has been applied to the finan- Market activity that is too weak to bring cing of pensions as during a person’s security prices back to their efficient levels

© 2002 Donald Rutherford because of the arbitrageurs having limited have been longest on the book. Increas- capital, short investment horizons and an ingly there are movements towards the aversion to risk. creation of a computerized central book for each stock exchange. limited company (L2) A firm owned by shareholders whose limit price (D4) liability is limited to the amount of capital The highest common price set by a group subscribed. Since the mid-nineteenth cen- of sellers colluding together that they tury this has been a powerful means of believe they can charge without new firms financing large firms. The extent to which seeking to enter that industry in search of this form of organization is used varies high profits. from country to country. In Germany, for Lindahl equilibrium (H4) example, as it is viewed with suspicion, A set of ‘Lindahl prices’ such that at those very few companies are limited liability prices everyone demands the same level of and public. The development of SECONDARY each PUBLIC GOOD. These prices are indivi- MARKETS in unlisted securities has encour- duals’ shares of the tax burden. This aged the movement to limited liability. equilibrium is the equivalent of a compe- Seealso:jointstockcompany;Unlisted titive equilibrium for an economy with SecuritiesMarket public goods. When in equilibrium, the tax rate for an individual will equal his or limited general competitive bidding her marginal utility from that public good. (D4) All markets for private goods are perfectly A form of competition limited to those competitive and the government provides who have stated qualifications. public goods. PARETO OPTIMALITY is achieved limited market liberalization (P0) by an appropriate redistribution of in- A partial transition from a planned to a come. MARKET ECONOMY. Goods allocated under References the plan cannot be resold and scheduled deliveries cannot be purchased on the Milleron, J.C. (1972) ‘Theory of value with public goods: a survey article’, Journal market. Without these priorities, there of Economic Theory 5: 419–77. would be full market liberalization. Lindahl price (H2, H4) limited partnership (K2, M1) The share of total tax revenue paid by an A partnership consisting of limited, or individual that is the basis for his or her sleeping, partners who provide finance ‘demanding’ PUBLIC GOODS. This price is rather than contribute to management and equal to the MARGINAL UTILITY from a general partners who manage the firm. public good. The sum of Lindahl prices Limited partners have no personal liability; for an economy is equal to the cost of general partners have unlimited liability. supplying public goods. limit order (G1) linearcorrelation(C1)seelinear An order to buy a SECURITY at or below a regression specified price or to sell it for at least a particular price. linear programming (C1, I3, R4) An optimization technique originally ap- Seealso:marketorder plied to two problems: the transportation limit order book (G1) problem of determining the cheapest pat- A list for a SECURITY of LIMIT ORDERS ranked tern of routes to supply a number of by price and then chronologically accord- markets from a number of sources, and ing to the time entry that is kept by a the diet problem of determining the cheap- SPECIALIST. Priority is given to stocks that est diet which will provide a minimum

© 2002 Donald Rutherford nutritional intake. Since the first use of together national macroeconomic models this technique in the 1940s, it has come to to show the relationships between major be used extensively in the public and national economies, especially trade and private sectors. monetary flows and exchange rates. References Seealso:COMET;INTERLINK Baumol, W.J. (1958) ‘Activity analysis in one lesson’, American Economic Review Lipsey, Richard George, 1928– (B3) 48: 837–73. Canadian economist educated at the Uni- Dorfman, R., Samuelson, P.A. and Solow, versity of British Columbia, Toronto, and R.M. (1958) Linear Programming and the London School of Economics, where Economic Analysis, New York: he was later lecturer and professor from McGraw-Hill. 1955 to 1964. He was professor at Essex Gass, S.I. (1969) Linear Programming University from 1964 to 1970 and subse- Methods and Applications, 3rd edn, quently at Queen’s University in Kingston, New York: McGraw-Hill. Ontario, from 1970 to 1985. Luenberger, D.E. (1984) Introduction to Linear and Non-Linear Programming, He is famous to hundreds of thousands 2nd edn, Wokingham and Reading, of students in the Western world for his MA: Addison-Wesley. textbooks: An Introduction to Positive Economics, first published in 1963, which linear regression (C1) is, as its name suggests, strongly empirical The relationship between two variables in tone and hence has been frequently which approximates graphically to a revised; and Economics, which was first straight line. published in 1966 in the USA. He first Seealso:leastsquaresmethod made his mark as an economist with his joint article with Lancaster, ‘The general line item veto (H6) theory of the second best’ (Review of The power to veto part of a budget whilst Economic Studies June 1956), which made approving the rest. In the USA, forty-three a major contribution to welfare econom- governors can veto parts of state budgets ics. Subsequently, in a series of articles on but the US president has no such power inflation, he provided the microeconomic over the federal budget. explanations for the PHILLIPS CURVE. His numerous other works include articles on linkage (D2) CUSTOMS UNIONS, LOCATION THEORY and The forward or backward connection be- monetary theory. tween industries at different stages of pro- duction. The measurement of the increases References in employment and value added brought Lipsey, R.G. (1991) The Collected Essays about by the expansion of one part of an of Richard G. Lipsey, 3 vols, Aldershot: ECONOMY uses the linkage idea. Most Edward Elgar. aspects of an economy – prices, taxes, liquid assets (E5, G2) public expenditure, technology and infor- Cash plus short-term assets (loans and mation – are considered. Some enthu- bills of exchange soon to mature) which siasts, who have emphasized linkages as can be quickly converted into cash without the key to ECONOMIC GROWTH, have ignored a capital loss to the asset holder. the existence of resource constraints. Seealso:backwardlinkage;forwardlink- liquid assets ratio (E5) age A reserve assets ratio which takes into account both cash and monetary assets linkage models (C5) soon to mature and hence convertible into Large-scale econometric models that link cash with small risk of capital loss. At

© 2002 Donald Rutherford various times from 1971 the UK banks, a German railway system and Zollverein, for example, were asked to have different or CUSTOMS UNION. He committed suicide. liquidity ratios, the required percentage His most celebrated work was The Na- changing with the redefinition of liquid tional System of Political Economy, origin- assets. ally published in 1841. In it he is very critical of SMITH’s ‘cosmopolitan’, or FREE- liquidity (E4, G0) TRADE, economics for assuming that there The characteristic of assets immediately was the universal peace which free trade available for the discharge of financial requires and for ignoring the fact that obligations: the most liquid of assets is Great Britain had grown strong through CASH. For there to be pure liquidity, it is protectionism. List argued that free trade necessary that the asset market is perfect was to the benefit of merchants rather with the consequence that the sale of an than to the advantage of a nation as a asset does not affect its price. Also the whole, for the basis of national economic asset is riskless because its price is con- power is the encouragement of ‘productive stant. Securities are only liquid if there is powers’, especially manufacturing, an organized market for them. through protection. liquidity preference (E4) Seealso:mercantilism Reasons for holding money classified by KEYNES according to motive. He identified listedbank(G2)seeclearingbank; the TRANSACTIONS, PRECAUTIONARY and SPEC- commercialbank ULATIVE DEMAND FOR MONEY. listed company (L2) Seealso:IS–LMcurves A company whose securities are quoted in the list of a stock exchange’s traded stocks. liquidity trap (E4) This listing increases the marketability of a The minimum floor to the rate of interest. company. Keynes expounded the view that the SPEC- ULATIVE DEMAND FOR MONEY would introduce listed security (G1) this factor price rigidity because security A stock or share whose price is published prices would rise to a level that investors on the official list of a stock exchange. The consider a maximum and consequently INTERNATIONAL STOCK EXCHANGE insists that interest rates would reach a minimum. for a company’s securities to be listed it This ‘trap’ challenges the classical view must agree to publish regularly many that complete flexibility in factor prices types of financial information, in addition brings about a full-employment equili- to what is required under company legisla- brium. tion. liquid market (G1) list price (D4) A market where buying and selling are A price announced in a catalogue or other easy and low cost with the consequence list of a producer or retailer. This is not that prices tend to their underlying va- necessarily a TRANSACTION PRICE as many lues. list prices are subject to discounts and negotiation. List, Friedrich, 1789–1846 (B3) German economist and leading defender little dragons (P0) of PROTECTIONISM who was professor of South Korea, Taiwan, Hong Kong, Singa- economics at the University of Tubingen pore. from 1817 to 1819, a journalist in the Seealso:newlyindustrializedcountry USA from 1825 to 1832 and subsequently US Consul in Leipzig and then Baden. He living wage (J3) campaigned vigorously for the creation of A MINIMUM WAGE sufficient to cover

© 2002 Donald Rutherford expenditure on food, fuel, clothing and theory, the investment demand for funds relaxation. and the supply of loanable funds through savings would in equilibrium bring about a Lloyd’s (G2) unique rate of interest. London insurance market founded in the coffee house of Edward Lloyd in 1688. It loanshark (G2, K4) consists of underwriting members with A person lending money at exorbitant unlimited liability for the risks they have rates of interest usually to borrowers with underwritten and non-underwriting mem- no collateral and no access to conven- bers. Syndicates of underwriters are re- tional lenders such as banks. This form of sponsible for most of the risk. Originally, lending has long been a major activity of Lloyd’s was concerned with marine insur- organized crime. ance but it has diversified its interests to loan stock (G1) fire, accident, motor and aviation insur- A stock exchange security with a fixed rate ance. Lloyd’s Agents throughout the world of interest and, usually, prior entitlement and the Lloyd’s List provide crucial infor- to payment out of any available earnings. mation for the insurance industry. Although based in the UK, Lloyd’s has Seealso:debenture long done most of its business with US Local Enterprise Agency (R5) insurance companies. An agency in the UK financed by private References sector firms to help potential entrepre- Hodgson, G. (1984) Lloyd’s of London. A neurs to set up in business. This aid chiefly Reputation at Risk, London: Allen Lane takes the form of free specialist services. and Viking Press. local expectations theory (G1) Lloyd’s name (G2) The assertion that over a short-term in- An underwriting member of Lloyd’s insur- vestment horizon the yields of bonds of ance market who accepts unlimited liabi- different maturities will be the same. lity. The tax advantages associated with local government finance (H7) membership have always attracted wealthy The financing of the government of a investors. Mismanagement, alleged fraud region, city or district by local taxation, and billions of claims over asbestos and charges and grants from central govern- oil spillages in the 1980s caused the bank- ment. At the local level property taxes, ruptcy of many names. In 1993 Lloyd’s local sales taxes and local income taxes are rules were changed to allow corporate the principal forms of taxation used. In investors to join. The number of names order to maintain the same standards of fell from 34,000 at its peak to about 3,000 service throughout a country, a national in 2000. government often provides grants to cover LMcurve(E1)seeIS–LMcurves part of local costs, e.g. educational expen- ditures. Major problems arise if the local load fund (G2) revenue is too small to meet local needs, A MUTUAL FUND charging disproportio- e.g. if there is a large non-resident popula- nately large commissions on smaller in- tion, as in New York City or Glasgow, vestments. using facilities without paying full local Seealso:no-loadfund taxes. Also, if there is not a clear separa- tion of powers between the levels of loanable funds theory (E4) government, a local government might A popular theory of the determination of pursue macroeconomic policies, e.g. em- the rate of interest dominant in economics ployment policies, which are too expensive before Keynes’s General Theory. Under the for it to finance, as has happened in the

© 2002 Donald Rutherford UK. Although property taxes are often a Seealso:Tiebouthypothesis major source of local revenue and provide an additional tax base, they have been local union (J5) criticized for their regressive nature over US LABOR UNION which organizes workers in some ranges of incomes. one establishment, company or craft and hence is the smallest part of a US labor Seealso:communitycharge;federalfi- union. In 1982, the average local union nance;fiscalmobility;rates had only 200 members. Locals play a local labour market (J4) significant role in collective bargaining, A geographical market which brings to- especially the negotiation of labour con- gether buyers and sellers within a given tracts between labour and management, area, often defined as -to-work and are combined into federations known area in which employers and workers are as INTERNATIONAL UNIONS. A US labor union in close contact with each other. CLASSICAL member has direct contact with the local, ECONOMISTS, following SMITH’s celebrated and not the international, union. discussion of WAGE DIFFERENTIALS, believed Seealso:companyunion;enterpriseunion that the free movement of workers in response to wage differentials would bring location theory (R1, R3) about an equalization of the net advan- A study of the determinants of the geo- tages of employment. Labour economists graphical distribution of agriculture, in- believe that there are fewer market imper- dustry and other economic activities. An fections, especially of an informational early influential model was von Thu¨nen’s kind, in these local markets than in other which viewed the location of activities in labour markets. However, the conflict be- terms of concentric rings around a central tween INTERNAL and EXTERNAL LABOUR MAR- urban market with land uses and land KETS has made it more difficult to see local values being reduced the further they were markets of this kind functioning in a from the centre. Later theorists, including classical manner. Also, the concept applies Losch, sought to explain how industrial mostly to markets for less skilled workers. activity would be located at the point of Managerial and professional workers con- minimum transport cost and maximum sider themselves participants in the wider profitability, given the dispersion of raw national and international labour markets. material sources and consumers. As the Seealso:labourmarket;labourmobility theory of the firm was expanded to con- References sider aims other than PROFIT MAXIMIZATION, location theory took into account the Robinson, D. (ed.) (1970) Local Labour possibility that a location could be chosen Markets and Wage Structures, London: Gower. to satisfice rather than maximize the Smith, A. (1776) The Wealth of Nations, benefit to a firm and that sales rather than ed. R.H. Campbell and A.S. Skinner, profits were of dominant concern. Much Book 1, ch. 10, Oxford: Clarendon of location theory is now incorporated Press, 1976. into URBAN ECONOMICS and REGIONAL ECO- NOMICS as location theorists have increas- localmonopoly(L1)seespatial ingly studied urban settlements. monopoly References local public good (H4) Beckman, M. (1968) Location Theory, A public good locally provided for the New York: Random House. benefit of a local community and financed Hall, P. (ed.) (1966) Von Thunen’s Isolated largely out of local taxation; a spatially State (1826), Oxford and New York: limited public good. Pergamon.

© 2002 Donald Rutherford Isard, W. (1956) Location and the Space by a stagnation phase. The first cycle was Economy, Cambridge, MA: MIT Press. from 1100 to 1450, the second from 1450 Losch, A. (1954) The Economics of Loca- to 1750 and the third has not been tion, New Haven, CT: Yale University completed. Press. Seealso:Kondratieffcycle;longwave locked-in effect (E4, H2) 1 The effect of rising interest rates on the References holding of government bonds. Holders Cameron, R. (1973) ‘The logistics of of long-term government securities in European economic growth: a note on times of rising interest rates (and hence historical periodization’, Journal of Eur- falling bond prices) are reluctant to sell opean Economic History 2: 145–58. because of the consequent capital losses. logit model (C5) 2 The effect of capital gains taxes being An econometric model comparing the greater than inheritance taxes so that odds of the occurrence of an event or state shareholders can benefit from refraining of affairs with the non-occurrence of that from selling stocks that have appre- event or state. To obtain a linear model ciated in value and passing them un- the logarithm of the odds ratio is used – taxed to their heirs. hence the term logit. locked-in industry (L0) Seealso:probitmodel;Tobinmodel An industry which cannot easily move because some locations are more expensive logrolling (H0) than others. The political practice, extensively practised Seealso:footlooseindustry in the USA, of legislators trading votes. A vote is given for a particular proposal in locked-in knowledge (O3) return for voting for another proposal. Technical knowledge specific to a particu- Thus, projects with only minority support lar production process and not transfer- can be approved because their proposers able to other processes; also known as have given their votes on other issues. The ‘tacit’ knowledge. concept is essential to understanding how Seealso:footlooseknowledge US federal public expenditure is approved. locomotive effect (O4) Lombard rate (E4) The expansionary effect of the economic The rate of interest usually 1/2 per cent growth of a large country on smaller above the discount rate charged by the countries which experience an increase in BUNDESBANK when acting in its capacity as demand for their exports. LENDER OF LAST RESORT. Banks can borrow for up to three months against the collat- lockout (J5) eral of certain high-quality securities, Industrial action by an employer to pre- which include treasury bills and federal vent employees from working until they bonds. agree to the terms and conditions of employment proposed. Lome´ Convention (F0) An agreement, originally signed in 1975 Seealso:strike and subsequently extended in 1980 and logistic cycle (E3, N0) 1985, which is unique in north–south A cycle in economic activity of 150–300 relations. It was between the members of years’ duration which, when plotted as a the EUROPEAN COMMUNITY and forty-six de- graph of industrial production against veloping countries of Africa, the Carib- time, approximates to the statistical logis- bean and the Pacific. It has exempted tic curve of an expansion phase followed these less developed countries from all

© 2002 Donald Rutherford industrial and 96 per cent of agricultural In 1991, it merged with the LONDON INTER- tariffs of the European Community and is NATIONAL FINANCIAL FUTURES EXCHANGE. established through European Develop- ment Fund technical and financial assis- long (F3) tance. Although another seventeen less A foreign exchange surplus. A foreign developed countries have become benefici- exchange dealer is ‘in long’ when his or aries, Asian countries are still excluded. her bank has a surplus of a particular The granting of aid under this scheme is currency. now subject to human rights being re- Seealso:short spected in the recipient country. The amount of aid per capita provided is only Long Boom (N1, O4) a few US dollars per head. The period from the 1940s to 1960s (or 1990 some assert) which was characterized References by historically high economic growth Alting von Geusau, E.A.M. (ed.) (1977) rates, low unemployment and fairly stable The Lome´ Convention and a New Interna- prices. Cheap oil prices helped to sustain tional Economic Order, Leyden: Sijthoff. the boom. London Discount Market Association long fraud (G0, K4) (G1) A method of luring a supplier into advan- London’s nine DISCOUNT houses that con- cing TRADE CREDIT through a borrower stitute the UK’s short-term money market. acquiring a reputation for settling ac- counts. The fraudster reliably pays all London Inter-Bank Offered Rate (E4) debts when due and, after establishing The interest rate on dollar deposits lent such trustworthiness, incurs a large debt, between first-class banks in London. Its especially on a major order, and then principal use is as the base interest rate on disappears. which the prices of EURODOLLAR and other EUROCURRENCY loans are calculated. The longitudinal data (C8) INTERNATIONAL MONETARY FUND uses it as a Statistical information on changes to a benchmark for calculating the interest rate cohort through time, e.g. the career of on most of its lending. These loans specify persons. an agreed spread above a LIBOR three- or six-month rate, usually of ½–2 per cent. Seealso:timeseries There is no set procedure or set time for long period (D0) changing LIBOR. Other financial centres, 1 The period in which all adjustments including Paris, Singapore and Tokyo, have been made to a price change. have offered rates. 2 The period in which supply is very ELAS- TIC as a great expansion in the quanti- London International Financial Futures ties of factors of production is possible. Exchange (F1) A market founded in 1982 to deal in a Seealso:Marshallianlongperiod wide range of FUTURES in financial secu- rities, including gilts, US Treasury bonds long-term credit bank (G2) and Eurodollars; founded in 1982. It is A bank that makes long-term loans to smaller than the leading Chicago market, finance industry and arranges the issue of founded in 1972. New York, Canada and securities. Major examples of these banks Australia have similar markets. are three state-owned Japanese banks, the Industrial Bank of Japan, the Long-Term London Traded Options Market (F1) Credit Bank of Japan and Nippon Credit A market associated with the INTERNA- Bank. Exposure to domestic declining TIONAL STOCK EXCHANGE, founded in 1978. industries in which they have long invested

© 2002 Donald Rutherford and increasing competition from other Lorenz curve (C1, D6) banks have forced them to diversify into A graphical representation of INEQUALITY new markets, including the international first proposed in 1905 by US-born statisti- syndicated loan market. cian Max Otto Lorenz. On the vertical and horizontal axes are measured accumu- long-term income averaging (H2) lated percentage distributions, e.g. of firms A method of calculating income to pro- and their sales. This is used in the study of duce fairer progressive taxation of persons income distribution and of industrial CON- with fluctuating incomes. Without aver- CENTRATION. aging, a person with only occasional years of high income would be taxed much more heavily in those years than is fair when the years of low income are also taken into consideration. The principal method sug- gested is to tax cumulative average income in order to avoid long-term taxation un- duly reflecting the few years of high income. However, there are critics of this system as the stabilization effects of pro- gressive taxation are reduced. Australia has repeatedly attempted to deal with this problem. In the USA, the TAX REFORM ACT 1986 eliminated income averaging but re- duced tax burdens by cutting top marginal tax rates. References Musgrave, R.A. and Shoup, C.S. (eds) loss function (C1) Readings in the Economics of (1959) This shows the deviation of a data point Taxation, pp. 77–92, London: Macmil- lan. from a least squares fitted line through a scatter of points measured on the vertical long wave (E3) axis as a function of the deviation mea- A cycle in economic activity of about fifty sured on the horizontal axis. This has been years’ duration, usually referred to as the applied to DISUTILITY to indicate what has KONDRATIEFF CYCLE. This cycle in time series to be minimized. data was noted as early as 1847 by Hyde Seealso:leastsquaresmethod Clarke. A variety of explanations have been suggested for these waves, including loss leader (M3) a cluster of major INNOVATIONS, wars, major A good or service sold at less than the cost changes in transportation systems and of producing it as an inducement to major changes in primary product mar- consumers to use a particular retail outlet. kets. Supermarkets have made much use of this Seealso:logisticcycle marketing device. References Lotharingianaxis(R1)seeRhinelands Reijnders, J. (1990) Long Waves in Eco- hourglass nomic Development, Aldershot: Edward Elgar. lottery (C7) van Duijn, J.J. (1983) The Long Wave in A game of chance to obtain prizes funded Economic Life, London: Allen & Un- by the sale of tickets; a set of pay-offs each win. with its own probability. In Italian ‘lotto’

© 2002 Donald Rutherford means destiny or fate. Lotteries are as three-quarters of the numbers are greater ancient as Moses’ in the Book of Num- in value; the seventy-fifth percentile. This bers, chapter 26, and Julius Caesar’s to value is a benchmark to measure LOW PAY. fund repairs to Rome. Several major US Seealso:median;upperquartile universities and the British Library used lotteries to raise initial funding. Today low pay (J3) many US states have their own lotteries. The pay of workers in the bottom part of A national lottery was reintroduced in the the earnings structure. Various measures UK in 1994. Within three years 70 per of low pay include being paid less than the cent of the population were regularly lower quartile of earnings (bottom 25 per playing the game and 13 per cent of the cent), less than the level of social security gaming market had been secured by the benefit or less than is paid to comparable lottery. A private consortium, Camelot, workers. Increasingly low pay is regarded has run the lottery for a fee of 1 per cent as relative deprivation rather than being of the sales revenue. It has distributed 50 below the subsistence level – even SMITH per cent of the take in prize money and 28 and RICARDO recognized that the notion of per cent has been devoted to ‘good causes’ subsistence varies with time and place, not otherwise funded by the government, being not only sufficient for food, housing especially sport and the arts. Lottery fever and clothing but enough to participate has always provoked concern as the gulli- fully in a particular society. The low-pay ble poor can ruin themselves through problem is narrower than the poverty buying tickets. The odds of winning the problem as it concerns only employed jackpot in the UK lottery, 14 million to 1, persons who either regard it as a problem illustrate the view of Adam Smith: ‘the because they are paid less than their chance of gain is naturally overvalued, we marginal products, or regard it as unjust may learn from the universal success of to receive little for working normal hours. lotteries’ (Wealth of Nations, Book I, ch. Suggestions for removing this labour mar- X, Part I). ket problem include MINIMUM WAGE legisla- Louvre Accord (F3) tion, a narrowing of WAGE DIFFERENTIALS An agreement of February 1987 between and INCOMES POLICIES biased towards the the leading industrialized nations of the low paid. OECD to stabilize exchange rates between major currencies by maintaining the value loyalty bonus (G0) of the US dollar in a period with a large The extra shares awarded to the original US balance of payments deficit. The USA shareholders of a company for retaining promised to use fiscal measures to reduce their investment for a stipulated period. demand for imports and Japan and West Bonuses of this kind have been a feature of Germany promised to employ monetary UK PRIVATIZATION issues. and fiscal means to expand their econo- (B3) mies, with the hope the demand for US Loyd, Samuel Jones, 1796–1883 English banker and leading monetary exports would increase. In order to keep theorist of the CURRENCY SCHOOL. Educated the dollar’s value high, higher US interest at Cambridge University; Baron Over- rates and a fall in stock market values stone from 1850. As a Member of Parlia- were inevitable. The accord provided a ment and subsequently adviser to the BANK useful forum for the discussion of the OF ENGLAND, he opposed many of the economic policies of leading economies banking innovations of his day, including and their international implications. joint stock banking. His recommendations lower quartile (C1) formed the basis for the BANK CHARTER ACT A value in a set of numbers such that 1844.

© 2002 Donald Rutherford References 2 A person who takes INDUSTRIAL ACTION in McCulloch, J.R. (ed.) (1858) Tracts and an attempt to prevent the implementa- Other Publications on Metallic and Pa- tion of technical change. per Currency, London: Longman. O’Brien, D.P. (ed.) (1971) The Correspon- lump of labour fallacy (J2) dence of Lord Overstone, 3 vols, Cam- The view that in at least the short run bridge: Cambridge University Press. there is a fixed demand for labour. Em- ployment can only be increased by job L share (G1) sharing and by reducing the hours worked A share of a Chinese company listed on by the existing labour force. This opinion the London Stock Exchange. suggests that macroeconomic policy is Lucas, Robert E., Jr, 1937– (B3) limited in its ability to stimulate an econ- US economist, originally trained as a omy. historian at Chicago University, where he has been John Dewey Distinguished Ser- lump-sum tax (H2) vice Professor of Economics since 1980. A tax of the same amount whatever the As a vigorous advocate of the theory of activity or circumstances of the taxpayer, e.g. a POLL TAX. A lump-sum tax on a firm RATIONAL EXPECTATIONS, he has become a increases its fixed costs but leaves MAR- leader of the NEW CLASSICAL ECONOMICS School. GINAL COST the same, and thus the output and price of a profit-maximizing firm are References unaffected in the short run. In the long Lucas, R.E. (1981) Studies in Business- run, however, when all costs are variable, a Cycle Theory, Oxford: Basil Blackwell. high lump-sum tax would shut down some Lucas, R.E. and Sargent, T.E. (1981) firms. Rational Expectations and Econometric Practice, London: Allen & Unwin. Lundberg, Erik Filip, 1907–89 (B3) Leading Swedish specialist on the theory Lucas supply function (E1) and policy of the TRADE CYCLE. He was This states that output is the function of educated at Stockholm University and growth in technical progress, population, subsequently was professor of economics output in the previous period and errors in there from 1946 to 1965. From 1937 to expectations of the price level: 1955 he was Director of the Economic Research Institute. His exposition of trade yt ¼ kt þ gðpt p ÞþlYt1 t cycle analysis has been applied to Swedish stabilization policy. in which y is real output, pt is the price level, pt* is the expected price level, g and References l are parameters and kt is the growth Lundberg, E. (1937) Studies in the Theory term. This function introduced a different of Economic Expansion, London: P.S. notion of expectations from ADAPTIVE EX- King. PECTATIONS. Lundberg lag (E2) Luddite (J5, N3) The slow adjustment of production to 1 A member of a gang of English craft changes in income causing investment or workers led by Ned Ludd in the period disinvestment in stocks as sales respond 1811–13 who showed opposition to the more rapidly than output. When incomes introduction of textile machines in Not- are rising, sales are more than output and tingham, England, and surrounding so stocks are run down, causing unin- places and the consequent loss of em- tended disinvestment; when incomes are ployment by smashing the machines at falling, there is an unintended investment night. in stocks.

© 2002 Donald Rutherford Luxemburg effect (F2) her greatest work, The Accumulation of The causal relationship between the flow Capital (1913), she developed the Marxian of money capital and the flow of capital idea of capital accumulation, predicting goods from a metropolis to colonies or that, as further capital accumulation is other satellites. Rosa LUXEMBURG asserted impossible in a closed economy, imperial- that this could assume different forms ist expansion into foreign markets and less including loans between states, PORTFOLIO developed countries would occur so that INVESTMENT in foreign-owned enterprises capitalists would be able to obtain further and direct investment in overseas subsidi- SURPLUS VALUE. Like her other economic aries. The metropolis benefits from this in writings, it was notable for its powerful that the money flows generate a demand historical illustrations. She was assassi- for its capital goods and the repayment of nated by a soldier outside a hotel in Berlin loans by satellites forces them into eco- and her body was thrown into the River nomic dependence. Spree, later to be recovered and buried. Luxemburg, Rosa, 1870–1919 (B3) References Prominent socialist writer who was born Luxemburg, R. (1951) The Accumulation in Zamose, Poland, the daughter of a of Capital, London: Routledge & Kegan Jewish businessman. Educated at the Rus- Paul. sian Second Gymnasium for Girls, War- Nettl, J.P. (1966) Rosa Luxemburg, Lon- saw, and Zurich University where she don: Oxford University Press. graduated with a doctorate in law and luxury (D0) political science in 1897 (her thesis on The A superior good or service affordable and Industrial Development of Poland was an increasingly demanded at higher income original work of economic history arguing levels. The poor cannot buy luxuries; the against the formation of a nation state of rich, having been able to satisfy basic all Polish nationals). She spent much of needs, have a choice between purchasing her life as a political journalist in Ger- luxuries or saving. The concept of INCOME many and as organizer of the Social ELASTICITY OF DEMAND is used to identify Democratic Parties of Germany and Po- luxuries: if that elasticity is greater than land. As early as 1904, despite following one, then the good or service is a luxury. many of MARX’s ideas, she criticized LENIN Luxuries are often purchased to show the for his autocratic centralist views. Many high-ranking status of a person. aspects of the Bolshevik Revolution of 1917 in Russia upset her, including the Seealso:Giffenparadox;incomeand methods used and the signing of the substitutioneffects;inferiorgood;Veblen Treaty of Brest-Litovsk with Germany. In good

© 2002 Donald Rutherford M

M0 (E4) 1982 in the USA to provide a good The narrowest definition of the money transactions measure of money. In the supply consisting only of notes and coin USA, it consists of M1 plus overnight in circulation plus bankers’ deposits with and continuing contract repurchase agree- the Banking Department of the BANK OF ments and overnight Eurodollars issued to ENGLAND. This measure was introduced US residents plus MONEY MARKET DEPOSIT into the UK in October 1983 and given ACCOUNTS plus savings and time deposits increasing prominence in Treasury state- of less than $100,000 plus balances in ments from October 1985. So many pay- general purpose and broker–dealer MONEY ments are made by the transfer of bank MARKET MUTUAL FUNDS. In the UK, it con- deposits that M0 is only a partial picture sists of M1 plus private sector interest- of economic activity in a modern econ- bearing sterling bank deposits plus private omy. Also changes in the method of wage sector holdings of retail building society payment from cash to cheque change the shares and deposits and national savings extent to which M0 is representative. bank ordinary deposits. However, it has recently been regarded as M3 (E4) a useful guide to the size of the BLACK In the USA this is defined as M2 plus ECONOMY that is dominated by cash trans- large denomination time deposits and actions. Changes in M0 can lead or lag term repurchase liabilities plus term Euro- NOMINAL GROSS DOMESTIC PRODUCT. dollars held by US residents at foreign M1 (E4) branches of US banks and the banks of Non-interest-bearing components of the the UK and Canada plus institution-only wide monetary base plus private sector MONEY MARKET MUTUAL FUNDS. non-interest-bearing sterling sight bank M3c (E4) deposits (UK). Currency outside the STERLING M3 plus private sector holdings Treasury, Federal Reserve Banks and of foreign currency bank deposits (‘c’ vaults of depository institutions plus tra- refers to the currency assets included). vellers’ checks of non-bank issuers plus demand deposits of all commercial banks M4 (E4) plus OTHER CHECKABLE DEPOSITS (USA). Sterling M3 plus private sector holdings of BUILDING SOCIETY shares and deposits and M2 (E4) sterling certificates of deposit minus build- A measure of the money supply created in ing society holdings of bank deposits

© 2002 Donald Rutherford and bank certificates of deposit, and notes Ricardo, D. (1817) Principles of Political and coin. Economy and Taxation, ch. 31, ed. by R.M. Hartwell, Harmondsworth: Pen- M5 (E4) guin, 1971. M4 plus holdings by the private sector, other than building societies, of money Machlup, Fritz, 1928–83 (B3) market instruments (bank bills, treasury An Austro-American economist born near bills, local authority deposits), certificates Vienna and educated at the University of of tax deposit and national savings instru- Vienna, where he was taught by Ludwig ments (excluding savings certificates, von MISES, the supervisor of his doctoral SAYE and other long-term deposits). thesis on the GOLD STANDARD. In 1933 he emigrated to the USA and held chairs at Maastricht Treaty (F0) the Universities of Buffalo (1933–47), A treaty of the EUROPEAN UNION amending Johns Hopkins (1947–60), Princeton the TREATY OF ROME signed in December (1960–71) and New York for the remainder 1991 which established the Economic and of his life. He was a leading authority on Monetary Union, a common defence and international monetary co-operation, as is foreign policy and the Economic and evident in his seventeen books and almost a Social Cohesion Fund. hundred articles (e.g. Remaking the Inter- macaroni defence (G3) national Monetary System (1968) on that A tactic employed by a company resisting subject). His other interests in economics a takeover bid. It issues many bonds included the THEORY OF THE FIRM, THE PATENT subject to the condition that they be SYSTEM and ECONOMIC METHODOLOGY. redeemed at a high price after a takeover. References Seealso:poisonpill Dreyer, J.S. (1978) Breadth and Depth in Economics: Fritz Machlup: The Man machinery question (O3) and His Ideas, Lexington, MA: Lexing- The effect on unemployment of the intro- ton Books. duction of machinery. CLASSICAL ECONO- MISTS, especially RICARDO, took the view Macmillan Gap (G2) that an increase in FIXED CAPITAL would An institutional gap in the range of finan- reduce the size of the WAGES FUND and be cial institutions observed by the Macmillan injurious to workers, whereas John Stuart Committee on Finance and Industry (UK) MILL presented a more subtle analysis of of 1931. Small and medium-sized firms the variety of effects of increasing CAPITAL– found it difficult to raise finance as they LABOUR RATIOS. This issue of technological were too small to issue shares but reluctant unemployment is still pertinent to many to use expensive bank advances. It was discussions in DEVELOPMENT ECONOMICS. thought that the performance of many companies, especially in export markets, References was adversely affected by their shortage of Berg, M. (1980) The Machinery Question capital. Since 1931, many new financial and the Making of Political Economy institutions, including the INDUSTRIAL AND 1815–48, Cambridge: Cambridge Uni- COMMERCIAL FINANCE CORPORATION, have been versity Press. Mill, J.S. (1848) Principles of Political set up to deal with this problem. Also, the Economy: With Some of their Applica- availability of VENTURE CAPITAL and the tions to Social Philosophy, Book I, ch. 6, growth of the UNLISTED SECURITIES MARKET ed. by J. M. Robson, Toronto: Univer- have provided more finance for such firms. sity of Toronto Press, 1965, Vol. 1. Nicholson, J.S. (1892) The Effects of Ma- macroeconomic demand schedule (E0) chinery on Wages, rev. edn, London: The schedule showing different combina- Sonnenschien. tions of the price level and real income to

© 2002 Donald Rutherford equate planned spending with actual out- Since macroeconomics is used to analyse put, assuming that interest rates maintain governments’ economic policies, it is in- the money market in equilibrium. evitably surrounded by controversy. References Blanchard, O.I. and Fischer, S. (1989) Lectures on Macroeconomics, Cam- bridge, MA, and London: MIT Press. Phelps, E.S. (1990) Seven Schools of Macroeconomic Thought, Oxford: Clar- endon Press.

magic quadrilateral (E0) Joan ROBINSON’s description of an ECONOMY simultaneous with FULL EMPLOYMENT, fast ECONOMIC GROWTH, stable prices and a balance of payments equilibrium.

Mahalanobis model (O2) The basis of the second Indian five-year plan of the 1950s which propounded the view that a shift to investing in machines macroeconomic policy (E6) to make capital goods, i.e. heavy industry, Measures used by governments to influ- instead of investment in light industry ence major economic aggregates, especially would eventually produce a higher level GROSS NATIONAL PRODUCT, UNEMPLOYMENT, IN- and faster growth rate of consumption. In FLATION and the MONEY SUPPLY. Macro- some senses this was a repetition of the policies have been possible since 1945 philosophy of the early Soviet five-year through the availability of NATIONAL INCOME plans. The model has been criticized for accounting, other increases in economic neglecting supply constraints, other than a data collection and the theoretical frame- shortage of capital, and for ignoring the work provided by KEYNES, his successors fact that many industries supply both and rivals. Increasingly it has been difficult intermediate and final goods. The model to separate macro-policies from micro- is named after Prasanta Mahalanobis policies, particularly in the labour market. (1893–1972) who was a world-renowned authority on statistical sampling and a Seealso:EmploymentAct1946;fullem- member of the Indian Planning Commis- ployment sion from 1955 to 1967. macroeconomics (E0) Main Street (G1) The study of the relationship between A collective expression for investment economic aggregates, particularly national analysts and brokers. income, total consumption, investment and the money supply. Although ROBERT- Malinvaud, Edmond, 1923– (B3) SON in his A Study of the Trade Cycle in Leading Western econometrician and eco- 1915 was perhaps the first economist to nomic theorist who has been a major emphasize the importance of considering influence on the construction of economic output in aggregate terms, the Keynesian models. He was born in Limoges, France, revolution made this new approach a and educated in law at the Ecole Poly- concern of economics; the associated ad- technique, Paris, before turning to statis- vent of NATIONAL INCOME accounting pro- tics. He was Professor-Director at the vided data to measure the relationships. Ecole National de la Statistique et de

© 2002 Donald Rutherford l’Administration Economique from 1957 analysis of population statistics and an- to 66 and Director General of INSEE. His other check (‘moral restraint’). Despite researches have included the normative contemporary criticism, it became a pillar theory of optimal resource allocation and of the Ricardian system. Later, socialists the proper rules for the definitions funda- and other critics attacked such pessimistic mental to economic statistics and national predictions for ignoring the beneficial accounts. effects of technical progress. Nevertheless Malthus’s Essay was an inspiration to References Charles Darwin when he was formulating Malinvaud, E. (1972) Lectures on Micro- his theory of evolution. Malthus’s Princi- economic Theory, trans. A. Silvey, Am- ples of Political Economy (1820) provided sterdam: North-Holland. —— (1980) Statistical Methods of Econo- a fuller analysis of value and price theory metrics, 3rd edn, Amsterdam: North- than RICARDO and discussed the problem of Holland. a deficiency in ‘EFFECTUAL DEMAND’ (a gen- —— (1980) Profitability and Unemploy- eral glut), causing KEYNES to rank Malthus ment, Cambridge: Cambridge Univer- as one of his major predecessors as a sity Press. macroeconomic theorist. —— (1985) The Theory of Unemployment Reconsidered, 2nd edn, Oxford: Basil References Blackwell. Cunningham Wood, J. (1986) : Critical Assessments, malleable capital (E0, O4) London: Croom Helm. Physical capital capable of being instantly James, P. (1979) Population Malthus: His and costlessly changed into another form. Life and Times, London: Routledge & A term much used in neoclassical growth Kegan Paul. theory to dispense with the problem of Wrigley, E.A. and Souden, D. (eds) (1986) The Works of Thomas Robert Malthus expectations. ,8 vols, London: Pickering & Chatto. Malthus, Thomas Robert, 1766–1834 managed currency fund (F3, G2) (B3) An investment fund with its assets in A leading classical economist who played several currencies which creates profits for a major part in founding modern DEMO- investors by buying and selling foreign GRAPHY. After Cambridge, where he was a currencies in anticipation of fluctuations student and fellow of Jesus College (1784– in their value and from earnings arising 1805), for the rest of his career he was from deposit holdings and interest on professor of modern history and political short-term bonds. economy at Haileybury College, Hertford- shire, training clerks for the East India managed floating system (F3) Company. The post BRETTON WOODS exchange rate The optimism of William Godwin’s regime in which the extent to which Enquiry Concerning Political Justice exchange rates could freely move to estab- (1793) prompted him to write An Essay lish their market values was limited by the on the Principle of Population (1798) which intervention of CENTRAL BANKS. asserted that population grows in a GEOME- Seealso:dirtyfloat TRICAL PROGRESSION but that the means of subsistence increases in only an ARITHMETIC managed trade (F1) PROGRESSION. Unless population growth is The abandonment of a free market and subject to a preventive check (e.g. abor- FREE TRADE for government intervention. tion) or a positive check (war, famine, This form of protectionism is often under- pestilence) there will be misery and vice. taken to help particular industries. In the In subsequent editions he included more USA in the 1980s there was managed

© 2002 Donald Rutherford trade for the automobile, steel and semi- managers has been responsible for a conductor industries especially to cope change of aims. However, some Marxists with Japanese imports. argue that the aims of firms essentially remain the same as shareholders and mana- Seealso:infantindustryargument gers have similar socioeconomic back- management accounting (M4) grounds. The financial appraisal of the past, present References and future activities of a firm. It includes Marris, R. (1964) The Economic Theory of CASH BUDGETING (a prediction of future cash Managerial Capitalism, London: Mac- inflows and outflows which indicates what millan. further finance is required), CAPITAL BUD- GETING (appraisal of investment plans) managerial revolution (M1) and TRANSFER PRICING. Management ac- James Burnham’s theory that after 1914 countants are also concerned to monitor there was a transition from a capitalist to the design of present accounting systems a managerial society with the class of to prevent fraud and to meet the growing managers dominant, operating most effec- needs of management for information. It tively where the state owns the means of developed from cost accounting in re- production. Because managers became the sponse to the increasing complexity of ruling class, they exploited workers just as large firms. individual capitalists had done before, ensuring that there would be an unequal Seealso:accounting;financialaccounting distribution of income. As managers with- management buyout (G3) out capital will not be guided by a profit A management’s purchase of a company motive, the economy they run will be less from its shareholders. Buyouts have be- subject to cyclical fluctuations and crises come increasingly popular in the UK and and can be successfully planned; this the USA since the 1960s as many man- planning will take a long-term view to agers fear the dismemberment of their encourage invention and innovation. company by a receiver. Often managers Much of Burnham’s argument is couched finance the acquisition by fixed interest in Marxist terms as in his career as borrowing using the collateral of the professor of philosophy at New York company’s assets in a leveraged buyout. University (1932–54) his dominant con- cern was a socialist critique of contempor- Seealso:assetstripping ary society. GALBRAITH and others have viewed this revolution more loosely as a management by objectives (M1) recognition of the transfer of power in The setting of specific targets for subordi- corporations from shareholders to hired nate managers relating to each of their managers. tasks so that the individual efficiency of each unit of an organization can be References monitored regularly. Burnham, J. (1945) The Managerial Revo- lution, Harmondsworth: Penguin. managerial models of the firm (L2) Explanations of the behaviour of a FIRM managerial utility function maximiza- according to its dominant aims. The var- tion (L2) ious aims assumed include sales maximi- Maximization of the satisfaction of the zation, PROFIT MAXIMIZATION, MANAGERIAL managers of a FIRM. The utility of man- UTILITY FUNCTION MAXIMIZATION and maximi- agers will be increased if their status zation, of the rate of growth of the firm. It improves by an enlargement of staff ex- has been argued that the passing of the penditures, as this shows ability to man- control of firms from shareholders to age, or if managerial salaries and profits

© 2002 Donald Rutherford are higher than an acceptable minimum supply of labour. These forecasts can be level. made for a nation, a region or a firm. They consist of deriving a demand for References labour forecast from an output forecast Williamson, O.E. (1964) The Economics of using fixed labour–output coefficients Discretionary Behavior: Managerial Ob- (sometimes revised by informed manage- jectives in a Theory of the Firm, Engle- wood Cliffs, NJ: Prentice Hall. ment opinion) and a supply of labour forecast based on population projections, Manchester School (B1) LABOUR FORCE PARTICIPATION RATES and esti- Benjamin Disraeli’s term in 1848 for the mations of labour migration. nineteenth-century Lancashire cotton manufacturers and politicians who strenu- manpower policy (J2) ously advocated FREE TRADE, buying in the Various measures to train the LABOUR cheapest and selling in the dearest market. FORCE, increase LABOUR FORCE PARTICIPATION The original centre of the school was the RATES, improve the allocation of the exist- Anti-Corn Law League (founded in 1838 ing labour force and bring about a close by Richard Cobden and John Bright) but match between labour demand and supply it expanded its LAISSEZ-FAIRE principles over in the future. The first step in the opera- other policy issues. It was more of an tion of this policy is to prepare a man- action group than a school of economics; power forecast, often by applying fixed contemporary German PROTECTIONISTS con- labour–output coefficients to output fore- temptuously called it ‘Manchestertum’. casts. From these forecasts it is possible to see which instruments of manpower policy Seealso:CornLaws should be chosen, e.g. training measures to References eliminate an expected shortage of skilled Grampp, W.D. (1960) The Manchester workers. Although many countries had School, Stanford, CA: Stanford Univer- active manpower policies during the Sec- sity Press. ond World War as the demands of the armed forces for personnel created labour Mandeville, Bernard, 1670–1733 (B3) shortages elsewhere in most economies, it Dutch doctor of medicine and essayist was not until the 1950s and 1960s that the who, after acquiring a doctorate in medi- UK and the USA pursued active policies. cine at the University of Leiden in 1691, settled in London. In a series of poems Seealso:labourmarketpolicy and essays compiled as The Fable of the maple leaf (E5) Bees (1714, 1724) he demonstrated that Canadian gold coin weighing one troy private vices such as vanity, fraud and ounce (31.1 g). theft promote the public good by provid- ing much employment. In a sense he Maquiladora (F1) anticipated the INVISIBLE HAND principle of A trade programme established in 1965 SMITH and the LAISSEZ-FAIRE views of some and expanded in 1989 to allow duty-free classical economists. imports into Mexico for transformation References into Mexican exports. Hayek, F. A. (1966) ‘Mandeville’, Proceed- Marcet, Jane, 1769–1858 (B3) ings of the British Academy 52: 125–41. Wife of a distinguished physician and Mandeville, B. (1970) The Fable of the daughter of a Swiss merchant; very fa- Bees, ed. P. Harth, Harmondsworth: mous in her day as a writer on economics. Penguin. Her Conversations on Political Economy, in manpower forecasting (J2) which the Elements of that Science are Estimating the future demand for and Familiarly Explained (1816), published ten

© 2002 Donald Rutherford years after her successful Conversations on putational experience in applying this Chemistry, anticipated some of RICARDO’s principle has increasingly dealt with the ideas and was praised by both him and problems of fixed costs, complex produc- SAY. Her stern summary of CLASSICAL ECO- tion and distribution systems and changes NOMICS takes the form of conversations in demand and technology. Critics of this between Mrs B and Caroline on twenty- type of pricing remain concerned about its one topics, including property, division of MONOPOLY and INCOME DISTRIBUTION effects. labour, capital, wages, population, the condition of the poor, revenue from fac- tors of production, value, money, foreign trade and expenditure. Caroline is encour- aged to study economics as ‘you will seldom hear a conversation amongst liberal-minded people without some reference to it’. Seealso:femaleeconomists marginal cost (D0) The cost of producing another unit of output. Whether marginal cost falls, rises or is constant depends on whether there are increasing, decreasing or constant RE- TURNS TO SCALE. Seealso:averageincrementalcost marginal cost of abatement (Q0) The cost of removing the last unit of a References nuisance, e.g. a noise or some form of Rees, R. (1984) Public Enterprise Econom- physical pollution. This measure can be ics, ch. 5, London: Weidenfeld & Nicol- used to see whether it is worthwhile to son. reduce the external costs of an activity, e.g. to calculate the expense of reducing a marginal efficiency of capital (E2) noise by a decibel at a time until an The rate of discount which will make the acceptable level has been reached. present value of a stream of annual in- comes from an investment in fixed capital marginal cost pricing (D4) Setting a price so that it is equal to the marginal cost of producing that good or service. It is justified on the grounds of maximizing social efficiency. In practice, there are difficulties in following this rule. Deficits can arise for a firm with declin- ing average total costs, and consequently falling marginal costs, as prices, if set equal to marginal costs, would fail to cover fixed costs. However, these can be covered sepa- rately – by government subsidy or by a TWO- PART TARIFF, part of which would be the ‘price of entry’ to the market, e.g. a telephone rental can cover fixed costs and the charge for calls marginal costs. Com-

© 2002 Donald Rutherford equal to the current supply price of that VA LU E popular with many of the CLASSICAL asset. The concept can be expressed in a ECONOMISTS. Although many have viewed diagram: net investment I will expand their work as a revolution in economics, until it reaches I1, where the marginal they had many predecessors who share efficiency of capital MEC is equal to the their glory, particularly COURNOT, THU¨ NEN, rate of interest i. DUPUIT and GOSSEN. References Seealso:continuitythesis Keynes, J.M. (1936) The General Theory of References Employment, Interest and Money, Book IV, ch. 2, London: Macmillan; New Black, R.D., Coats, A.W. and Goodwin, York: St Martin’s Press. C.D.W. (1973) The Marginal Revolution in Economics, Durham, NC: Duke Uni- marginal efficiency of investment (E2) versity Press. The INTERNAL RATE OF RETURN on capital, marginal physical product (D2) net of the rate of interest. The extra physical amount of output from marginal employment subsidy (H2, J3) employing another unit of a factor of A government subsidy given to firms for production, e.g. labour or capital. the creation of every additional job above Seealso:marginalrevenueproduct;re- a stated reference level of employment. turnstoscale This scheme can be more effective than a general employment subsidy as it targets marginal private cost (D0) pockets of severe unemployment. The cost to a household or firm of producing an extra unit of output. marginal firm (L2) An established firm of an industry only Seealso:marginalsocialcost earning NORMAL PROFITS. It would leave that marginal private damage (Q0) industry if its net earnings were less. This The cost to a firm of producing another concept is crucial to PERFECT COMPETITION. unit of a good or service generating marginalism (B4) externalities, e.g. a chemical works will An economic method, central to NEOCLAS- have to bear the costs of corroded pipes. SICAL ECONOMICS, much used since 1870 in Seealso:marginalsocialdamage economics. In most cases, it compares an incremental change in one variable with a marginal productivity theory (D2, D3, similar change in another, e.g. an addition J3) to total costs compared with an addition A theory of the demand for a FACTOR OF to total revenue. It assumes automatic PRODUCTION by a profit-maximizing firm. It movement to EQUILIBRIUM and ignores in- is asserted that labour or capital will be stitutional impediments. demanded until the MARGINAL REVENUE from employing it is equal to its MARGINAL marginalists (B1) COST. The theory, first expounded by John A group of economists of the 1870s who Bates CLARK, has been used to explain powerfully used differential calculus to wage determination but, as it says nothing examine the effects of small changes in about supply, is only useful in explaining economic quantities and were amongst the wages in the short run when labour supply founders of the school of NEOCLASSICAL is completely INELASTIC. ECONOMY. Simultaneously, JEVONS in Man- chester, MENGER in Vienna and WALRAS in marginal product of labour (D0, J2) Lausanne emphasized the notion of MAR- The extra output from one more unit of GINAL UTILITY as central to value theory, labour input. It is difficult to measure for thereby abandoning the LABOUR THEORY OF large sectors and so, as a proxy, what is

© 2002 Donald Rutherford measured is the extra product resulting, on marginal rate of transformation (D2) average, from an extra labour input. The reduction in the amount of output of good X as a consequence of an additional See also: average incremental cost unit of a related good Y being produced; marginal propensity to consume (E2) the slope of the PRODUCTION POSSIBILITY The change in consumption resulting from FRONTIER. This marginal rate is equal to increasing income by one unit. For exam- the marginal cost of Y divided by the ple, if all the additional income is con- marginal cost of X. sumed, the marginal propensity to consume (MPC) is 1; if only one-half, the marginal revenue (D0) MPC is 0.5. This measure is essential in The increase in total revenue resulting CONSUMPTION FUNCTION and MULTIPLIER ana- from output increasing by one unit. Under lysis. Consumer research shows that MPCs PERFECT COMPETITION, a firm’s marginal are usually lower for higher income groups. revenue will equal the price of its product as its demand curve is horizontal. For a marginal propensity to import (F1) firm to maximize its profits, it must The change in the value of imports choose the output level where its marginal brought about by income increasing by revenue is equal to marginal cost. one unit. If all extra income is spent on imports, the marginal propensity to im- marginal revenue product (D0) port (MPM) is 1; if only 10 per cent is A MARGINAL physical PRODUCT (MPP) mul- spent on imports, the MPM is 0.1. Calcu- tiplied by the MARGINAL REVENUE obtained lation of the MPM is essential to a from that unit. Under PERFECT COMPETITION, measurement of the FOREIGN TRADE MULTI- as price is equal to MARGINAL REVENUE, the PLIER. marginal revenue product (MRP) is equal marginal propensity to save (E2) to the product of the marginal physical The change in saving resulting from in- product and the price. The MRP shows come increasing by one unit. In a simple the addition to the TOTAL REVENUE of a firm economy described by the equation na- of producing another unit. tional income = consumption + saving, marginal social cost (D0, Q0) the MARGINAL PROPENSITY TO CONSUME plus the marginal propensity to save is equal to The extra cost to society of one unit of unity. An economy with a high marginal output. propensity to save will have little scope for Seealso:externality;marginalprivate MULTIPLIER expansion of its national in- cost come as saving is a withdrawal from the CIRCULAR FLOW of income. marginal social damage (Q0) The total cost, private and non-private, to marginal rate of substitution (D1) society of producing another unit of a The amount of one good which a con- good or service injurious to people and sumer receives as compensation for giving the environment, e.g. a chemical works up one unit of another good. It is equal to with pollutant by-products will increase the ratio of the MARGINAL UTILITIES of two the private costs of its owner and also goods and is represented by the slope of any member of society coming into con- an INDIFFERENCE CURVE. tact with the pollution. There is no in- References centive to abate pollution if the marginal Hicks, J.R. (1939) Value and Capital, ch. 1, cost of abatement is greater than the Oxford: Oxford University Press. marginal social damage.

© 2002 Donald Rutherford Seealso:marginalcostofabatement; margins (J3) marginalprivatedamage Additions to the Australian BASIC WAGE to reward different skills and create OCCUPA- marginal tax rate (H2) TIONAL WAGE DIFFERENTIALS. The amount of tax paid on an extra unit of money income. In the study of labour margin trading (G1) supply, marginal tax rates are often calcu- Purchases of securities only requiring pay- lated to see whether high marginal rates ment for a portion of the transaction, with have an incentive or disincentive effect on interest being charged on the debit bal- labour supply. An incentive effect occurs if ance. If the margin were 20 per cent only a taxpayer has a target post-tax income $20,000 of a purchase costing $100,000 achievable only by working more after a would be requested by a broker. In the rise in the marginal rate of tax; a disin- USA , the practice has long been com- centive effect occurs if a higher marginal mon, contributing to the financial panic of tax rate makes the taxpayer opt for leisure 1929 as then small investors with few instead of work. resources used loans to purchase stock; Seealso:averagetaxrate when the loans were recalled, the demand for and prices of stocks collapsed. marginal utility (D0) See also The amount of satisfaction obtained from : margin requirements consumption of the last unit of a good or market (D4) service. Although there were hints of such A medium for exchanges between buyers an analytical tool in economics before and sellers. Some markets are physically 1870, particularly in BENTHAM’s writings, it located in one place; others connect buyers was the MARGINALISTS who were first to and sellers by telephone, fax and e-mail, make extensive use of the concept, em- especially in the case of financial markets. ploying differential calculus. The LAW OF Markets for goods and services are termed DIMINISHING MARGINAL UTILITY was enun- ‘product’ markets; for labour and capital, ciated simultaneously. ‘factor markets’. There is a linkage between Seealso:cardinalutility;util;utility factor and product markets in that the demand for a factor is derived from the margin call (G1) demand for its product. Dealers in a A broker’s demand for additional cash. market seek to create an EQUILIBRIUM be- This request insures a broker against a tween demand and supply at a particular price fall as an investor deposits an amount price. However, the existence of many ofcashwithhisorherbrokerproportion- market imperfections, e.g. MONOPOLY and ate to the value of share purchases. ASYMMETRIC INFORMATION, distorts markets. margin of safety (M2) A full set of markets must include markets Total sales revenue minus breakeven point for FUTURES and for risk taking. Markets sales revenue. have also been classified according to whether they are FIXPRICE or FLEXPRICE. Seealso:breakevenlevelofincome Seealso:blackmarket;buyer’smarket; margin requirements (E5) capitalmarket;clearingmarket;common The banking rule imposed by the FEDERAL market;contingentmarket;controlled RESERVE SYSTEM on its member banks which market;currencymarket;discountmarket; determines the minimum amount which duallabourmarket;efficientmarket; has to be paid in advance for the purchase Eurobondmarket;Eurodollarmarket;ex- of stock market securities. ternallabourmarket;factormarket;

© 2002 Donald Rutherford federalfundsmarket;forwardmarket; Seealso:incomespolicy;Lerner;prices freemarket;futuresmarket;goldmarket; policy greymarket;insurancemarket;internal References labourmarket;internalmarket;Interna- tionalMonetaryMarket;labourmarket; Lerner, A.P. and Colander, D.C. (1980) MAP: A Market Anti-inflation Plan, lemonsmarket;locallabourmarket;Lon- New York: Harcourt Brace Jovanovich. donTradedOptionsMarket;missingmar- ket;over-the-countermarket;primary market balance of payments (F4) labourmarket;primarymarket;secondary The balance of demand for and supply of labourmarket;secondarymarket;second a country’s currency in the exchange market;securitiesmarket;seller’smarket; market at a given exchange rate. shallowmarket;short-termmoneymarket; Seealso:balanceofpayments spotmarket;swapmarket;third market;UKgiltsmarket;UnlistedSecu- market capitalization (G1, M2) ritiesMarket;USTreasurybondmarket; The EQUITY value of a company equal to whitemarket;wholesalemoneymarket the total number of its shares multiplied by their market price. marketable discharge permit (Q0) A permit to discharge air and water market clearing (D0) pollutants up to a standard level of Adjusting demand and supply to each environmental quality which can be sold other until an EQUILIBRIUM is established. to another firm. This is a modified pollu- To clear, either price or quantity changes tion offset system. can be used. References market clearing price (D0) Krupnick, A., Oates, W. and Van De Verg, The ruling price in a particular period for E. (1983) ‘On marketable air pollution which there is sufficient demand to equal permits: the case for a system of pollu- the amount supplied, even if there are tion offsets’, Journal of Environmental simultaneous shocks to the economy. Economics and Management 10: 233–47. Some markets rarely appear to produce McGartland, A.M. and Oates, W.X. clearing prices as they are in DISEQUILI- (1985) ‘Marketable permits for the pre- vention of environmental deterioration’, BRIUM for long periods of time, e.g. the Journal of Environmental Economics and labour market where involuntary unem- Management 12: 207–28. ployment and vacancies coexist for long periods of time. market adjustment (D0) The changes in prices and quantities aris- market concentration (L1) ing from changes in demand and supply of The concentration of sales of an industry a market. or a market accounted for by the largest firms, e.g. the proportion of electrical market anti-inflation plan (E3) goods sold by the largest four firms. A proposal to keep the general price level Seealso:aggregateconcentration stable but individual prices flexible by a system created by legislation which would market-conforming chain of causation issue sales rights to firms. These rights (O1) would equal current net sales at pre-exist- A market-friendly economic development ing prices, corrected for changes in a firm’s strategy which attempts to increase ECO- capital and labour inputs and the average NOMIC GROWTH through greater competition growth in national productivity. Relative and improvements in the educational sys- prices could change by a firm buying sales tem. Freedom of entry and exit of firms rights unused by other firms. are crucial to this strategy.

© 2002 Donald Rutherford market demand (D0) market relationship, only the relationship The total demand for a good or service by between price and quantity is analysed. If all the consumers who pay for it. anything else which could affect the quan- tities demanded and supplied changes, the Seealso:sponsordemand EQUILIBRIUM is disturbed, e.g. if consumers’ market discrimination coefficient (J7) incomes or tastes change, the weather is BECKER’s measure of pure DISCRIMINATION poor, there is a change of government or a which is the residual after differentials war. produced by variations in education, skills Seealso:disequilibrium;equilibrium and job experience have been removed. It is measured by the formula (D0, H4, Q0) 1 The malfunctioning of a market be- YðWÞ Y ðWÞ cause of the imperfections in it. MDC = 0 EXTERNALITIES YðNÞ Y0ðNÞ 2 because a market is pro- ducing social costs. where Y(W) and Y(N) are the actual 3 The lack of a market for a particular incomes of the dominant group W and good or service, as in the case of PUBLIC the oppressed group N respectively and GOODS. the incomes Y0 are those in the absence of The most familiar of failures are UNEM- discrimination. PLOYMENT, persistent shortages of particu- Seealso:discrimination lar skills, balance of payments disequilibria, the production of PRIVATE GOODS at con- market distortion (D0) siderable external cost, regional problems A market allocation that fails to reach a and unanticipated inflation. social optimum. Sometimes this occurs Seealso:marketdistortion;missingmar- because of government intervention. ket market economy (P1) market forces (L1) An economy with extensive private owner- 1 Demand for and supply of FACTORS OF ship of capital and with allocation of PRODUCTION and the goods and services goods and services by the price mechanism produced by them. in the absence of government intervention. 2 The determinants of prices, investment The PHYSIOCRATS and CLASSICAL ECONOMISTS and output in competitive markets. praised this form of economy; NEOCLASSI- 3 The system of allocation which is the CAL ECONOMISTS have analysed it in detail, alternative to ECONOMIC PLANNING. e.g. by showing how a system of COMPETI- TIVE TRADING is used for the exchange of all marketform(D4,L1)seemarket commodities. For a market economy to structure flourish, goods must be available in com- petitive markets at prices which reflect market-maker (G1) their long-run and businesses A stockbroker who both carries out cli- must be motivated by profit. ents’ orders to buy or sell and trades on his or her own account. By being prepared market equilibrium (D0) to buy and sell at all times, he or she A state of rest for a market with the creates a market in stocks and shares. The quantity of a good or service traded London STOCK EXCHANGE copied this system constant and prices not moving up or from the NATIONAL ASSOCIATION OF SECURITIES down, with the consequence that there is DEALERS AUTOMATED QUOTATION SYSTEM when no incentive for buyers or sellers to modify the jobbing system peculiar to the UK was their behaviour. In the simplest case of a abandoned in 1986. But London did not

© 2002 Donald Rutherford follow the narrow New York rule of AGGREGATE CONCENTRATION ratio and is of- having a single market-maker per stock. ten used as a major managerial goal. In 1987, there were forty in London, a market socialism (L2, P4) much larger number than thought neces- 1 A planned economy which attempts to sary. improve allocation by using markets. Seealso:jobber;primarydealer This type of ECONOMY experienced many economic problems; for example, the market order (G1) most famous case, the former Yugosla- An order to buy or sell a SECURITY at the via,experiencedhighinflation,lowecono- current market price. mic growth and rising unemployment. Seealso:limitorder 2 Various forms of workers’ control and self-management. market power (D0) A buyer’s or seller’s ability to influence a Seealso:industrialdemocracy;workers’ market price. For a seller, this power, the participation consequence of the INELASTICITY of the References demand curve facing it, often results in Devine,P.J.(1988)Democracy,andEconomic high profits. Planning, Cambridge: Polity Press. Seealso:concentration Prout, C. (1985) Market Socialism in Yugoslavia, Oxford: Clarendon Press. market prices (E3) market space (M3) A valuation of the NATIONAL INCOME that The total amount of customer spending includes indirect taxes net of subsidies. with a particular company. It depends on Seealso:factorcost;grossnationalpro- the proportion of a customer’s income duct available to the company and on the range of products the customer is willing to buy. market rate of interest (E4) The RATE OF INTEREST set by a particular See also: market share financial market. market structure (L1) Seealso:naturalrateofinterest;Wicksell 1 The organizational form of a market. 2 The number of firms, buyers and pro- market risk (D0) ducts related to each other. The possible losses caused by a volatile market subject to frequent price changes. The principal structures are competitive, Also known as ‘price risk’. oligopolistic and monopolistic. The struc- ture has a major effect on the freedom of a market segmentation (D4, J4) firm to make economic decisions and also The division of a market into sub-markets affects the level of product prices. Such separated by barriers. John Stuart MILL structures form a continuum differing described the sub-markets as non-compet- from each other by the degree of CONCEN- ing groups. DISCRIMINATION has caused TRATION in that market. many labour markets to be segmented. To Seealso:duopoly;monopolisticcompeti- increase total revenue firms use PRICE DIS- tion;oligopoly;perfectcompetition CRIMINATION to separate one part of a market from another. marking (D0, G1) 1 The valuation of assets or income. market share (L1, M3) 2 A recorded sale or purchase of secu- The proportion of the sales of an industry rities. sold by a particular firm or group of firms. This share is the basis of the concept of an See also: historic cost

© 2002 Donald Rutherford Markov chain model (C1, F2) marriage allowance (H2) A probabilistic analysis showing how each The additional tax relief given to married state in an evolutionary process produces people to enable a spouse to be more the next state in a finite chain. This has easily supported; also known as marriage been applied to the study of reproduction deduction. and migration, e.g. migration between two Seealso:income-splittingsystem countries depends on past movements of population. Marshall, Alfred, 1842–1924 (B3) References The Cambridge economist who dominated economics in the UK from the late nine- Bartholomew, D.J. (1982) Stochastic Mod- els for Social Processes, 3rd edn, New teenth century to the 1930s. After graduat- York and Chichester: Wiley. ing in mathematics from Cambridge in 1865 and becoming a fellow of St John’s Markovitz efficient portfolio (G1) College, Cambridge, he turned to the A portfolio of securities with the highest study of ethics and psychology. It was his expected return for a given level of risk. passionate interest in social issues that led Sometimes called a mean–variance effi- him to economics, beginning with a trans- cient portfolio. lation of classical economics into mathe- matics and some papers on international Markovitz, Harry Max, 1927– (B3) trade theory. In 1877 he married a pupil, Educated at the University of Chicago and Mary Paley (with whom he wrote his first professor at Rutgers University since 1980. book, The Economics of Industry (1879)), He has been principally concerned in his and was appointed Principal and Professor works with the theory of rational beha- of Political Economy at the new Univer- viour under uncertainty and portfolio sity College, Bristol. From 1885 to 1908 he theory. He has contributed to production was professor of political economy at theory and the creation of software to aid Cambridge, retiring early to concentrate business decision making. In 1990, he on his writing. shared the NOBEL PRIZE FOR ECONOMICS with It was the publication of his Principles SHARPE and MILLER for his contribution to of Economics in 1890 that established his portfolio theory. leadership of the economics profession. This beautifully written book, which rele- mark-up (D4) gates difficult points to footnotes and The margin for profits added to average appendices, was intended to build on the cost when pricing products according to a theories of the CLASSICAL and MARGINALIST formula. Schools an integrated analytical frame- work for the subject. His vast knowledge mark-up pricing (D4) of economic history and the industrial and The formation of a product price by labour conditions of his day is evident adding a percentage for profit to unit throughout. He achieved an exposition of average cost. A gross mark-up includes a price theory still basic to modern micro- contribution to overhead costs; a net economics. ELASTICITY OF DEMAND, the dis- mark-up does not, as the unit cost in- tinction between short and long periods, cludes a contribution to overheads, assum- the concept of ECONOMIC RENT, CONSUMER’S ing a particular output. The theory was SURPLUS and internal and external ECONO- designed as a realistic alternative to using MIES OF SCALE are all carefully explained. marginal measures to calculate prices. It Some innovations, e.g. the REPRESENTATIVE has been asserted that this pricing method FIRM, were less successful. His sympathy is a major cause of COST-PUSH INFLATION. for much of classical economics and his Seealso:Kalecki reading of psychology gave him an organic

© 2002 Donald Rutherford view of the development of firms. He prices are established, the FACTORS OF PRO- intended to publish a second volume to DUCTION are adjusted to demand and the cover industrial fluctuations, money and supply of these factors is changed – a international trade but it was not until stationary state similar to that assumed in 1923 that he was able to do so in his RICARDO’s theory of value. MARSHALL distin- Money, Credit and Commerce, when it was guished it from the period of secular too late for him to write with the force he change in which there is a ‘gradual growth had achieved in his Principles or to refine of knowledge, of population, and of capi- his analysis. By achieving the separation of tal, and the changing conditions of de- the teaching of economics from the other mand and supply from one generation to ‘moral sciences’ he soon made Cambridge another’. the centre of UK economics. His star References pupils PIGOU and KEYNES used many of his analytical tools and continued the venera- Marshall, A. (1920) Principles of Econom- ics. An Introductory Volume, 8th edn, tion of him and his works. Book 5, ch. 5, London: Macmillan. Seealso:continuitythesis Marshallian methodology (B4) References The PARTIAL EQUILIBRIUM ANALYSIS central to Groenewegen, P. (1995) A Soaring Eagle: NEOCLASSICAL ECONOMICS. Marshall, fond of 1842–1924, Aldershot: the motto natura non facit saltum (nature Edward Elgar. does not make a jump), was concerned to Guillebaud,C.W.(ed.)(1965)Marshall’s demonstrate the continuous nature of Principles of Economics, variorum edn, economic change, examining economic London: Macmillan. phenomena ‘a bit at a time’ so that the O’Brien, D.P. and Presley, J.R. (eds) (1965) forces which bring about EQUILIBRIUM could Pioneers of Modern Economics in Britain, be adequately examined. He forged new ch. 2, London: Macmillan. Pigou, A.C. (ed. ) (1925) Memorials of tools to achieve his analytical goals: these Alfred Marshall, London: Macmillan. included substitution, the ELASTICITY coeffi- cient, the REPRESENTATIVE FIRM, CONSUMER’S Marshallian demand curve (D0) SURPLUS, QUASI-RENT, internal and external MARSHALL’s graphical representation of a ECONOMIES OF SCALE, PRIME AND SUPPLEMEN- demand schedule showing the relationship TARY COST, the short run and the long run. between two variables, price and quantity Marshallian short period (D2) demanded, assuming that any other deter- The period of time in which output can minants of demand remain the same as only be increased by using existing factor prices change. FRIEDMAN and others have supplies more intensively. discussed the implications of the ceteris paribus assumptions, especially the diffi- Marshallian stability (D0) culty of keeping real income constant as Market stability brought about by the prices change. adjustment of quantity to differences be- tween demand price and supply price. A References new EQUILIBRIUM is not achieved if price or Friedman, M. (1953) Essays in Positive quantity moves in the wrong direction or Economics, pp. 47–99, Chicago and if there is overadjustment of price or London: University of Chicago Press. Marshall, A. (1920) Principles of Econom- quantity. ics, 8th edn, Book 3, ch. 3 and Mathe- Seealso:cobweb matical Appendix, London: Macmillan Marshall–Lerner condition (F4) Marshallian long period (D2) The values of PRICE ELASTICITIES OF DEMAND A period of several years in which normal for imports and exports required for a

© 2002 Donald Rutherford DEVALUATION of a currency to succeed in from generous: more was given after the improving a country’s BALANCE OF PAYMENTS. plan than during the period of its opera- The condition states that the sum of the tion. The Marshall Plan hoped to create a price elasticities of demand for imports new international order by linking Europe, and exports, measured in the same cur- and the Third World. The rency, must be more than unity and ELASTI- USA would purchase raw materials from CITIES OF SUPPLY must be high. Thus if the less developed countries which would then demand for imports is not elastic enough be able to buy exports from Western Europe. to discourage consumption of them when The economic plight of East European import prices have risen consequent on countries after 1989 has prompted de- devaluation, the demand for exports can mands for a similar major aid initiative. be so elastic that the increased value of Seealso:EuropeanBankforReconstruc- imports induced by devaluation will com- tionandDevelopment pensate. This is a PARTIAL EQUILIBRIUM approach as only import and export mar- References kets are considered. Hogan, M.I. (1987) The Marshall Plan: America, Britain and the Reconstruction Seealso:J-curve of Western Europe, 1947–52, Cambridge Marshall Plan (N1, O2) and New York: Cambridge University Press. US AID to sixteen countries of Western Wexler, I. (1983) The Marshall Plan Re- Europe proposed by General George Mar- visited: The European Recovery Program shall, US Secretary of State, which, in the in Economic Perspective, Westport, CO: form of economic and military grants and Greenwood. loans, amounted to $16.4 billion in the period 1948–52. Western Europe’s loss of Martineau, Harriet, 1802–76 (B3) overseas investments, the ending of much Leading popularizer of economics in Eng- of its trade with Eastern Europe and the land in the mid-nineteenth century. Born decline in its TERMS OF TRADE necessitated in Norwich, the daughter of a Unitarian outside help. In 1946, large European cloth manufacturer, she studied SMITH, RI- balance of payments deficits required im- CARDO and MALTHUS from the age of 14 and mediate US assistance consisting of ship- was inspired to write on political economy ments of goods and finance for by MARCET’s popular works. Severe deaf- reconstruction. It was given to these coun- ness forced her to adopt a literary career, tries, members of the ORGANIZATION FOR which she successfully did with her twenty- ECONOMIC CO-OPERATION AND DEVELOPMENT,as four part Illustrations of Political Econ- part of the European Recovery Pro- omy, Fables with Morals, beginning with gramme and was administered by the an account of life in the wilds of South European Co-operation Administration. Africa. This work followed the typical The recipient countries were expected to classical division of the subject into pro- follow orthodox economic policies to con- duction, distribution, exchange and con- trol inflation, get their exchange rates at sumption, and gained her a reputation as the right level and adjust their domestic a female Malthusian. She said that the policies to achieve an external balance. It research materials she used were ‘the was hoped that Marshall Aid would avoid standard works on the subject of what I a major world depression after the Second then took to be a science’. World War. The gift of US dollars to Seealso:femaleeconomists;Malthus Europe enabled European countries to finance imports from the USA, but the References dollar gap was slow to disappear and the Fox, C. (1883) Harriet Martineau’s Auto- amount of Marshall Plan assistance far biography, 2 vols, London: Virago Press.

© 2002 Donald Rutherford Martineau, H. (1859) Illustrations of Poli- 1841 for his research into post-Aristotelian tical Economy, 9 vols, London: Routle- Greek philosophy. His interest in socialism dge, Warner & Routledge. was first aroused by conversations with martingale (C7) Baron von Westphalen, whose daughter Originally a French betting system in Jenny he was later to marry; his taste for which the stakes are doubled after each metaphysics was stimulated by involve- loss to assure a favourable outcome with a ment in the Young Hegelian Group from high probability of success. This mathema- 1837. His career as a journalist began with tical model of a fair game, a stochastic his editing of the liberal paper Rheinsche process, has been applied to the analysis of Zeitung from October 1842; his interest in asset prices, particularly to see whether the economics dates from his residence in rates of return to assets are such that asset Paris in 1844 where he had migrated to prices and cumulated dividends at their study contemporary French socialism. It present values are equal to the discounted was to SMITH, RICARDO and JAMES MILL that value of a mutual fund. he turned to obtain an analytical training to tackle what was to be his life-long References research project, CAPITALISM. Fortunately, Hall, P. and Heyde, C.C. (1980) Martin- in Paris he met Friedrich ENGELS who was gale Limit Theory and its Applications, to be until death his collaborator and, on New York: Academic Press. many occasions, financial supporter. After Le Roy, S.T. (1989) ‘Efficient capital mar- a three-year sojourn in Brussels he visited kets and martingales’, Journal of Econo- England to see at first hand the most mic Literature 27 (December): 1583–621. advanced industrial country. Apart from Marxian economics (E6, P2) short periods in Paris and Cologne in The application of MARX’s theories of VA - 1848–9 to participate in the socialist move- LUE and EXPLOITATION to price theory, COM- ments which sprang up at the time of the PETITION and the working of modern 1848 European revolutions, he spent the CAPITALIST economies. In recent years rest of his life in London financially Marxian economists have attempted to precarious and incessantly acquiring in provide an alternative to NEOCLASSICAL the British Museum Reading Room the analysis of most areas of economic theory masses of knowledge which fuelled his and policy, including monetary and gen- analysis of history and society. eral macroeconomic theory as well as a His contribution to economics appears study of TRANSNATIONAL CORPORATIONS, in- in Grundrisse (1857–8), Das Kapital (1867, come distribution and the business cycle. 1885 and 1894) and Theories of Surplus Prominent Marxian economists in the Value (1905–10). Although many of the twentieth century have included Paul ideas in his works had long been discussed BARAN, Maurice Dobb and Ronald Meek. by classical economists, e.g. value in use and value in exchange, the decline in the References rate of profit and labour as a basis of Roemer, J.E. (1981) Analytical Foundations value, he was able to form them into a of Marxian Economic Theory, Cam- powerful new synthesis. This consisted of bridge: Cambridge University Press. the TURGOT–SMITH stages theory, an analysis Marx, Karl Heinrich, 1818–83 (B3) of the circulation of money and of com- German-born philosopher, sociologist, modities and his examination of the deter- journalist and leading classical economist. minants of SURPLUS VALUE to expose the Born in Trier, the son of a prosperous defects of capitalism in a way unparalleled lawyer, he was educated at the University in economics. But he has not been without of Bonn (briefly) and at the University of his critics, particularly because many of his Berlin where he received a doctorate in prophecies were unfulfilled with respect to

© 2002 Donald Rutherford the collapse of capitalism and the increas- techniques in the Soviet-type economy. If ing IMMISERATION of the working class. there is excess demand when expected Marx realized that the TRANSFORMATION supply has been calculated, the planners PROBLEM was a major challenge to his value can recommend the importation of extra and price theories: devotees since his death quantities of the scarce resource or cut have tried to solve it but their proposed down the amounts requested by subordi- solutions usually require so many restric- nate organizations. tive assumptions as to make their results trivial. Whatever may have been his de- material good (D0) fects as an economic theorist, his influence A good which has the widest availability has been massive with thousands of aca- because access to it is a function of demic disciples throughout the world de- absolute, not relative, real income. termined to study economics in a Seealso:positionalgood sociological and ideological context. References mathematical economics (C6) Elster, J. (ed. ) (1986) Karl Marx: A Reader, ‘Economics, if it is to be a science at all, Cambridge: Cambridge University Press. must be a mathematical science’ (W.S. Freedman, R. (ed.) (1962) Marx on Eco- Jevons). Although the use of mathematics nomics, Harmondsworth: Penguin. was to characterize the MARGINALIST Junankar, P.N. (1982) Marx’s Economics, School, it was not until after 1950 that Oxford: Philip Allan. mathematical models, with increasing mo- McLellan, D. (1973) Karl Marx: His Life mentum, became so central to the formu- and Thought , London: Macmillan. lation and exposition of economic theory. Wheen, F. (2000) Karl Marx, London: SAMUELSON’s Foundations of Economic Ana- Fourth Estate. lysis (1948) did much to show the power of marzipan layer (G2, M1) mathematical tools and subsequent math- The managers below the level of director ematical economists were to develop equi- or partner who are responsible for the librium and maximizing models. The operations of a financial institution such mathematical techniques most frequently as a bank or brokerage house, employed include calculus, differential equations, matrix algebra and LINEAR PRO- matching (J6) GRAMMING. MARSHALL, according to KEYNES, Connecting a job vacancy to a person was slightly contemptuous of ‘the rather willing to fill it. This is the central task of ‘‘potty’’ scraps of elementary algebra, geo- a labour market but public employment metry and differential calculus which make offices often provide a free service. up mathematical economics’. Seealso:marketclearing References Arrow, K.J. and Intriligator, M.D. (eds) matching function (D4, M4) (1981–4) Handbook of Mathematical 1 The number of contacts recurring at Economics, Amsterdam: North-Holland. any moment of time as a function of Chiang, A.C. (1984) Fundamental Methods the number of searchers on both sides of Mathematical Economics, 3rd edn, of a market. Tokyo: McGraw-Hill. 2 A statement in accounts of all costs Nicola, P.C. (2000) Mainstream mathema- associated with a stream of income. tical economics in the twentieth century, Heidelberg and New York: Springer material balance (E1) Verlag. The balance of demand and supply for a particular class of commodities. This bal- mature economy (N0, O3) ancing was a central feature of planning A stagnant advanced economy; an economy

© 2002 Donald Rutherford at its peak making full use of available existed on the New York Stock Exchange technology. since 1792. A major effect of this change was a reduction in the number of securities maturity (G0) firms. The terminal date at which a BOND, BILL or debt is due to be paid. Seealso:BigBang

Seealso:termstructureofinterestrates McFadden Branch Banking Act 1927 maturity mismatch (G2) (G2) A difference between the maturities of the US federal statute which helped national assets and liabilities of a financial institu- banks to compete with state-chartered tion. Banks, such as UK banks in the past, banks by allowing them the same power to avoided this problem through a policy of open branches as the state banks in that lending only short term; Germany and area. An aim of the Act was to encourage other European banks have traditionally banks to stay in the FEDERAL RESERVE SYSTEM. permitted long-term lending, increasing McFadden, Daniel L., 1937– (B3) the possibility of a mismatch. Born in Raleigh, North Carolina, and maturity structure of debt (G0) educated in physics and economics at An analysis of government debt according Minnesota University. Since 1963 he has to the number of years to redemption of been a professor at the University of each government-issued security. The per- California, Berkeley, apart from a period centage of the total government debt in at the Massachusetts Institute of Technol- each category of years to maturity is ogy from 1978 to 1991. He has also been stated, e.g. X per cent to mature within Director of the Econometrics Laboratory five years, Y per cent to mature in six to at Berkeley since 1991. In the 1970s he ten years. This analysis of the national developed statistical methods based on the debt is essential to debt management. economic theory of discrete choice and applied them widely, even to traffic plan- maturity transformation (G0) ning. He shared the NOBEL PRIZE FOR ECO- The activity of banks and building socie- NOMICS in 2000 with James HECKMAN for ties of borrowing short and lending long. developing new methods of consumer This practice is possible because of the demand analysis. slow changing habits of borrowers and the general law of averages which ensures little MCM (C5) variation in the total amount deposited. The multicountry econometric model used by the US Federal Reserve Board, cover- maximin (C7) ing the USA, Canada, Japan, the UK, Maximizing the gains to the worst off. Germany and the rest of the world. Seealso:Rawlsianjustice Seealso:linkagemodels maximum likelihood estimator (C1) References The value of a sample statistic which minimizes the squares of the differences Howe, H.E., Hernandez-Cata, E., Stevens, between a regression line and actual data. G., Berner, R., Clark, P. and Kwack, S.Y. (1981) ‘Assessing international interde- Seealso:leastsquaresmethod pendence with a multi-country model’, Journal of Econometrics 15: 65–92. Mayday (G2) The deregulation of the Wall Street secu- Meade, James E., 1907–96 (B3) rities industry on 1 May 1975. Price UK economist educated at Cambridge and competition was increased by abolishing Oxford Universities. As Economics Fellow minimum commissions, a system that had of Hertford College, Oxford, from 1930 to

© 2002 Donald Rutherford 1938 he contributed to the emerging numbers in that set, e.g. for the set 3, 4, macroeconomics of KEYNES by participat- 5, 6, 7 whose arithmetic mean is 5, the ing in the CAMBRIDGE CIRCUS. His subse- mean deviation is [(3 5) + (4 5) + (5 quent career was spent at the League of 5) + (6 5) + (7 5)] divided by 5, i.e. Nations (1940–7), as professor of com- 1.2, ignoring signs after the differences merce at the London School of Economics have been calculated. (1947–57) and at Cambridge as professor of political economy (1957–67). He was means of payment (E4) A general function of money enabling it to awarded the NOBEL PRIZE FOR ECONOMICS in be an immediate way of making a payment. 1977, with OHLIN, for his work on interna- tional trade. In wartime, with Richard See also: medium of exchange STONE, he produced National Income and Expenditure (1944), a book which influ- measure of economic welfare (D6) enced much of post-war NATIONAL INCOME GROSS NATIONAL PRODUCT adjusted by the accounting. Subsequent books on interna- subtraction of ‘bads’ (which include pollu- tional economics, especially Theory of In- tion and services such as law and order) ternational Policy (1951, 1955), clearly and the addition of ‘goods’ (which include expounded the leading aspects of the household activities such as do-it-yourself subject, e.g. his examination of the rela- (DIY) work) which are not conventionally tionship between a country’s INTERNAL AND measured in NATIONAL INCOME accounting. EXTERNAL BALANCES which has become a Nordhaus and TOBIN introduced the term. standard tool of macroeconomic analysis. median (C1) Like the leading economists of the nine- The middle value (or ARITHMETIC MEAN of teenth century, he produced his Principles the two middle values when there is an of Political Economy (four volumes, 1965– even number of values) of numbers ar- 76). Numerous other works include those ranged in order of magnitude, e.g. the on CAPITAL THEORY, wealth distribution and median of 10, 15, 20, 25, 30 is 20. INCOMES POLICY. In 1978 he chaired the Meade Commission on ‘The Structure Seealso:mean;mode and Reform of Direct Taxation’. median voter theorem (H0) References The proposition that the MEDIAN voter Howson, S. and Moggeridge, D. (eds) determines the outcome of an election in (1988–90) The Collected Papers of James a majority vote, assuming that the distri- Meade, Vols I–IV, London: Unwin Hy- bution of preferences has a single peak. man. Johnson, H.G. (1978) ‘James Meade’s medium of account (E4) contribution to economics’, Scandina- A NUME´ RAIRE used for quoting prices and vian Journal of Economics 80: 64–85. valuing the quantities used in accounts. It is usually, but not necessarily, a circulating mean (C1) currency, as in the case of guineas. A measure of the central tendency of a POPULATION or SAMPLE. Seealso:unitofaccount

Seealso:arithmeticmean;geometric medium of exchange (E4, G0) mean;harmonicmean 1 A means of making a payment in the future. mean deviation (C1) 2 A form of credit which allows a trans- The sum of the differences between the action to proceed. numbers of a set and the ARITHMETIC MEAN of the set, divided by the number of See also: means of payment

© 2002 Donald Rutherford medium of redemption (E4) fessor at the University of Vienna in 1879. Cash, or another type of money, into He was also tutor to Crown Prince Rudolf. which banknotes are convertible. Menger set the tone for much of later Austrian economics in that he objected to Medium-term Financial Strategy (E6, the use of mathematics (unlike Jevons) H5) because it dealt with quantities, not es- The UK policy for public borrowing and sences, and led to arbitrary statements. He monetary growth first announced in May sought to enunciate laws based on simple 1979 for the period 1979–84. Originally, it elements, e.g. needs, satisfaction, goods, was argued that announcing the govern- which were not influenced by time and ment’s strategy gave everyone in the econ- space. Like many of his successors he had omy a firm basis for expectations. a libertarian attitude to economic policy. However, increasingly in the 1970s, the strategy became a looser statement of Seealso:Hayek;Mises;Wieser. intent. It continued to be published an- References nually in the UK budget report as a set of targets for public borrowing and monetary Alter, M. (1990) Carl Menger and the Origins of Austrian Economics, Boulder, growth CO: Westview Press. Seealso:RedBook Hicks, J.R. and Weber, W. (eds) (1973) Carl Menger and the Austrian School of megacorp (L2) Economics, Oxford: Clarendon Press. A large global corporation controlled by its executives, not its shareholders. These menu costs of inflation (E3) corporations have been able to replace The costs of changing the prices on goods smaller competitive firms because techno- in an inflationary period, i.e. new price logical change made possible production tags, catalogues and price lists. ECONOMIES OF SCALE and national and inter- Seealso:shoeleathercostsofinflation national markets. Also, the modernization of financial markets enabled the raising of References capital to finance mergers and the expan- Caplin, A. and Spulber, D. (1987) ‘Menu sion of existing firms and advances in costs and the neutrality of money’, accounting and management science re- Quarterly Journal of Economics 102: moved managerial DISECONOMIES as a bar- 703–25. rier to growth. But continued expansion of mercantilism (B1) megacorps is always threatened by the A system of ideas and government policies powers of tough governmental COMPETI- advanced by a series of writers of eco- TION POLICIES to break up firms that have nomic pamphlets, many of them mer- acquired too much monopoly power. chants (hence the term), who in the Menger, Carl, 1840–1921 (B3) period 1550–1750 advanced theories of The founder of AUSTRIAN ECONOMICS who, international trade, money, prices and with JEVONS in Manchester and WALRAS in employment. The major writers of this Lausanne, is also credited with founding school include HALES, MALYNES, NORTH, MUN MARGINALISM in the 1870s by using the idea and CHILD. The earlier writers emphasized of DIMINISHING MARGINAL UTILITY as the the importance of keeping the balance of foundation of a theory of VA LU E. payments in surplus so that bullion could He was educated at the Universities of be accumulated. Money was not seen, Vienna, Prague and Cracow before be- initially, as being a factor of production, coming a journalist and civil servant. In except to finance wars. TARIFFS, EXCHANGE 1871 he published his principal work, CONTROLS and monopoly trading compa- Principles of Economics; he became pro- nies were advocated to achieve these ends.

© 2002 Donald Rutherford Later writers developed more subtle the- See also: balance of payments ories looking at the balance of payments merchant bank (G2) as a whole. Since the East India Company A SECONDARY BANK specializing in the exported silver bullion to India to pay for finance of trade, portfolio management, imports from India, writers had to provide CORPORATE FINANCE and MERGERS. As it does a more complex theory of international not receive deposits directly from the economics, moving from particular to public, it obtains finance for lending from general balances. In a sense, mercantilism WHOLESALE MONEY MARKETS. It has the ex- was an elaborate theoretical justification clusive right under the Companies Acts to for tariffs, then a major source of govern- transfer undisclosed sums from its profit ment revenue. This school of economics and loss account to its hidden reserves. can be viewed more sympathetically as The more famous merchant banks have promoters of policies which would create included Morgan and Grenfell, Hill Sa- national strength and growth. They were muel, Kleinwort Benson, Rothschilds, worried about unemployment, especially Hambros and Lazards. Increasingly, in in England which was adjusting to the the USA ‘merchant banking’ refers to a problem of provision for the poor after the high-risk form of investment banking dissolution of the monasteries and the which has extended the range of its decline in the wool industry. Unemploy- services to include the provision of BRID- ment prevented a nation from achieving its GING finance and EQUITY investment in full output potential so they advocated firms purchased through a LEVERAGED MAN- public works and regional policies not AGEMENT BUYOUT. dissimilar from many which have been used in Western countries in the twentieth Seealso:investmentbanking century. The critiques of HUME and SMITH – merchant capitalism (N0, P1) particularly Hume’s assault in his SPECIE- An economic system consisting of whole- FLOW MODEL and Smith’s discussion of the nature of money and of the desirability of salers who advance funds to manufactur- free trade – relegated mercantilist doc- ing workers to produce goods for the trines to the sidelines of economics. But merchants’ market. This stage of economic some nineteenth-century writers, including development was succeeded by INDUSTRIAL CAPITALISM. LIST, had ideas with a mercantilist tinge. The recent school of NEO-MERCANTILISM has merger (G3) kept these writers’ ideas firmly on the An amalgamation of two or more firms agenda of economic policy discussions. into a new firm. A vertical merger occurs References when firms in industries at different stages of bringing a good to the final consumer, Heckscher, E.F. (1935) Mercantilism, trans. M. Shapiro, ed. E. F. Soderlund, Lon- i.e. extractive, manufacturing or distribu- don: Allen & Unwin. tion, join together. If the firms are in the Magnusson, L. (1994) Mercantilism: the same industry, there is a horizontal mer- shaping of an economic language, Lon- ger. A CONGLOMERATE MERGER is an amalga- don and New York: Routledge. mation of firms with dissimilar activities. McCulloch, J.R. (1954) Early English Mergers often come in waves, particularly Tracts on Commerce, Cambridge: Cam- in times of general economic depression as bridge University Press. a way of reducing costs, e.g. in the USA in Viner, J. (1937) Studies in the Theory of 1901–3 and in the UK in the 1920s. As a International Trade, chs 1 and 2, Lon- high proportion of conglomerate mergers don: Allen & Unwin. fail to make efficiency gains in RESEARCH merchandise balance of trade (F4) AND DEVELOPMENT, production or market- Visible balance of trade. ing, it is argued that they are without

© 2002 Donald Rutherford industrial logic; horizontal mergers have a sociology professor. At Columbia Univer- better reputation for improving profitabil- sity and the California Institute of Tech- ity and efficiency; vertical mergers make nology he studied mathematics. At the no significant difference. In the USA, e.g. Massachusetts Institute of Technology he in 1982 and 1984, guidelines for what are learned economics from SAMUELSON’s Foun- acceptable mergers have been published by dations of Economic Analysis and was soon the Antitrust Division of the Department to become his research assistant. From the of Justice. age of 10 he had invested in the stock market so naturally turned to mathemati- Seealso:horizontalintegration;vertical cal finance theory, working on the pricing integration of WARRANTS and applying the notion of References EXPECTED UTILITY to optimal portfolio selec- Mussati, G. (eds) (1995) Mergers, markets tion. Subsequently he emphasized in his and public policy, Dordrecht, Boston work the dynamics of institutional change and London: Kluwer Academic. as a guide to understanding the financial system and developed a formula for valu- merger arbitrage (G3) ing stock OPTIONS. His academic career Tactical use of the accumulated stocks of began in 1970 at the Sloan School of companies in takeovers, often practised by MIT; in 1988 he migrated to the Harvard US investment banks. Arbitrageurs can Business School for the rest of his career. determine the outcome of takeover bids, In 1997 he shared the NOBEL PRIZE FOR and often precipitate them. ECONOMICS with Myron SCHOLES. He has Seealso:greenmail served on the boards of several MUTUAL FUNDS and been involved in long-term merit bad (H4) capital management. A good or service disapproved of by a government because of research into its mesoeconomy (P0) bad effects. Drugs, tobacco and various That part of the ECONOMY run by big unauthorized medical practices are major business. It is intermediate between house- examples. Taxation and prohibition under holds or small firms and national govern- the criminal law have been used as ways of ments. preventing consumption of them. References merit good (H4) Holland, S. (1987) The Market Economy A good provided by a government because from Micro to Mesoeconomics, London: of the belief that its general consumption Weidenfeld & Nicolson. is desirable. Thus education and libraries metallist (E4) are often freely provided. It is argued that Someone who believes that the value of a the superior wisdom of governments based currency depends on the intrinsic value of on detailed research justifies them in the gold, silver or copper it is made of, or assuming this paternalist role. which backs a note issue. merit want (H4) Seealso:bimetallism;cartalist;Currency A demand for a good or service encour- School aged by the state so supplied free, e.g. education, health care. Public expenditure Metropolitan Statistical Area (J1, R1) is necessary to satisfy these wants. A large population centre of the USA See also: merit bad; merit good including the adjoining communities so- cially and economically integrated with it. Merton, Robert C., 1944– (B3) In rural areas, except New England, Born in New York City, the son of a MSAs refer to counties. This term re-

© 2002 Donald Rutherford placed the ‘Standard Metropolitan Statis- References tical Area’ after June 1963. Armour, H.O. and Teece, D.J. (1978) ‘Organization, structure and economic Seealso:ConsolidatedMetropolitanSta- performance: a test of the multidivi- tisticalArea;PrimaryMetropolitanStatis- sional hypothesis’, Bell Journal of Eco- ticalArea nomics 9: 106–22.

Metzler paradox (F1) microcredit (G2, O1) Despite a tariff imposing a charge, it can Small loans used to encourage small busi- lead to a lower post-tariff price if the nesses in developing countries such as world price is forced down through an Bangladesh. inelastic foreign demand for the importing microeconomics (D0) country’s export good. The study of the economic behaviour of References part(s) of an economic system, especially a Metzler, L.A. (1949) ‘Tariffs, international household or a firm. To make this possi- demand, and domestic prices’, Journal ble, PARTIAL EQUILIBRIUM ANALYSIS, inaugu- of Political Economy, 57:345–51. rated by MARSHALL, and GENERAL EQUILIBRIUM analysis, largely founded by Mexican peso crisis (F3) WALRAS, are used. The major issues dis- The devaluation of the peso in December cussed are matters of pricing, distribution, 1994 and its aftermath in 1995. Dramatic investment, WELFARE ECONOMICS, demand political events, including an armed insur- and supply. The school of NEOCLASSICAL rection, the killing of leading politicians, ECONOMICS was to emphasize the microeco- terrorism and the kidnapping of leading nomic character of much of economics; businessmen preceded a speculative attack KEYNESIANISM had the opposite effect as its on the currency and subsequent financial construction of macroeconomic models crisis. Mexico’s fixed exchange rate regime returned economics to the wider concerns made its currency vulnerable. which had been prominent in CLASSICAL, and other, schools of economics. Increas- mezzanine finance (G2, M2) ingly economists have found it difficult in An unsecured loan, often used to finance a their construction of models to separate MANAGEMENT BUYOUT, which ranks after microeconomics from macroeconomics. secured loans but before equity in the event of a liquidation of a company. The Seealso:macroeconomics interest charged on these loans is higher Microproduction function (D2) than for secured loans and linked equity is A firm’s production function showing the often given to the lender. This form of maximum output which can be produced finance is used to supplement other by its physical inputs, given the constraint sources to effect management buyouts. of its technology. M-form (L2) Seealso:productionfunction A multidivisional type of enterprise orga- microsimulation model (C8) nized with its operating divisions sepa- An attempt to reproduce the complex rated from its strategic decision-making micro reactions to an external stimulus divisions. This structure, arranged as within a household or a firm. Micro data profit centres for different products, sets detailing household labour market brands and geographical markets, was behaviour, income, expenditure and demo- pioneered by Du Pont and General Mo- graphic characteristics have been analysed tors. to consider, for example, the micro con- Seealso:H-form;U-form;X-form sequences of a tax and benefit system.

© 2002 Donald Rutherford References developed economies such as the USA and Sutherland, H. (1995) ‘Static microsimula- increasingly in less developed countries. tion models in Europe. A survey’, Uni- Also, since 1960 attention has been paid versity of Cambridge, Microsimulation to the movement of workers from the Unit Discussion Paper, MU 9503. Mediterranean regions to more northern regions of EUROPEAN COMMUNITY countries, middle price (G1) of highly skilled workers to the USA, and The average of the buying and selling of New Commonwealth (i.e. the Indian prices of securities on London’s STOCK EX- subcontinent and Caribbean) workers to CHANGE which are quoted in the Stock Exchange Daily Official List. Prices the UK. quoted in the financial press usually ap- Many explanations of migration are in proximate to the middle price. terms of an analysis of factors pushing workers out of a country (unemployment, middle product (D2) low incomes) and of factors pulling work- A semi-finished good requiring further ers into a country (high growth, high pay processing before being suitable for final and career advancement). The increasing consumption. It is both an output of a provision of social services in advanced productive process and an input to an- countries has contributed to demands for other. Much of the trade between subsidi- immigration controls. Ravenstein (1834– aries of a MULTINATIONAL company is of 1913) distilled from UK population cen- this kind. suses of 1861, 1871 and 1881 ‘laws’ of migration which concluded that migration Seealso:intermediategood is largely caused by economic circum- References stances and is typically a step-by-step Sanyal, K. and Jones, R.W. (1982) ‘The process of short movements from rural to theory of trade in middle products’, urban areas. American Economic Review, 72: 16–31. Seealso:braindrain;gravitymodel;hot migrant labour (F2, J2) money Foreign labour available in an economy References for short periods of time, i.e. several Grigg, D.B. (1977) ‘E.G. Ravenstein on months or a few years. This labour pro- the laws of migration’, Journal of His- vides a national economy with a second- torical Geography 3: 41–54. ary labour force. It is popular with Shaw, R.P. (1975) Migration Theory and employers as it increases the ELASTICITY of Fact: A Review and Bibliography of labour supply and, being rarely unionized, Current Literature, Philadelphia, PA: can often be obtained at lower wage rates. Regional Science Research Institute. Seealso:guestworker;reservearmyof migration-fed unemployment (J6) labour;secondarylabourmarket A type of unemployment common to migration (F2, J1) many Third World countries. Migration Movement of population, labour or capi- initially occurs because the urban wage tal between countries or between regions. rate is more than the SUPPLY PRICE of rural The most studied form of migration has workers and continues until deterred by been the international migration of labour, urban unemployment. This type of unem- especially the large westward migrations of ployment seems near insoluble because the nineteenth century to the USA. As any policy measures to create urban jobs part of the process of economic develop- will stimulate migration, causing labour ment of a country, there is rural–urban supply to grow faster than demand and migration within it: this has happened in thus creating further unemployment.

© 2002 Donald Rutherford military–industrial complex (P0) and he acquired more fame with Com- The set of relationships between a defence merce Defended (1807). He became an ministry and the industries supplying ardent disciple of BENTHAM who gave him weapons and other goods and services for much financial support necessary in his the armed forces. It is argued that this early years to bring up nine children. He complex is crucial to the functioning of personally tutored his eldest son JOHN many major capitalist economies as indus- STUART MILL. James Mill’s History of British trial output is to a large extent determined India (1817) helped him to gain an assis- by defence requirements. GALBRAITH and tant examinership at the East India Com- several radical economists have discussed pany: he rose to the top post of Chief the role of this complex in their analysis of Examiner and was succeeded by his illus- modern Western economic systems. How- trious son. He encouraged RICARDO in his ever, within the USSR there was also for a writing of his Principles of Political Econ- long time a close link between defence omy (1817). industries and the armed forces. Mill, John Stuart, 1806–73 (B3) military Keynesianism (E6) English philosopher, political theorist and The maintenance of a high level of AGGRE- major classical economist. His father, GATE DEMAND by huge government expen- James MILL, a close friend of BENTHAM, ditures on defence. This has been used as a educated him at home in a rigorous description of the US economy post-1945. programme which started with Greek at Miller, Merton, 1923–2000 (B3) the age of 3 and reached political economy Educated at Harvard and Johns Hopkins ten years later. John learned economics by Universities and professor at the Univer- making notes on RICARDO’s Principles sity of Chicago from 1981. Along with which his father then published as Ele- ments of Political Economy (1821). He MODIGLIANI, from 1958 he established that in corporate finance a firm’s value is followed his father into a clerkship in the determined by its investment decisions, East India Company where he was em- not its dividend policy. His interests broa- ployed until 1858 and engaged in the dened to include the regulation of finan- political reform movements of the day cial services through his directorships of being Member of Parliament for Westmin- the Chicago Board of Trade and Chicago ster from 1865 to 1868. John turned his Mercantile Exchange. In 1990, he shared attention to a range of philosophical and political issues, writing on women’s rights, the NOBEL PRIZE FOR ECONOMICS with MARKO- representative government, logic, UTILITAR- VITZ and SHARPE for pioneering work in the theory of financial economics. IANISM and liberty. But he made an out- standing contribution to economics, being Mill, James, 1773–1836 (B3) more than he modestly claimed – a clari- Born in Montrose, Scotland, the son of a fier of SMITH’s and RICARDO’s ideas. cobbler and educated at Montrose Acad- In his brilliant Essays on Some Un- emy and Edinburgh University where he settled Questions of Political Economy, studied divinity and learned economics written when he was only 23 but not from Dugald Stewart. Licensed in 1797 to published until 1844, he developed the preach in the Church of Scotland and an theory of RECIPROCAL DEMAND to explain itinerant preacher until he went to London the ratios at which nations would trade if in 1802 and took to journalism becoming they followed the principle of COMPARATIVE editor of The Literary Journal and St ADVANTAGE. Also he introduced the idea of James’s Chronicle. His first work on eco- a demand schedule, refined SAY’S LAW and nomics was Essay of the Impolicy of expounded one of the earliest theories of Bounty on the Exportation of Grain (1804) the TRADE CYCLE which he attributed to

© 2002 Donald Rutherford price delusion. He returned to economics fairness is inefficiency and governments in his large Principles of Political Economy are fallible, it is undesirable to give govern- with Some of their Applications to Social ments an extensive role. This notion of Philosophy, first published in 1848, repub- LAISSEZ-FAIRE in modern clothes is attribu- lished seven times in his lifetime and the table to NOZICK. standard textbook on the subject in the References UK until MARSHALL’s Principles superseded it in 1890. Many features of the work were Nozick, R. (1975) Anarchy, State and Utopia, Oxford: Basil Blackwell. novel. He introduced a discussion of idealist SOCIALISM (ST SIMON and FOURIER)– minimax (C7) partly under the influence of Harriet Minimizing the maximum disadvantage; a Taylor, later to be his wife – and clearly GAMES THEORY principle for choosing a expounded what have become key eco- course of action. nomic concepts. In the Principles, OPPORTU- NITY COST, ECONOMIES OF SCALE, the problem minimum efficient scale (D2) of JOINT COSTS and SEXUAL DISCRIMINATION in The level of output of a firm at which the the labour market are some of his numer- L-shaped AVERAGE COST curve becomes a ous innovations. His self-confident claim plateau of many minimum cost outputs. It that he had finally sorted out the theory of is used to show the significance of ECONO- value invited the ridicule of later writers, MIES OF SCALE, e.g. by seeing the effect on particularly JEVONS,butMARSHALL can in costs of reducing the level of output to many respects be regarded as a follower. half the minimum efficient size or by References comparing this level of production with the entire domestic demand for the pro- Hollander, S. (1985) The Economics of John Stuart Mill, Oxford: Basil Black- ducts of that industry. well. Seealso:optimumfirm Mill, J.S. (1963) The Collected Works of John Stuart Mill, Toronto: University of Toronto Press; London: Routledge & Kegan Paul. Ryan, A. (1974) J. S. Mill, London: Routledge. mineral-based economy (N0, P0) An industrial economy using large machin- ery driven by a plentiful supply of energy, especially coal. This economy, less reliant on agricultural products, can sustain a higher POPULATION DENSITY than its prede- cessor, the ADVANCED ORGANIC ECONOMY. References Wrigley, E.A. (1988) Continuity, Chance and Change, ch. 3, Cambridge: Cam- bridge University Press. minimal state (H1) A state limited to a few functions, usually only protection against force, theft, fraud and the enforcement of contracts. It is minimum funding requirement (G2) argued that as the price of promoting A financial rule compulsory for UK pro-

© 2002 Donald Rutherford viders of final salary pension schemes employment by Qe Qm. There are many which insists on a stated proportion of countries where this has happened but the liabilities of the scheme being covered detailed labour market analysis, especially by assets. where is present, is needed before such policies are wholly abandoned. minimum lending rate (E4) The UK’s successor to the BANK RATE used from October 1971 to August 1981 by the Bank of England for financing the money market when acting as LENDER OF LAST RE- SORT. Unlike the bank rate, the minimum lending rate was usually tied to short-term money market interest rates, with the possibility of it being changed on the occasions when monetary policy de- manded an administrative change. Seealso:federalfundsrate;Lombard rate;primerateofinterest minimum list heading (L0) Title of an industry or industrial group in UK production statistics. minimum reserve requirements (F3) A form of exchange control that aims to References reduce the impact on domestic liquidity of Starr, G. (1981) Minimum Wage Fixing: a foreign currency inflow. An International Review of Practices and minimum supply price of labour (J3) Problems, Geneva: ILO. The lowest wage a worker will accept. Ministry of International Trade and Rather than accept less, a person will Industry (L5) prefer to be either unemployed or out of The key Japanese ministry for administer- the labour force. ing INDUSTRIAL POLICY. It acts primarily Seealso:reservationwage;voluntaryun- through giving administrative guidance employment rather than through controls and subsidi- zation. It helps firms plan long term, giving minimum wage (J3) advice on the appropriate level of invest- The minimum rate of employee remunera- ment to meet future demand and export- tion fixed by a government for an hour’s ing. Its other tasks include the work in a particular industry, region or implementation of policies on the encour- whole economy. Many countries, including agement of small businesses, consumer France and Australia, have long used this protection and environmental policy. In policy response to the problem of LOW PAY. the 1950s it took a major role in developing Minimum wage legislation was passed in the steel and shipbuilding industries, in the the UK in 1998. It is often argued that the 1960s electronics and heavy construction imposition of a new minimum wage, or an and in the 1980s advanced technologies. increase in existing levels, will have an unemployment effect and will fuel infla- Minsky, Hyman Philip, 1919–96 (B3) tion by increasing the entire WAGE CONTOUR; A prominent US POST-KEYNESIAN economist in the figure, setting a minimum wage Wm who was educated at Chicago and Har- above the equilibrium wage We reduces vard Universities and has been professor

© 2002 Donald Rutherford of economics at Washington University in seemed to be eclipsed by KEYNESIANISM St Louis. He studied the flaws of capital- until its powerful revival in the 1970s. Like ism, acknowledging the influence of his Austrian contemporaries, Mises began SCHUMPETER. His POST-KEYNESIAN views were with UTILITY theory and a study of BUSINESS crucially influenced by meeting Joan RO- CYCLES but after the First World War BINSON and her circle in a visit to Cam- attacked the nature of allocation in socia- bridge, England, in 1968–9. list societies and then investigated eco- References nomic philosophy in great detail. In his The Theory of Money and Credit (1912) he Minsky, H.P. (1975) John Maynard Keynes, New York: Columbia University Press. was one of the first economists to inte- grate MICROECONOMICS and MACROECONOMICS Mirrlees, James A., 1936– (B3) by founding his theory of money and Born in Galloway, Scotland, and educated credit on the individualism of Austrian in mathematics at Edinburgh and Cam- microeconomics. He also used a cash bridge Universities. He was supervised at balance and EXPECTATIONS APPROACH to Cambridge for a PhD on INDICATIVE PLAN- money. His novel approach to the trade NING by Richard STONE. A trip to India cycle based on the SPECIE-FLOW MECHANISM initiated his interest in economic develop- with bank credit being crucial to the ment: his Project Appraisal and Planning generation of booms and slumps was to (1994) has been extensively used by inves- be a major inspiration to HAYEK. tors in less developed countries. Edge- worth Professor of Economics at Oxford References from 1968 to 1995 and then subsequently Butler, E. (1988) Ludwig von Mises, Alder- professor at Cambridge. He shared with shot: Gower. William VICKREY the NOBEL PRIZE FOR ECO- von Mises, L.E. (1912) The Theory of NOMICS in 1996 for his work on optimal Money and Credit, trans. H. E. Batson, taxation when there is competition be- London: Jonathan Cape. tween tax rates and labour has little —— (1937) Socialism: An Economic and substitutability. His research has also in- Sociological Analysis, 2nd edn, trans. J. Kahane, New York: Macmillan. cluded a study of MORAL HAZARD, incentive —— (1949) Human Action, A Treatise on structures in tax systems, insurance mar- Economics, New Haven, CT: Yale Uni- kets and credit allocation. versity Press. misaligned rate of exchange (F3) —— (1962) The Ultimate Foundation of An exchange rate which persistently de- Economic Science, Princeton, NJ: Van Nostrand. parts from its FUNDAMENTAL EQUILIBRIUM level. Moss, L.S. (ed. ) (1976) The Economics of Ludwig von Mises, Kansas City, KS: Mises, Ludwig Edler von, 1881–1973 Sheed and Ward. (B3) A leading Viennese economist whose in- misintermediation (G0) fluential seminar conducted when he was Mismatching the maturities of assets and professor of the University of Vienna liabilities by banks and other financial (1913–36) included many famous econo- intermediaries who borrow short and lend mists, such as MACHLUP and HAYEK.He long. The consequences of this are finan- taught at the Graduate Institute of Inter- cial instability and the possibility of in- national Studies, Geneva, from 1934 to creased fluctuations in an economy. 1940 and was professor of economics at New York University from 1945 to 1969. Seealso:disintermediation;intermedia- As an economic liberal, he was a leading tion;maturitymismatch;termstructure member of the AUSTRIAN SCHOOL, which ofinterestrates

© 2002 Donald Rutherford References international trade and Third World devel- McCulloch, J.H. (1981) ‘Misintermedia- opment would have grown faster. tion and macroeconomic fluctuations’, Journal of Monetary Economics 8(July): (P4) 103–15. An ECONOMY combining the methods and goals of CAPITALISM and SOCIALISM, particu- missing market (D0) larly by encouraging the growth of the A market not existing now but a possibi- public sector. Partly under the influence of lity in the future to cope with an EXTERN- KEYNES, there has been in many Western ALITY. The creation of these new markets is countries a commitment to FULL EMPLOY- undertaken with the aim of reaching a MENT which encouraged the growth of the social optimum. Often there is an absence public sector and, hence, the mixed econ- of markets for RISK, information and omy. In this type of economy, the basic future goods and HOME PRODUCTION. capitalist model is augmented in a number References of ways. To market principles are added some income redistribution through taxa- Hahn, F. (ed.) (1989) The Economics of Missing Markets, Information and Games, tion and welfare benefits; to private sector Oxford: Clarendon Press. firms, state-owned bodies; to pricing, a planning system, usually of no more than Mitchell, Wesley Clair, 1874–1948 (B3) an INDICATIVE kind. Many West European A leading US INSTITUTIONAL ECONOMIST who economies, particularly Germany and laid the foundations for modern studies of Sweden, are of this kind. The UK econ- the BUSINESS CYCLE. Educated at Chicago omy until 1979 was often described as University, professor at the Universities of being mixed, but in the 1980s with the California (1903–13) and Columbia (1913– abandonment of INCOMES POLICIES, the PRI- 19 and 1922–44) and director of the New VATIZATION of several NATIONALIZED INDUS- School of Social Research (1919–31). His TRIES and the attempt to apply work Business Cycles (1927) began a long MONETARISM, the term is less applicable. and dedicated investigation into economic References fluctuations. Together with Arthur BURNS Lord Roll of Ipsden (ed.) (1982) ‘The he set up the NATIONAL BUREAU OF ECONOMIC mixed economy’, Proceedings of Section RESEARCH’s method of measuring of busi- F (Economics) of the British Association ness cycles. for the Advancement of Science Meeting, References London: Macmillan. Burns, A.F. (ed.) (1952) Wesley Clair mixed good (D0) Mitchell: the Economic Scientist, New York: National Bureau for Economic A good with the characteristics of both Research. PRIVATE and PUBLIC GOODS. Seealso:clubgood mixed bundling (M3) The sale of two or more goods or services mobility of labour (J6) either jointly in a package deal or sepa- Movements of members of the LABOUR rately. FORCE between areas (geographical mobi- Seealso:bundling;purebundling lity), between industries (industrial mobi- lity) or between occupations (OCCUPATIONAL mixed credit (F3, G0) MOBILITY). In the classical account of the A mixture of a loan supplied by a finan- labour market, mobility would continue cial institution at a commercial rate of until the net advantages of jobs were interest and a SOFT LOAN. With a more equalized (see SMITH’s Wealth of Nations, generous form of credit, the volume of Book 1, ch. 10). However, increasingly

© 2002 Donald Rutherford labour economists became aware of the ment an evaluation of the particular cor- imperfections of the labour market split- poration, active participation in CORPORATE ting it up into NON-COMPETING GROUPS. GOVERNANCE and a clear policy for execu- Later, the cost of information and job tive remuneration. search were emphasized as barriers to movement. The measurement of labour Model Tax Convention (H2) mobility depends greatly on the classifica- The OECD’s consensual rules for taxing tion of areas, industries and occupations income and capital to avoid double taxa- used: the broader the classification, the tion and the consequential discouragement lower the amount of mobility. The right of to investment. This guide, first published labour to move freely within the EUROPEAN in 1992 and regularly updated, has been COMMUNITY is granted by Article 48 of the the basis for over 1,500 tax treaties TREATY OF ROME and enforced by Article 49; throughout the world. the Council of Ministers by Regulation 1612 in 1968 gave effect to this principle. modern economy (N0, P4) Seealso:motility;searchcost An ECONOMY which has reached an ad- vanced stage of DEVELOPMENT with high per mobility status (J6) capita incomes, a full range of political AclassificationoftheUSpopulation and financial institutions, industries using which compares the place of residence of the latest available technology and a large an individual person at different dates. service sector. The shorthand measure of mobility trap (R2) modernity, real GROSS NATIONAL PRODUCT per An area of low house prices whose resi- head, is misleading because countries with dents are prevented from moving to an different ranges of economic activity have urban area with higher property prices, been put on a par, e.g. China with India, e.g. from North East England which has Haiti with Mali, France with Libya. In- lower property prices than London. creasingly, the overall level of technologi- cal diffusion has been chosen as a better mode (C1) indicator. The value of a set of numberswhich most fre- quently occurs, e.g. 7 is the mode of 2, 3, Modigliani, Franco, 1918– (B3) 3, 4, 5, 6, 6, 7, 7, 7, 11, 11. Some distri- Italian-born US economist who was edu- butions are without modes. cated at the University of Rome and the Seealso:mean;median;unimodaldistri- New School for Social Research. In his bution early career, he taught at the University of model(C0)seeeconomicmodel Illinois, Carnegie Institute of Technology and Northwestern University. From 1962 model company management (G3) he has been a professor at the Massachu- The recommendations of the MYNERS COM- setts Institute of Technology. A major MITTEE concerning the presentation of an- aspect of his work has been to relate COR- nual information to shareholders, share- PORATE FINANCE to MACROECONOMICS, making holder meetings and the need to follow it possible to see the impact of business best practice in disclosure. finance on real variables. All students of model institutional investor (G3) economics are aware of his life-cycle ap- The ideal conduct of large investors ac- proach to the CONSUMPTION FUNCTION.He cording to the MYNERS COMMITTEE. These was awarded the NOBEL PRIZE FOR ECONOMICS investors should communicate to manage- in 1985.

© 2002 Donald Rutherford References tions for 1969. In the USA from 1979 to Modigliani, F. (1980–9) The Collected 1981 and in the UK from the mid-1970s to Works of Franco Modigliani, 3 vols, mid-1980s, with varying degrees of enthu- Cambridge, MA, and London: MIT siasm, governments attempted to apply Press. monetarist principles to their macroeco- moments (C1) nomic policy making. The sum of the deviations of the values of References a variable from a point in a distribution Friedman, M. (ed.) (1956) Studies in the divided by the number of values (first Quantity Theory of Money, Chicago: moment); for the second moment, the Chicago University Press. squares of the deviations have to be —— (1969) The Optimum Quantity of calculated; for the third moment, the Money and other Essays, London: Mac- cubes of the deviations, etc. millan. Laidler, D., Tobin, J., Matthews, R.C.O. monetarism (B0, E4) and Meade, J.E. (1981) ‘Conference A modern revival of the QUANTITY THEORY papers on monetarism – an appraisal’, OF MONEY, making use of modern NEOCLAS- Economic Journal 91: 1–57. SICAL ECONOMICS. It regards the money Stein, J.L. (ed.) (1976) Monetarism, Am- supply as the most important determinant sterdam: North-Holland. of aggregate money income and reasserts the relevance of price theory to macroeco- monetarist approach to the balance of nomics. Central to monetarism are the payments (F4) concepts of a TRANSMISSION MECHANISM to The view that BALANCE OF PAYMENTS adjust- allow money to influence output, via ments are made through capital movements relative prices, of normal output (employ- and interest rate changes in capital mar- ment) instead of FULL EMPLOYMENT, of the kets. This is the alternative to the KEYNE- NATURAL RATE OF UNEMPLOYMENT, of mone- SIAN approach of adjusting expenditure to tary impulses between transitory and more achieve a balance of payments equilibrium. permanent components of movements in price level and output, and of a POLITICAL monetary accommodation (E5) ECONOMY of society which analyses the role A discretionary change in the nominal of government non-sociologically. FRIED- money supply by central monetary autho- MAN’s works from the 1950s are the most rities in response to a price change which famous writings on this subject. Popularly, has changed the real money supply. monetarism is thought of as a tough FIS- CAL STANCE and careful attention to mone- monetary base (E5) tary variables when targeting the economy. Cash, banker’s deposits with a CENTRAL In practice, most monetarists use the BANK and short-term monetary assets gradualist approach of aiming for a rate which form the basis of bank credit; also of monetary expansion likely to achieve known as HIGH-POWERED MONEY. MONETARY long-term price stability. DEMAND MANAGE- POLICY sometimes takes the form of con- MENT is avoided because of the belief that trolling the size of the monetary base as a an economy will always tend to the NAT- means of restricting the growth of the URAL RATE OF UNEMPLOYMENT. It made head- money supply, but it cannot simply hope lines in the USA when the 1968 tax that a change in the monetary base will increase failed to curb inflation and when ensure a corresponding change in total the monetarists at the Federal Reserve bank credit as there may be many portfo- Bank of St Louis made striking predic- lio adjustments, existing high-powered

© 2002 Donald Rutherford money in excess of reserve requirements References and DISINTERMEDIATION. Bain, A. (1980) The Control of the Money Supply, Harmondsworth: Penguin. Monetary Control Act 1980 (G2) Chick, V. (1977) The Theory of Monetary The popular shortened title of the DEPOSI- Policy, Oxford: Basil Blackwell. TORY INSTITUTIONS DEREGULATION AND MONE- Dow, I.C.R. and Saville, I.D. (1988) A TARY CONTROL ACT 1980. Critique of Monetary Policy: Theory and British Experience, Oxford: Oxford Uni- monetary inflation (E3) versity Press. INFLATION brought about by an increase in Goodhart, C. (1989) Money, Information the MONEY SUPPLY. and Uncertainty, 2nd edn, London: Macmillan. monetary overhang (E2, E3) Great Britain Treasury (1980) Monetary Accumulated savings which could cause Control; A Consultation Paper, London: future inflation. This overhang has long HMSO, Cmnd 7858. been a feature of East European econo- Kuroda, I. (ed.) (1997) Towards more mies because shortages have meant that effective monetary policy,NewYork:St individuals could not spend as much of Martin’s Press; London: Macmillan. their incomes as they desired. This extra purchasing power when released pushes up Monetary Policy Committee (UK) (E5) prices. The committee set up in 1997 to set interest rates independently of the Treasury. It has monetary policy (E5) the single task of maintaining a target rate A governmental policy, for the most part of inflation set by the CHANCELLOR OF THE implemented by a CENTRAL BANK, which EXCHEQUER. It has been noted for increasing influences AGGREGATE DEMAND by a variety the volatility of interest rates. Its narrow of methods, including the changing of remit resembles New Zealand’s rather than interest rates, OPEN MARKET OPERATIONS and the US’s comparable committee. the setting of targets for the MONEY SUPPLY. The least active of monetary policies is a monetary veil (E4) long-term linkage between money supply Money regarded as a veil that distracts growth and real GROSS DOMESTIC PRODUCT attention from the real activities of the (seeFRIEDMAN);themostactive,frequent economy. changes to fine-tune the economy. The earliest of monetary policies used interest Seealso:classicaldichotomy rates as a means of controlling an econ- monetization (H6) omy, especially under the GOLD STANDARD, The financing of government debt by and then a range of methods to control increasing the MONEY SUPPLY. This occurs the volume of bank deposits through when, at existing interest rates, it is diffi- required cash and reserve asset ratios was cult for a government to borrow by issuing used. In the 1970s and 1980s in the USA bonds and has to resort to borrowing and the UK, it was fashionable to adopt directly from the commercial banks and MONETARISM. However, limiting monetary the money market, which in turn can policy chiefly to setting targets for the rate expand their deposits and, hence, the of growth of key monetary aggregates was money supply. The aim of monetization is difficult so monetary policy reverted to to keep down interest rates and prevent using a variety of former methods. CROWDING OUT. The extent of monetization Seealso:cheapmoney;monetarism;rules in an economy is sometimes used as an versusdiscretion indicator of economic DEVELOPMENT.

© 2002 Donald Rutherford Seealso:securitization money at call (E4, G1) The most liquid of banks’ assets after money (E4) cash. This money can be immediately 1 Anything which is immediately and recalled from the money market to which generally acceptable for the discharge it is lent. of a debt or in exchange for a good or Seealso:overnightmoney service. 2 In most cases, a liability of a govern- money centre bank (G2) ment introduced into an economy by In terms of assets, one of the largest US making transfer payments to firms and banks. There are about eight or nine, households or by purchasing assets. mostly based in New York. To be used as a measure of value, money money gross domestic product (E0) must be expressible in units and stable in The nominal value of all of the incomes value. It makes the DIVISION OF LABOUR arising from the economic activities within possible, saving the time that would have a country in a given period. This has often to be spent on barter. As early as ARISTO- been a popular central target in macro- TLE, it was recognized that money serves as economic policy making. a medium of exchange, a unit of account money illusion (E4) and a . What serves as Confusing money values with real values, money has varied from society to society a phenomenon of inflationary periods. and from time to time. In primitive socie- Workers and consumers may be prepared ties commodities are used (even today to accept inferior bargains because they tobacco is widely used in prisons), in soci- have not fully taken inflation into account. eties of medium development coins and In collective bargaining, too much atten- then BANKNOTES, in modern economies the tion to money wage rates can lead to deposits of the leading COMMERCIAL BANKS. workers not being compensated suffi- ciently for price changes; frequent product Seealso:callmoney;coinage;credit price changes make it difficult for consu- money;fiatmoney;high-poweredmoney; mers to be aware of the extent of inflation. insidemoney;IOUmoney;nearmoney; Also known as inflation illusion. outsidemoney;papermoney;plastic money;tokenmoney Seealso:priceperception References money income (D0, M4) Friedman, B.M. and Halm, F.H. (eds) Receipts expressed in money at the prices (1990) Handbook of Monetary Econom- current when that income was paid; ‘nom- ics, Amsterdam: North-Holland. inal income’. Galbraith, J.K. (1975) Money. Whence it Seealso:realincome Came, Where it Went, Boston: Houghton Mifflin. moneylaundering(K4)seelaundering Harrod, R.F. (1969) Money, London: money Macmillan; New York: St Martin’s Press. Jones, R.A. (1976) ‘The origin and devel- money market certificate (G1) opment of media of exchange’, Journal A six-month US money market security, of Political Economy 84: 757–75. much used by THRIFTS for investing in US Laidler, D. (1969) ‘The definition of money. federal funds. Theoretical and empirical problems’, Journal of Money, Credit and Banking money market deposit account (G2) 1: 508–25. US RETAIL BANK deposit based on holdings Newlyn, W.T. (1978) The Theory of Money, of money market assets introduced in 3rd edn, Oxford: Clarendon Press. 1982.

© 2002 Donald Rutherford money market mutual fund (G2) Seealso:M0;M1;M2;M3;M3c;M4; US UNIT TRUST consisting of money market M5;sterlingM3 securities. THRIFTS have provided this References means of allowing small investors to participate in short-term money markets; Bank of England (1990) ‘Monetary aggre- gates in a changing environment: a corporations find the funds useful for statistical discussion paper’, 47. liquid investments. monkey (E4) money multiplier (E4) Five hundred units of a currency, e.g. of The change in the stock of money result- the dollar or pound sterling. ing from a change in the MONETARY BASE by one unit, e.g. by one pound or one dollar. Monnet’s law (D0) Thus if there is a change in a reserve asset People only accept change when they are of $1 million and the total volume of bank faced with necessity and only recognize deposits increases by $5 million, the necessity when a crisis is upon them. This money multiplier has the value of 5. Any was first enunciated by Jean Monnet alteration in the desired LIQUID ASSETS RATIO (1888–1979), the father of French INDICA- of the banking system will change the TIVE PLANNING. value of the money multiplier. The impor- tance of this multiplier has been exagger- monobank (G2) ated as monetary authorities may make The single state-owned bank of a Soviet- the level of interest rates a more important type economy which functions both as a monetary target. Also, changes in the CENTRAL BANK and as a RETAIL BANK methods of monetary control and in the throughout the economy. Although most public’s demand for currency require capitalist economies have separate banking changes in reserve ratios. institutions which specialize in different banking functions, in the nineteenth cen- moneyness (E4, G1) tury in several European countries there 1 Being near enough to CASH to be suita- were banks with united functions. ble as a MEDIUM OF EXCHANGE. 2 The degree to which an OPTION is IN-THE- mono-economics (A1) MONEY. The type of economic theory regarded as applicable to every type of economic money-order economy (O1, P0) system and country, irrespective of its A poor national ECONOMY which receives stage of development and economic con- much of its income in the form of remit- ditions. CLASSICAL and MARXIST ECONOMICS tances from relatives of its population emphasize the theoretical implications of living abroad. different stages of development. money-purchase pension (G2) Seealso:stagestheory A pension with fixed contributions but benefits related to the state of the financial Monopolies and Mergers Commission markets in which the fund’s assets are (L4) invested. The UK body which investigated proposed mergers, monopoly situations and anti- money supply (E4) competitive practices referred to it by the The total amount of money available Director-General for Fair Trading or the within a country. It is variously measured Secretary of State for Trade and Industry. in a narrow or broad way depending on Its predecessors were the Monopolies and which types of bank deposit are included Restrictive Practices Commission (1948 to and on whether bank deposits in other 1956) and the Monopolies Commission currencies are included. (1956 to 1965): a change of name was

© 2002 Donald Rutherford necessary when the extra task of consider- best examples as in the private sector COM- ing mergers was added to its remit. Its lack PETITION POLICY has opposed monopoliza- of power has often been noted: it cannot tion. initiate its own inquiries, nor take action to remedy the situations it criticizes. It was succeeded by the COMPETITION COMMISSION in 1998. Seealso:antitrust;competitionpolicy monopolistic competition (L1) A market structure first discussed by in 1932. It is similar to PERFECT COMPETITION, apart from the crucial assumption of PRODUCT DIFFERENTIA- TION which has the effect of introducing selling costs. These costs create a BARRIER TO ENTRY with the effects of reducing the number of firms in the industry and creating a small amount of monopoly power for each producer. Since monopo- listically competitive firms produce, in equilibrium, at a point of the AVERAGE COST curve above the minimum, monopolistic competition is criticized for resulting in lower output and higher product prices Seealso:concentration; than under perfect competition. Herfindahl–Hirschmanindex; Seealso:excesscapacitytheorem Lernerindex References monopoly capitalism (L2, P1, P2) Chamberlin, E.H. (1933) The Theory of 1AnECONOMY whose economic activities Monopolistic Competition, Cambridge, are dominated by OLIGOPOLISTIC indus- MA: Harvard University Press. tries so that a surplus, or SUPERNORMAL PROFITS, can be earned. monopoly (L1) 2ACENTRALLY PLANNED ECONOMY whose The sole producer of the entire output of industry is run by huge state monopo- goods and services of an industry. A lies to facilitate the co-ordination of monopoly usually has INELASTIC demand economic activities. for its products, unless the industry is so 3 TRANSNATIONAL CORPORATIONS who have narrowly defined that there are some near behaved, according to Marxian econo- substitutes produced by other industries. mists, as economic imperialists. Under monopoly, the demand curve for References the firm is also the demand curve for the Monopoly industry. If the monopoly follows the rule Baran, P. and Sweezy, P. (1966) Capital, New York: Monthly Review of profit maximization, i.e. it equates the Press. MARGINAL REVENUE and MARGINAL COST of production, it has an opportunity to earn monopoly power (L1) SUPERNORMAL PROFITS. In the past, major The power of a dominant firm or firms examples of monopolies were chartered over a particular market or economy. trading companies such as the East India Proxy measures of this take the form of Company; today, PUBLIC ENTERPRISES are the CONCENTRATION RATIOS.

© 2002 Donald Rutherford Seealso:Herfindahl–Hirschman Monte Carlo methods (C9) index;Lernerindex Computer simulation experiments used to estimate the values of parameters by ran- monopolyprofit(D3)seesupernormal dom sampling and regressing the results of profit successive experiments to establish that least squares estimators are unbiased. monopoly zoning (H7) A local government strategy to create a Mont Pelerin Society (P4) fiscal surplus based on maximizing fiscal A group of liberals who first met in April revenue and minimizing the cost of service 1947 at Mont Pelerin, near Montreux, provision by a careful drawing of local Switzerland, to discuss liberalism, its de- boundaries. cline and possible revival. Its original membership, dominated by HAYEK, Karl monopsony (D0) Popper, Michael POLYANI, Lionel ROBBINS The sole buyer in a particular market. In and MISES, was later extended to include product markets, public authorities are the FRIEDMAN and STIGLER. Its powerful politi- major examples, e.g. the UK’s National cal associates have included in Germany Health Service; in labour markets, any Konrad Adenauer, in the USA Arthur large firm employing a large proportion BURNS, and in the UK Enoch Powell, Sir of the industry’s workforce. As a mono- Keith Joseph and Sir Geoffrey Howe. psonist faces an upward-sloping factor supply curve, its MARGINAL COST curve is moonlight economy (K4, P0) above its average cost curve. Monopsonis- Part of a national economy noted for tic firms employ fewer workers at lower extensively using cash for transactions to wages than competitive firms, if they are avoid records being kept which could be PROFIT MAXIMIZERS. available to tax authorities. Seealso:casheconomy

moonlighting (J2) The unauthorised holding of another job in addition to one’s principal employment. One job provides the main source of employment income and the other a sup- plement. This practice is widespread in low-wage economies or underpaid sectors of a national economy.

moral hazard (D0) A problem of INSURANCE: by insuring property or one’s life, the insured may indulge in more risky behaviour increasing the probability of the undesired event occurring. Thus an insurance system can cause MARGINAL SOCIAL COST to be in excess of MARGINAL PRIVATE COST, a suboptimal situation. This encourages post-contrac- tual optimism. Seealso:risk

moral suasion (E5) A method the BANK OF ENGLAND uses to

© 2002 Donald Rutherford control commercial banks by negotiation, EQUILIBRIUM theory, INPUT–OUTPUT ANALYSIS rather than by OPEN MARKET OPERATIONS. and economic dynamics in his Theory of Economic Growth (1969). Also he has Seealso:jawbone fruitfully applied mathematical economics Morgan Stanley Capital International to the study of MARX’s ideas in Marx’s World Index (G1) Economics: A Dual Theory of Value and An index of stock market prices gathered Growth (1973) and in Value, Exploitation from the world’s leading stock exchanges and Growth (1978). His Economic Theory covering about 60 per cent of their market of Modern Society (1975) has popularized capitalization. many results of mathematical economics previously inaccessible to the non-mathe- Morgenstern, Oskar, 1902–77 (B3) matician. A German-American mathematical econo- mist, born in Silesia, Germany, but edu- References cated at the University of Vienna. In his Morishima, M. (1971) Walras’ Economics: early career he was Director of the Austrian A Pure Theory of Capital and Money, Institute for Business Cycle Research from Cambridge: Cambridge University 1931 to 1938 and professor of Vienna Press. University from 1931 to 1938, when he —— (1976) The Economic Theory of Mod- was also a member of the Vienna Circle of ern Society, trans. D. W. Anthony, Cam- bridge: Cambridge University Press. philosophers and mathematicians. In 1938, the Nazi occupation of Austria led to his mortgage (G0) dismissal from the university and emigra- Literally a ‘dead pledge’; in practice a tion to the USA. At Princeton University, charge over property given to a lender so he fruitfully collaborated with NEUMANN, that a borrower can raise finance either to persuading him to apply GAME THEORY to effect the original purchase of it or to economics: their collaboration resulted in acquire funds for other purposes. This The Theory of Games and Economic Beha- centuries’ old legal device has made possi- viour (1944). His later work included ble the financing of mass house ownership books on economic prediction and aspects throughout non-socialist economies. of US defence. Seealso:adjustableratemortgage;build- References ingsociety;collateralizedmortgageobliga- Morgenstern, O. (1965) On the Accuracy tion;equity-linkedmortgage;mortgage of Economic Observations, 2nd edn, bond;mortgagestrip;thrift Princeton, NJ: Princeton University Press. mortgage bond (G0) —— (1970) The Predictability of Stock A securitized form of a loan backed by a Market Prices, Lexington, MA: Lexing- mortgage. These bonds have been created ton Books. by investment institutions selling off their Morishima, Michio, 1923– (B3) outstanding home loans to another com- Japanese-born UK professor of econom- pany which finances the purchase by a ics. He was born in Osaka, Japan, and bond issue (often a Eurobond). The bor- graduated from Kyoto University. After rower continues to pay interest to the teaching at Kyoto and Osaka and visiting original lender who then passes on the Oxford and Yale, in 1968 he permanently interest to service the coupon on the bonds emigrated to the UK where he was profes- which have been issued. SECURITIZATION sor at Essex University from 1968 to 1970 increases the amount of mortgage lending, and subsequently at the London School of without the original lenders having to Economics. He is a mathematical econo- increase their capital. Also, BUILDING SOCIE- mist of note who has synthesized GENERAL TIES and housing loan associations become

© 2002 Donald Rutherford more competitive in the loans market, a questionnaire concerning a worker’s in- through securitization, as they are able to tentions. Determinants of motility include lend at lower interest rates. There are more a person’s level of education, type of examples of these bond issues in the USA occupation and financial ability to obtain than in the UK, despite more elaborate housing in another area. regulation of them. Mortgage bonds in Seealso:mobilityoflabour sterling were first issued in 1987. Motor of Europe (E6) mortgage credit association (G2) Germany, the largest and key ECONOMY. An association owned by its members which raises finance by issuing bonds on moving averages (C1, E3) a stock exchange. The interest payable on A method of smoothing the fluctuations in loans fixed over a five-year period is kept a time series by calculating a series of low by the relatively small costs of admin- ARITHMETIC MEANS. This is regularly used to istration. This type of association has eliminate seasonal fluctuations, e.g. a flourished in Denmark. twelve-month moving average is calculated for January by dividing the sum of the Seealso:buildingsociety;savingsand values for January to December by 12, for loanassociation February by dividing the sum of the values mortgage equity withdrawal (G2) for the twelve months from February to A remortgaging of a house to obtain the following January by 12, and so forth. finance for consumer expenditure. multicollinearity (C1) mortgage pass-through security (G2) The state of an econometric relation such A share or a participating certificate in a that some or all of the explanatory vari- pool of mortgages. ables are highly correlated with each other. mortgage strip (G2) Seealso:autocorrelation The division of a mortgage into an inter- Multi-Fibre Arrangement (F1) est-only part and a principal-only part to A trade agreement covering textiles and increase its marketability and to dispose of clothing negotiated in 1973 between the assets of a THRIFT or other financial twenty-seven developing countries and six- institution. teen developed countries which is a major most favoured nation (F1) exception to the GENERAL AGREEMENT ON The status that accords a country the same TARIFFS AND TRADE. It has been renewed trading privileges, e.g. exemptions from several times and is scheduled to be tariffs, as the other signatories to a com- phased out in 2005. This quota scheme mercial treaty or agreement. Under the for producers was originally designed to rules of the GENERAL AGREEMENT ON TARIFFS provide gradual adjustment to interna- AND TRADE, all parties to the agreement are tional shifts in COMPARATIVE ADVANTAGE and usually expected to accord this privilege to to liberalize world trade gradually. In their fellow trading partners. practice, it restricts the exports of fibres to consumer countries, e.g. the UK and mothballing (D2) USA. In 1986, the MFA was extended to The preservation of unused productive more fibres (sisal, jute and ramie – a flax- capacity in working order in case a change like substance). A production limit is in demand or costs makes resumption of assigned to a country which then shares it production viable. out among individual producers: if one motility (J6) manufacturer wants to expand production The tendency of a worker to be mobile in then it can buy an enlarged quota on the a labour market. This can be measured by open market. The GATT believes that the

© 2002 Donald Rutherford MFA distorts the pattern of world trade as it impedes the expansion of low-cost producers. The MFA’s effects have been to raise the cost of clothing and the profits of domestic producers in developed coun- tries. It has curbed the exports of develop- ing countries but has encouraged a shift to higher quality products amongst the estab- lished Third World producers. In the URU- GUAY ROUND it was agreed to phase out MFA quotas over ten years. References Choi, Y.-R., Chung, H.S. and Marian, N. (1985) The Multi-Fibre Arrangement in multinational corporation (F2, L2) Theory and Practice, London: Pinter. An international firm that produces goods multilateral aid (F3, O0) or services in several countries, without FOREIGN AID which consists of the distribu- being concentrated in a single country, tion to developing countries by an inter- Although the term first became popular national agency, e.g. the WORLD BANK,of in the 1960s, by the late nineteenth century the grants given by wealthier countries. several US, UK and Dutch firms had Although it is argued that aid in this form acquired such characteristics. is fairer than BILATERAL AID, it is still The advantages of production abroad, possible for there to be biases in the rather than exporting from the original distribution policy of a major agency. country of operation, include a saving in transport costs, the adjustment of product Multilateral Investment Guarantee Ag- design to make products more acceptable ency (F3) to local markets, a reduction, in many An offshoot of the WORLD BANK created in cases, in corporate taxation and access to 1988 to promote foreign investment by local labour and capital which may be guaranteeing against many risks, including more abundant than at home. The im- expropriation and currency transfer. It mense success of this form of organiza- also offers advice to developing countries tion, prominent in many industries, wanting to make their economies more including motor cars, computers, pharma- attractive to the potential foreign investor. ceuticals, food processing, oil and soap, has attracted envy and criticism: envy multilevelmarketing(M3)seepyramid from national governments with less eco- selling nomic power and competence; criticism multimarket contact (L4) from Marxists who see the growth of multinationals as a sinister international Meetings between two large CONGLOMER- expansion of CAPITALISM. TRADE UNIONS ATES in several markets. As this can lead to tacit co-operation to stabilize prices and complain about competition from cheap market shares, it has attracted the atten- labour countries; science graduates lament tion of ANTITRUST regulators. the increased concentration of research and development activities in the USA to multimodal frequency curve (C1) the detriment of other countries; national A FREQUENCY CURVE with more than two governments object to the loss of tax maxima. revenue and the difficulties of operating

© 2002 Donald Rutherford industrial and employment policies when multiple exchange rate (F3) much of their industrial sector is con- An exchange rate with different values trolled by foreign-owned entities. according to the nature of the interna- Many controls have been suggested to tional transaction. Often, BALANCE OF PAY- reduce what are seen to be the less MENTS current account transactions are at attractive effects of multinationals: govern- a different rate from capital account trans- ments and trade unions lay down strict actions. Central banks allow these differ- conditions for foreign countries wishing to ent rates because of the different pressures invest, fiscal devices are used to maintain on parts of their balance of payments, e.g. tax revenues and domestically owned mul- needing imports of capital but not imports tinationals are monitored. In extreme of luxury goods. Common examples of cases, exasperated national governments multiple rates are the existence of official have nationalized the assets of foreign- and BLACK MARKET exchange rates in opera- owned subsidiaries, but in many cases this tion simultaneously and an official rate has been as sensible as cutting the hands together with more favourable rates for off a worker and expecting the severed industries being helped under an industrial hands to do the same work as before – a policy. subsidiary, unsupported by the services of Seealso:dualexchangerate the rest of the corporation, is a poor shadow of its former self. Despite so many multiple unit auction (D0) attempts to curb the activities of multi- A sale of identical units of a good in nationals, they continue to grow, enjoying which the buyers can bid for only one, or all the benefits of ECONOMIES OF SCALE and less than the total number. There is no retaining their status as major world reserve price or minimum bid. economic institutions. multiplier (E0) References The relationship between an increment in Caves, R.E. (1982) Multinational Enter- income and a change in AGGREGATE DE- prise and Economic Analysis, Cam- MAND; in particular, the ratio of extra bridge: Cambridge University Press. expenditure to extra investment. There were hints of a multiplier concept as early multiple correlation (C1) as the seventeenth century in PETTY’s works The extent to which there is a relationship but it was not until KAHN postulated an between three or more variables, measured employment multiplier in 1930 that formal by the COEFFICIENT OF MULTIPLE CORRELATION. attempts were made to measure it, parti- Seealso:linearcorrelation cularly by Colin CLARK. It has become a central idea in macroeconomics. For a multiple equilibria (D5) simple closed economy described by the 1 The state of market in which balances equation in several parts occur simultaneously. This is represented by a diagram with Y ¼ C þ I several points of intersection between, for example, when an aggregate supply where Y is national income, C is aggregate curve is linear but the aggregate de- consumption and I is net investment, the mand curve is S-shaped. multiplier is 1/(1 MPC), with MPC the 2 The coexistence in a national ECONOMY marginal propensity to consume; for an of a low-efficiency, low-output equili- open economy described by the equation brium and a high-efficiency, high-out- put equilibrium. Y ¼ C þ I þðX MÞ

© 2002 Donald Rutherford where X is exports and M is imports, the Seealso:regression multiplier is 1/[1 (MPC + MPM)], with (B3) MPM the marginal propensity to import. Mun, Thomas, 1571–1641 Director of the East India Company and See also: balanced budget; employment; leading MERCANTILIST whose formulation of foreign trade multiplier; money multiplier; economic theory in England’s Treasure by regional multiplier; super multiplier Forraign Trade (first published posthu- References mously in 1664) represented the finest flowering of late mercantilist ideas. To Hansen, A.H. (1948) Income, Employment justify the export of silver bullion by the and Public Policy: Essays in Honor of Alvin H. Hansen, New York: Norton. company, he extended the current idea of the balance of payments as being a parti- multiplier–accelerator model (E3) cular balance between two countries to the An economic model attempting to explain concept of a general balance between one business cycles: the MULTIPLIER makes in- country and the rest of the world, permit- come respond to investment and the AC- ting some individual balances to be in CELERATOR ensures that changes in income deficit. Adam SMITH’s view of mercantilism will generate net investment. Given certain was heavily influenced by Mun. values in the basic equations, fluctuations References will be generated, but it is usual for there Appleby, J.O. (1978) Economic Thought to be ceilings and floors to economic and Ideology in Seventeenth Century activity to cause turning points in the England, Princeton, NJ: Princeton Uni- aggregate activity of a national economy. versity Press. References Mundell–Fleming model (E1) Goodwin, R.M. (1948) ‘Secular and cycli- An open economy model extending the cal aspects of the multiplier and the IS–LM model on which an FF curve is accelerator’, in Income, Employment imposed to show that the economy is in and Public Policy: Essays in Honor of equilibrium when there are equilibria in its Alvin H. Hansen, New York: Norton. money and goods markets and its imports Hicks, J.R. (1950) A Contribution to the Theory of the Trade Cycle, Oxford: equal its exports. The TERMS OF TRADE affect Oxford University Press. the positions of both the IS and FF Samuelson, P.A. (1939) ‘Interactions be- curves. tween the multiplier analysis and the Seealso:IS–LMcurves principle of acceleration’, Review of Economic Statistics 21: 75–8. References Mundell, R.A. (1968) International Eco- multistage tax (H2) nomics, New York: Macmillan. A tax raised at each stage of production; a VALUE-ADDED or TURNOVER TAX. Mundell, Robert A., 1932– (B3) Born in Kingston, Ontario, and educated multivariate analysis (C1) at the University of British Columbia and The examination of the relationship be- MIT. He was on the staff of the Interna- tween several variables, usually a depen- tional Monetary Fund from 1961 to 1966 dent variable and several independent and held chairs at Chicago from 1966 to variables. An example of this would be a 1971 and at Columbia from 1974. He has study of the determinants of the unem- written extensively on international eco- ployment rate (the dependent variable) nomics and is an authority on optimum and educational qualifications, age and currency areas. He has advised many previous work experience (independent international organisations, including the variables). United Nations and the EEC whom he

© 2002 Donald Rutherford advised on a single currency. In 1999 he value metals. Tax-free funds invest in tax- was awarded the NOBEL PRIZE IN ECONOMICS exempt bonds of, for example, US states. for ‘his analysis of monetary and fiscal Funds of funds spread risk by investing in policy under different exchange rate re- several mutual funds. Social conscience gimes and his analysis of optimum cur- funds avoid investments in industries or rency areas’. countries subject to moral criticism.

Mundell–Tobin effect (E3, E4) Seealso:investmenttrust The effect on interest rates of price infla- mutual insurance company (G2) tion. Nominal interest rates rise at a An insurance company owned by its mem- slower rate than inflation because the bers. Increasingly these have changed their public holds less in money balances in status and been quoted on the stock inflationary times thereby driving down market. interest rates. Myners Committee (G3) muni (H7) A working group chaired by Paul Myners US municipal bond. and set up by the UK Department of Trade and Industry in 1995. In its report, Muth–Mills model (R4) Developing a Winning Partnership: How A study of the relationship between the Companies and Institutional Investors are differential costs of commuting in an Working Together, it set out the broad urban area and the differences in house criteria for being a MODEL COMPANY MANAGE- prices. This model is used to explain the MENT or MODEL INSTITUTIONAL INVESTOR. internal structure of cities. Lower house prices in the suburbs are sufficient to Myrdal, Gunnar, 1898–1987 (B3) justify high commuting costs to the central A leading Swedish economist and sociolo- business district. gist. He studied at Stockholm University under WICKSELL, CASSEL and HECKSCHER in References preparation for his notable academic and Mills, E.S. (1967) ‘An aggregative model of public career. In his varied life he was resource allocation in a metropolitan professor at Geneva (1931–2) and at area’, American Economic Review 57: Stockholm (1933–9 and 1961–5) Universi- 197–210. Muth, R.F. (1969) Cities and Housing, ties, as well as being a Senator of the Chicago: Chicago University Press. Swedish Parliament from 1934 to 1936 and 1942 to 1946, Minister for Trade and mutual fund (G2) Commerce from 1945 to 1947 and Execu- US UNIT TRUST. There are many types. tive Secretary of the UN Economic Com- General equity funds invest in a range of mission for Europe from 1947 to 1957. He equities with the aim of outperforming the was awarded the NOBEL PRIZE FOR ECONOM- market as measured by, for example, STAN- ICS, with HAYEK, in 1974; his wife, whom he DARD & POOR’S 500 index. Index funds are married in 1924, gained the Nobel Peace invested in the leading stocks which com- Prize in 1982. prise the principal stock market price His major contribution to economics indices. Strategic funds are very diversified has been his work Monetary Equilibrium, as they invest in all markets, including a central work of the STOCKHOLM SCHOOL,in currency and futures markets. Sector funds which he developed his 1927 doctoral specialize in one sector of the stock thesis on price formation and change to market. Overseas funds consist of the show the importance of the ex ante, ex stocks of a foreign country or a group of post distinction in macroeconomics. He is them, e.g. Japan or Europe. Precious metal also famous for his contributions to meth- funds invest in gold, silver and other high- odological debates, particularly in his

© 2002 Donald Rutherford work The Political Element in the Devel- Myrdal, G. (1939) Monetary Equilibrium, opment of Economic Theory and Objectiv- London: W. M. Hodge. ity in Social Research in which he —— (1944) American Dilemma: The Negro Problem and Modern Democracy,New advanced the idea of a value-free econom- York: Harper. ics. His commitment to development eco- —— (Swedish edn 1930, English edn 1953) nomics is evident in his Asian Drama,asis The Political Element in the Development his sociological ability in American Di- of Economic Theory, trans. P. Streeton, lemma. London: Routledge & Kegan Paul. —— (1968) Asian Drama: An Inquiry into References the Poverty of Nations, London and Kindleberger, C.P. (1987) ‘Gunnar Myr- New York: Twentieth Century Fund. dal, 1898–1987’, Scandinavian Journal of —— (1970) Objectivity in Social Research, Economics 87: 393–403. London: Duckworth.

© 2002 Donald Rutherford N

nanny state (I3) versities. He taught in the 1950s at the An ECONOMY which is a WELFARE STATE Massachusetts Institute of Technology un- providing so many benefits as to take til mental illness caused his retiral; later he away much personal responsibility and was a visiting scholar at the Institute for create a DEPENDENCY CULTURE. Advanced Study, Princeton University. An economist and mathematician who is fa- narcodollars (F3, K4) mous for distinguishing co-operative from Dollars used to launder the money of drug non-co-operative games and formulating barons of the world. the Nash equilibrium. In 1994 he shared Seealso:launderingmoney the NOBEL PRIZE FOR ECONOMICS with HARSA- NYI and SELTEN for his contribution to Nash bargaining (C7) games theory. A two-person economic game in which there is collusion between the players. References Equilibrium is such that an individual’s Nasar, S. (1998) A Beautiful Mind, Lon- don: Faber and Faber. MARGINAL RATE OF SUBSTITUTION = the MAR- Nash, J.F. (1951) ‘Non-cooperative games’, GINAL RATE OF TRANSFORMATION. This equili- brium is inefficient because the price Annals of Mathematics 54: 286–95. facing the consumer is equal to the price National Association of Securities Deal- of the PUBLIC GOOD, with some of the ers and Investment Managers (G2) benefit accruing to others. This has been UK association of insurance brokers and applied to oligopoly to show how a firm investment advisers, some of whom deal in makes the best response to the decisions of over-the-counter shares. its rivals. Seealso:over-the-countermarket Nash equilibrium (C7) In a game with two players an equilibrium National Association of Securities occurs when each strategy of a pair is the Dealers Automated Quotation System best response to the other. Each player (G2) uses the highest possible pay-off, given the US securities market founded in 1938 other player’s strategy. This was invented which lists over-the-counter securities not in 1950. listed on regular exchanges. By the end of the 1980s, it became the second largest Nash, John Forbes, 1928– (B3) securities market in the USA and the third Born at Bluefield, West Virginia, he was largest in the world, making it the stron- educated at Carnegie and Princeton Uni- gest stock market in competition to the

© 2002 Donald Rutherford New York Stock Exchange, particularly founded in 1920 and based in Washington, because of its innovations in technology DC. Its famous research series includes the and market making. The price quotations seminal work of KUZNETS on NATIONAL IN- of its MARKET-MAKERS are the basis of COME and the studies by MITCHELL and competition in this electronic market; each BURNS of the business cycle. Its dominant stock has a minimum of two market- concerns have been macroeconomic. makers. From 1982, only stocks with at national debt (H6) least 100,000 shares worth at least $5 each The total indebtedness of the central and have been included, i.e. 2,500 stocks. It is local governments of a country at a also linked to the INTERNATIONAL STOCK EX- particular time to its own public and CHANGE to provide a TRANSATLANTIC MARKET foreign creditors taking the form of short- in 600 securities. term BILLS and long-term BONDS. In most Seealso:over-the-countermarket cases, such debt has accumulated because the country’s public expenditure is more National Banking Act 1863 (G2) than its tax revenue. The burden of a US federal statute whose provisions in- national debt is usually measured by the cluded the setting up of the COMPTROLLER OF ratio of national debt to gross national THE CURRENCY to increase the supervision product. Long-term debt can be regarded and, therefore, the solvency of COMMERCIAL as a burden to subsequent generations. BANKS. It restricted nationally chartered banks to operating only one branch. Seealso:overlappinggenerationsmodel Seealso:branchbanking;McFadden National Economic Development Cou- BranchBankingAct1927 ncil (E6) A tripartite council set up in the UK in National Board for Prices and Incomes 1962 consisting of representatives of the (E3, J3) government, trade unions and employers. The UK public board which administered a Its original aim was to introduce INDICA- national prices and incomes policy in 1965– TIVE PLANNING into the UK. Although some 72. Of its 170 reports, some were on whether general economic forecasts were published, particular price or wage increases were it soon, with the use of Economic Devel- justified and others were concerned to relate opment Councils for particular industries, these two aspects of inflation. The board concentrated on producing detailed re- produced much applied microeconomic commendations for improving sectors of analysis noted for having a greater depth the UK economy. Until its abolition in than the publications of many other public 1992, it was valued as a forum by all authorities of the day; the subsequent Pay participants apart from in the 1980s when Board produced less profound reports. trade unions were in dispute with the government over de-unionization of work- Seealso:incomespolicy;pricespolicy ers in intelligence establishments. In the References 1980s, it moved from INDUSTRIAL POLICY Fels, A. (1972) The British Prices and measures to SUPPLY-SIDE ECONOMICS. It was Incomes Board, Cambridge: Cambridge abolished in 1992. University Press. Mitchell, J. (1972) The National Board for National Enterprise Board (L5) Prices and Incomes, London: Secker & A UK public corporation created by the Warburg. Industry Act 1975 to encourage industrial investment and restructuring; in a sense a National Bureau of Economic Research successor to the INDUSTRIAL REORGANIZATION (E6) CORPORATION. It used its funds to invest in An independent economics institute private sector firms to effect mergers. Also

© 2002 Donald Rutherford it had the task of managing existing incomes should be treated with caution. government shareholdings in major firms, Apart from different statistical conven- especially British Leyland and Rolls tions from country to country, there is Royce, helping small firms and allocating also the problem of translating income grants under REGIONAL POLICY. In 1980, the estimates in one currency into those of Conservative government considerably re- another, often the US dollar. In general, duced its role by selling off many of its measures of the national income usually investments and by cutting its annual exclude non-market activities, leisure and funds. environmental social costs, making them inaccurate as measures of ECONOMIC WEL- national income (E0) FARE. 1 The money value of the goods and services resulting from the economic See also: accounts; European system of activities of the residents of a country accounts; measure of economic welfare; over a time period, usually of a quarter National Income and Product Accounts; or whole year. net economic welfare; physical quality of 2 A monetary flow showing net additions life; purchasing power parity; System of to wealth. National Accounts 3 The sum of FACTOR INCOMES. References 4 The net national product (gross na- tional product less depreciation) be- Beckerman, W. (1966) International Com- parisons of Real Income, Paris: OECD. cause income is a FLOW CONCEPT showing —— (1980) An Introduction to National net additions to wealth over a time Income Analysis, 3rd edn, London: Wei- period. denfeld & Nicolson. Different countries have varying views on Kravis, I.B. (1978) International Compar- what constitutes ‘an economic activity’ so isons of Real Product and Purchasing differ in what they include in their na- Power, Baltimore, MD: published for the World Bank by Johns Hopkins tional income accounts. However, there is University Press. conceptual accord that national income, Shaikh, A.M. and Tonak, E.A. (1994) national product and national expenditure Measuring the wealth of nations: the are identical because there is in every political economy of national accounts, economy a CIRCULAR FLOW of income: an Cambridge, New York and Melbourne: economic activity produces an output Cambridge University Press. which, when sold, constitutes expenditure United Nations International Comparison and creates incomes for the factors of Project (1978) Phase II. production that have made it. The na- tional income at market prices includes in National Income and Product Accounts the valuation of economic activities indir- (E0) ect taxes net of subsidies; the valuation at The national income accounts of the USA factor cost does not. which began in 1947; earlier estimates had Rough estimates of the national income been produced by the US Department of were made as early as the seventeenth Commerce with the advice of KUZNETS but century by PETTY and Gregory King, but they lacked an expenditure breakdown of fairly accurate national income accounting the national product. The need for better is a product of the macroeconomic revolu- economic information in the Second tion in economic thinking in the 1930s: World War prompted the creation of this CLARK and STONE in the UK and KUZNETS in new accounting framework. The new ac- the USA laid the foundations for today’s counts had the aims of providing a con- national accounting. International com- sistent and interrelated system, improving parisons of different countries’ national statistical procedures for estimating all

© 2002 Donald Rutherford series using the latest data and incorporat- and social conditions. Apart from occa- ing changes in basic aggregates to make sional pamphlets, it publishes an influen- the definitions used more useful. tial quarterly review and undertakes its The basic table is own economic forecasting. gross national national insurance contribution (H2, product = personal consumption I3) expenditures UK employment tax created in 1948. The + contributions from employers, employees gross private domestic and the self-employed are kept in a sepa- investment rate fund to finance a range of benefits, + net exports of goods including those for the unemployed, the and services sick and the retired. BEVERIDGE, when + government devising this system, was inspired by the purchases older social security system of Germany introduced by Bismarck. Further tables present disaggregated sta- tistics of the principal components. (L5) The acquisition of privately owned enter- Seealso:EuropeanSystemofAccounts; prises by a government, with or without nationalincome;SystemofNationalAc- compensation. counts Seealso:nationalizedindustry;publicen- References terprise Eisner, R. (1988) ‘Extended accounts for national income and product’, Journal nationalized industry (L5) of Economic Literature 26 (December): A publicly owned firm engaged in the 1611–84. production of goods and services. Foss, M.F. (1983) The US National Income Although governments have been in- and Product Accounts. NBER Studies in volved in the ownership of industrial Income and Wealth, Vol. 47, Chicago: concerns as early as the MERCANTILISTS University of Chicago Press. US Bureau of Economic Analysis, The and post offices have long been state National Income and Product Accounts owned in many countries, it is in the of the United States, 1929–82. Survey of twentieth century that large basic indus- Current Business, July issues. tries have been state owned, e.g. in France and in the UK. In the latter, most National Industrial Recovery Act 1933 of these were established by the Labour (N6) government of 1945 to 1950 as an im- A major US federal statute of the New plementation of clause 4 of the Labour Deal which sought to promote industrial Party Constitution; private sector firms in recovery. Under section 7, the codes of the basic industries of transport, energy competition (statements of price and out- and steel, as well as the Bank of England, put policies) had to recognize the right of were purchased. The extension of public workers to organize collectively making ownership gave the UK the character of a this statute an important forerunner of MIXED ECONOMY. Other countries, particu- the WAGNER ACT. larly France, greatly extended public own- ership in the 1930s; in the USA, the National Institute for Economic and creation of AMTRAK was a rare US Social Research (E6) example of this organizational form. But UK independent economics institute in the 1980s, it became UK government founded in 1938 to research into economic policy to ‘privatize’ the more profitable

© 2002 Donald Rutherford nationalized industries, including telecom- began in 1965 but, instead of lasting until munications, water, gas and electricity. 1970, terminated nine months later when The trading position of a nationalized the seamen’s strike exacerbated a balance industry is affected by its monopoly posi- of payments problem necessitating defla- tion and the lack of market discipline, tion in place of the growth aims of the both by having public finance to supple- plan. It was hoped that the UK national ment borrowings from capital markets and income would increase by 25 per cent over by being kept in existence when virtually five years. This was unlikely as many of bankrupt. As a consequence, a high pro- the assumptions, e.g. those for export portion of government grants has been to growth and labour mobility, were regarded subsidize wage bills, rather than to finance as too generous; the industrial inquiry long-term investment. In September 1981 which provided a database for the plan- President Mitterrand of France, one of the ners was regarded as highly inaccurate. last to argue the case for nationalization, The essence of indicative planning – that gave as reasons for taking large industrial government forecasts are sufficiently influ- groups and banks into , ential to encourage investment – was the elimination of monopoly and quasi- lacking: few believed in the ambitious monopoly situations which provide a basis schemes of these planners. for political influence in France, safe- References guarding national sovereignty and the provision of tools for industrial develop- The National Plan, London: HMSO, Cmnd 2764, (1965). ment in the future. Seealso:privatization;publicenterprise national wealth (E0) The total assets owned by the residents of References a country on a particular day. The most Chester, N. (1975) The Nationalisation of reliable estimates are for firms as they have British Industry, 1945–51, London: to keep balance sheets. Many household HMSO. Pryke, R. (1971) Public Enterprise in assets are only valued on death so the Practice: The British Experience of Na- sample of wealth statistics produced from tionalisation over Two Decades, London: probate sources is non-random. It could MacGibbon & Kee. be argued that HUMAN CAPITAL estimates —— (1981) The Nationalised Industries: should be included in the national wealth Policies and Performance since 1968, as trained labour is a major national asset. Oxford: Robertson. But few countries are statistically ambi- tious enough to attempt such a measure, National Labor Relations Act 1935 (J5) although it is possible to produce an see Wagner Act 1935 estimate if a POPULATION CENSUS asks ques- tions about educational qualifications and National Labor Relations Board (J5) training. US federal board created in 1933 and Seealso:balancesheet;stockandflow subsequently authorized by the WAGNER concepts;wealth ACT. It attempts to prevent and remedy unfair labour practices, to promote COL- References LECTIVE BARGAINING by conducting secret Goldsmith, R.W. (1985) Comparative Na- ballots to establish whether a labour tional Balance Sheets. A Study of organization can represent a group of Twenty Countries 1688–1978, Chicago workers. and London: University of Chicago Press. National Plan (UK) (E6) Revell, L.L. (1967) The Wealth of the An exercise in INDICATIVE PLANNING which Nation: The National Balance Sheet of

© 2002 Donald Rutherford the United Kingdom, 1957–61, Cam- natural rate of growth (O4) bridge: Cambridge University Press. The maximum long-term rate of ECONOMIC GROWTH. In the HARROD–DOMAR growth (Q0) model it is measured as the sum of the 1 The means of producing goods and rate of population growth and the rate of services based on Nature. TECHNICAL PROGRESS reflected in labour PRO- 2 Environmentally provided assets – soil, DUCTIVITY: G = n + t, where G is the water, atmosphere, wildlife, forests. natural rate of growth, n is the rate of 3AnECONOMY free of government inter- population growth and t is the rate of vention following its natural course. technical progress. Population growth leads to a growth of the LABOUR FORCE; natural increase (J1) technical progress increases labour pro- The increase in a human population re- ductivity. sulting from an excess of live births over deaths. Natural increase rates are higher in See also: warranted rate of growth the THIRD and FOURTH WORLDS than in the natural rate of interest (E4) FIRST WORLD. Marginal product of capital. natural monopoly (L0) Seealso:marketrateofinterest;Wicksell An INDUSTRY which, it is argued, should be run as a MONOPOLY, usually to achieve the natural rate of unemployment (J6) maximum amount of ECONOMIES OF SCALE. 1 The single rate of unemployment com- If a natural monopoly brought about by patible with a constant rate of inflation. the technology of an industry were re- 2 The long-term rate of unemployment placed by COMPETITION, there would be an around which an economy fluctuates as increase in unit costs, as happens when a EXPECTATIONS of wage and price changes natural monopoly in energy distribution is are fully realized by the associated rate split up, losing the advantages of technical of inflation. Attempts to move the scale economies. Another case for mono- economy to a lower rate of unemploy- polies of this kind is that a good or service ment by fiscal and monetary stimula- is not supplied by any private concern and tion are unsuccessful as expectations can only be supplied by the government, increase leading to inflationary in- e.g. national defence. creases in prices and wages which push the unemployment rate back to the References natural rate. The natural rate changes Di Lorenzo, T.J. (1996) ‘The myth of in response to changes in the composi- natural monopoly’, Review of Austrian tion of the labour force as flows in and Economics, 9: 43–58. out of the stock of the unemployed are Shaked, A. and Sutton, J. (1983) ‘Natural affected. The natural rate is usually oligopolies’, Econometrica 51: 1469–84. Sharkey, W.W. (1982) The Theory of Nat- illustrated by a vertical PHILLIPS CURVE. ural Monopoly, New York and Cam- References bridge: Cambridge University Press. Friedman, M. (1968) ‘The role of mone- tary policy’, American Economic Review natural price (D0) 58 (March): 1–17. The central long-run equilibrium product price around which market prices fluctu- natural resources (Q0) ate. Adam SMITH, in introducing this con- LAND, including soil, air, water, minerals, cept, said that the natural price would be animal and plant life. Environmental re- the sum of the natural prices of land, sources supporting life and health and labour and capital. providing amenities and energy resources

© 2002 Donald Rutherford are included; human resources and physi- significant differences in economic equi- cal capital are excluded. libria?’, American Economic Review 75: 708–20. Seealso:externality;pollutioncontrol needs of trade (B1) References A banking doctrine, advanced by the Johnson, R.L. and Johnson, G.V. (eds) BANKING SCHOOL, that demand, rather than (1990) Economic Valuation of Natural the amount of specie held by a bank, Resources. Issues, Theory, and Applica- should determine the amount of bank- tions, Boulder, CO: Westview Press. notes in circulation. Pearce, D. and Turner, K. (eds) (1989) Economics of Natural Resources and needs standard (D3, D6) Environment, Brighton: Harvester A principle of DISTRIBUTION based on Louis Wheatsheaf. Blanc’s notion ‘From each according to natural trade (F1) ability, to each according to needs’. It is FREE TRADE that follows its natural course difficult to implement this approach to and is not distorted by government sub- income distribution as the concept of sidies. Strongly advocated by Adam SMITH. ‘need’ is subjective and it has the disin- centive effect of discouraging more indus- Navigation Acts (F1, L5, N4) trious and talented workers whose reward Legislation which insisted that all outward is diminished by the extra income given to and homeward trade must be in the the poor. shipping of that country. England’s first Navigation Act was in 1381; Scotland also negative equity (G0) had such Acts. Apart from being a protec- The amount by which the value of an tive device for maintaining the income of asset, such as a house or a consumer and employment in the shipping industry, durable, falls short of the amount bor- these Acts also ensured that there were rowed to finance its purchase. Negative sufficient ships to provide a naval reserve. equity often occurs in falling property Adam SMITH approved of this exception to markets. FREE TRADE. The UK repealed these acts in negative externality (D0) 1850. An action adversely affecting the produc- See also: Jones Act tion or consumption of a third party. near money (E4) Seealso:externality TIME DEPOSITS with financial institutions negative feedback (O4) which, on notice, can be converted into The unfavourable effects of fast economic money, e.g. BUILDING SOCIETY deposits, CDs. growth which make further growth diffi- These lack the essential characteristic of cult, e.g. because of the LAW OF DIMINISHING money – being immediately usable as a RETURNS in an agrarian economy. MEDIUM OF EXCHANGE – but readily can be converted into money. negative income tax (H2) An income maintenance scheme which near rationality (D0) makes cash payments to persons with less The tendency to take a decision differing than an arbitrary level of income (which is from an optimal decision by the amount D notionally related to SUBSISTENCE). Advo- because of inertia, adjustment, menu costs cates of such schemes argue that the POV- or errors in implementation. ERTY TRAP is eliminated, there is a reduction References in administration costs and the labour Akerlof, G. and Yellen, J. (1985) ‘Can supply from low-income households is small deviations from rationality make increased because they would no longer

© 2002 Donald Rutherford be caught by high MARGINAL TAX RATES when especially at Chicago University. It takes moving from welfare benefits to employ- the view that an economy’s equilibrium ment incomes under a discontinuous ben- will occur after a disturbance because of a efit tax scale. Short-run US experiments of taˆtonnement process with flexible wages this kind have included urban schemes in and prices. As prices disseminate informa- New Jersey and rural projects in Iowa. tion and provide incentives for economic agents, economic plans and activities are Seealso:socialdividendscheme co-ordinated. References This school of economics, emphasizing Parker, H. (1989) Instead of the Dole: An the roles of consumers, producers and Inquiry into the Integration of the Tax savers, has shifted from a study of market and Benefit Systems, London: Routle- allocation to the science of individual and dge. institutional choices about resources in Pechman, L.A. and Timpane, R.M. (eds) markets and other economic institutions. (1975) Work Incentives and Income It provides little macroeconomic analysis, Guarantees, Washington, DC: Brook- except in its aggregation of individuals’ ings Institution. choices. HICKS and SAMUELSON have been negativesaving(E2)seedissaving the most brilliant theorists of the school in the twentieth century. Critics of neoclassi- negotiable order of withdrawal (G2) see cism reject the view of economic agents as NOWaccount being concerned with maximization of utility, profit or net income and want to negotiated co-ordination (E0, P4) dethrone the central principles of dimin- A form of democratic national planning, ishing MARGINAL UTILITY and diminishing resembling French INDICATIVE PLANNING,in MARGINAL RATES OF SUBSTITUTION. However, which interest groups nationally, and the neoclassicals continue to show the within each sector of an economy, reach usefulness of the principles of maximiza- agreement before their conclusions are tion, equilibrium and substitution at the reviewed by a national representative as- margin in their study of a host of modern sembly. The principal issues in negotia- problems, including job search, crime, tions are investment and labour. time, marriage and housing, and the ele- References gance of their theorizing. Marquand, D. (1988) The Unprincipled Seealso:continuitythesis;marginalists Society: New Demands and Old Politics, London: Jonathan Cape. References neighbourhood effect (Q0) Boland, L. (1982) Foundations of Economic Method, London: Allen & Unwin. An EXTERNALITY, or spillover effect, which Henry, L.E. (1990) The Making of Neo- has a spatial impact. Industrial pollution classical Economics, London: Unwin provides many examples of costly effects; Hyman. beautiful buildings and gardens increase the welfare of nearby residents. (D0, E0) An approach to economic theory combin- (B1) neoclassical economics ing the price theory created by CLASSICAL The school of economics emerging in the ECONOMICS and KEYNESIAN macroeconomics. UK and the USA in the late nineteenth SAMUELSON popularized this concept in his century, after ‘the Marginal Revolution’, bestselling textbook Economics. MARSHALL, EDGEWORTH, PARETO, WICKSELL and WALRAS being its most prominent neo-Keynesians (B2) founders. Building on marginal analysis, it A modern refinement of KEYNESIAN macro- dominates much of US economics today, economics, particularly associated with

© 2002 Donald Rutherford HICKS and MEADE in the UK and with a means of encouraging employment TOBIN, KLEIN, MODIGLIANI and Blinder in the growth. USA. To undertake this enhancement of Seealso:alternativeeconomicstrategy; Keynes’s ideas, the IS–LM framework and infantindustryargument;mercantilism; the PHILLIPS CURVE have been extensively Smoot–HawleyTariffAct used. This theoretical approach often re- fers to the failures of markets, particularly References the labour market that does not clear Johnson, H.G. (ed.) (1974) The New Mer- because money wages are often inflexible cantilism: Some Problems in Interna- downwards. A major policy prescription tional Trade, Money and Investment, of this school of economics is DEMAND Oxford: Basil Blackwell. MANAGEMENT to keep an economy in equili- brium. neo-Ricardian theory (B2, D0) A return to the LABOUR THEORY OF VALUE of References RICARDO, based on SRAFFA’s seminal work of Benassi, C., Chirco, A. and Colombo, C. 1960 which attempted to solve problems (1994) The , such as the formulation of a satisfactory Oxford and Cambridge, MA: Blackwell. theory of a surplus-producing economy. A class analysis, rather than a NEOCLASSICAL neo-Malthusians (B1) approach, is used to show how the surplus Followers of MALTHUS who in the nine- produced is divided into PROFITS, INTEREST teenth century advocated birth control as and RENT. Prices are not explained by a means of checking population growth; in labour time values but by a cost of produc- the twentieth century they have been more tion theory, stating the socially necessary concerned to emphasize the conservation conditions of production. Thus prices = of natural resources, given limited techni- physical quantities of machines and raw cal progress. materials employed + wages paid to the workforce + a mark-up on those costs. The Seealso:ClubofRome theory develops Marxian theory, discard- References ing the view that the tendency of the rate of Soloway, R.A. (1982) Birth Control and the profit is to fall and the development ten- Population Question in England, 1877– dencies of the capitalist mode of produc- 1930, London and Chapel Hill, NC: tion. Neo-Ricardian analysis has been University of North Carolina Press. applied to specific aspects of twentieth- century capitalism, especially oligopoly. neo-Marxists (B2) References A group of economists, especially Mandel and Sweezy, who have tried to reinterpret Fine, B. and Harris, L. (1979) Rereading Capital, New York: Columbia Univer- MARX in the light of more recent economic sity Press. thought, including KEYNES’s. Steedman, I. (1977) Marx after Sraffa, References London: New Left Books. Mandel, E. (1968) Marxist economic the- ory, London: Merlin Press. net acquisition of financial assets (E1) Sweezy, P.M. (1968) Theory of capitalist A set of sectoral balances used to analyse development: Principles of Marxian poli- the overall state of an economy. These tical economy, New York and London: balances can be individually in deficit or Modern Reader Paperbacks. surplus. The CAMBRIDGE ECONOMIC POLICY GROUP frequently used this approach in its neo-mercantilism (B2, F1) analysis of the PUBLIC SECTOR borrowing The modern advocacy of PROTECTIONISM as requirement.

© 2002 Donald Rutherford net asset value (G0) a firm with various services, e.g. market- The value of the total assets of a company ing, research, training, financial analysis. after deduction of all debts. It is expressed These workers use computers linked by as X pence, or dollars, per share. telephone to a main office. An obvious advantage of this system is a reduction in net barter terms of trade (F1) office accommodation costs, but the social The ratio of an index of export prices to an implications of isolated work and the index of import prices; the most commonly effect on industrial relations of the geo- used measurement of the TERMS OF TRADE. graphical fragmentation of the labour net economic welfare (D6) force could be considerable in the long GROSS NATIONAL PRODUCT adjusted by sub- run. tracting from it ‘bads’ such as pollution Seealso:homework and by adding the value of beneficial non- market activities, including leisure. network externality (D1) The effect on a user of a product or services Seealso:measureofeconomicwelfare of other people using compatible products net investment (E2) or services. Major sources of these are the An addition to the stock of capital in a Internet and telephone services. given time period. Net investment plus networking economy (P0) REPLACEMENT INVESTMENT constitute gross An ECONOMY consisting of many small investment. specialist firms, or NETWORKERS, linked Seealso:acceleratorprinciple together by an information system, a POST- INDUSTRIAL SOCIETY. net present value (M2) The discounted value of future income network theory (D0) from a particular investment less the dis- An account of how a network establishes counted value of expected costs. A positive trust leading to a reduction in costs. net present value indicates that an invest- net worth (M2, M4) ment project is worthwhile. 1 Total assets minus total liabilities. Seealso:marginalefficiencyofcapital 2 The capital a proprietor employs in a business. net property income from abroad (F4) The receipts of rents, profits and interest neural network model (C8) see arising from ownership of foreign assets, automatic neural network modelling less the payments of the same to non- neutral budget (G0, H5) residents. Net property income from 1Anationalfinancialbudgetwiththe abroad is added to the GROSS DOMESTIC PRO- FISCAL STANCE of seeking to avoid stimu- DUCT to calculate the GROSS NATIONAL PRO- lation or contraction of a national DUCT. economy. Seealso:balanceofpayments 2 A national STRUCTURAL DEFICIT equal to zero. netput (D2) Net output. neutrality of money (E4) A money supply able to affect the price netting (G0) level but not real output and employment. The reduction of offsetting obligations to This view of money is challenged by NEO- create a single ‘net’ obligation. KEYNESIAN economists, who argue that an networker (J2) increase in the money supply, by causing a A person who works at home or at a local shift in the LM curve, will bring down network office providing the head office of interest rates and increase real output.

© 2002 Donald Rutherford Seealso:classicaldichotomy make mistakes. Central to this technically sophisticated theory is the belief that neutral real rate of interest (E4) markets clear. The principal proponents MONETARY That level of interest at which of these views in the USA are LUCAS and POLICY neither expands nor contracts the Thomas Sargent; in the UK, Patrick economy. Minford and Michael Beenstock. neutral technical progress (O3) Seealso:perfectcompetition INVENTIONS or INNOVATIONS which do not References affect the relative PRODUCTIVITIES of the FACTORS OF PRODUCTION used. HICKS, more Buiter, W.H. (1980) ‘The macroeconomics precisely, defined this type of economic of Dr Pangloss: a critical survey of the new classical macroeconomics’, Eco- growth as raising the marginal productiv- nomic Journal 90: 34–50. ities of capital and labour in the same Hoover, K.D. (1988) The New Classical proportions for unchanged factor inputs, Economics, Oxford: Basil Blackwell. whereas HARROD sought to describe it as progress which does not change the CAPI- New Deal (J2, N1) TAL–OUTPUT RATIO when there is a constant 1 The US policies used by President rate of interest and rate of profit on Franklin D. Roosevelt to revive the capital. depressed US economy of 1933–7. Loosely called ‘KEYNESIAN’, these poli- New Cambridge economics (B2) cies included the creation of budget The analytical approach of the CAMBRIDGE deficits. Financial stability was sought ECONOMIC POLICY group led by Wynne God- through DEPOSIT INSURANCE, the setting ley who offered an ALTERNATIVE ECONOMIC up of the SECURITIES AND EXCHANGE COM- STRATEGY for the UK economy in the MISSION and the extension of the powers 1970s. The group believed that inflation to regulate banks. COLLECTIVE BARGAINING can be caused by trade union power, an was extended through the Wagner Act increase in world commodity prices and and through the codes of the National devaluation. Its policy recommendations Recovery Administration. There was a included an expansionary fiscal policy, new partnership between business and import quotas to correct balance of pay- government that, in a sense, created a ments problems and the setting of tax MIXED ECONOMY. rates at a level likely to bring about full 2 The training programme introduced in employment and a balance of payments the UK in 1997 and financed initially equilibrium. out of a windfall tax on the profits of References public utilities. Cuthbertson, K. (1979) Macroeconomic References Policy. The New Cambridge, Keynesian Lippman, W. (1938) The Good Society, and Monetarist Controversies, London London: Allen & Unwin. and Basingstoke: Macmillan. New Earnings Survey (J3) new classical economics (B2) An annual survey of UK earnings pub- A modern US and UK school of econom- lished by the Department of Employment ics combining the use of the RATIONAL EX- in 1968 and every year from 1970. It PECTATIONS hypothesis with MONETARISM and provides detailed statistics on the occupa- a LAISSEZ-FAIRE approach to economic pol- tional, industrial and regional distribu- icy. All markets are assumed to be per- tions of employment incomes. fectly competitive in their behaviour and all unemployment is voluntary because it new (R1) arises only when employers and employees The study of the determinants of the

© 2002 Donald Rutherford geographical distribution of economic ac- the latest technology, exposed to GLOBA- tivity. With its roots in MARSHALL’s notion LIZATION based on knowledge and em- of EXTERNAL ECONOMIES and DISECONOMIES OF ploying highly skilled workers. It is SCALE, as well as CENTRAL PLACE THEORY, this noted for risk, uncertainty and constant subject has expanded to include regional change. An early indication of an econ- science and trade theory. omy becoming ‘new’ is the development of a large services sector. Fast electronic new economic history (N0) communications have made possible A study of the differences in and evolution swifter transactions and trading in of institutions over time. This approach goods and services over the Internet. takes into account property rights, the role This type of economy has high employ- of ideology and bargaining power. Social ment, low inflation and rapid growth in efficiency is sacrificed to the interests of productivity, with the expectation of rulers. unending expansion. References 2 The ‘Neue Economie’ is the German North, D. (1990) Institutions, Institutional government’s attempt to create a ‘third Change and Economic Performance, Cam- way’. bridge: Cambridge University Press. new federalism (H7) New Economic Mechanism (P4) A view of the relationship between US 1 Hungarian economic reforms of 1968. federal and state governments announced Under this mechanism, the planning by President Nixon in 1971 and revived by system was modified by replacing plan President Reagan in the 1980s, that there directives to a large extent by direct should be devolution of many federal relationships between firms; price deter- activities to the states, including education mination was more influenced by mar- and welfare programmes. ket forces through the linkage of See also: dual federalism domestic prices of exports and imports to world market prices and most invest- new fiscal federalism (H7) ment decisions were decentralized. US system of FEDERAL FINANCE proposed by 2 Soviet economic reforms announced in President Ronald Reagan and agreed by 1987: changes to prices and wages were the US Congress in 1996 which instituted proposed in order to increase economic block grants to states in place of catego- efficiency and improve economic incen- rical grants usually based on entitlements tives. for eligible families and persons. This new system was intended to reduce federal See also: perestroika spending and to give states more discre- New Economic Policy (P2) tion in spending. The second phase of LENIN’s economic References policy for the USSR in the 1920s which, Hosek, J. and Levine, R. (1986) The New in an attempt to increase production, Fiscal Federalism and the Social Safety replaced war communism with decentrali- Net. A View from California, Santa zation of industry and a measure of Monica, CA: RAND Corporation. privately owned small-scale trade. new home economics (D1) References The study of the reasons for the creation Krugman, P. (1991) Geography and Trade, of families. It is argued that people’s Cambridge, MA: MIT Press. behaviour is a function of their needs and propensities. new economy (P0) 1 A structurally modern economy using Seealso:homeeconomics

© 2002 Donald Rutherford References off of Third World countries’ debts. Ori- Becker, G. (1991) A Treatise on the Family, ginally proposed in a resolution of the Cambridge, MA: Harvard University General Assembly of the United Nations Press. in May 1974, this order was intended to reduce, by international co-operation, the new industrial state (P0) widening inequality between rich and poor GALBRAITH’s term for the modern economy countries. Marketing boards, similar to the which is dominated by a ‘technostructure’ ORGANIZATION OF PETROLEUM EXPORTING COUN- of large firms dedicated to stable produc- TRIES, were suggested for many PRIMARY tion and the creation of wants so that PRODUCTS so that income would be redis- there is no deficiency of demand for their tributed to poorer countries in the form of products. He argues that the planning monopoly profits. Also, it was suggested system used can be practised by both CAPI- that preferential treatment should be given TALIST and SOCIALIST ECONOMIES. for developing countries’ exports to devel- References oped countries to enhance poorer coun- Galbraith, L.K. (1967) The New Industrial tries’ foreign trade earnings. This order State, London: Hamish Hamilton; Bos- overall hoped to raise living standards by ton, MA: Houghton Mifflin. a different approach to economic DEVELOP- MENT. new institutional economics (G0, H0, L0, O0, P0) Seealso:BrandtCommission;worlddebt An interdisciplinary study approach to problem economics employing AGENCY THEORY, PROP- new issue (G2) ERTY RIGHTS and TRANSACTION COSTS econom- ics to analyse economic institutions and The shares offered by a company when it is marketing its securities on a stock provide an alternative to NEOCLASSICAL ECO- market for the first time or raising addi- NOMICS. Its many applications include industrial organization, corporate govern- tional capital. The shares can be issued by ance, public choice, the economics of TENDER or by prospectus. development and the transformation of Seealso:placing;rightsissue;stag post-socialist economies. newKeynesian(B2)seeneo-Keynesians References Samuels, W. (1995) ‘The present state of NewLeft(B2)seeradicaleconomics institutional economics’, Cambridge newly industrialized country (O0) Journal of Economics 19: 569–90. Spain, Brazil, Mexico, South Korea, Tai- new international division of labour wan, Hong Kong and Singapore. These (F0) countries have acquired their status either Specialization, particularly by Third World because of the absolute size of their countries, in a narrow range of exports, manufacturing sectors or through the rate either because of the historical develop- of growth of their manufacturing indus- ment of their industries or because of the tries. Some of these countries have used global production planning practised by TARIFFS to protect their INFANT INDUSTRIES. MULTINATIONAL CORPORATIONS. new macroeconomics (B2) New International Economic Order An examination of the microeconomic (F0) foundations of macroeconomics, particu- A proposal, popular amongst Marxian larly theories of INFLATION and the NATURAL economists, to alleviate the problems of RATE OF UNEMPLOYMENT. The school also the THIRD WORLD by changes in interna- incorporates some of the ideas of the tional trading arrangements and a writing- POST-KEYNESIANS.

© 2002 Donald Rutherford References References Phelps, E.S. et al. (1970) The Microeco- Thompson, G. (1990) The Political Econ- nomic Foundations of Employment and omy of the New Right, London: Pinter. Inflation Theory, New York and Lon- don: Macmillan. ‘news’ (G0) Information about fundamental macroe- new political economy (D0, E0) conomic variables, e.g. unanticipated A school of economics which attempts to movements in interest rates, NATIONAL IN- demonstrate that actual economic policies COME or a BALANCE OF PAYMENTS current are determined by a political mechanism. account which causes unanticipated Income distribution and the nature of changes in exchange rates. political institutions are especially empha- sized. GAME THEORY, PRINCIPAL–AGENT, TRANS- References ACTIONS COSTS and the POLITICAL BUSINESS Frenkel, L.A. (1981) ‘Flexible exchange CYCLE are all used as tools of analysis. rates, prices and the role of ‘news’. Lessons from the 1970s’, Journal of References Political Economy 89: 665–705. Drazan, A. (2000) Political economy in macroeconomics, Princeton, NJ: Prince- new town (R5) ton University Press. Government-financed urban developments Persson, T. and Tabellini, G. (2000) Poli- tical Economy: Explaining Economic in the UK designed to reduce the popula- Policy, Cambridge, MA: MIT Press. tion of the larger cities, especially London and Glasgow. The establishment of new new protectionism (F1) see neo- towns occurred in two waves: in the late mercantilism 1940s and the 1960s. All of these twenty- six towns were originally run by separate new regionalism (F1) corporations charged with the tasks of The formation of new trading blocs in the building sufficient housing and attracting world because of the shortcomings of industrial and commercial investment. multilateral agreements such as GATT, Although the planners of these towns e.g. NAFTA. These new blocs often have hoped to integrate residential and indus- deep integration and can consist of smaller trial areas to reduce COMMUTING, this has countries making concessions to a larger not happened as much as expected, partly one – as in the case of Mexico being because of a mismatch of jobs and work- subordinate to the USA. This develop- ers. Increasingly these towns have found it ment makes moderate trade concessions difficult to grow as they have suffered, like and creates deep links between national the major old cities, from the decline of economies. the UK manufacturing sector. The uto- New Right (B2) pian hopes for these towns have been Political and economic thinkers who came dashed by rising unemployment and to prominence in the 1980s in the USA crime. and Western Europe through advocating LIBERTARIAN ECONOMICS. Their proposals in- new trade theory (F1) clude a minimal role for the state, little Models of international trade which have government intervention in the running of built on earlier models which assumed national economies, a market approach to PERFECT COMPETITION to incorporate IMPER- production and distribution and PRIVATIZA- FECT COMPETITION and INCREASING RETURNS. TION. References Seealso:economicdevolution;laissez- Krugman, P.R. (1979) ‘Increasing returns, faire monopolistic competition and interna-

© 2002 Donald Rutherford tional trade’, Journal of International Nobel Prize for Economics (B3) Economics 9: 469–79. The ‘Nobel Memorial Prize in Economic New York Mercantile Exchange (G1) Sciences’ awarded to distinguished econo- The biggest market for energy futures and mists and econometricians since 1969. options; usually referred to as NYMEX. Prominent in the list of prize winners are persons from the USA, France, Scandina- New York Stock Exchange (G1) via, the USSR and the UK: Established in 1792 when twenty-four brokers signed an agreement in Wall 1969 ; Jan Tinbergen Street. It moved indoors in 1793 and took 1970 its present name in 1863. Every stock 1971 Simon Kuznets traded is assigned to a specialist who also 1972 ; John Hicks acts as a broker. All of the exchange’s 1973 transactions are published daily. By 1987, 1974 Friedrich von Hayek; the NYSE had 1,366 members. In 1980, its subsidiary, the NEW YORK FUTURES EXCHANGE, 1975 Leonid Kantorovich; Tjalling was opened. C. Koopmans 1976 Milton Friedman Seealso:AmericanStockExchange 1977 James Meade; Bertil Ohlin N-firm concentration ratio (L1) 1978 Herbert Simon The ratio of the sales of a group of firms 1979 W. Arthur Lewis; Theodore Schultz of an industry to the sales of that industry 1980 Lawrence Klein as a whole. The number of firms most 1981 James Tobin commonly chosen for industrial censuses 1982 George Stigler is three, four, five, eight or sixteen and 1983 Gerard Debreu hence the ratios are sometimes called 1984 Richard Stone three-firm, four-firm, eight-firm or six- 1985 Franco Modigliani teen-firm ratios. Also known as the lead- 1986 James M. Buchanan ing firms ratio. 1987 Robert M. Solow Seealso:concentration;monopolypower 1988 Maurice Allais 1989 Trygve Haavelmo niche bank (G2) 1990 Harry Markovitz; Merton Miller; 1 A specialist bank with a particular place William Sharpe in the financial sector. The consequence 1991 Ronald H. Coase of this concentration on particular types 1992 Gary S. Becker of customer or financial service gives it 1993 Robert W.Fogel; Douglass C. North higher profitability but the greater risk of not being diversified in its activities. 1994 John Harsanyi; John F. Nash; Reinhard Selten 2ALASER BANK. 1995 Robert Lucas niche trading (G1) 1996 James A. Mirrlees; William Vickrey Specializing in a particular form of trad- 1997 Robert C. Merton; Myron S. Scholes ing, which is a characteristic of many 1998 securities markets. 1999 Robert A. Mundell Nikkeiren (J5) 2000 James J. Heckman; Japanese Federation of Employers’ Asso- Daniel L. McFadden ciations. 2001 George A. Akerlof; Andrew M. Spence; Joseph E. Stiglitz Seealso:shunto

© 2002 Donald Rutherford References nominal tax rate (H2) Breit, W. and Spencer, R.W. (1986) Lives The published rate of tax on a good, of the Laureates, Cambridge, MA, and income or capital. The whole burden of London: MIT Press. such taxes is often reduced by tax allow- Lindbeck, A. (1985) ‘The prize in eco- ances or credits. nomic science in memory of Alfred Nobel’, Journal of Economic Literature nominee account (G2) 23 (March): 37–56. An arrangement for hiding the beneficial ownership of shares. Banks and other nodal pricing (D4, Q4) financial institutions buy shares in the A set of prices related to each node of a name of a nominee account for persons system such as electricity transmission. or companies wishing to be anonymous. The opposite of ZONAL PRICING. This is most useful to a company which is noise (C1) accumulating another company’s shares Random disturbances which distort a sig- with a view to making a takeover bid. This nal. The probability distribution of what is system is chiefly supported for its admin- received depends on what is sent. istrative convenience. Seealso:whitenoise non-accelerating inflation rate of unemployment(E3)seenaturalrateof noisetrader(G1)seeinvestorsentiment unemployment no-load fund (G1) non-bankactivities(G2)seeBank A MUTUAL FUND not charging sales commis- HoldingCompanyAct1956 sion. non-basic commodity (D0) Seealso:loadfund A commodity affecting the production of nomenklatura (P2) some, but not all, other commodities. Members of the political elite of the Seealso:basiccommodity former East European countries appointed by the Communist Party. Social and eco- non-basic industry (L0) nomic privileges were given to members of An industry providing services to a com- committees ranging from the Central plex of basic industries. Party Committee to district committees. non-competing group (J4) Although out of power in the 1990s, the An occupational group of the labour nomenklatura continued to exercise power market separated from other groups by in many TRANSITION ECONOMIES. BARRIERS TO ENTRY. John Stuart MILL,who nominal (D0, E0) first noted this market imperfection, li- The current money value unadjusted for kened the labour market to a hereditary inflationary change of an economic vari- caste system. Restricted access to educa- tion, union rules and discrimination sepa- able, e.g. EXCHANGE RATE, RATE OF INTEREST, rate of protection or tariff. rate the labour force into these groups, giving rise to occupational WAGE DIFFEREN- nominal gross domestic product (E0) TIALS. GROSS DOMESTIC PRODUCT at current prices. non-employment (J1, J6) This is regarded as a suitable reference Being without a job. The unemployed, target for regulating public expenditure. In retired, sick, the rich living on investment the UK and the USA, GDP figures are income alone and carers for dependants published quarterly. make up this population category. Some of nominalincome(D0)seemoneyincome this underutilization of labour is associated

© 2002 Donald Rutherford with a lack of opportunity for, or restricted associated with it and, hence, no entitle- access to, paid employment. ment to profits. These enterprises, usually financed by donations, endowments or Seealso:labourforce government grants, aim to maximize the non-goal equilibrium (E0) quantity and quality of the service pro- An EQUILIBRIUM state that is the conse- vided and to break even. In the public quence of the interaction of economic sector, most governmental institutions are forces, not the conscious pursuit of a NPEs; in the private sector, households, particular agent. A major case is NATIONAL charitable foundations, mutual insurance INCOME in a MARKET ECONOMY. companies and a variety of clubs are the major examples. The motives for establish- Seealso:goalequilibrium ing NPEs are various, including the provi- non-interest-bearing M1 (E4) sion of MERIT GOODS, the subsidization of A component of M1, introduced because religion and the arts and the commemora- somebankschangedthecharacterofCUR- tion of a major benefactor. A dislike of RENT DEPOSITS (SIGHT DEPOSITS) by paying market mechanisms and altruistic attitudes interest on them. have been fundamental to the growth of NPEs. non-linear correlation (C1) The relationship between two variables References which approximates in a diagram to a Gassler, R.S. (1986) The Economics of curve. Non-profit Enterprise: A Study in Ap- plied Economic Theory, New York and Seealso:leastsquaresmethod;linearre- London: University Press of America. gression;scatterdiagram Holtman, A.G. (1988) ‘Theories of non- profit institutions’, Journal of Economic non-linearpricing(D4)seesecond-degree Surveys 2: 30–45. pricediscrimination Rose-Ackerman, S. (ed.) (1986) The Non- Profit Sector: Economic Theory and non-market sector (P0) Public Policy, Oxford: Oxford Univer- The part of an economy which does not sity Press. sell its goods and services. The output of governments, households and farms (in non-renewable resources (Q3) the case of less developed economies) Fossil fuels or metals which are exhausti- makes up much of the activity of this ble deposits of the earth’s surface. sector. non-standard tax relief (H2) non-parametric model (C5) A reduction in the taxable income of a An econometric model that attempts to person on account of actual expenses use statistical inference and economic data incurred. These expenses are recognized to explore the relationship between eco- by a tax authority as deductible. nomic variables without using a given functional relationship. non-tariff barrier (F1) A barrier to imports, other than an import non-pecuniary returns (J3) tax. The non-tariff methods used include The reward to a worker other than wages, the imposition of rigid safety standards, salaries and fringe benefits. Personal satis- strict administrative standards, global and faction, power, status and continual happi- bilateral quotas, orderly marketing ar- ness are amongst these returns. rangements and VOLUNTARY EXPORT RE- non-profit enterprise (L3) STRAINTS. Examples include the MULTI-FIBRE An organization, other than a firm, whose ARRANGEMENT, the USA’s orderly marketing members have no private PROPERTY RIGHTS arrangement with Korea and Taiwan on

© 2002 Donald Rutherford non-rubber footwear, safety measures on normal price (D4) colour TVs and CB radios, and the EUR- MARSHALL’s notion of an equilibrium price. OPEAN COMMUNITY’s import restrictions in Seealso:naturalprice 1981 on steel from Korea. The GENERAL AGREEMENT ON TARIFFS AND TRADE approxi- normal profit (D0) mately measures the extent of the applica- The minimum amount of PROFIT a firm tion of restrictive measures as the ratio of must earn to remain in existence. The restricted imports/total imports. This mea- normal profit rate is the OPPORTUNITY COST sure is imprecise as a restriction will affect to the firm of employing capital in that the total flow of imports. Non-tariff bar- industry. Since this profit is the minimum riers can also be measured by calculating supply price of ENTREPRENEURSHIP, it will be restricted imports as a share of the total included along with other costs in the consumption of manufactured goods, or total costs of a firm. When measuring consumption of restricted manufactured MONOPOLY POWER, normal profit is used as goods as a share of the total consumption a benchmark: if a firm has profits in excess of manufactured goods. of normal profit, it is to some extent a monopolist. Seealso:protection;tariff (A1) non-tradables (F1) normative economics Goods and services that do not enter into Economics based on value judgments international trade. Many services of a stating what should be the case, e.g. personal kind, e.g. hairdressing, can only ‘personal incomes should be equal’. The be sold within a country, but most goods distinction between this type of economics can be traded with the exception of those and POSITIVE ECONOMICS includes in its which cannot be preserved from perishing ancestry HUME’s ‘is–ought’ dichotomy. and those which are too heavy and fixed Normative issues, central to WELFARE ECO- to remove, e.g. buildings (although there NOMICS, cannot be settled by appeals to are exceptional cases of UK buildings facts. being shipped to the USA). Seealso:economicmethodology non-zero-sum game (C7) References A situation in which the total amount to Myrdal, G. (1954) The Political Element in be distributed amongst the players is not the Development of Economic Thought, equal to zero. The game may be a positive trans. P. Strecten, London: Routledge & sum game, a negative sum game, or the Kegan Paul. sum may vary because of the strategies or Norris–La Guardia Act 1932 (J5) decisions of the players, as in the PRISON- US federal statute that gave US LABOR UN- ERS’ DILEMMA game. IONS substantial relief from judicial inter- Seealso:zero-sumgame ference. Under section 3 of the Act, YELLOW DOG CONTRACTS were made unen- normal distribution (C1) forceable; under section 5 courts were A symmetric distribution shaped like a prohibited from granting injunctions on bell. the grounds of unlawful combination or Seealso:kurtosis conspiracy. Similar Acts were passed by several US states. normal good (D0) A good whose demand increases as in- Seealso:WagnerAct1935;Taft–Hartley come rises. Such a good will have an IN- Act1947 COME ELASTICITY OF DEMAND more than one. North American Free Trade Area (F1) Seealso:inferiorgood An extension of the US–Canada Free

© 2002 Donald Rutherford Trade Agreement of 1989 to include ‘Not in my backyard’ (R0) Mexico, agreed in 1992. Over fifteen years A frequently made objection to an envir- all duties, tariffs and non-tariff barriers onmental change perceived to be detri- between the countries will be eliminated. mental with the recommendation that For trade-sensitive products such as beer, someone else suffer. This plea, nicknamed footwear and maize there will be long ‘NIMBY’, is often uttered when waste periods of adjustment. A three-nation dumps and unsightly buildings are pro- panel will consider trade disputes, includ- posed. ing related employment and environmen- no-trade equilibrium (D0) tal matters. An equilibrium position with domestic North, Douglass Cecil, 1920– (B3) demand equal to domestic supply for an Educated at the University of California, autarkic state. he taught at the University of Washington Seealso:autarky from 1950 to 1983 and was subsequently Henry R. Luce Professor of Law and NOW account (G2) Liberty at Washington University, St Negotiable order of withdrawal account; a CHECKING ACCOUNT (US) which bears inter- Louis. His celebrated work in CLIOMETRICS considers the evolution and economic est. Super-NOW accounts offer a higher effects of legal and social institutions. He rate of interest. is famous for The Economic Growth of the Nozick, Robert, 1938–2002 (B3) United States, 1790–1860 (1961) and US philosopher of the NEW RIGHT famous Structure and Change in Economics for his notion of the ‘minimal state’. He (1981). In 1993 he was awarded the NOBEL was educated at Columbia College and PRIZE FOR ECONOMICS with FOGEL. Princeton University. He has taught at Princeton from 1962 to 1965 and been a north–south gap (R5) full professor of philosophy at Harvard The regional difference in prosperity in since 1969. His libertarian view of the Great Britain and many other countries limited role of government is in accord usually measured by GDP per capita, with much of the thinking of FRIEDMAN property prices and levels of unemploy- and HAYEK. ment. Some countries such as Italy have a north more prosperous than the south. The Seealso:forcedlabour gap often represents the difference between References the region with the national capital and Nozick, R. (1974) Anarchy, State and peripheral areas. In the world as a whole Utopia, Oxford: Basil Blackwell. there is a disparity in income between prosperous countries north of the equator N share (G1) and the poorer countries to the south. An AMERICAN DEPOSITORY RECEIPT issued by a Chinese company and listed on the New note issuance facility (G2) York Stock Exchange. Promises by banks to lend money to Seealso:Ashare;Bshare;Lshare companies when they cannot raise it in short-term securities markets. This is a null hypothesis (C1) form of OFF-BALANCE-SHEET FINANCING or In statistics, the hypothesis that there are adjusted claim. Increasingly US banks are no differences between the characteristics using NIFs as an alternative to traditional of a population and a sample taken from it, medium-term credit facilities, often ar- or between two samples of that population. ranged with a syndicate of banks. nume´raire (D0, E4) Seealso:revolvingunderwritingfacility A measuring rod for stating relative prices;

© 2002 Donald Rutherford WALRAS’s term for a commodity used for sion of an economy costs rise faster than this measurement purpose. demand as a cycle reaches its peak. nutcracker theory of the business cycle References (E3) Sherman, H.J. (1991) The Business Cycle: A cycle in economic activity in which Growth and Crisis under Capitalism, profits are squeezed like a nut from the Princeton, NJ: Princeton University two sides of limited demand and rising Press. costs. This occurs because in every expan-

© 2002 Donald Rutherford O

Oaxaca wage decomposition (J3, J7) Seealso:managerialmodelsofthefirm; A method of distinguishing wage differ- theoryofthefirm ences due to human capital characteristics occupation (J2) from those based on DISCRIMINATION. The work activity of a person defined References according to the education, skill, responsi- Oaxaca, R. with Ransom, M. (1994) ‘On bility and experience demanded by an discrimination and decomposition of employer. wage differentials’, Journal of Econo- References metrics, 61: 5–21. International Labour Organisation (1968) The International Standard Classification objective function (D0, E0) of Occupations, Geneva: ILO. A statement in equation form of a depen- dent variable which has to be maximized occupational licensing (J2, K2) or minimized by independent variables The regulation of types of employment or attaining optimal values. In the case, e.g. SELF-EMPLOYMENT, including the crafts and of a UTILITY FUNCTION, utility is the depen- PROFESSIONS. The regulatory bodies engaged dent variable to be maximized and quan- in licensing have included guilds and tities of different goods are the professional associations. They aim to independent variables which have to be maintain the quality of a particular occu- optimally combined. pational group by supervising training, punishing malpractice and limiting entry. objectives of firms (L2) What a FIRM has as its aim or target. occupational mobility (J6) A worker’s movement between one type of PROFIT MAXIMIZATION is assumed in many theories of the firm to be the central aim job and another. The amount of mobility of a firm but research since the 1930s has depends greatly on the fineness of the noted that managers have many other occupational classification chosen. Since objectives, partly because they are not 1945, even with the broadest classification of occupations, a great shift from manual shareholders directly rewarded in propor- to white-collar jobs has been apparent in tion to a firm’s profitability. Objectives many advanced countries, partly because replacing profit maximization include of DE-INDUSTRIALIZATION and the expansion sales maximization, maintaining (or in- of the service industries. creasing) a market share and achieving a target rate of return on capital employed. Seealso:labourmobility

© 2002 Donald Rutherford occupational segregation (J4) an official stock exchange but resembles An occupational distribution of a labour officially recognized products. An example force such that men, or women, or differ- is a bank CERTIFICATE OF DEPOSIT linked to ent ethnic groups, are under-represented the performance of STANDARD & POOR’S 500 or over-represented in particular occupa- stock index. tions compared with their proportions in the total labour force. An example of this Office of Fair Trading (L4) would occur if overwhelmingly black UK organization set up in 1973 to admin- males worked in domestic service. In many ister COMPETITION policy. Its tasks include countries women are heavily concentrated examining monopoly situations, monitor- in nursing, retailing, secretarial and do- ing ANTI-COMPETITIVE PRACTICES in the UK, mestic service jobs. regulating CONSUMER CREDIT and consider- ing proposed mergers which might be Seealso:crowdinghypothesis;discrimi- referred to the COMPETITION COMMISSION.It nation maintains the register of permitted restric- tive trade practices. off-balance-sheet financing (G3, M4) Funds raised for a business not shown in Office of Management and Budget (H1) its BALANCE SHEET. This type of financing is An office of the US president set up in 1970 resorted to when the company has bor- in succession to the Bureau of the Budget rowed near to the limit set by its Articles (founded 1921) which is responsible for of Association or when it wants to avoid preparing the Executive’s budget for pre- increasing its GEARING and attracting an sentation to Congress in January each year. adverse stock market reaction. The ap- After examination by House and Senate pearance of a company’s balance sheet can committees, a concurrent resolution on the be improved by transferring liabilities to budget is announced by 15 April to be associated companies or by using particu- followed by legislation by 15 May. Once the lar devices, e.g. the leasing of capital budget is passed, the OMB supervises and equipment, the artificial sale of stock to a controls its administration and provides financial company to acquire extra funds, data on programme performance. mortgage SECURITIZATION, FACTORING, sale and repurchase agreements and loan official development assistance (O0) transfers. Increasingly, the bodies super- Aid granted by a national government to vising the accountancy profession are de- an international organization such as the manding fuller and more open financial WORLD BANK. reporting. Seealso:foreignaid Seealso:creativeaccounting official financing (F4) offer curve (F1) An item in the balance of payments of a A curve showing what a country will offer country which is the amount of finance in exports for the amount it imports in a which has to be raised from overseas model of two goods. It is used to analyse monetary authorities, by currency borrow- the effects of tariffs. Also known as a ing and drawing on official reserves to reciprocal demand curve. finance a deficit in the current and capital accounts. offer price (G1) 1 The price at which a company offers to officialreserves(E5)seeinternational sell its shares to the public. reserves 2 The selling price of UNIT TRUST units. offshore banking (G2) off-exchange instrument (G2) Banking activities conducted abroad to A financial product that is not traded on evade domestic monetary controls. UK

© 2002 Donald Rutherford financial institutions have resorted to HECKSCHER–OHLIN TRADE THEOREM. His most small Commonwealth countries such as famous work is Interregional and Interna- the Bahamas and a number of islands, tional Trade (1933). His contribution to including the Channel Islands and the Isle international trade theory earned him, of Man. (The USA regards banking activ- with MEADE, the NOBEL PRIZE FOR ECONOMICS ities in every foreign country, including the in 1977. UK, as ‘offshore’.) The principal activities References of offshore banks are the management of investment trusts and participation in Samuelson, P.A. (1981) ‘Bertil Ohlin (1899–1979)’, Scandinavian Journal of Eurodollar and Eurobond markets. Economics 83: 355–71. Steiger, O. (1976) ‘Bertil Ohlin and the off-the-job training (J2) origins of the Keynesian Revolution’, Formal training, usually away from the History of Political Economy 8: 341–66. premises of one’s employer, which takes the form of lectures, tutorials and practical oil-price increases (E3, Q4) sessions. A switch to this type of training Major supply shocks in 1973–4 caused by has been necessary because of the hapha- the ORGANIZATION OF PETROLEUM EXPORTING ON-THE-JOB TRAINING zard nature of much COUNTRIES raising the price of oil and in and the increasing amount of technical 1979–80 by a cutback in Iranian oil pro- knowledge required for many occupations. duction and exports after the Iranian Seealso:generaltraining Revolution. In 1973–4, the price rose from $1.90 to $9.76; in 1979–80 from $17.26 to Ohlin, Bertil, 1899–1979 (B3) $28.67; and in 1990, Iraq’s invasion of Ku- Swedish international trade and macroe- wait also led briefly to oil-price inflation. conomic theorist and a leader of the STOCKHOLM SCHOOL, who was educated at Okun, Arthur M., 1928–80 (B3) Lund University, the Stockholm School of US economist and policy adviser who was Business Administration, Harvard Univer- educated at Columbia University and sity and at the University of Stockholm taught at Yale University from 1952 to where he was a doctoral student of CASSEL. 1963. He was a member of the COUNCIL OF He was a professor of economics from ECONOMIC ADVISERS from 1964 to 1968, the 1925 to 1930 at Copenhagen and at Stock- year in which he was chairman. His most holm from 1930 to 1965 (as successor to influential work was with the BROOKINGS HECKSCHER). In a parallel political career, INSTITUTION as its senior fellow from 1969, he was a member of the Swedish parlia- contributing to Brookings Papers on Eco- ment (1938–70), leader of the Swedish nomic Activity as joint editor. His fame Liberal Party (1944–67) and Minister of largely rests on his The Political Economy Trade (1944–45). of Prosperity (1970), Equality and Effi- As a member of the STOCKHOLM SCHOOL, ciency – The Big Trade-off (1975) and his he in many ways anticipated KEYNESIAN posthumous classic Prices and Quantities – ideas by using the concepts of the PROPEN- A Macroeconomic Analysis (1981). His SITY TO CONSUME, LIQUIDITY PREFERENCE and work as a macroeconomist had the major the MULTIPLIER in articles of 1933 and 1934. concern of attaining economic growth In times of excess capacity, he argued (in without inflation; the trade-off between 1934) that the government should under- equality and efficiency also interested him. take investment projects that would not Seealso:discomfortindex;invisiblehand- compete with the private sector and would shake;leakybucket;Okun’slaw be deficit financed. He developed Heckscher’s factor price equalization the- References ory of international trade to produce the Gordon, R.J. and Hall, R.E. (1980)

© 2002 Donald Rutherford ‘Arthur M. Okun: 1928–80’, Brookings Old Lady of Threadneedle Street (E5) Papers on Economic Activity 1: 1–5. see Bank of England

Okun’s law (E0) old staples (L5, L6) A rule of thumb, applicable to the US The heavy industries once the basic indus- economy in 1960–80, which states that tries of industrialized economies: coal, when the ratio of actual to potential iron and steel and shipbuilding are the annual GROSS NATIONAL PRODUCT changes by principal examples. They were concen- 3 per cent (more recent estimates state 2 trated in areas with major rivers and large per cent), the observed unemployment rate mineral deposits. changes in the opposite direction by 1 per Seealso:commandingheights;heavyin- cent. The potential gross national product dustry is measured by extrapolating the US gross national product of 1950 (when there was oligopoly (L1) full employment and full capacity) and A MARKET or INDUSTRY consisting of a adding to it the long-run trend of produc- small group of sellers, often five or less. tivity improvements. A relationship noted This term was originally coined by Sir by the US economist, Arthur OKUN. Thomas More in his Utopia (1518). An oligopolistic type of market structure is References usual in modern science-based industries, Okun, A.M. (1970) The Political Economy e.g. computer hardware, pharmaceuticals. of Prosperity, Washington, DC: Brook- Oligopolies can be collusive (firms make ings Institution. joint-pricing and output decisions) or non-collusive. However, collusive oligo- Old Age, Survivors, Disability and poly is less common because of competi- Health Insurance (I3) tion laws that have outlawed it in many The largest social insurance programme in countries. Oligopoly price theory tries to the USA established by the Social Security explain the interaction of the decision Act 1935. It covers over 90 per cent of making of firms in non-collusive situa- retired US citizens, although eligibility is tions: the KINKED DEMAND CURVE is a major based on age, not retired status. Employ- example of this approach, as are PRICE ers, employees and self-employed persons LEADERSHIP models. The most recent finance it on a ‘pay-as-you-go’ principle developments in oligopoly analysis through payroll taxes. The benefits have included the STRUCTURE–CONDUCT- granted are a percentage of average earn- PERFORMANCE, strategic entry deterrence ings, over the period when a person could and CONTESTABLE MARKETS approaches. expect to have been in employment cov- ered by the scheme. Since the Revenue Act Seealso:kinkeddemandcurve 1942, it has been US federal policy to References encourage the expansion of private pen- Friedman, J.W. (1983) Oligopoly Theory, sion plans. Cambridge and New York: Cambridge Seealso:payrolltax;SocialSecurityAct University Press. 1935 (L1) A market controlled by a few dominant old economy (P0) buyers. That national ECONOMY, or part of it, which makes little use of information technology Seealso:monopsony organizing the production of goods and Omnibus Budget Reconciliation Act services in factories, offices and shops. (H6) Seealso:neweconomy US federal statute which includes both

© 2002 Donald Rutherford changes in tax laws and appropriations to should be sold in the domestic market at various government spending programmes. the world equilibrium price. An Act of this kind removes the legislative Seealso:multipleequilibria work of passing several appropriation and revenue bills. one-shot game (C7) A game with the initial decisions on price, one-bank holding company (G2) output and advertising expenditure main- US corporation with only one banking tained throughout the game. subsidiary other subsidiaries which can be engaged in activities prohibited to one-tailed test (C1) banks. A statistical significance test which is only concerned with the upper or the lower part one-club policy (E6) of a distribution of a variable. MACROECONOMIC POLICY which chiefly uses one policy instrument, e.g. interest rates, Seealso:two-tailedtest to the exclusion of others. One two three bank (G2) one country, two systems (P4) A fringe bank licensed by the UK Board A CENTRALLY PLANNED ECONOMY which per- of Trade under the Companies Act 1967, mits CAPITALISM to operate in part of it. section 123. As there was lax control over This arrangement was designed for Hong these new banks and no supervision by the Kong when it ceased to be a British colony Bank of England, the banks were shown in 1997 so that capitalism could survive in to be unstable during the BARBER BOOM of the planned Chinese economy. the 1970s and the consequent SECONDARY BANKING CRISIS. one-crop economy (O0) An ECONOMY whose production is largely on-the-job training (J2) concentrated on one PRIMARY PRODUCT and The acquisition of skills through copying hence is vulnerable to fluctuations in its the example of experienced workers who TERMS OF TRADE and major threats to are continuously present to supervise the production, e.g. bad weather. Economies work attempts of the trainee. Most APPREN- producing copper, ground nuts, sugar and TICESHIP schemes are of this nature. BECKER coffee have often been of this type. included this type of training in his con- cept of HUMAN CAPITAL. one hundred per cent reserve banking (G2) Seealso:off-the-jobtraining A form of banking which maintains a openbiddingsystem(D0)seegeneral bank’s total volume of deposits (liabilities) competitivebidding equal to reserve assets. Under this system, a bank is unable to make advances open economy (F1, P0) through credit creation. Although such An economy engaged in international banking can resist RUNS ON A BANK, it makes trade. The degree of openness of an little profit through not holding illiquid economy can be measured by its imports bills, bonds and loans. or exports as a proportion of gross domes- Seealso:Fisher;fractionalreservebank- tic product: for the most open of econo- ing mies this can be over 60 per cent. The smaller an economy, the more open it one-price law (D0) usually is, as it is unlikely to produce a The market rule that only one price is full range of goods and services. Open produced by a market in equilibrium. The economies such as the UK, Holland and PHYSIOCRATS were early exponents of the Belgium are, therefore, much affected by view that internationally traded goods fluctuations in world trade.

© 2002 Donald Rutherford Seealso:autarky;closedeconomy who has an informational (or other) ad- vantage, e.g. exclusive knowledge of the open-ended fund (G2) true quality of a good offered for sale. A UNIT TRUST or MUTUAL FUND whose size is determined by the amount of units sold Seealso:asymmetricinformation;lemons and hence is ‘open’. market open market operations (E5) opportunity cost (D0) Purchases and sales of bills and govern- The value of the alternative forgone by ment bonds by a CENTRAL BANK in order to choosing a particular activity. A major change their prices and hence interest rates example is the choice of work rather than and the quantity of reserve assets held by leisure, where the opportunity cost of work- the banking system. If a fall in interest ing is the amount of leisure sacrificed. Such rates is desired, the central bank will buy a cost arises from the scarce nature of bonds to increase their prices and hence resources. The economist uses opportunity lower their yields. This is a principal tool cost as the central meaning of cost. The of MONETARY POLICY that can be used any much-used expression ‘there’s no such thing day that markets are open and does not as a free lunch’reflects the fact that all goods need legislative approval. and services have their opportunity costs. open population (J1) Seealso:accountingcosts;Wieser A population subject to emigration of its optimal control (C6) residents and/or immigration from other The use of mathematical techniques to areas. choose among several policies in order to Seealso:economicrefugee regulate or control a system. This approach is used increasingly to select a mixture of open shop (J5) FISCAL and MONETARY POLICIES, as well as to A workplace where workers are employed manage a portfolio of securities. whether or not they have TRADE UNION membership. References Pindyck, R.S. (1973) Optimal Planning for Seealso:closedshop;unionshop Economic Stabilization: The Application of Control Theory to Stabilization Policy, Operation Twist (E5) Amsterdam: North-Holland. Manipulation of the US TERM STRUCTURE OF INTEREST RATES in 1961 by the Kennedy optimal peg (F3) Administration raising short-term rates A currency peg intended to stabilize the and holding, or allowing to fall, long-term prices of traded goods or the BALANCE OF rates. The effects of this policy were hoped TRADE or the TERMS OF TRADE or the rate of to be an improvement in the balance of INFLATION of a particular economy by payments through HOT MONEY flows at- attaching that economy’s currency to a tracted by higher short-term interest rates basket of other currencies in order to and some stimulus to investment by not reflect the pattern of a country’s trade. raising the long-term rates. Pegging attempts to achieve an external balance continuously for that country. References Modigliani, F. and Sutch, R. (1966) ‘In- References novations in interest rate policy’, Amer- Williamson, J.H. (1982) ‘A survey on the ican Economic Review 56 (May) (Papers literature on the optimal peg’, Journal of and Proceedings): 178–97. Development Economics II: 39–61. opportunistic behaviour (C7, D0) optimal rate of pollution (Q2) The actions of a partner to an exchange The rate of pollution at which the marginal

© 2002 Donald Rutherford social benefit of pollution control and one currency or by a number of linked marginal social cost of pollution are equal. currencies, e.g. the EUROPEAN MONETARY SYS- TEM. The necessary conditions for an optimal taxation (H2) optimum area include wage and price A tax structure maximizing SOCIAL WEL- flexibility and mobility of capital and FARE. As a taxation system uses a variety labour. The social and political unity of of taxes, optimal income taxes and opti- the area is more important than its size. mal commodity taxes have to be deter- Setting up an area with a COMMON CUR- mined simultaneously. Optimality is RENCY brings about the adjustment costs obtained by a correct TRADE-OFF between of extra unemployment, reductions in economic efficiency and distributional ob- residents’ income and wealth and migra- jectives. tion, which can be financed out of a joint See also: Ramsey rule FISCAL POLICY for the area. optimal work effort (J2) Seealso:EuropeanMonetarySystem The amount of work which equates the References MARGINAL UTILITY of an hour’s work with Ishiyama, Y. (1975) ‘The theory of opti- the marginal utility of another hour’s mum currency areas: a survey’, Interna- leisure. tional Monetary Fund Staff Papers 22: optimization problem (D0) 344–83. Mundell, R.A. (1961) ‘A theory of opti- The task of maximizing or minimizing an mum currency areas’, American Eco- OBJECTIVE FUNCTION. Major cases of optimi- nomic Review 51: 657–65. zation in economics include a consumer with a fixed income buying a combination optimum firm (L2) of goods and services which will maximize A firm whose output is produced at his/her utility, the maximization of the minimum average cost. A unique optimum wealth of equity shareholders by finding is only possible for firms with U-shaped the best growth policy for a firm and average costs and only likely to exist in the minimizing the cost of producing a parti- short run. cular output by choosing the appropriate Seealso:minimumefficientscale combination of factors of production. Different forms of programming are used optimum income tax (H2) to solve these problems. That rate of income tax that maximizes economic welfare within the production References possibilities available. This tax rate de- Baumol, W.J. (1965) Economic Theory and pends on the skill distribution within the Operations Analysis, 2nd edn, Engle- population and the population’s labour– wood Cliffs, NJ: Prentice Hall. Vajda, S. (1961) Mathematical Program- consumption preferences. ming, Reading, MA: Addison-Wesley. References optimum city (R1) Mirrlees, J. (1971) ‘An exploration in the A large settlement which maximizes the theory of optimal income taxation’, Re- view of Economic Studies 38: 175–208. SOCIAL WELFARE function of the households residing there. optimum population (J1) References An ideal-sized population that maximizes output per head. As this is not the max- Mirrlees, J. (1972) ‘The optimum town’, imum-sized population that a country can Swedish Journal of Economics 74: 114–35. support, the population can exceed such optimum currency area (F3) an optimum. Critics of this concept have The group of countries ideally covered by noted that there is no consensus support-

© 2002 Donald Rutherford ing the view that output per head should commodity or financial asset at a specified be maximized; for example, for military price in a stated time period. reasons a larger population may be pre- Seealso:calloption;putoption ferred. option demand (D0) optimum quantity of money (E4) Demand for a good or service which is The quantity of money associated with a usually not consumed by the person re- nominal rate of interest of zero and max- garding it as desirable, e.g. private car imum consumer welfare. This can only be users may desire there to be a public adopted as a policy if there is a model of transportation service not for themselves how money is used in a national economy. but for those who cannot afford private References transportation. A high option demand can Bewley, T. (1983) ‘A difficulty with the reduce the price of the good or service in optimum quantity of money’, Econome- question: demand for insurance is of this trica 51: 1485–1504. kind – the more entering an insurance Friedman, M. (1969) The Optimum Quan- scheme, the lower the premiums for insur- tity of Money and Other Essays, Chi- ing against a particular risk. cago: Aldine. Seealso:sponsordemand optimum tariff (F1, F3) 1 The tariff that will maximize the eco- options exchanges (G1) nomic welfare of a country. Providing it OPTIONS were first traded in 1973 with the is a large economy and the elasticity of opening of the Chicago Board Options supply is less than infinite, through Exchange (CBOE). Now option trading is offered by more than a dozen US ex- changing the TERMS OF TRADE by impos- ing a tariff it is possible to have in- changes and on the major European creased revenue from trade despite its exchanges. On some exchanges more than lower volume. 1 million contracts are traded daily in many products. Apart from equities and 2A TARIFF that increases a country’s welfare by maximizing the return to its bonds, option trading is also available for precious metals, oil, agricultural commod- potential MONOPOLY or MONOPSONY power. ities, foreign currencies and market in- This tariff must be set at that rate which dexes. equalizes the social benefit and social cost of the marginal import. Optimum orderly market agreement (F1, L1) tariffs have been recommended for less 1 A restrictive trading agreement between developed countries with a substantial the firms of an industry which is experi- monopoly in their export trade. If the encing a decline in the total demand for optimum tariff is zero, then there is a its output. In response to this decline, strong case for FREE TRADE. Corden voluntary quotas are agreed between refers to an ‘orthodox optimum tariff’ firms to allow a more orderly adjust- as an export tax which changes the ment to a lower level of sales, avoiding TERMS OF TRADE as the tax restricts cut-throat price competition so that exports and raises their prices. each firm can at least maintain its References individual sales level. But there is lim- Corden, W.M. (1974) Trade Policy and ited scope for introducing these agree- Economic Welfare, Oxford: Clarendon ments as, if they are made by a group of Press. firms without the approval of govern- ment, they are likely to violate national option (G2) COMPETITION POLICIES. The right to buy or sell a currency, 2 An agreement between countries to

© 2002 Donald Rutherford restrict exports to a country with trade organic premium (Q0) deficits as a means of protecting its The higher prices consumers are prepared industries. to pay to obtain food which has been produced by an ‘organic’ farmer, i.e. some- ordinalist revolution (D6) one using traditional agricultural methods The major advance in welfare economics and not artificial fertilizers and additives. in the 1930s, particularly wrought by The higher costs associated with this HICKS, which founded welfare theorems on small-scale farming partially justify the the ordering of persons’ utilities, not on higher product prices. the actual units of UTILITY derived from consumption. The INDIFFERENCE CURVE was organizational economics (A1) a major new tool of this analysis. A branch of microeconomics which has made use of psychology, sociology, politi- Seealso:revealedpreference cal science, biology, ecology and anthro- References pology to study the nature of organizations and the phenomena asso- Cooter, R. and Rappoport, P. (1984) ‘Were the ordinalists wrong about welfare ciated with them. From early studies of economics?’, Journal of Economic Lit- power within organizations and the con- erature 22 (June): 507–30. sequences of being dependent on outside Hicks, J.R. (1939) Value and Capital, ch. 1, resources, this form of economics has Oxford: Clarendon Press. changed to using , TEAM THEORY, business strategy, AGENCY THEORY ordinal utility (D0) and the EVOLUTIONARY THEORY OF THE FIRM. Subjective satisfaction expressed as or- dered preferences. This makes possible the Seealso:Williamson ranking of satisfactions as first, second, References third and so forth without having to state Barney, J.B. and Ouchi, W.G. (eds) (1986) the amount by which one satisfaction is Organizational Economics, San Francisco greater or less than another. and London: Jossey-Bass. Seealso:cardinalutility;util;utility Organization for Economic Co- operation and Development (F0) ordinary share (G1) The group of rich industrialized countries An EQUITY of a company which usually founded in 1961 and consisting of the constitutes a major part of its issued eighteen European countries of the ORGANI- capital. These shares will be paid a divi- ZATION FOR EUROPEAN ECONOMIC CO-OPERATION, dend if priority capital holders of deben- the USA and Canada. Later to join were tures or preference shares have been paid Japan (1964), Finland (1969), Australia and the directors decide to distribute the (1971) and New Zealand (1973), with the remaining earnings. result that it now produces about two-thirds Seealso:commonstock of the world’s output with only one-sixth of its population. This Paris-based organiza- organic composition of capital (D0, E0) tion provides a forum for the discussion of A Marxian term for the ratio of constant policies for promoting ECONOMIC GROWTH, to variable capital. Constant capital is FREE TRADE and FOREIGN AID to less devel- regarded as the dead labour embodied in oped countries and has an independent the means of production and variable secretariat which produces tables of stan- capital the live labour, i.e. the labour dardized economic data of member coun- required at that stage of production. It tries and economic forecasts (more accurate can be regarded as a CAPITAL–LABOUR RA- than many national forecasts because of the TIO. joint forecasting of linked economies). Its

© 2002 Donald Rutherford influential economic policy committee frustration with the oil companies made meets two or three times a year and is OPEC assume the role of price fixing. chaired by the chairman of the US Pre- However, the 1981 price increase was too sident’s Council of Economic Advisers. great: Saudi Arabia dissented from the subsequent cut, leading to a price war and Seealso:INTERLINK the weakening of the joint power of Organization for European Economic OPEC. Co-operation (F0) Seealso:oil-priceincreases An international organization founded in 1948 to administer US aid to the eighteen References West European countries benefiting under Ghanem, S. (1986) OPEC: The Rise and the Marshall Plan. Its principal achieve- Fall of an Exclusive Club, London: KPI. ments were the creation of the European organization theory (L2) Monetary Agreement in 1956, its organi- A modern THEORY OF THE FIRM that asserts zation of the negotiations which estab- that the goals and behaviour of a firm are lished the EUROPEAN COMMUNITY and its the consequences of its organizational contribution to trade liberalization. The structure. This theory challenges earlier ORGANIZATION FOR ECONOMIC CO-OPERATION theories based on PROFIT MAXIMIZATION.A AND DEVELOPMENT succeeded it in 1961. major example of this new approach is the assertion that managers are satisficiers, Organization of Petroleum Exporting not maximizers. Countries (F0, Q4) The major world oil producers’ forum Seealso:managerialmodelsofthefirm established by the Baghdad Conference original issue discount bond (G1) of 1960, on the initiative of Venezuela. It A type of JUNK BOND issued at a large has aimed to restore oil prices to their discount below its par value with COUPON pre-September 1960 levels, to keep oil rates below the market yields at the time companies’ prices stable and to oblige of issue. After an initial period, the cou- countries not to agree to increase produc- pon rate is raised. tion if another country failed to reach an agreement with an oil company. The five orphan assets (G2) founder members – Iraq, Iran, Kuwait, Money unclaimed from maturing life as- Saudi Arabia and Venezuela – were joined surance and pension schemes. by Qatar in 1961, Libya and Indonesia in 1962, Abu Dhabi in 1967, Algeria in other checkable deposits (G2) 1969, Nigeria in 1971, Ecuador in 1973 NOW ACCOUNTS + ATS accounts (USA). and Gabon in 1975. Its affairs were ‘other things being equal’ (D0) conducted in six-monthly regular and seeceterisparibus further extraordinary meetings. Following years of turbulent negotiations with oil out of the money (G2) companies that failed to raise the incomes For a CALL OPTION where the UNDERLIER is of the oil countries as much as they below the STRIKE PRICE; for a PUT OPTION desired, the six Gulf oil producers in where the underlier is above that price. October 1973 unilaterally increased their outlier (C1) oil price by 70 per cent and cut produc- A data point which is more than an tion by 5 per cent; in December 1973, arbitrary distance from a regression line. there was a further price increase of 13 per cent. OPEC was able to agree on outplacement agency (J6) common prices and quotas until dual An employment agency specializing in pricing was introduced in 1976. Thus placing redundant executives. Financial

© 2002 Donald Rutherford sector DEREGULATION in New York and change their decisions to buy, sell, invest, London caused these agencies to flourish. save, work or engage in leisure immediately. output budgeting (H6, M2) Seealso:insidelag The division of an organization’s budget outside money (E4) into sub-budgets so that expenditures and A monetary asset of the private sector that output can be compared. Although this is a liability of a government, assuming disaggregation is often arbitrary, it is a government demand does not fall as its total conscious attempt to improve the effec- debt rises in real terms. Gold coins under tiveness of expenditure, particularly in the the GOLD STANDARD, currency and bank US public sector. Also known as the PLAN- reserves under a FIAT MONEY system and NING, PROGRAMMING, BUDGETING system. HIGH-POWERED MONEYare the major examples. output capacity (D2) Seealso:insidemoney Performance from a machine or a produc- tive mechanism available to a consumer. A outsider wage setting (J3) concept especially applicable to the oil The fixing of wages by the forces of an industry. EXTERNAL LABOUR MARKET rather than by the personnel and labour policies of a parti- output floor regulation (L5) cular firm. An alternative to PRICE CAP REGULATION. This requires a regulated firm to produce Seealso:insiderwagesetting a minimum output. Under this form of outsourcing (D2) regulation profit is usually lower than Subcontracting a productive activity to an- under price regulation. The two forms of other firm in the same or another country. regulation coincide under a monopoly. overaccumulation (E2) References Investing too much so that current con- Weitzmann, M.L. (1974) ‘Prices vs. quan- sumption has to be reduced; investing in tities’, Review of Economic Studies 41: projects with low rates of return. 477–91. over-award payment (J3) output gap (E1) An addition to the Australian BASIC WAGE The difference between the actual level of and MARGINS awarded by the Arbitration output of an economy and its potential or Commission. It is the cause of WAGE DRIFT capacity output level, usually based on in the Australian labour market. econometric modelling. A positive output gap reflects labour and other shortages overdraft(G2)seeadvance threatening inflation; a negative gap re- overfunding (E5, H6) strains inflation. The issue of more government bills and Seealso:inflationarygap bonds than is necessary to finance govern- ment expenditure. A phenomenon of the output–inflation trade off (E3) see UK in the 1980s. Phillips curve Seealso:PublicSectorDebtRepayment outside lag (E6) overheadcapital(E2)seesocialcapital The time between the implementation of an economic policy and the realization of all overhead costs (D0) of the effects of the use of that policy 1 FIXED COSTS to pay for administration of instrument. As these instruments, e.g. tax an organization. rates, affect economic behaviour, it is un- 2 Costs that do not vary with the level of likely that economic agents can or will output.

© 2002 Donald Rutherford overheating (E6) constitutes the NET PROPERTY INCOME FROM An excessive expansion in the level of ABROAD item of the balance of payments. economic activity of an economy, often as Short-term assets often accumulate through a result of the using of DEMAND MANAGE- a difference in interest rates; long-term MENT to expand demand at a faster rate assets by the direct investment of MULTI- than the output potential of the economy NATIONAL CORPORATIONS. permits. In some cases, a simplistic appli- overseas sterling area (F0) cation of KEYNESIANISM which poorly esti- mates sustainable growth and the amount A group of countries connected with the of excess capacity in an economy is UK that used sterling for international responsible. transactions as a principal currency re- serve and linked the value of their curren- Seealso:Medium-termFinancialStrategy cies to the pound. It consisted principally of Commonwealth countries (except Ca- overlapping generations model (D9) nada), South Africa, Iceland, Ireland, A GENERAL EQUILIBRIUM model which exam- Kuwait and Jordan and existed in its full ines the consequences of an economy form until June 1972, only Ireland and being demographically structured such Gibraltar remaining until final abolition in that each generation overlaps in time with October 1979 when UK EXCHANGE CON- its successor. This model has been used in TROLS ended. These countries acquired the study of the rate of interest, business their sterling balances in several ways: by cycles, national debt and tax incidence. having a favourable current account sur- References plus with the UK or by UK direct invest- Diamond, P.A. (1965) ‘National debt in a ment in them or by deposit in the UK of neoclassical growth model’, American foreign currencies and gold earned by Economic Review 55: 1126–50. trade with countries outside the sterling Kareken, J.M. and Wallace, N. (eds) area. (1980) Models of Monetary Economics, Proceedings and Contributions from Seealso:sterling;sterlingarea Participants of a December 1978 Con- overshooting (E6) ference, Federal Reserve Bank of Min- A short-term reaction to a shock greater neapolis. than the response in the long run. Samuelson, P.A. (1958) ‘An exact con- sumption loan model of interest with overshooting price (D0) or without the social contrivance of A price which in the short run over-adjusts money’, Journal of Political Economy to changing market conditions and 66: 467–82. Wilson,C.A.(1981)‘Equilibriumindynamic thereby overshoots the long-run price. models with an infinity of agents’, Overstone,Lord(B3)seeLoyd,Samuel Journal of Economic Theory 24: 95–111. Jones overnight money (E4) over-the-counter market (G1) Short loans of one to three days’ duration Trading in shares outside of a stock by banks to the money market. In London exchange by licensed brokers. This type of this is the major source of finance of the stock market has existed in the USA since DISCOUNT HOUSES. the 1870s. overseas assets (F3) overtime (J2) The holdings by a country’s government Work outside normal daily or weekly con- and residents of financial and other assets tractual hours, e.g. working longer than 8 of other countries. The income from them, hours per day or 40 hours per week. A less payments overseas of the same nature, COLLECTIVELY BARGAINED agreement or a

© 2002 Donald Rutherford labour contract will clearly state what is change the whole of society by the estab- normal and what is overtime working. lishment of villages where the inhabitants This work attracts a higher hourly rate held their property in common and com- of pay than normal hours’ working but bined rural and industrial occupations to can still be attractive to an employer when avoid the division of labour. He used up a temporary increase in production is his own capital in founding ideal commu- necessary or when the non-wage labour nities at New Harmony, Indiana, in 1825 costs are so high as to inhibit the recruit- and at Queenwood, Hampshire, in 1839. ment of further workers. Despite the They both failed but many Owenite orga- recessions of many countries in the 1970s nizations flourished, including the London and 1980s, since the 1960s much overtime Co-operative Society. In his final years he working still occurs. turned to spiritualism. Seealso:workinghours References Owen, R. (1813–16) A New View of overtrading (M2) Society. Operating a firm with a low CURRENT RA- —— (1820) Report to the County of TIO, a shortage of working capital so that a Lanark (1820) shortage of cash makes payment of wages, taxes and sums due to trade creditors owner occupation (R2) impossible on the date due. Housing occupied by the owner. In the UK, in 1914, 10.6 per cent of its housing Seealso:undertrading stock was owner occupied; in 1950, 29.5 percentbutin1985,61.9percent.Inthe over-urbanization (R1) USA, 55 per cent of housing units were The growth of a city at a higher rate than owner occupied in 1950 and 64 per cent in its creation of high-wage employment, 1987. Tax relief on mortgage interest and often brought about by the unrealistic the disappearance of much private sector expectations of persons in rural areas. housing available for renting have encour- There are many examples of such growth aged this growth. in less developed countries, especially in Africa. ownership structure (K2, Q0) References 1 A classification of the business sector by sole proprietor, partnership, corpora- Mills, E. and Becker, C. (1986) Studies in Indian Urban Development,NewYork: tion or limited liability company. Oxford University Press. 2 An analysis of the beneficial ownership of a firm distinguishing private indivi- overvalued currency (F3) duals from investment institutions and A currency with a value above its sustain- the government. able market rate. 3 Types of property tenure. Owen, Robert, 1771–1858 (B3) own rate of interest (E4) Born in Newtown, Montgomeryshire, SRAFFA’s notion, used by KEYNES, that for Wales, the son of a saddler, ironmonger every durable commodity there is a rate of and postmaster. He started his career as a interest for it in terms of itself, e.g. a wheat draper at the age of 10 in London and by rate of interest, a steel rate of interest. A the age of 19 became a partner in a steel rate of interest of 10 per cent means Manchester cotton mill. The partnership that 110 tonnes of steel in a year’s time acquired the New Lanark Mills in 1800: exchanges for 100 tonnes now. The money by 1810 the mills employed 2,000 and were rate of interest is based on the same famed for their enlightened labour prac- principle. The difference between market tices. In 1817 he published a plan to and spot prices is the basis for calculating

© 2002 Donald Rutherford own rates for particular commodities. References Own rates show the relationship between Keynes, J.M. (1936) The General Theory of the value of the future services of an asset Employment, Interest and Money, ch. 17, and its present cost, expressed as a YIELD London: Macmillan. or A RATE OF RETURN.

© 2002 Donald Rutherford P

Paasche index (E3) References An index of output or prices which uses Daly, M.T. and Logan, M.I. (1989) The weights of the current year. The Paasche Brittle Rim, Harmondsworth: Penguin. price index is P packagedeal(D0,L1)seeinterlinked p q P i i transaction p0q 1 panel bank (G2) A bank in the Euribor market with a high where p , are the prices of the current year, 1 volume of business in the EUROZONE money p0 are the prices of the base year and q1 markets. When that market was set up are the weights of the current year. The there were forty-seven banks from the first Paasche output index is European Union countries to adopt the P euro, four banks from other EU countries p q P i i and six large international banks of the p1q0 USA and Japan. panel data (C8) where q are the quantities of the current 1 Data collected regularly over a period time year, q are the quantities of the base year 0 from a randomly selected number of and p are the prices of the current year 1 individuals. Many types of economic be- and p are the prices of the base year. 0 haviour, including consumption, have been observed by this method. Pacific Rim (O0) The thirty-four countries and twenty-three Panglossian economics (A1) islands around the Pacific covering 70 A complacent optimism about the future. million square miles (180 square kilo- Dr Pangloss, a fictional character in Vol- metres) and consisting of 2.4 billion people taire’s Candide, asserted that every effect (more than a half of the world’s popula- has a cause and everything is for the best. tion). Since 1979 this world region has papergold(F3)seespecialdrawingrights achieved more than half of the world’s economic growth. Future prospects for paperless entry (G2) growth around the Pacific are considerable Electronic banking pioneered by the Sys- as the combination of Japanese production, tem Committee on Paperless Entry set up innovation and marketing methods har- by the bank clearing houses of San Fran- nessed to Chinese resources is formidable. cisco and Los Angeles and the Federal

© 2002 Donald Rutherford Reserve in 1968. By 1978 a national net- paradox of liquidity (G0) work was set up. The attempt to obtain cash by selling non- liquid assets which fails if done on a large Seealso:dematerialization scale. When many owners liquidate assets, paper money (E4) asset prices fall and it is more difficult to BANKNOTES generally acceptable in payment obtain purchasers. Thus the strong desire of a debt. Originally this paper derived its to increase liquidity has made the fulfil- status from being convertible into gold or ment of the desire less achievable. silver because of their intrinsic value. Since 1931, banknotes have usually been incon- paradox of thrift (E2) vertible so paper money can act as a MED- The contradictory effects of saving as it is IUM OF EXCHANGE because of the financially both beneficial in providing funds for sound character of the banking system investment but detrimental to an under- issuing it. The status of paper money is employed economy. SMITH and other CLAS- recognized by making it ‘LEGAL TENDER’. SICAL ECONOMISTS believed that what is Seealso:BankingSchool;goldstandard; saved is invested so there cannot be Thornton excessive saving. However, KEYNES and leading Swedish economists of the 1930s paper profit (M4) believed that there could be an imbalance An increase in the BOOK VALUE of an asset between EX ANTE saving and investment. yet to be realized. This profit is expressed Hoarding savings instead of investing in nominal terms and does not take into them contributes to a reduction in AGGRE- account INFLATION. GATE DEMAND and the making of a reces- paradox of costs (E0) sion. The new millennium began with low A case of higher wages being associated personal sector savings in many industria- with higher macro profits. This occurs lized countries. because higher wages cause higher house- Seealso:savingsratio;StockholmSchool hold incomes in turn leading to higher demand and profits. paradox of value (D0) paradox of debt (G3) This states that goods with great useful- The impossibility of a particular company ness, e.g. water, command a low price but reducing its debt (leverage) ratio because those with little usefulness, e.g. diamonds, other companies are following the same are expensive. Although this so-called strategy. If debt ratio reduction becomes paradox was known to the Greeks, espe- widespread, capital accumulation and prof- cially PLATO, it was SMITH’s citing it in The its fall with the consequence that the rate of Wealth of Nations which made it popular growth of internal funds based on profits is as a justification for cost of production, less than the rate of growth of borrowing. especially labour, theories of value. De- spite his resolution of the paradox in his References Lectures on Jurisprudence of 1762–63 in Steindl, J. (1952) Maturity and Stagnation terms of dearness being caused by scarcity, in American Capitalism, Oxford: Black- it was not until the MARGINALISTS clearly set well. out the DIMINISHING MARGINAL UTILITY LAW paradox of lending (G2) and distinguished total from marginal Banks are most willing to lend to people utility that the ‘paradox’ was put to rest. with least need to borrow. People with They asserted that water has a high total, high incomes and little debt are the most but low marginal, utility and diamonds the creditworthy and hence attractive as bank reverse; price is proportional to marginal, customers but in less need of bank finance. not total, utility in NEOCLASSICAL ECONOMICS.

© 2002 Donald Rutherford paradoxofvoting(D7)seeimpossibility Seealso:generativecity theorem parasitic industry or trade (J3, L0) parallel currency strategy (F3) A group of firms noted for paying wages The simultaneous use of a COMMON CUR- so low that workers have to be subsidized RENCY, e.g. the ecu, and national curren- by welfare payments or by relatives. Un- cies. equal bargaining power is often the cause of low wages and poor health the result. Seealso:hardecu References parallel importing (F1) The importation of two versions of the Webb, S. and Webb, B. (1920) Industrial Democracy, London: Longman, Green. same product, e.g. a branded pharmaceu- tical and a cheaper substitute. To avoid parastatal (I3) this competition dual pricing of the A company at least 50 per cent owned by branded product is practised. the state. As the state is responsible for any deficits made there is a tendency for parallel loan (F3) such firms to have poor financial disci- A two-way currency loan between two pline and excessive labour forces. In Latin firms in different countries to protect them American countries parastatals have only against exchange rate fluctuations, e.g. a been maintained by increases in the money UK firm and an Italian firm may lend supply with inevitable inflationary conse- each other their own currency for six quences for the national economy. months after which time they repay that currency. Seealso:jointequityventurecompany; nationalizedindustry parallel market economy (P4) see secondeconomy (D2) The efficiency of a system which cannot parallel plants (J5, L1) produce more of any product from the Manufacturing plants or factories produ- same level of inputs without reducing the cing the same product for the same em- output of another product by switching ployer but at different locations so that if inputs between products or by changing a strike occurs in one, production can be techniques. This view of efficiency has switched to another, reducing the power of been challenged because of the difficulties a TRADE (LABOR) UNION. of valuing outputs and comparing them, parallelpricing(D4)seepriceleadership its ambiguity in referring to many alter- native allocations and the possibility that parameter (C1) present allocations may produce different A quantified characteristic of a statistical outputs in the future. population, e.g. MEAN, STANDARD DEVIATION. Pareto improvement (D6) parametric pricing (D4) Making at least one person in a commu- A method of pricing based on the costs nity better off without anyone else being and prices of the previous year adjusted made worse off. for learning, affordability and changing levels of risk. This estimating technique See also: Pareto optimum uses a price function. Pareto optimum (D6) parasitic city (R1) An allocation of resources such that no A city which impoverishes the surrounding one can be made better off without some- region by drawing into it capital and one else being made worse off; the most better quality labour. There are many famous notion of optimality in WELFARE cities in the THIRD WORLD of this kind. ECONOMICS.

© 2002 Donald Rutherford Pareto,Vilfredo,1848–1923(B3) Seealso:ceterisparibus;generalequili- French-bornItaliansociologistandecon- brium omistwhomadealeadingcontributionto partialunemployment(J6)seework WELFAREECONOMICSbysettingoutthecon- ditionsforawelfareoptimum,always sharing knownnowasthe‘Paretooptimum’.In participatingsecurity(G1) hisCoursd’EconomiePolitique(1896)he Asecurityentitlingtheholderbothtoa attemptedasynthesisofeconomics,so- fixedamountofinterestordividendsand ciologyandMarxistthought:economic toextraearningsaboveapre-setlevel. UTILITYwasexaminedinapsychological andsociologicalcontextandMarxian partnership(L2) classanalysiswasextendedtoastudyof Abusinessjointlyownedbytwoormore thenatureofconflictbetweeninterest personswhoarepersonallyresponsiblefor groups.Realizingtheconsequencesfor itsdebtsandeachshareinitsprofits.This societyofpoliticaldemocracy,hewas formofbusinesshaslongbeenpopular reluctanttoretainasocialistapproachto withprofessionalpersons,e.g.lawyersand conflictinhisworkLesSyste`mesSocia- accountants;bankingoftenwasorganized listesof1902.LikeWALRAS,hewasa inpartnershipsbeforethecomingofjoint memberoftheLAUSANNESCHOOL. stockcompanies. References Seealso:limitedcompany Borkenau,F.(1936)Pareto,NewYork: parvalue(F3,G1) Wiley. 1Thenominalvalueofashareprinted Bucolo,P.(ed.)(1979)TheEconomicsof onastockcertificateatthetimeof VilfredoPareto,LondonandTotowa, NJ:Cass. issue. 2Thevalueofacurrencyunderafixed ParisClub(F0)seeGroupofTen exchangerateregime. Seealso:BrettonWoodsAgreement Parkinson’slaw(M1) ‘Workexpandssoastofillthetime patent(O3) availableforitscompletion.’C.Northcote Anofficialdocumentconferringexclusive Parkinsonpostulatedthelawin1955after privilegesonaninventionforaperiodof hisobservationofAdmiraltystaffingin years.Patentscreateaformidabletechno- theUK. logicalbarriertoentry,establishingand maintainingMONOPOLYPOWER.Sincepatents partialequilibriumanalysis(D0) allowmonopolyprofitstoaccruetotheir Atechniqueofmicroeconomicanalysis inventors,theyareamajorprivateincen- pioneeredprincipallybyCOURNOTandMAR- tivetoresearchanddevelopment.Non- SHALLtoanalyseamarketorotherpartof patent-holderscanonlyusepatentedtech- aneconomybyitself.Usuallytherelation- nicalknowledgebylicence.Althoughthe shipbetweenonlytwovariablesisconsid- patentsystemmayencourageinventors,it ered,withtheassumptionthatanything hasbeencriticizedonthegroundsthatall whichcaninfluencethatrelationshipre- scientificknowledgeshouldbeafreegood mainsunchanged.Indemandanalysis,the andthattheconsiderablelegalcostsof relationshipbetweenpriceandquantity registeringandprotectingapatentexclude demandedisanalysed,assumingthat thepoorinventorfromusingthesystem. ‘otherthingsbeingequal’,i.e.thattastes, Seealso:invention;productcycle incomes,otherprices,oranythingwhich couldinfluencethequantitydemandeddo path dependent (D0) notchange. The dependence of a network or a system

© 2002 Donald Rutherford on previous decisions made by producers tions such as those of rational choice and consumers. A current price of a good theory. By a process of induction themes or service, for example, is dependent on emerge to reveal the unity of part of the past sales. economic system. These models aim to produce interconnected patterns which ap- Patinkin, Don, 1922–97 (B3) proximate to the real economic system. A major Israeli monetary economist and interpreter of KEYNES who was born in References Chicago where he attended and taught at Wilber, C.K. and Harrison, R.S. (1978) the University of Chicago. Since 1949 he ‘The methodological basis of institu- was a lecturer and (from 1956) professor tional economics: pattern model, story- at the Eliezer Kaplan School of Econom- telling, and holism’, Journal of Economic ics and Social Sciences, Hebrew University Issues 12: 61–89. of Jerusalem. From 1969, he was Director pattern settlement (J3) of Research at the Maurice Falk Institute A wage agreement which follows the pay for Economic Research in Israel. deal of a dominant bargaining group. In Money, Interest and Prices (1956) he Sweden and Japan both have co-ordinated applied Hicksian general EQUILIBRIUM ana- bargaining of this kind, often with the lysis to Keynesian macroeconomics, bril- bargain of the metal industries setting a liantly integrating the real and monetary pattern for other bargaining groups of economies by treating money as a com- TRADE UNIONS and EMPLOYERS’ ASSOCIATIONS. modity which renders services. However, Lower inflation and higher levels of em- in his other numerous writings he had ployment are associated with centralized sharp words of criticism for central ele- collective bargaining of this kind. ments of Keynes’s General Theory, parti- cularly the notion of ‘INVOLUNTARY Seealso:wageround UNEMPLOYMENT’ and the absence of a sup- payback method (M2) ply function in Keynes’s macro model. A method of INVESTMENT APPRAISAL that patriarchal monopoly (D1) assesses a project by the length of time The state of a household in which the wife needed to repay that investment by its does no market work, cannot exit through earnings. As a method, it has been criti- cized for bias against some projects which divorce and has ECONOMIC RENT extracted by her husband. The husband buys goods necessarily will yield earnings only in the at market prices and sells them to his wife long run. at a higher, indirectly measured, price thus PAYE (H2) obtaining the rent. Pay as you earn. A method of paying income tax or contributing to a social patrimonial industry (L0, O2) An industry in which the original country security fund. The UK introduced this retains a controlling interest so that for- system in 1944, partly on the advice of eign ownership is limited to 49 per cent. KEYNES. In the USA, this is known as This rule is applied in the Mexican econ- income tax withholding. omy to the industries constituting its basic pay freeze (E3, E6) infrastructure. A phase of an INCOMES POLICY in which no Seealso:jointequityventurecompany; increase in wages and salaries is permitted. parastatal This can be used as an extreme measure by a national government in times of pattern model (C5) inflation or by an employer in serious An empirical economic model based on financial difficulties. It is difficult to en- case studies rather than on a priori assump- force a pay freeze for long as it usually

© 2002 Donald Rutherford makes workers suffer a fall in real incomes at times of peak demand to reflect the and prevents the labour market from using higher costs of supplying them then. There wage rates to clear the labour market. are many examples of this in the supply of energy and passenger transport, e.g. char- paymentbyresults(J3)seeincentivepay ging less for the electricity consumed by scheme night storage heaters and lower rail fares payment-in-kind bond (G1) on days with less traffic. Industries needing A JUNK BOND such that the issuer can issue this type of pricing face demand conditions more debt in lieu of a cash COUPON payment which fluctuate over the cycle of a day or a over the early part of the bond’s life. year and by a supply with high fixed costs and low variable costs. The higher prices Seealso:originalissuediscountbond charged to pay for extra capacity cannot be pay-off (C7, D0) too great, otherwise consumers will shift 1In GAME THEORY the expected values their demand to other times which will assigned to different combinations of make it increasingly difficult to raise suffi- strategy and counter-strategy. cient revenue to cover the costs of peak- 2 The benefit derived from a course of load special capacity. action, net of cost. Seealso:two-parttariff Seealso:minimax;regret References pay performance sensitivity (G1, J3) Crew, M.A. and Kleindorfer, P.R. (1986) The link between executive remuneration The Economics of Public Utility Regula- and the value of stock OPTIONS. If the tion, Cambridge, MA: MIT Press. executive performs well then the market Williamson, O.E. (1966) ‘Peak load pri- value of the firm will increase and also the cing and optimal capacity under indivi- value of any stock options. sibility constraints’, American Economic Review 56: 810–27. paypolicy(E6)seeincomespolicy payroll tax (H2) Pearson Report (O0) A tax on labour usually equal to a fixed The Report in 1969 of the Commission proportion of the wage bill or of an on International Development headed by individual employee’s remuneration. In Lester Pearson, a former prime minister the USA, this tax became part of the of Canada. It recommended that develop- federal revenue system by the Social Se- ing countries should encourage DIRECT curity Act 1935 when it was introduced to FOREIGN INVESTMENT, that all developed finance social security programmes. Na- countries should by 1975 devote at least 1 tional insurance in the UK is based on per cent of GROSS DOMESTIC PRODUCT to FOR- this principle. EIGN AID and that aid should not be tied to procuring goods in the donor’s country. peace dividend (H5) The extra amount of revenue governments References hope to have available for public expendi- World Bank Commission on International ture or tax cuts because of a reduction in Development (1969) Partners in Devel- defence expenditures resulting from the opment: Report of the Commission on International Development, New York ending of the ‘Cold War’ in 1989. How- and London: Pall Mall Press. ever, the scope for turning guns into butter is limited by the political instability of pecking-order theory (G3, M2) several regions of the world. An explanation of a firm’s financial capital peak-load pricing (D4, L1) structure. It asserts that a firm first uses The charging of higher prices to consumers internal funds, then marketable securities,

© 2002 Donald Rutherford then new debt and finally new common in their stances. Although this was prac- stock (ordinary shares). tised in the UK coal industry as early as the period 1893–14, it has been revived as pecuniary economy of scale (D0, G0) a method of wage dispute settlement, e.g. A reduction in the cost of purchasing in Japanese companies to avoid strikes. inputs or obtaining investment finance as Arbitration is compulsory in twenty US a result of operating at a higher output. states for public sector industrial disputes, Seealso:economyofscale eight using only pendulum arbitration and two using it to some extent. Perhaps such pecuniary external economy (D0) arbitration is most suitable when there is a A reduction in the average costs of a firm general principle at stake, e.g. wage cuts or brought about by the financial actions of wage increases. Also known as flip-flop, other firms. A major example of this is the final offer or straight-choice arbitration. simultaneous undertaking of several in- vestment projects that reduce costs by References reducing the risk of one of the projects Davis, D. (1989) The Power of the Pendu- failing. lum, London: Institute of Economic Affairs. Seealso:economyofscale Treble, J.G. (1990) ‘The pit and the pendu- lum: arbitration in the British Coal pecuniary returns (D3) Industry, 1893–1914’, Economic Journal Rewards to a FACTOR OF PRODUCTION in the 100: 1095–108. form of money. penny share (G1) Seealso:non-pecuniaryreturns A share in a UK company worth less than pegged exchange rate (F3) 50p. The potential for capital growth is An exchange rate kept in the same rela- considerable for many of these securities. tionship to another currency, or to gold, Seealso:heavyshare through using that country’s central bank reserves or through borrowing from the Penrose, Edith Tilton, 1914–96 (B3) After an education at Johns Hopkins INTERNATIONAL MONETARY FUND or other central banks. This is done to avoid University and various academic posts, unnecessary exchange rate fluctuations including one in Baghdad, Penrose was and because of the belief that central Professor of Economics at the School of banks are more astute than private parties Oriental and African Studies, University in setting exchange rates. Most pegging is of London, from 1964 to 1979. Her most done against the dollar. There are many famous contribution to economics is her examples of pegging. For almost 100 theory of the growth of the firm. It had years, until 1934, the US dollar was 20.67 the optimistic theme that the human and per fine ounce of gold. The UK pound material resources managed by a firm can was pegged at US$2.80 in the period be used to achieve its limitless expansion 1948–67; Haiti pegged the gourde at 5 through product and market diversifica- gourdes to the dollar from 1907 onwards. tion and the recruitment of additional high-level managers. Her other works in- Seealso:ExchangeRateMechanism; cluded books on the international PATENT goldstandard system, the international petroleum indus- try and Middle East oil. pendulum arbitration (J5) A system of arbitration under which the References arbitrator has to choose either manage- Penrose, E.T. (1959) The Theory of the ment or union proposals. As no compro- Growth of the Firm, Oxford: Basil mise is possible, both sides are moderate Blackwell.

© 2002 Donald Rutherford pension (H2, J3) in order of magnitude into 100 equal parts. 1 A replacement of employment earnings The first percentile, for example, shows that for retired persons. It can take the form value below which 1 per cent of the values of a flat rate benefit or be related to of a variable lie. The LOWER QUARTILE is the previous earnings and be arranged by a 25th percentile; the MEDIAN is the 50th government or firm or financial institu- percentile; the UPPER QUARTILE is the 75th tion. Pensions can be financed from an percentile. insurance fund or on a ‘pay-as-you-go’ Seealso:decile;median principle with contributions and gov- ernment grants financing the payout of perestroika (P4) benefits. The reconstruction of the Soviet economy 2 A regular payment by a government to proposed in detail in 1987 consisting of a person for distinguished service or granting greater independence from many achievements, e.g. to a soldier or a planning directives to enterprises, even to writer. the extent of being able to go bankrupt. pension fund (G2) As part of economic democratization, the The accumulated contributions of an em- rewards of all workers would depend on ployer and employees of a firm, or other their contribution to the success of an employing organization, which are used to enterprise. To improve economic effi- finance the future payment of retirement ciency, a more realistic structure of prices pensions. In the UK, the largest funds are was proposed. The price structure in the those of the long-established public cor- 1980s was much in need of reform as rents porations, major private sector firms and had last been fixed in 1928, communal local governments. Pension funds since charges in 1946 and many food items, 1945 have become major INSTITUTIONAL IN- including bread, in 1954. This price rigid- VESTORS with the potential to have a great ity prevented demand and supply reaching influence on the movement of share prices. equilibrium in particular markets. The principal limitation on the freedom of pension mis-selling (G2) enterprises was giving priority to state The sale of complicated pension schemes orders. This change was not popular with without explaining the full nature of the unskilled workers as many faced unem- pension scheme. In the UK this led in the ployment for the first time in their lives. 1990s to many retired people having lower than expected incomes. Seealso:Liberman pension scheme (G2) References An arrangement to pay a regular income to Gorbachev, M.S. (1987) Perestroika: New a person too old or too ill to work. By the Thinking for our Country and the World, late nineteenth century, many governments London: Collins. realized that some provision for the elderly Rapoport, V. (1989) Perestroika: A Selec- was needed; in the twentieth century, the tion of Articles, London: Overseas Pub- lications Interchange. spread of COLLECTIVE BARGAINING brought a proliferation of private pension plans. perfect competition (L1) Seealso:OldAge,SurvivorsandDisabil- A market which has a large number of ityInsurance;StateEarningsRelatedPen- buyers and sellers engaged in the trading sionsScheme of a HOMOGENEOUS GOOD, with freedom of entry and exit for firms, no government percentagegrant(H7)seegrantinaid intervention, no transport costs and a percentile (C1) perfectly elastic supply of factors of pro- A value obtained by dividing data arranged duction. Although few markets, apart

© 2002 Donald Rutherford from some securities and commodities Economics, ch. 8, Chicago and London: markets, even approach such a state of University of Chicago Press. affairs, perfect competition is very impor- perfect price discrimination (D0) see tant conceptually as an extreme case in the first-degreepricediscrimination classification of markets. Many economic theories do not advance beyond the as- performance-related pay (J3) sumption of perfect competition. An INCENTIVE PAY SCHEME which attempts to link all or part of an employee’s remunera- tion to the achievement of output and output-related goals instead of to the amount of time supplied by an employee to a firm. It is hoped by firms with performance-related pay (PRP) schemes that turnover, profits, loyalty to the firm and quality of work done will increase and that industrial unrest and ABSENTEEISM will diminish. Seealso:profit-relatedpay

peripheral capitalism (P1) The dependent CAPITALISM of THIRD WORLD countries. The gradual INDUSTRIALIZATION of less developed countries at the periph- ery raises their productivity and labour incomes and creates a surplus that is transferred to advanced countries at the ‘centre’. The centre thus has a faster rate of capital accumulation and income growth than the periphery. Also, the centre is assumed to have greater technological progress than the periphery, as well as different income and price ELASTICITIES of demand for manufactures and primary products. The income and wealth dispari- ties between centre and periphery which result have prompted the demand by PRE- BISCH and others for a range of socialist policies to appropriate the surplus created at the periphery, to limit imports and to increase industrialization.

periphery firm (L1) A small or medium-sized firm in a largely OLIGOPOLISTIC industry which is dominated by core firms.

References perks(J3)seefringebenefits Knight, F.H. (1921) Risk, Uncertainty and Profit, Part II, Boston and New York: permanent arms economy (P0) Houghton Mifflin. An ECONOMY able to continue its accumula- Stigler, G.J. (1965) Essays in the History of tion beyond the limit set by a fall in the

© 2002 Donald Rutherford rate of profit because permanent value is Consumption Function, Princeton, NJ: increasingly diverted into unproductive Princeton University Press. consumption. A term coined by a UK perpetuity (G0) Marxist, Kidron, to describe Western A fixed interest bond with no redemption economies, despite being as applicable to date. many SOVIET-TYPE ECONOMIES. Seealso:consol Seealso:military–industrialcomplex; militaryKeynesianism personal bank (G2) A bank with deposits from individual men References and women and no commercial clients. Kidron, M. (1968) Western Capitalism Many savings banks were of this nature since the War, London: Weidenfeld & until extensive financial deregulation en- Nicolson. couraged diversification. Melman, S. (1974) The Permanent War Economy, New York: Simon & Schuster. personal capitalism (P1) Ownership of industry by the families of permanent employment (J2) the founders of major firms. A Japanese practice of offering lifetime employment to workers, when they join a Seealso:capitalism;merchantcapitalism firm from school or university. This be- personal equity plan (G0) came popular with firms short of labour in UK fiscal arrangement introduced in 1987 the 1950s and anxious about labour turn- that originally permitted individuals to over. The system has rarely been applied invest up to £200 per month, or £2,400 to small firms and less to women than to per year, in EQUITIES, with the incentive of men. Under this system, all employees, not having to pay income tax on dividends except senior management, retire at 55. received from these investments. Plans can Increasing pressures in the Japanese econ- only be arranged by a ‘registered man- omy in the 1990s threatened the existence ager’, i.e. a bank, building society, stock- of the system. broker or licensed dealer in securities. References personal income (D3) Taira, K. (1970) Economic Development and The amount of income a person receives the Labor Market in Japan,NewYork: from being engaged in productive activity Columbia University Press. or owning income-producing assets. It is permanent income hypothesis (E2) determined by an individual’s endowments (including abilities and HUMAN CAPITAL), A theory of the CONSUMPTION FUNCTION that income can be divided into permanent tastes (for work, leisure, saving and risk income (expected lifetime income) and taking), and luck (windfall gains and losses). A person’s income takes the form transitory income (e.g. WINDFALL GAINS)so that permanent consumption is a function of wages, salaries, interest, dividends, gifts of permanent income and transitory con- and rents. As all countries levy taxation, sumption a function of transitory income. for most persons DISPOSABLE INCOME is less than personal income. Before FRIEDMAN, the theory was suggested by several writers. personal income distribution (D3) Seealso:absoluteincomehypothesis;life- The distribution of income between indi- cyclehypothesis;relativeincomehypoth- viduals; the SIZE DISTRIBUTION OF INCOME. esis Statistics on this indicate what proportion of total household income is received by References individuals in each income band, e.g. the Friedman, M. (1957) A Theory of the top 5 per cent. Most studies show the

© 2002 Donald Rutherford stability of this distribution over time and import TARIFFS, taxes on FACTORS OF PRODUC- considerable inequality. TION (e.g. the SELECTIVE EMPLOYMENT TAX), employer contributions to social security References schemes and VALUE-ADDED TAXES. Diagram- Atkinson, A.B. (1983) The Economics of matically, such a tax is shown by an up- Inequality, 2nd edn, Oxford: Clarendon ward shift of the MARGINAL COST curve by Press. Phelps Brown, E.H. (1977) The Inequality the amount of the tax. The extent to which of Pay, Oxford and New York: Oxford producers and consumers pay the tax will University Press. depend on the ELASTICITY of the demand and supply curves. A tax of this kind is (G0) personal sector liquid assets usually contrasted with a LUMP-SUM TAX. Savings deposits of persons with banks, building societies and state savings institu- perverse price (D0) tions. These deposits can be converted into A price which falls as a consequence of an cash at short notice. increase in demand. personnel economics (J2) Seealso:Giffenparadox The study of the business aspects of hu- References man resources based on microeconomic Broome, J. (1978) ‘Perverse prices’, Eco- principles, especially the notions of max- nomic Journal 88: 778–87. imizing agents, equilibrium and efficiency. Peter principle (M1) References The hypothesis that in a hierarchical Lazear, E.P. (2000) ‘The future of person- organization each person rises to the level nel economics’, Economic Journal 110: of his or her incompetence and stays there. 611–39. Poor information within INTERNAL LABOUR per-unit tax (H2) MARKETS is largely responsible for this. A tax which increases the cost of producing Professor Lawrence J. Peter (1920–90) of a unit of a good by the amount of the tax; the University of Southern California sadly formulated this principle after exten- sively studying many organizations. References Peter, L. and Hull, R. (1969) The Peter Principle: Why Things Always Go Wrong, London: Souvenir Press. petrocurrency (E4) A currency whose value is influenced by the large part oil plays in that country’s balance of payments. petrodollars (F3) The surplus receipts of oil-producing countries which were invested abroad rather than spent on imports. Surpluses invested in Japan were termed petroyens, in Switzerland, petrofrancs. petroleum revenue tax (H2) UK tax levied on the proceeds from selling oil and gas above a certain sales levy. Operating costs and royalties are deducted

© 2002 Donald Rutherford from sales revenue before the tax is the proportion of the labour force engaged charged. The exploitation of North Sea in SERVICES to increase. oil reserves brought about this tax which enabled UK governments to share in the Phillips, Alban William Housego, 1914– oil industry’s prosperity. 75 (B3) New-Zealand-born economist who in- Petty, Sir William, 1623–87 (B3) vented in 1958 a major tool of macroeco- Described by MARX as the ‘founder of nomics, the ‘Phillips curve’, which political economy’ and by KEYNES as ‘the originally showed the trade-off between father of modern economics’. He had an wage inflation and unemployment and eventful life rising from being a cabin boy was subsequently applied to changes in of humble origins to a chair of anatomy at the general price level. Also, in a series of Oxford, a chair of music at Gresham’s College, London, Physician-General to articles he examined multiplier–accelerator Cromwell’s army in Ireland, a founder of relationships and did much to introduce the Royal Society and an original thinker the optimal control approach to stabiliza- in economics, far surpassing most of his tion policy. In 1938, at the beginning of his career, MERCANTILIST contemporaries. His principal mentor was Thomas Hobbes, particularly he graduated as an electrical engineer, and in matters of taxation. then ran a cinema and hunted crocodiles Most of his economic writings, dictated in Queensland before acquiring a BA in at night to his secretaries as he paced up sociology and economics (1949) and a and down his study munching raisins, were PhD (1952) at the London School of attempts to solve the policy problems Economics. As an undergraduate, he saw posed by the Restoration of Charles II. scope for applying his engineering knowl- His most comprehensive work was the edge to economics. He was able to con- first economic work on public finance, A struct an analogue machine which applied Treatise of Taxes (1662); his posthumous dynamic control theory to a CIRCULAR FLOW Political Arithmetick (written 1671, pub- model of the economy; this met with the lished 1690) introduced the quantification approval of leading economists such as of economic variables to political econ- MEADE and HICKS and led to his first omy. He is credited with the first clear academic appointment. He was soon ap- enunciation of many economic ideas, in- pointed to the Tooke Chair of Economic cluding HUMAN CAPITAL, the LABOUR THEORY Science at the London School of Econom- OF VALUE, EXPENDITURE TAXES, PUBLIC WORKS ics, which he held from 1954 to 1967. As a as a cure for UNEMPLOYMENT, the DIFFEREN- professor at the Australian National Uni- TIAL THEORY OF RENT, the TRADE CYCLE, THE versity (1968–70), he pursued his interest CIRCULAR FLOW of income, the bank creation in the Chinese economy. of credit and the VELOCITY OF CIRCULATION. Seealso:multiplier–acceleratormodel References References Hull, C.H. (ed.) (1899) The Economic Writings of Sir William Petty, Cam- Blyth, C.A. (1975) ‘A.W.H. Phillips, MBE’, bridge: Cambridge University Press Economic Record 51: 303–7. (reprinted New York: A.M. Kelley, Phillips, A.W. (1950) ‘Mechanical models 1964–5). in economic dynamics’, Economica New Roncaglia, A. (1985) Petty: The Origins of Series, 17 (August): 283–99. Political Economy, Cardiff: University —— (1958) ‘The relation between unem- College Cardiff Press. ployment and the rate of change of money wage rates in the United King- Petty’s law (O4) dom, 1861–1957’, Economica New Ser- The tendency as an economy develops for ies, 25: 283–300.

© 2002 Donald Rutherford Phillips curve (E3) United Kingdom, 1861–1957’, Econom- The relationship between unemployment ica New Series, 25: 283–99. Santomero, A.N. and Seater, J.J. (eds) and inflation so named by SAMUELSON and (1978) ‘The inflation-unemployment SOLOW after Phillips attempted to identify it trade-off: a critique of the literature’, in 1958 by plotting data on changes in UK Journal of Economic Literature 15: 499– money wage rates for 1861–1957 against 544. the national unemployment rates (a mea- Sawyer, M.C. (1991) The Political Econ- sure of overall demand in the UK econ- omy of the Phillips Curve, Aldershot: omy). Later work on the Phillips curve Edward Elgar. sought to take into account INCOMES POLI- CIES and inflationary expectations. The physical quality of life index (D6) long-run Phillips curve is vertical at the A measure of ECONOMIC WELFARE more sophisticated than GROSS NATIONAL PRODUCT NATURAL RATE OF UNEMPLOYMENT. From the mid-1980s in the USA and UK this curve per capita. This index, pioneered by the has been almost horizontal so economic Overseas Development Council of Wa- policy can effect changes in unemployment shington, DC, is based on the percentage without increasing inflation. of literacy in a population, infant mortal- ity and life expectancy after age 1 (to avoid double counting of infant deaths). Some countries rank much lower by this index than by per capita gross national product, e.g. oil-producing countries. Critics of the index are concerned about its narrowness as there are so many other physical indicators of welfare. References Morris, M.D. and Alpin, M.B. (1980) Measuring the Condition of the World’s Poor: The Physical Quality of Life Index, New Delhi: Promilla.

Physiocrats (B1) The leading French school of economic thought which was active in the 1760s and 1770s and whose members were the first to be called ‘e´conomistes’. QUESNAY, Mira- beau, Dupont de Nemours and TURGOT used the name Physiocrats to mean ‘Lords of Nature’ as they took the view that the economy should pursue its natural course. There should be no interference by gov- ernment and agriculture should be ac- corded a unique status as it produces a surplus through plants and animals repro- ducing themselves unlike machines, the product of sterile manufacture. Apart from References presenting one of the earliest models of Phillips, A.W. (1958) ‘The relationship the economy (in Quesnay’s Tableau Econ- between unemployment and the rate of omique), they also advocated an impot change of money wage rates in the unique (single tax) based on agricultural

© 2002 Donald Rutherford rents and laid the foundations for classical ment and Equilibrium (1941). Although he price theory. Much of their work had been was initially critical of KEYNES’S GENERAL more clearly set out by CANTILLON. But the THEORY, by 1949 he was prepared to con- high praise accorded to them by SMITH and cede that it was an original contribution to MARX ensures that they will never be economic analysis. forgotten. References References Casson, M. (1983) Economics of Unem- Meek, R.L. (1962) The Economics of ployment, Oxford: Martin Robertson. Physiocracy: Essays and Translations, O’Brien, D.P. and Presley, J.R. (eds) (1981) London: Allen & Unwin. Pioneers of Modern Economics in Brit- ain, ch. 4, London: Macmillan. picketing (J5) Verbal or physical persuasion of workers Pigou effect (E2) not to enter the premises of a firm where The effect on consumption of a change in there is an INDUSTRIAL DISPUTE. In the UK, the real value of cash balances brought only peaceful picketing to convey informa- about by a change in the money supply, tion by no more than six pickets as- e.g. an increase in the money supply which sembled is legal. causes a rise in prices, a reduction in the purchasing power of cash balances which piece rate (J3) results in lower consumption. Diagramma- A specific wage rate per unit of output. tically, this effect can be shown as a shift Piece rates were a major method of paying in the IS curve. Also known as the ‘real workers and now are useful in incentive balance effect’. pay schemes. Seealso:IS–LMcurves Seealso:timerate Pigovian subsidy (H2) piecework system (J3) A SUBSIDY encouraging the production of A wage system that rewards workers ac- goods and services which provide external cording to the number of pieces/units of a benefits. product they produce. This is the alter- native to remunerating workers according Seealso:externality;Pigou to the time a worker contracts to offer an Pigovian tax (H2) employer. Piecework was introduced to A tax charging firms for the external costs relate work to productivity. However, it which arise from their productive activ- has often been criticized for causing un- ities. stable earnings and causing stress to work- ers who overexert themselves. Seealso:externality;Pigou Pigou, Arthur Cecil, 1877–1959 (B3) Pink Book (F0) The Cambridge economist who was a UK BALANCE OF PAYMENTS accounts. fellow of King’s College from 1902 to pink economy (L1) 1959 and professor of economics, in suc- The business sector with a range of goods cession to MARSHALL, from 1908 to 1943. and services for consumption by homo- In Wealth and Welfare (1912), which was sexuals often run by the same. These expanded into The Economics of Welfare include bars, restaurants, hotels, clothes (1920), he built upon Marshallian founda- shops and bookshops. Since so many tions a study of the size and distribution homosexuals have no dependants, they of national income and the case for have high disposal incomes available for government intervention. His other major consumption in this sector. works included Industrial Fluctuations (1927), Public Finance (1928) and Employ- Seealso:economy

© 2002 Donald Rutherford Pippy (J1) common property amongst the guardians Person inheriting parents’ property: of his ideal republic. usually a middle-aged person living in an Seealso:AncientGreeks;Aristotle area with high property prices. The in- creased wealth of the person helps main- platykurtic (C1) see kurtosis tain the price level. Plaza Agreement (F3) Seealso:greybelt The agreement of the GROUP OF FIVE meet- ing at the Plaza Hotel, New York, in pit committee (G1) September 1985 to intervene in exchange An exchange committee charged with the markets to bring down the value of the US task of fixing the daily settlement prices of dollar. $12 billion was spent by central futures contracts. banks in the first few weeks of the agree- Pittsburgh-plus(D4)seebasingpoint ment. Within a year the US dollar was pricing devalued by 22 per cent. However, the US trade deficit continued to be large. placing (G1) A method of selling shares by which a Plaza Two (F3) seller and buyer privately arrange the An agreement of the GROUP OF FIVE in Paris transaction, instead of trading on a stock in February 1987 to support the US dollar exchange. by attempting to increase Japanese and West German imports and to stabilize planning, programming, budgeting (H6, leading currency rates at the same levels. M2) PlowdenCommittee(H5)seePublic A budgetary system evaluating expendi- ExpenditureSurveyCommittee ture programmes in their entirety by tak- ing into account the total effects of them, point elasticity (C1, D0) using COST–BENEFIT ANALYSIS. This system, The responsiveness of quantity demanded introduced into the US Department of or supplied to an infinitely small price Defense in the early 1960s, was extended change. It is calculated, using differential to other US Departments in 1965. calculus, as the product of two ratios. In Seealso:cost-effectivenessanalysis the case of price elasticity of demand, it is given by References D Harberger, A.C. (1982) Project Evaluation: ð QijQiÞ100 point elasticity = Collected Papers, London: Macmillan. DPijPiÞ100 (E4) plastic money DQiPi CREDIT CARDS and DEBIT CARDS made with ¼ QiDPi plastic and used instead of BANKNOTES, CO- INS and bank CHEQUES to pay for consumer Seealso:arcelasticity;elasticity goods and services. point estimate (C1) Plato, 428/7–348/7 BC (B3) An estimate of a PARAMETER of a popula- Ancient Greek philosopher who was one tion which is given by one number. of the first to discuss fundamental eco- Seealso:intervalestimate nomic concepts, particularly in his Repub- lic and Laws (Book V). He advocated a point-input, point-output model (E1) DIVISION OF LABOUR based on different nat- An economic model based on the assump- ural abilities, discussed the role of money tion that the output from a labour input and advocated EXCHANGE CONTROLS and takes one period to be produced.

© 2002 Donald Rutherford poison pill (G3) policy harmonization (E6, H2) A way of resisting a company takeover 1 The alignment of the economic policies consisting of making the equity capital less of one country with those of another. attractive to a predator. This form of economic integration can remove barriers to the movement of Seealso:macaronidefense goods and services and factors of pro- Polanyi, Karl, 1886–1964 (B3) duction. In the EUROPEAN COMMUNITY, Hungarian socialist who migrated from there have been many attempts to do Budapest to Vienna in 1919 and then to this, especially between countries be- England in 1933. He lectured for the longing to the EUROPEAN MONETARY SYS- Workers’ Educational Association before TEM. moving in 1947 to Columbia University 2 Taxation treaties between countries where he conducted seminars on compara- which establish the rules for the taxa- tive economic institutions and ECONOMIC tion of incomes of individuals who ANTHROPOLOGY. He is noted for his analysis receive incomes from countries of which of exchange systems and examination of they are not residents. socialist planning. In his The Great Trans- formation (1944) he argued that under CA- policylag(E6)seeinsidelag;outsidelag PITALISM, labour and land had been turned policy smoothing (E6) into commodities so that human society Reducing the amplitude in swings in a had become subordinated to the economic policy from one limit to another often by system. using independent non-political boards of experts to formulate policy changes. polarization (G2) Monetary policy is often conducted by an The rule of the Securities and Investment independent central bank. Board (UK) that banks and building societies must choose either to give inde- Seealso:EuropeanCentralBank;Federal pendent advice on all life and UNIT TRUST ReserveSystem;MonetaryPolicyCom- products available on the market or to sell mittee the products of only one company. policyvariable(E0)seechoicevariable Although the aim of the rule is to give consumers independent advice, it has re- political business cycle (E3) sulted in less advice being offered in retail Fluctuations in economic activity brought outlets. about by democratically elected govern- ments seeking to win successive elections. polarization effect (F0) It has been argued that political parties The cumulative and dynamic consequence have a choice between unemployment and to a country in an economic union of inflation so that in the period before an ECONOMIC INTEGRATION. This can result in election they will stimulate a boom to growing or diminishing prosperity. The reduce unemployment at the expense of countries more attractive are those whose price rises but after the election will deflate production centres grow at the expense of when returned to power. This discretion- the others. ary use of fiscal policy destabilizes an economy. The theory appears to be more policy credibility (E6) applicable to some ORGANIZATION FOR ECO- A characteristic of a policy conducted by rational agents who have used the correct NOMIC CO-OPERATION AND DEVELOPMENT economies, e.g. the USA and Germany, economic model and all available informa- than others. In 2001 in the UK large tion when forming their expectations. accumulated tax revenues were released to Seealso:newclassicaleconomics coincide with the General Election.

© 2002 Donald Rutherford Seealso:Phillipscurve regressive nature of many poll taxes has often led to them being criticized. In the References USA, poll taxes have been used by state Lachler, U. (1982) ‘On political business and local governments. Until the 24th cycles with endogenous election dates’, Amendment of the US Constitution of Journal of Public Economics 17: 111–17. MacRae, C.D. (1977) ‘A political model of 1964 outlawed it, the payment of a poll the business cycle’, Journal of Political tax was required of voters in some south- Economy 85: 239–63. ern states, thus excluding the poor, many Minford, P. and Peel, D. (1982) ‘The of whom were black. In the UK, a ‘COM- political theory of the business cycle’, MUNITY CHARGE’ which has some of the European Economic Review 10: 253–70. characteristics of a poll tax was introduced Nordhaus, W.D. (1975) ‘The political busi- in 1989–90 to replace ‘rates’, the local ness cycle’, Review of Economic Studies property tax. 42: 169–90. pollution charge (H2, Q2) political economy (A1) 1AnEFFLUENT FEE. The term used for economics in the eight- 2AUSER CHARGE. eenth and nineteenth centuries and revived in recent years to reflect a policy-oriented pollution control (Q2) view of the subject. Liberal political econ- Measures to reduce emissions of noxious omy was founded by Adam SMITH and was gases and other wastes into the air, rivers concerned then with the art of managing and sea. Legislation, e.g. the US Clean Air public finances and the advising of states- Acts of 1970, 1977 and 1990 and the 1972 men on revenue maximization. SCHUMP- Amendments to the Federal Water Pollu- ETER, in his History of Economic Analysis, tion Control Act, together with private defined it as ‘an exposition of a compre- actions and the orders of regulatory agen- hensive set of economic policies that its cies are used to curb polluting activity and author advocates on the strength of cer- fine or sue the perpetrators of it. Pollution tain unifying normative principles, such as control programmes vary in effectiveness: the principles of economic liberalism [or] often the control of the first and major . . . Socialism’. ROBBINS asserted that poli- emissions has a higher return to anti- tical economy is concerned with policy pollution expenditure than further mar- prescriptions. Today, this applied view of ginal expenditures. Increasingly it has been economics rejects the world of PERFECT noted that pollution control measures re- COMPETITION, criticizes the uncertainties of duce economic growth and profits. free enterprise and makes use of PUBLIC References CHOICE theory. Baumol, W.J. and Oates, W. E. (1975) The Seealso:Post-Keynesians Theory of Environmental Policy, Engle- References wood Cliffs, NJ: Prentice Hall. Lange, O. (1963 and 1971) Political Econ- pollution tax (H2, Q2) omy, 2 vols, New York and Oxford: A tax on firms responsible for emissions Pergamon. that should be equal to the marginal value poll tax (H2, H7) of the damage caused. The aim of such a A tax of a fixed monetary amount levied tax is to induce firms to follow optimal on every member of a population. In production techniques. feudal societies, the amount depended on Seealso:effluentfee rank so the same amount per head would be charged within a certain class but a poop (G1) different amount from class to class. The A person with insider information capable

© 2002 Donald Rutherford of affecting the value of a stock market of the English Poor Law, Cambridge: security. Cambridge University Press. Himmelfarb, G. (1984) The Idea of Pov- Poor Laws (I3, N4) erty: England in the Early Industrial Age, New York: Alfred A. Knopf., London: The succession of English statutes begin- Faber & Faber. ning with those of 1597 and 1601 which aimed to relieve poverty by providing popular capitalism (P1) welfare benefits or work within work- An ECONOMY which allows a large propor- houses. This welfare programme was fi- tion of the population to share in the nanced by levying a ‘poor rate’ on the profits arising from private ownership landowners of each parish. The poor were under CAPITALISM, usually through WIDER confined to the parish of birth and sepa- SHARE OWNERSHIP. rated into the able-bodied and ‘impotent’, i.e. infants, elderly persons, invalids and population (J1) lunatics. Under an Act of 1722, the first 1 All of the finite number of items from 200 workhouses were erected for the aged which a statistical sample is taken. and infirm; the able-bodied were given 2 The total number of residents of a outdoor relief. country or area within it. World popu- Growing rural poverty in the late eight- lation is dominated by China’s popula- tion that constitutes about a quarter of eenth century prompted many economists the total. The major determinants of of the day, including MALTHUS, to argue population growth are the birth rate, that the Poor Laws encouraged population the death rate and international MIGRA- growth and a magnification of the pro- TION. blem of poverty. SMITH was opposed to arrangements restricting GEOGRAPHICAL MO- Seealso:Malthus;statistics BILITY by keeping the poor in the parishes of birth. A Royal Commission, which population census (J1) The counting of the number of persons included Nassau SENIOR, was set up to investigate the administration of the Poor within a country, or part of it, and the Laws. In its report of 1834, it recom- measurement of their characteristics. Most mended that relief should be confined to modern national censuses take place every the ‘indigent’, i.e. the able-bodied pauper, five or ten years, the oldest continuous census being the USA’s which started in the aged and the sick, and available only 1790 (England and Wales has had a con- within workhouses. Poor Laws, the Royal tinuous census since 1801, apart from Commission argued, should not be avail- 1941). Earlier limited censuses were con- able for the poor in general as that would ducted in several countries, e.g. Iceland’s in include help to low-paid workers. Other 1703, but these were only occasional. The proposals in the period of CLASSICAL ECO- United Nations has played a major role in NOMICS included BENTHAM’s idea of profit- standardizing the categories of information making industry houses into which the sought by enumerators and in encouraging poor would be confined (Pauper Manage- the universality of national censuses, which ment Improved, 1798) and G. Poulett was achieved by 1983. Common to most Scrope’s insurance scheme financed by censuses are data on age, sex, place of employers’ contributions (Principles of Po- birth, marital status, normal residence and litical Economy, 1832, ch. 12). occupation. Increasingly planners have Seealso:poverty;subsistence used the population census as a means of obtaining a broad range of socioeconomic References data. This has met with some resistance as Boyer, G.R. (1990) An Economic History people are sensitive about revealing many

© 2002 Donald Rutherford personal characteristics with the conse- of growth of population. Many population quence that there can be under-enumera- policies regard the birth rate as the key tion as the average person may suspect that control variable as it is the major cause of the purpose of a census is to provide a rapid population growth or decline. If statistical basis for conscription or in- population growth is outstripping a coun- creased taxation. try’s economic development, as in China, birth control and rules on the maximum Seealso:defactopopulation;dejure family size are introduced. If population population;demographicaccounting;de- decline is of concern to a country, e.g. mography because of a shortage of young men to References maintain the size of a national army, fiscal Benjamin, B. (1970) The Population Cen- inducements including lower taxes are sus, London: Heinemann. offered to increase average family size. Casley, D.J. and Lury, D.A. (1987) Data Whatever the rate of growth of popula- Collection in Developing Countries, 2nd tion, there are often policies to change the edn, Oxford: Clarendon Press. geographical distribution of population in UnitedNations(1980)PrinciplesandRecom- order to equalize population density be- mendations for Population and Housing tween regions, e.g. the creation of NEW Censuses, New York: United Nations. TOWNS in the UK. population density (J1) Seealso:regionalpolicy The number of persons per unit of land area. This is a major determinant of References property prices, of much public expendi- United Nations (1982) World Population ture, of many social costs and of produc- Trends and Policies: 1981 Monitoring tivity. Population densities vary greatly Report, Vols 1 and II, New York: Uni- from country to country. Some less devel- ted Nations. oped countries appear to have low popula- tion densities because a high proportion of populist interest rate (E4) their land areas is uninhabitable moun- A RATE OF INTEREST chosen by at least two governments. tains, deserts or swamps. PETTY and others have argued that higher population densi- pork barrel legislation (H5) ties increase PRODUCTIVITY. US federal legislation that grants federal Seealso:growthpole money to projects non-essential in char- acter and of benefit to small areas in the population explosion (J1) hope of maintaining voters’ loyalty. As The acceleration of the rate of population most of the taxpayers financing this ex- growth, especially after 1800 in industria- penditure do not benefit because of its lized countries, and in less developed connections with specific localities, it is countries in the twentieth century. A fall usually only possible to pass such legisla- in the death rate as a consequence of the tion by including it in wider bills of increased availability of public health mea- national appeal and by LOGROLLING. sures and the slow spread of contraception in poorer countries have brought about portfolio balance (G0) this population growth. The major curb to The distribution of a person’s or a socie- growth is often, regrettably, famine. ty’s wealth among different assets accord- ing to the preferences of the portfolio Seealso:Malthus;neo-Malthusians holder. TOBIN has, following KEYNES’S GEN- population policy (J1) ERAL THEORY, used this approach to mone- Co-ordinated government measures to tary theory. As yields vary from asset to achieve a desired size, structure and rate asset, this approach has been used as an

© 2002 Donald Rutherford explanation of the structure of interest position-risk capital (G2) rates. That capital of a securities house used to guard against sudden downturns in mar- Seealso:termstructureofinterestrates kets. The past price volatility of a particu- portfolio investment (G0) lar type of SECURITY will determine how Investment in securities. much position-risk capital is needed to insure against a fall in stock market prices. Seealso:foreigndirectinvestment positive discrimination (J7) portfolio optimization (G1) Granting the minorities of society en- Seeking the best trade-off between RISK hanced access to education and jobs in an and reward. A technique used to strike attempt to reduce overall discrimination this balance is the mean variance optimi- against them. This approach to helping zation approach to diversification. the disadvantaged is deeply resented by the well-qualified applicants who are re- portfolio selection (G0) jected and by minority groups who believe The choice of a mixture of financial assets they are being patronized. to constitute the holdings of wealth of an individual or an institution. Available in- Seealso:affirmativeaction;discrimina- formation, attitude towards risk and the tion;reversediscrimination income aims of the holder of the portfolio positive economics (A1) will all determine the selection. The resul- Empirical, scientific economics based on a tant portfolio will often be a mixture of quantitative analysis of economic data. risky and safe assets. Although contrasted with NORMATIVE ECO- References NOMICS, the distinction is often blurred, Tobin, J. (1958) ‘Liquidity preference as particularly because of the controversial behaviour towards risk’, Review of Eco- nature of much of economic data. Positive nomic Studies 25: 65–86. economics has been criticized for the positivist philosophy from which it derives portfolio trade (G0) its methodology. The sale of the whole portfolio of a fund or other financial institution. The firm Seealso:economicmethodology bidding for it knows the quality of the positive feedback (O4) components of the portfolio but not the The favourable consequences of economic details of which securities are included. growth in generating further growth, e.g. because the first phase of growth includes positional good (D0) the improvement of the infrastructure. A GOOD whose access is determined by an individual’s income relative to others’. Many Seealso:negativefeedback goods are positional because they are fixed POS machine (G2) in amount, as is land available for leisure Point of service register in a shop commu- purposes. When an ECONOMY is growing, nicating directly with the customer’s bank. positional goods assume more importance. There is an increased demand for them but Seealso:debitcard as their supply is fixed economic growth postcode lottery (H4, I1) becomes of limited benefit. Rationing of goods and services, especially Seealso:materialgood health care, in the UK according to the place of residence, described by a postcode. References Hirsh, F. (1977) Social Limits to Growth, post-contractual optimism (D0) see London: Routledge & Kegan Paul. moralhazard

© 2002 Donald Rutherford posted price (Q4) entire classical theory of competition and The price at which an oil company is price determination. The school has a willing to sell its crude oil. This term stronger interest in macroeconomic rela- reflects the practice of early oil producers tionships than in macroeconomic quanti- posting on their rigs their selling prices. ties, prefers to regard firms as using MARK- UP rather than market determination of Seealso:GulfPlus prices, and in its monetary theory believes post-entry discrimination (J7) that money creates speculative excesses Setting the pay or promotion prospects of which destabilize the economy. Empirical employed persons lower than could be realities are preferred to the notion of expected on the basis of productivity and equilibrium. The principal policy recom- job performance. Workers who are female, mendations of this school are INCOMES PO- non-white or old often suffer in this way. LICIES, a new international monetary system and INDICATIVE PLANNING. Seealso:pre-entrydiscrimination Seealso:politicaleconomy post-industrial society (P0) References An economically advanced society with a Eichner, A.S. (ed.) (1979) A Guide to Post- declining manufacturing activity and ex- Keynesian Economics, London and New panding service sector. This inter-sectoral York: Macmillan. switch has coincided with the shrinking of Kregel, J.A. (1972) The Reconstruction of the size of the working class, the growth of Political Economy: An Introduction to education and the growth of new indus- Post-Keynesian Economics, London and tries based on INFORMATION TECHNOLOGY. Basingstoke: Macmillan. With declining manufacturing activity, an Pheby, J. (1988) New Directions in Post- economy becomes more decentralized as, Keynesian Economics, Aldershot: Edward increasingly, productive activities move Elgar. from factories and offices back to the postmodern economics (A1) home, in some senses resembling the An epistemological critique of modern pattern of economic activity before the economic theory that takes into account Industrial Revolution. the community producing such knowledge. Seealso:de-industrialization;newecon- It attacks the use of a deterministic omy ‘scientific’ methodology economics and a GENERAL EQUILIBRIUM approach in favour of References recognizing indeterminacy, uncertainty, the Bell, D. (1973) The Coming of Post-Indus- randomness and multiplicity of possible trial Society, Cambridge, MA: Harvard causes. In its analysis of LATE CAPITALISM it University Press. recognizes the fragmented nature of mod- Shelp, R.K. (1981) Beyond Industrializa- tion, New York: Praeger. ern life and the many motivations inspir- ing economic conduct. post-Keynesians (B2) References Economists, including Sidney WEINTRAUB, Cullenberg, S., Amariglio, J. and Ruccio, Joan ROBINSON, Paul DAVIDSON, Al Eichner D.F. (2001) Postmodernism, Economics and , who tried to synthe- and Knowledge, London and New York: size RICARDO, MARX, KALECKI and KEYNES to Routledge. incorporate a theory of income distribu- tion into macroeconomics. This school post-neoclassical endogenous growth believes that in goods, labour and money theory (O4) markets, demand determines supply, what- The hypothesis that ECONOMIC GROWTH de- ever the price level: this overthrows the pends on changes in technology and hu-

© 2002 Donald Rutherford man capital previously regarded as exo- sistence, it immediately statistically genous in neoclassical theory. This theory enlarges the poor sector of its popula- has been used to explain long-term con- tion. In less developed countries, with vergence in per capita incomes and out- large agricultural sectors, income and puts between countries. Also it has been earnings figures are not always available applied to regional development. so indirect measures, e.g. the rates of change of unemployment and food References consumption, and the lack of technical Romer, Paul M. (1994) ‘The origins of progress are used as poverty indicators. endogenous growth’, Journal of Eco- nomic Perspectives 8: 3–22. References Schiller, B.R. (1989) Economics of Poverty potential output (D2) and Discrimination, 5th edn, Englewood The maximum achievable output of an Cliffs, NJ: Prentice Hall. economy if all of its FACTORS OF PRODUCTION Sen, A. (1981) Poverty and Famines: An are fully employed. Actual output is often Essay on Entitlement and Deprivation, much less. New York: Oxford University Press. —— (1983) On Economic Inequality, Ox- Seealso:fullemployment ford: Clarendon Press. References Townsend, P. (1979) Poverty in the United Kingdom, Harmondsworth: Penguin. Okun, A.M. (1983) ‘Potential GNP: its Zheng, B. (1997) ‘Aggregate poverty mea- measurement and significance’, in J.Pech- sures’, Journal of Economic Surveys man (ed.) Economics for Policymaking, 11:123–62. Cambridge, MA: MIT Press. poverty line (I3) potential surprise function (E0) The level of INCOME just sufficient to SHACKLE’s view of EXPECTATIONS that the provide minimum subsistence for an indi- degree of surprise caused to us by the vidual or family. The social security legis- non-occurrence of a given outcome, as- lation of a country usually defines it for suming there has been no change in our the purposes of paying out benefits. There relevant knowledge, is a function of the is always much controversy over the ap- values of a continuous variable. The func- propriate minimum. Even SMITH and RI- tion is y = y(x) where y is the degree of CARDO were reluctant to define it in terms potential surprise and x is a continuous of physical survival alone. variable. Intensities of surprise lie between zero and the maximum intensity when Seealso:lowpay;poverty;povertytrap what was believed impossible occurs. One poverty trap (H2, I3) of two hypotheses is more attractive if the 1 Keeping low-income groups at the same potential surprise is nil and has a more level of disposable incomes because the desirable content than the other. rules of a country’s tax and benefit References system penalize the shift from welfare Shackle, G.L.S. (1949) Expectations in to employment incomes. Economics, Cambridge: Cambridge Uni- 2 Having no incentive to move from being versity Press. a welfare recipient to an employed per- son. These people pay high MARGINAL TAX poverty (I3) RATES on their incomes because when 1 Low income per person. they have an increase in income they 2 The state of being below an arbitrary both lose their cash welfare benefits and income level and regarded as poor by a begin to pay income tax. The trap is particular society. When a society up- calculated as the ratio of income tax grades what it regards as minimal sub- + NATIONAL INSURANCE CONTRIBUTIONS +

© 2002 Donald Rutherford cash benefits lost/an extra increment of precautionary demand for money (E4) income. The CASH needed to meet unforeseen ex- penditures. The expansion of credit facil- power law (C0) ities has reduced this demand. A straight line on a logarithmic scale. This is the fingerprint of a critical system Seealso:speculativedemandformoney; showing how small events effect great transactionsdemandformoney changes. predator–prey model (E3) praxeology (D0) A biological explanation of trade CYCLES A general theory of successful action suggested by Goodwin. Initially there are showing what can be deduced from the few predators but many prey, but the self-evident axiom that human beings act abundance of prey causes predators to purposively. MISES used praxeology as the increase. This leads to a fall in the number basis for explaining markets. of prey and then consequently of preda- tors. With fewer predators prey flourish Prebisch, Rau´l D., 1901–86 (B3) and the cycle starts up again. This cycle is Argentinian economist, who virtually analogous to MARX’s model of the relation- founded UNCTAD, being its first secre- ship between capital and labour, and tary-general from 1962 to 1969. He was a between wages and profits. graduate and professor of political econ- omy of the University of Buenos Aires. References After employment in the Ministry of Goodwin, R.M. (1967) ‘A growth cycle’, in Finance, he was appointed the first direc- C.H. Feinstein (ed.) Socialism, Capital- tor-general of the Latin American Insti- ism and Economic Growth, Cambridge: tute for Economic and Social Planning in Cambridge University Press. 1948, a recognition of his status as a leading authority on Latin American eco- predatory pricing (D4) nomic problems. On the restoration of Reductions in the prices of products below democracy to Argentina in 1984, he be- cost, usually in OLIGOPOLISTIC industries, to came an adviser to the new president. His drive rival firms out of business. The policy proposals have influenced thinking increased output that usually results, with consequential ECONOMIES OF SCALE, makes it on a NEW INTERNATIONAL ECONOMIC ORDER. even more difficult for new firms to enter. Prebisch–Singer thesis (F1) To stop this practice, the charging of A thesis arguing that as the TERMS OF TRADE prices below short-run marginal cost is have moved against developing countries, declared illegal, as has happened in several protection and import substitution should US ANTITRUST cases, e.g. the Standard Oil be used to promote industrialization in case of 1911. such countries. This approach was advo- References cated as a means of reducing income Areeda, P.E. and Turner, D.F. (1975) ‘Pre- inequalities between nations. datory pricing and related practices References under section 2 of the Sherman Act’, Prebisch, R. (1950) The Economic Devel- Harvard Law Review 88: 697–733. opment of and its Princi- McGee, J.S. (1958) ‘Predatory pricing: the pal Problems, New York: United Standard Oil (NJ) case’, Journal of Law Nations. and Economics 1: 137–69. Singer, H.W. (1950) ‘The distribution of gains between investing and borrowing pre-emption right (G0) countries’, American Economic Review The right of existing shareholders, under 40: 473–85. company law and stock exchange listing

© 2002 Donald Rutherford requirements, to subscribe for new shares 2 The extent to which a market price of a in proportion to their existing holdings. security is in excess of its offer price (if the share is newly issued) or in excess of pre-entry discrimination (J7) its asset value. 1 Discrimination in the educational system. 3 In insurance markets, the periodic pay- 2 A refusal to hire because of the appli- ment, usually monthly or annually, an cant’s age, race or sex. insured person has to make to have a Seealso:closedshop;discrimination; risk covered. post-entry discrimination Seealso:greymarket;newissue;organic preference falsification (D0) premium;stag The expression in public of preferences premium pay (J3) different from private preferences. Additional pay for working outside nor- References mal hours (overtime) or in special circum- stances, e.g. at night, or at a higher rate of Kuran, T. (1995) Private Truths. Public Lies. The Social Consequences of Preference PRODUCTIVITY. Falsification, Cambridge, MA: Harvard Premium Savings Bond (E2) University Press. A form of national savings introduced in preference share (G0) the UK in 1956: there are monthly prizes Fixed interest shares with first entitlement of up to £1 million instead of the payment to a company’s earnings after the payment of interest to all bondholders. They are of interest on DEBENTURES. Cumulative pre- redeemable on demand. ference shares accumulate unpaid interest present value (D0, E0) for payment at a later date. The value now of future incomes or costs which is calculated by using the technique preferential trading arrangement (F3) of DISCOUNTING. This is central to much An agreement between countries to lower investment appraisal, especially when COST– or eliminate import tariffs among a group BENEFIT ANALYSIS is employed. Keynes gave of countries to less than those charged to this approach prominence by introducing the rest of the world. It can take the form the concept of the MARGINAL EFFICIENCY OF of a CUSTOMS UNION or COMMON MARKET. CAPITAL. preferred habitat theory (E4) presumptive tax (H2) A theory of the TERM STRUCTURE OF INTEREST A tax based on an estimate of a taxpayer’s RATES which asserts that the structure is income. governed by the desire of traders to equal- ize expected returns, adjusted for risk Seealso:forfaitsystem premiums, taking into account that the price (D0) trader will have a preference for a short- The amount of money, or something of or long-term investment ‘habitat’. value, requested, or offered, to obtain one References unit of a good or service. Relative prices Modigliani, F. and Sutch, R. (1966) ‘In- are not expressed in terms of money but in novations in interest rate policy’, Amer- other goods or other services. Prices have ican Economic Review (Papers and been described as SIGNALLING devices: a Proceedings) 56: 178–97. price increase will indicate an excess of demand over supply encouraging produ- premium (D0, G0) cers to invest in increased productive 1 An additional amount of money paid capacity and the converse for a price fall. above a standard product or factor price. Seealso:value

© 2002 Donald Rutherford price bunching (D4) tion curve, PCC). From this curve can be Synchronized price setting by firms in the derived a DEMAND CURVE DD. The demand same or related markets. curve plots quantity demanded against price, which is the amount of money a Seealso:priceleadership;pricestagger- consumer will give up to obtain one unit ing of a good. Thus at a consumption level of price cap regulation (L5) 1, a point on the demand curve can be A method of limiting the price increases of obtained by measuring the distance be- public utilities, especially telecommunica- tween PCC and the top line, parallel to the tions, by a formula including an X factor. horizontal axis, which encloses it. When The formula could take the form of two units of good B are demanded, a ‘permitted price increase = consumer price point on the demand curve is obtained by rise X’. Such regulation aims to encou- measuring half the distance between PCC rage the utilities to be more efficient. In and the top line, and so on. the UK the formula is known as RPI X, the adjusted retail price index. price ceiling (E3) The maximum price set under a prices policy, or under specific legislation such as Rent Acts (UK), usually to help low- income households. As the price ceiling is characteristically below the equilibrium price, there will be excess demand and a need for rationing.

Price Commission (E3) UK public body administering PRICES POL- ICY in 1973–80. It applied the rules of a price code which were enforced most rigorously against the largest companies, which had to gain approval in advance of price increases, whereas the smallest merely had to keep records available for inspection to show compliance with the code. The rules included a statement of which cost increases could be passed on into product price increases and safe- guards to maintain profits so that invest- ment would not suffer. Many aspects of the code were similar to the French price policies in force in the 1950s and 1960s. The Competition Act 1980 abolished the Price Commission. price–consumption curve (D0) The relationship between changes in rela- tive prices and the consumption of two goods. INDIFFERENCE CURVES (I1,I2,I3 and I4) and BUDGET LINES are used to trace the path of consumption (the price–consump-

© 2002 Donald Rutherford Seealso:incomeconsumptioncurve monopolist, the incentive to discriminate arises from being able to increase profits price controls (E3) through capturing some of the CONSUMER Governmental interference with the price SURPLUS of the buyers. For the PROFIT-MAX- mechanism to achieve prices which are not IMIZING monopolist, the pricing rule to necessarily what a market would deter- follow is to set prices such that the MAR- mine. These often take the form of either a GINAL REVENUE in each sub-market is equal PRICE CEILING or a PRICE FLOOR. to the marginal revenues in the others. It is Seealso:pricespolicy essential for the monopolist to be able to prevent resale by customers in one sub- References market to those in others. Galbraith, J.K. (1952) A Theory of Price Control, Cambridge, MA: Harvard Uni- Seealso:discriminatingmonopoly;first- versity Press. degreepricediscrimination;second-degree Rockoff, H. (1991) Price Controls, Alder- pricediscrimination;third-degreeprice shot: Edward Elgar. discrimination price determination (D0) price–earnings ratio (G1) The method used by a market or adminis- The ratio of the market buying price of a trators to fix a price. Increasingly many share to its earnings per share. The Finan- economists have noted that some impor- cial Times calculates this net of corporation tant prices are not determined in the tax and unrelieved advance corporation market by demand and supply but by herd tax. A ratio for a company higher than instinct, social contract, negotiation, dom- that of other companies in the same sector ination, politics, power and speculation: reflects the market’s belief that its earnings major examples of non-market-determined are expected .to grow more rapidly, and prices are oil prices, the wage rate and the conversely if this ratio is low. It is difficult rate of interest. to use this ratio to make international comparisons of the value of companies as Seealso:administeredpricing earnings are measured differently from price discovery process (D4, G1) country to country, e.g. more conserva- The continual interaction between buyers tively in Germany and Japan for taxation and sellers to determine prices in a mar- reasons. ketplace. Seealso:cash–price–earningsratio Seealso:AustrianSchool price effect (D0) price discrimination (D0) The effect on quantity demanded of a 1 The practice of charging different prices change in price. As changes in prices affect to different customers despite the cost the relative ability to purchase particular of production being the same. goods and services and consumers’ real 2 Setting different prices for different incomes, the price effect can be analysed quantities of the same good. into INCOME AND SUBSTITUTION EFFECTS. Common ways of discriminating are ac- price elasticity of demand (D0) cording to consumers’ incomes, e.g. char- The responsiveness of quantity demanded ging students and retired workers less than to a change in price. It is measured others for entertainment, transport and crudely as the ratio of the percentage professional services. This is possible be- change in quantity demanded to the cause the ELASTICITY of the demand curve percentage change in price; more accu- changes from point to point on most rately as ARC or POINT ELASTICITY. This basic downward-sloping demand curves. For a tool of microeconomic analysis owes its

© 2002 Donald Rutherford precise formulation to MARSHALL, although real income against the price level. the idea was present in the works of MUN Changes in the price level are measured and John Stuart MILL. by price indices, e.g. in the UK the RETAIL PRICE INDEX and in the USA the CONSUMER price flexibility (D0) PRICE INDEX and GROSS DOMESTIC PRODUCT Complete freedom of prices to move up deflator. and down in response to changes in demand and supply. Only in unregulated price-maker (D4, G1) markets is this possible. 1AMONOPOLIST who can dictate the mar- ket price. Seealso:flexprice 2 A member of a stock exchange who sets price floor (L5) the initial prices for securities. A minimum price usually set by a govern- See also: seller’s market mental order. The major examples of these are MINIMUM WAGES and supported agricul- price–offer curve (D0) tural prices. The purpose of such interven- Another name for the PRICE–CONSUMPTION tion in markets is usually to maintain the CURVE. income of certain groups, particularly of price perception (D0) non-unionized workers or farmers. Awareness of an actual price relative to price gap (D4) other prices. When units of a currency are A difference between two prices, especially changed, e.g. through DECIMALIZATION or between a current price and an equili- through many price changes in a period of brium price. general INFLATION, consumers are often unable to understand what price is being price incentive (D0) stated. An inducement arising from goods and services having different prices. These in- Seealso:moneyillusion centives were regarded as crucial to gen- price rigidity (D0) erating ECONOMIC GROWTH by SMITH and his The characteristic of ADMINISTERED PRICES successors as they determine choices be- that are constant over longish periods of tween work and leisure, between goods time. Many OLIGOPOLISTIC industries pro- and labour, between present and future vide examples of this. consumption (via the interest rate) and among goods. Seealso:fixprice pricerisk(D0)seemarketrisk price leadership (D4) The pricing practice of many OLIGOPOLISTIC price-sensitive information (G0) industries which consists of the largest Unpublished knowledge about a company, firm publishing its price list ahead of its especially its current profitability and any competitors who closely follow the prices takeover offers it has received, which can already announced. This anti-competitive affect its share price. Dealing in such practice has often been used as a substi- information is a major form of INSIDER tute for COLLUSION. Also known as parallel TRADING. pricing. prices policy (E3) price level (E0) An anti-inflation policy often used in The average of the prices of all the goods conjunction with an INCOMES POLICY to set and services sold in an economy. This key rules for the determination of product macroeconomic concept is used in many prices. There has been a variety of such models of an economy, e.g. AGGREGATE DE- policies in France: price freezes, target MAND and AGGREGATE SUPPLY curves plot average prices with freedom to vary indi-

© 2002 Donald Rutherford vidual prices in a product group, price or factors of production by the free move- fixing according to a formula stating ment of prices. The characteristics of this which costs can be passed on into product system are its economy in the amount of prices. In the UK, there were such policies information needed for decision making in the 1960s and the 1970s under the and its ability to bring about swift adjust- NATIONAL BOARD FOR PRICES AND INCOMES and ments of supply to demand. Excess DE- the PRICES COMMISSION, whose rules were MAND automatically pushes up prices, partially inspired by the prices policy of giving a direct signal to producers to the Nixon Administration in the USA. increase their labour forces and capital The main problems of such policies are stocks. However, the is criti- that they can cause a shrinkage of profit cized on the grounds that it ignores many margins and net investment, and reduce SOCIAL COSTS as these are rarely evaluated the responsiveness of price structures to and charged to those responsible and can changing market conditions. create income inequalities. price stabilization (L5) See also: central planning A scheme to maintain product prices at a constant price level in order to stabilize price taking (L2) producer incomes. This is a method exten- A firm’s acceptance of market prices as its own prices because it has no influence sively used for PRIMARY PRODUCTS. Under over market price determination. This such schemes, a BUFFER STOCK is established to adjust supply to fluctuations in demand occurs in markets in which each firm has and a price is set which, it is hoped, will only a small proportion of the total output avoid excessive accumulation or decline in or sales. Under PERFECT COMPETITION, all firms are price-takers. the stocks held. Attempts by KEYNES in 1942 to establish a global scheme were price twist (L1, L5) frustrated by governments opposed to The raising of one type of price relative to state intervention in markets. Some another, e.g. of non-farm prices relative to schemes instituted by UNCTAD have farm prices. survived only a few years. Seealso:OperationTwist References Newbery, D.M.G. and Stiglitz, J.E. (1981) price war (L1) The Theory of Commodity Price Stabili- A ruthless campaign to drive rival firms zation: A Study in the Economics of from a market by repeatedly cutting prices. Risk, Oxford: Clarendon Press. The only way an existing firm can escape price staggering (D4) the effects of such a conflict is to have Price setting which responds slowly to the some kind of price agreement with other other price decisions made in that market. firms, or to become the lowest cost firm. An advantage of staggering is that a more Seealso:destructivecompetition carefully determined price is more sustain- able. primary capital (G2) The most secure form of BANK CAPITAL. Seealso:pricebunching According to current US and UK defini- References tions, it includes COMMON STOCK or EQUITY, Blanchard, O. (1987) ‘Individual and ag- retained earnings and minority interests in gregate price adjustment’, Brookings Pa- subsidiaries and excludes INTANGIBLE pers on Economic Activity 1: 57–109. WEALTH and investments in unconsolidated subsidiaries. price system (D0, P1) A method of allocating goods and services Seealso:secondarycapital

© 2002 Donald Rutherford primary care trust (I1) Primary Metropolitan Statistical Area A statutory National Health Service body (J1) in the UK responsible to a Health Author- An individual component of a CONSOLI- ity. It provides a full range of medical and DATED METROPOLITAN STATISTICAL AREA. related services or can commission them. (G2) It can, for example, employ general practi- primary mortgage market The market for real estate and property tioners or offer contracts to self-employed loans. Banks, BUILDING SOCIETIES, THRIFTS doctors. and insurance companies offer these loans primary commodity prices (Q0) in return for a MORTGAGE. World market prices of agricultural pro- Seealso:secondarymortgagemarket duce and minerals. As several Third World countries are greatly dependent on one or primary offering (G1) a few primary products for a very high An issue of shares to the investing public proportion of their export earnings, they other than the INITIAL PUBLIC OFFERING. attempt to use international agreements to maintain price levels or, at least, prevent primary product (Q1) secular declines in prices. The most power- An unprocessed agricultural product, parti- ful international agreement is cartelization cularly crops grown for food and textile of production. Price stability will be al- manufacturing, as well as fossil fuels and ways threatened by climate changes and metals. The production of primary products the consequential variation in harvests. is the principal economic activity of many Third World countries – hence changes in Seealso:commodityagreement;one-crop primary product prices cause fluctuations in economy;primaryproduct their national incomes. Changes in the TERMS OF TRADE have often been to the primary dealer (G1) disadvantage of less developed economies. A MARKET-MAKER in UK gilt-edged securi- ties. Seealso:one-cropeconomy primary deficit (H6) primary ratio (M4) The excess of a government’s expenditure The ratio of operating profit to capital (excluding interest payments) over its in- employed. come. Sometimes called the ‘actual defi- cit’. primary standard (Q2) The legal limit permitted for pollutants in primary employment (E0) see the air: beyond this limit, there is a danger employmentmultiplier to human health. primary labour market (J4) Seealso:ambientstandard;secondary That part of a national labour market standard consisting of large firms whose workers Prime-1 (G0) have good pay, job security and training. The top rating of creditworthiness of COM- Seealso:duallabourmarket;internalla- MERCIAL PAPER made by Moody’s Investors bourmarket;secondarylabourmarket Service. primary market (G1) Seealso:AAA A financial market concerned with new prime age worker (J2) issues of a particular bond, stock or other In developed economies, a man or woman financial asset. Many markets combine aged 25 to 55. This age classification is primary and secondary functions. often used in studies of LABOUR FORCE PARTI- Seealso:secondarymarket CIPATION as prime workers regard the la-

© 2002 Donald Rutherford bour market differently from other age food through hunting animals and the groups with the consequence that their gathering of berries and other wild crops. participation rates are higher than those Human needs are few and little work is of younger or older workers. required to obtain a simple subsistence livelihood. As there is no scarcity, eco- prime bank (G2) nomic problems do not arise. Adam SMITH A large bank with a high volume of deposits called this economy the ‘rude society’ and operating in the major money centres. stated, with an example of the trading of prime bank scam (G2) deer for beavers, that VA LU E in this society An investment scheme by a financial would be determined by relative labour institution giving itself the exalted title of quantities. ‘prime bank’ in order to attract funds principal (G0) from unsophisticated, often older, inves- A capital sum lent at a fixed rate of tors, who are tempted by promises of rates interest. of return of over 100 per cent. principal–agent (D0) prime cost (D0) A contractual relationship much discussed The direct cost of running a business, parti- in economics as it is at the heart of so cularly labour, energy and raw material many transactions. The principal increases costs; VARIABLE COSTS. A term used by MAR- RISK by delegating to another person the SHALL. performance of an economic transaction. Seealso:supplementarycost The advent of limited liability divorced the shareholder owners from the manager prime rate of interest (E4) agents. Principals can be more effective The rate of interest that US commercial through agents but have to design an banks charge small and medium-sized incentive scheme to make their agents firms for borrowing. Historically, this was follow their preferences. the interest rate the most creditworthy (G0) customers of banks were charged but with principalship Part of a bond or mortgage entitling the the development of the COMMERCIAL PAPER market, the largest customers borrow be- owner to receive payment of the amount originally lent. low the prime rate. Seealso:baserate prisoners’ dilemma (C7) The most famous of economic games. Two primitive economy (N0) prisoners have a choice between confessing A pre-agricultural society. It obtains its or not confessing to a crime. If both

© 2002 Donald Rutherford confess, they are sentenced to ten years; if private enterprise system (P1) both do not, they are sentenced to two A decentralized CAPITALIST economy which years for being present at the scene of the permits private ownership of business, crime; if one confesses and the other does much freedom of decision making and not, the former will get a one-year sen- the absence of most government direction tence and the other twenty years. The except the regulation of MONOPOLY and matrix of alternatives is used to illustrate PUBLIC UTILITIES and corporate taxation. the principle that the pursuit of individual Seealso:economicdevolution self-interest does not lead to a socially optimal result. Private Finance Initiative (H3) Seealso:gametheory A method of financing public sector projects introduced by the UK govern- private cost (D0) ment in 1992. It sought to separate the The cost to an individual person, or a ownership of public sector facilities from firm, of the resource(s) used, measured at the provision of services. Hospital build- market prices. In many cases, private cost ings, roads, train networks and computer approximates to the OPPORTUNITY COST of systems have been financed in this way. A employing such inputs. private consortium does the building and Seealso:socialcost then lets it back on a long lease to a public body such as a hospital trust. private cost of unemployment (J6) Although this can be an expensive way Loss of employment income and unquan- to finance public sector projects, it does tifiable personal stress. reduce Treasury borrowing.

Seealso:socialcostofunemployment private good (D0) private enterprise (L2) A good which when consumed by one 1 The principal type of industrial or person cannot be consumed by another commercial firm in a capitalist or mixed and whose supply can be restricted to one economy. consumer. These properties of being ‘rival’ 2 The private sector of an economy. and ‘exclusive’ separate goods such as food from PUBLIC GOODS. Under private enterprise, the capital is owned principally by individual persons Seealso:clubgood or non-governmental organizations and its private marginal benefit (D0) see major decisions, particularly on invest- marginalutility ment, the scale of production and prices, are chosen by the firm itself, with govern- private placement (G0) ment providing a framework for the activ- A direct method by which a firm can issue ity of the enterprise rather than its shares by using the services of a participating in the firm’s decision mak- financial institution to sell large blocks of ing. Increasingly, even in SOVIET-TYPE the issue to institutional investors (pension ECONOMIES, private enterprises operated funds, banks, insurance companies, etc.). alongside state-owned and state-run firms. The growth of EQUITY investment by these In the late 1980s, increasingly in Eastern institutions since 1945 has made large Europe and other communist countries private placements possible. private enterprise re-emerged: for example, from 1987, in the USSR, simple service Seealso:institutionalinvestor;underwri- industries, including taxi driving, could be ter run as private concerns. private rate of discount (D0) see Seealso:publicenterprise discountrate

© 2002 Donald Rutherford private sector (P1) the sale of state and local authority That part of the economy consisting of housing. firms owned by legal persons other than In practice, the programme has not met the state. In a MARKET ECONOMY the private all of its aims. Competition has not sector encompasses most economic activ- increased as much as was hoped because ity state monopolies in many cases have become private monopolies, instead of private sector liquidity (UK) (E4) being split into competing companies. This broad measure of the money supply Also, some of the assets were sold at less was much used in the 1980s and took two than their market value thus reducing the forms: amount of public revenue received from PSL1 = private component of sterling their sale. M3 excluding deposits of Seealso:economicdevolution over two years’ original maturity References + private sector holdings of Gayle, D.J. and Goodrich, J.N. (eds) money market instruments (1991) Privatisation and Deregulation in + certificates of tax deposit Global Perspective, London: Pinter. Swann, D. (1988) The Retreat of the State: PSL2 = PSL1 Deregulation and Privatisation in the UK + more liquid building so- and USA, Brighton: Harvester Wheat- ciety shares and deposits and sheaf. other similar forms of liquid Thompson, D., Kay, I. A. and Mayer, C. Privatisation: The UK Ex- savings instruments (eds) (1986) perience, Oxford: Clarendon Press. + SAYE deposits + bank deposits with an ori- probability (C1) ginal term longer than two The likelihood of an event occurring years which is calculated as the total number of actual occurrences divided by the total Seealso:M5 number of possible occurrences. The privatization (L5) value of a probability lies between 0 and The sale of publicly owned assets, espe- 1. cially industrial capital, to private inves- probable error (C1) tors. Many countries in the 1980s A quantity equal to 0.6745 STANDARD DE- undertook this kind of reduction of the VIATIONS of the estimate of a population public sector to achieve a variety of aims: PARAMETER. to improve industry by freeing it from bureaucratic state control, to augment probit model (C5) public revenue, to widen share ownership, Similar to the LOGIT model but producing a and to increase competition to benefit different estimate of parameters. Grouped consumers. One example is the sale of data are used to estimate the rate of several UK NATIONALIZED INDUSTRIES to the change of a probability. Also known as public, notably gas, steel, oil, water, the normit model. electricity, telecommunications, the state Seealso:Tobitmodel airline, and airports. Examples in other countries include France’s sale of St producer price index (E3) Gobain, Paribas and Suez, Japan’s sale US price index of commodities calculated of its railways and Hungary’s sale of by the Bureau of Labor Statistics; pub- state firms to companies and individuals. lished since 1890. It uses sellers’ prices by Privatization has also taken the form of direct sale, or through an organized

© 2002 Donald Rutherford market, of the first considerable large- product differentiation (L1, M3) volume commercial transactions of each A change in the appearance or presenta- commodity. It is based on over 10,000 tion of a product to entice consumers to commodity price series. believe that it is different from similar products. This differentiation is underta- Seealso:consumerpriceindex ken to give the producer to some extent the power of a monopolist with a unique producer’s surplus (D2) product. The concept is at the heart of the The gain to a producer arising from selling theory of MONOPOLISTIC COMPETITION but in some of its goods and services at more practice occurs most frequently in OLIGOPO- than the market price. LISTIC industries.

production asymmetry (P4) A characteristic of a DUAL ECONOMY result- ing from the traditional agricultural sector using a different combination of factors of production from the modern industrialized sector.

production function (E1) The statistical relationship between output and the factor inputs needed to produce it which reflects the technology of a process of production. The most famous of these functions are the COBB–DOUGLAS and CES functions. Seealso:microproductionfunction References Seealso:consumer’ssurplus Heathfield, D.F. (1971) Production Func- tions, London: Macmillan. References Marshall, A. (1920) Principles of Econom- production possibility frontier (D0) ics, 8th edn, appendix H, London: A curve showing the maximum possible Macmillan; New York: St Martin’s combinations of two goods that can be Press. producer subsidy equivalent (Q1) A method of agricultural support devised by the OECD to convert different types of farm aid into this single measure which is calculated as the ratio of the cash value of government support to the value of agri- cultural produce. product compatibility (L1) Tying a product to another in order to reduce competition, e.g. through produ- cing computer software usable only on a particular type of personal computer. Seealso:tyingcontract

© 2002 Donald Rutherford efficiently produced given a nation’s re- Labour productivity is measured as output sources. Each point on this curve shows per person, assuming that the quantities of the TRADE-OFF between the output of the other factors employed are constant (a two goods, or the OPPORTUNITY COST of difficult assumption in the case of capital). producing more of one good. In general, labour productivity can be regarded as a function of investment and production quota (D2) the business cycle, as well as the degree of The limit to the permitted output of a supervision of the workforce and of salary particular product. differentials and incentives. productive capital (H4) References That portion of SOCIAL CAPITAL invested in Barrell, R., Mason, G. and O’Mahony, M. those sectors of the economy in which (eds) (2000) Productivity, innovation and SURPLUS VALUE is created. economic performance, Cambridge, New York and Melbourne: Cambridge Uni- productive labour (J0) versity Press. A classification of labour first introduced Davies, S.W. and Caves, R.E. (1987) Brit- by SMITH and later to be prominent in ain’s Productivity Gap – A Study Based MARXIAN ECONOMICS. Smith regarded labour on British and American Industries, as productive if it added value to the raw 1968–77, Cambridge: Cambridge Uni- materials used, provided maintenance for versity Press. the labourer and profits for the employer Denison, E.E. (1967) Why Growth Rates Differ, Washington, DC: Brookings In- and produced a vendible commodity; MARX stitution. regarded this type of labour as that which Kravis, I.B. (1976) ‘A survey of interna- produces SURPLUS VALUE. The distinction tional comparisons of productivity’, between productive and unproductive la- Economic Journal 86 (March): 1–44. bour has influenced the measurement of NATIONAL INCOME. productivity bargaining (J3) 1 Wage bargaining which rewards workers productive potential (O4) for consenting to new working arrange- The maximum growth rate of a country ments so that output can be increased. extrapolated from past trends. It is mea- It was very popular in the UK in the sured by considering both the growth rates 1960s under an INCOMES POLICY which of the supply of factors of production allowed supernorm increases if there (labour and capital) and the PRODUCTIVITY was a genuine increase in productivity. of those factors. Many difficulties arose, including the Seealso:naturalrateofgrowth;potential difficulty of separating labour from output capital productivity, the resentment that workers who had long held back pro- productivity (O4) ductivity growth by their RESTRICTIVE The amount of real output produced by PRACTICES were disproportionately re- one unit of a factor input. Labour and warded and the difficulty of applying capital productivities have been extensively the principle to some sectors of the studied to understand the process of labour market, particularly the service economic growth and the international industries. There was much less produc- trade performance of individual countries. tivity bargaining in the USA in that US studies show that productivity is period. Passing on productivity gains in higher in more CAPITAL-INTENSIVE industries, higher wages, rather than in lower which are also unionized and where the prices and higher output, it is argued, cost of turnover and supervision is lower threatens the long-term employment and there is more industrial harmony. prospects of workers.

© 2002 Donald Rutherford 2 COLLECTIVE BARGAINING that uses produc- arrange examinations, certify competence tivity measures as a major determinant and regulate behaviour. After 1900 in of increases in pay. many countries the expansion of universi- ties increased the supply of entrants to References professions and eroded their pay differen- McKersic, R.B. and Hunter, L.C. (1973) tial with other occupations reducing the Pay, Productivity and Collective Bargain- private rate of return to HUMAN CAPITAL. ing, London: Macmillan. Also professional pay has lagged behind productivity shock (J6) other salaries as much professional em- A change in unemployment brought about ployment is in the public sector. by a labour-saving innovation or a general professionaltrader(G1)seespecialist fluctuation in PRODUCTIVITY levels. profit (D3) product life cycle (D2) A surplus of revenue over cost. Econo- The life cycle of a product from when it is mists, unlike accountants, include in total an innovation, often protected by PATENTS costs imputed OPPORTUNITY COST. Until the and hence earning monopoly profits for its ENTREPRENEUR was recognized as a factor of producer, through the stage when it is production, there was little debate about competing with substitutes to its final why profits were paid: reasons subse- stage of maturity when its profitability is quently suggested by CLASSICAL ECONOMISTS for the most part due to the ECONOMICS OF and later economists include that it is SCALE arising from a large output. This has either a payment for supervising and co- been used to explain trade patterns and ordinating land, labour and capital or a the behaviour of MULTINATIONAL CORPORA- recompense for risk taking. TIONS. References References Knight, F.H. (1921) Risk, Uncertainty and Vernon, R. (1971) Sovereignty at Bay, ch. Profits, Boston and New York: Houghton 2, Harmondsworth: Penguin. Mifflin. product market (D0, M3) profitability (M2) A set of relationships between buyers and The rate of return to capital achieved by a sellers to retail goods or services. firm. It is a function of managerial ability, resources available, the state of markets product moment formula (C1) and the behaviour of trade unions (which For a LINEAR CORRELATION coefficient, this can have a negative effect on the price/cost measure of the symmetry between X, the margin and on return to capital em- independent variable, and Y, the depen- ployed). Business analysts argue that dent variable, is calculated as the ratio of ‘profitability’ is a vague concept as the the sum of the products of the values of X data on profits are entirely dependent on and Y divided by the square root of the accounting conventions and the nature of product of the sum of the squares of X values revenue/taxation law. and the sum of the squares of Y values. profit and loss account (M4) profession (J2) A financial statement of the revenue and An occupation requiring a considerable expenditure of a firm and its consequential period of education and training. The profit or loss. Unlike a balance sheet, it original professions were in medicine, the refers to a period of time, not a state of law, the church, the army and the univer- affairs at a point in time. sities. In the nineteenth century many occupations acquired the status of a pro- profit centre (M4) fession by the founding of institutes to A part of a firm or other organization

© 2002 Donald Rutherford with separate accounts so that costs and reason for a person engaging in an eco- revenues can be attributed to it and its nomic activity. This is regarded as the contribution to the total profits of that basic force driving CAPITALISM. organization calculated. In MULTINATIONAL Seealso:altruism;economicman;non- CORPORATIONS, this form of decentralized profitenterprise accountingisessentialtomaintainefficiency. profit-related pay (J3) profit maximization (L2) Employee remuneration consisting of, or A possible goal for a firm implemented by based on, PROFITS as well as wages and setting prices so that MARGINAL REVENUE salaries. This form of pay has the advan- equals MARGINAL COST. When, at the mar- tages of fluctuating with profits, so that a gin, revenue is greater than cost, total firm’s wage bill falls in bad times and rises profits could be increased by further out- only in times of prosperity, and possibly put; when costs are greater than revenue, influencing worker behaviour as the divide total profits decline. In the diagram the between ownership and employment is total profits curve is plotted by calculating bridged by giving employees two types of the vertical distances between the total factor income. There are long-established costs and total revenue curves. Up to output examples of this approach, e.g. granting OM total profits are increasing as mar- Scottish fishermen shares of the proceeds ginal revenue is greater than marginal from each catch of fish, and profit dis- cost; after output OM marginal cost is tributions to Japanese workers. With fiscal greater than marginal revenue and so total encouragement and a managerial desire to profits decline. At OM, where total profits reward increased performance without are at a maximum, marginal revenue is equal raising labour costs, there are likely to be to marginal cost. Traditionally regarded as more pay schemes related to profits. One the central aim of the capitalist firm. disadvantage of this type of pay is that employees may resist further recruitment of staff as more employees will reduce per capita entitlements to profit. profit squeeze (D3, E0) A steady reduction in profits caused by the costs of labour or other factor inputs rising at a faster rate than product prices. This can occur at the level of the firm, the industry or the national ECONOMY. Squeezes often occur when prices are more severely controlled than wages, as in the UK in 1974–9. Seealso:pricespolicy profit taking (G0) A sale of shares that have risen in price. This practice, often by short-term specula- tors, can cause temporary downturns in stock market price indexes. Taking profits can also be done to avoid capital gains Seealso:managerialmodelsofthefirm taxation. profit motive (D0, P1) programme deal (G1) The desire for personal gain which is the Block portfolio switching by which a fund

© 2002 Donald Rutherford manager of an investment bank or stock- supply of labour and the encouragement broking firm exchanges a bundle of un- of a BRAIN DRAIN. Much of present-day TAX wanted securities for a portfolio with REFORM severely challenges the progressive different characteristics. This popular US principle, despite its long ancestry. In the practice has spread to the London stock USA, for example, the Tax Reform Act market. In most cases, the deals are based 1981 reduced tax progression but the TAX on the mid-price of the stocks on a REFORM ACT 1986 increased it again. Rous- particular day; the expected marketability seau argued that the wealthy, because of of the stocks will determine the cost of the having more property, need more protec- transaction. tion from the state so should pay more tax. SMITH in his Wealth of Nations argued program trading (US) (G1) that tax contributions should be in pro- Wall Street, New York, method of compu- portion to ability to pay but did not ter trading conducted by watching the indicate whether there should be an abso- relationship between the trend and fluc- lute or equal sacrifice. John Stuart MILL tuations of stock market prices. In favour rejected the idea that taxation should be of this system it is claimed that INSTITU- based on benefits received from the state TIONAL INVESTORS benefit as they can toler- as that would make taxation regressive. ate large short-term losses but few Vito di Marco justified progression in individuals are rich enough to participate terms of the MARGINAL UTILITY of income in this type of trading. However, the being lower for a rich man than for a poor system can cause a high volume of sell man, as BENTHAM had before him. orders to occur simultaneously bringing about massive declines in stock prices as Seealso:benefittax;canonsoftaxation; took place in October 1987. As a result of fiscalmobility;incometax;regressivetax the BRADY COMMISSION, the program trading References of the NEW YORK STOCK EXCHANGE is prohib- Boes, D. and Felderer, B. (1989) The ited whenever stocks fall by more than 50 Political Economy of Progressive Taxa- points in any one trading day. A similar tion, Berlin: Springer Verlag. method is used in the UK. prohibitive tariff (F3) Seealso:circuitbreakermechanism A TARIFF sufficiently high to exclude all imports. progressive tax (H2) A tax whose rate rises as income or project appraisal (E2) expenditure rises. The principal examples The calculation of the total effects of an of these are taxes on personal and corpo- investmentprojectonaneconomy,using rate incomes. Some INDIRECT TAXES, e.g. both market prices and SHADOW PRICES. VALUE-ADDED TAX, are progressive if they Seealso:cost–benefitanalysis exempt goods which constitute a higher proportion of the budget of lower income References groups so that the tax falls more on higher Hansen, J.R. (1978) Guide to Practical income groups. Project Appraisal: Social Benefit-Cost Progressive taxes aim to achieve a more Analysis in Developing Countries, equal distribution of income post-tax than Vienna: UNIDO. pre-tax: this goal is central to the eco- Little, I.M.D. and Mirrlees, J.A. (1974) nomic philosophies of some countries, Project Appraisal and Planning for De- veloping Countries, London: Heinemann particularly those with SOCIAL MARKET Educational. ECONOMIES (e.g. Sweden). However, critics of tax progression are concerned about the proletariat (J0) impact of such tax structures on the The underprivileged class of society that

© 2002 Donald Rutherford has to sell its labour because it does not property tax (H2) own the means of production. Marx re- A tax based on the value of property. The garded this class as exploited because revenue from this tax is often the major SURPLUS VALUE from its output was appro- source of local government finance. priated by capitalists. He predicted that by Seealso:rates;Tiebouthypothesis social revolution the proletariat would achieve the economic justice the BOURGEOI- property tax capitalization (H2, R2) SIE denied it. An effect on house values of a property tax. Full capitalization occurs when differ- promissory note (G0) ences in house prices are equal to the A signed promise in a document to pay a present value of variations in expected tax sum of money on demand or at a future liabilities, after taking into account hous- specified date. These notes are often nego- ing characteristics such as structure, neigh- tiable. bourhood and public services. propensity to consume (E2) References Either AVERAGE or MARGINAL PROPENSITY TO Oates, W.E. (1969) ‘The effects of property CONSUME. taxes and local public spending on propensity to save (E2) property values: an empirical study of tax capitalization and the Tiebout hy- Either AVERAGE or MARGINAL PROPENSITY TO pothesis’, Journal of Political Economy SAVE. 77: 457–71. property rights (P0) proportional accounting (G2) 1 The exclusive rights to use, transform A term in insurance for checking the total and transfer particular assets, goods insurance cover to ascertain what percen- and services. tage of claims and premiums are assigned 2 A privilege, power or immunity. to a particular insurance company. An analysis of property rights has enabled proportional tax (H2) economists to develop a more realistic A tax which is fixed as a proportion of a THEORY OF THE FIRM, rejecting the basic tax base, e.g. income or expenditure gen- assumption of PROFIT MAXIMIZATION, taking erally or on a particular good or service. into account TRANSACTIONS COSTS and recog- Although the revenue from the tax grows nizing diverse patterns of property owner- as the tax base expands, the marginal rate ship. The behaviour of individuals, of tax continues to be equal to the average motivated by self-interest, within organiza- rate of tax. The US PAYROLL TAX is a pro- tions is central to this new approach to portional tax up to the ceiling on the tax. microeconomics. Seealso:flatratetax;progressivetax; Seealso:Coase regressivetax References proportionategrant(H2)seegrantin Carter, A. (1989) The Philosophical Foun- dations of Property Rights, New York aid and London: Harvester Wheatsheaf. Proposition 13 (H2) De Soto, H. (2000) The mystery of capital: A proposition made binding on the State why capitalism triumphs in the West and of California (USA) in 1978 to reduce the fails everywhere else, New York: Basic Books. amount of taxation on residential prop- Furubotn, E.G. and Pejovich, S. (1972) erty. It was believed that residential prop- ‘Property rights and economic theory: a erty owners were paying an unfair amount survey of recent literature’, Journal of of taxation compared with business. The Economic Literature 10: 1137–62. proposition reduced the assessed values of

© 2002 Donald Rutherford property and limited future increases of protean economy (P0) those assessments to 2 per cent per annum 1 A changing ECONOMY which is moving and rate increases to 1 per cent per from one pattern of economic activities annum. and production methods to another. 2 An economy in which ENTREPRENEURS proprietors’ income (E0, M2) are constantly transforming inputs, out- The net income of individual proprietor- ships and partnerships; an item in US puts, their relationships with each other and the nature of industries. NATIONAL INCOME accounts which separates income of these types of firms on the grounds of their non-incorporation. protection (F1) Barriers to the international flow of goods prospect theory (D8) and services. The protectionist measures An account of decision making under available include TARIFFS, import quotas uncertainty. It states that the value of an and trade regulations (e.g. concerning alternative or option is the sum of the quality). Because protection is a departure products of specified outcomes. Each pro- from FREE TRADE, after the MERCANTILISTS duct is calculated by multiplying the utility advocated it, it was attacked by econo- from x by the weight attached to the mists for its effect on the allocation of objective probability of obtaining x. goods and services, but temporary protec- Seealso:expectedutility tion has been conceded by many econo- mists to be useful as a means of References encouraging INFANT INDUSTRIES. Kahneman, D. and Tversky, A. (1979) An analysis of the effects of protection ‘Prospect theory. An analysis of deci- on a national economy includes the sion-making under risk’, Econometrica changes in domestic production and con- XX: 263–91. sumption patterns and switches between prospectus (G1) foreign and domestic markets, with the The document published by a company consequence that employment increases at inviting the public to subscribe to a new the cost to consumers of having to spend issue of shares. It details the financial more to purchase higher priced domesti- history, current trading, future prospects cally produced goods. Developing coun- and multifarious activities of the company. tries with small export industries and thus A shrewd assessment of a prospectus fewer ECONOMIES OF SCALE, sometimes have enables an investor to judge whether the lower GROSS NATIONAL PRODUCTS as a conse- shares when marketed will sell at a PRE- quence of protection. MIUM. It is measured by either the gross or net Seealso:greymarket;stag rate of protection, the latter taking into account both exports and imports. The prosperity indicators (D6) cost of increasing employment through 1 Changes in real income or wealth. increasing domestic production can be 2 Increased consumption of superior measured as the ‘cost per job’, which is goods and services. the increase in the amount of consumer More specific measures of these include expenditure to obtain the same amount of the level of consumption of CONSUMER DUR- goods divided by the increased number of ABLE goods, migration rates to suburbia, a jobs in protected industries. rate of increase in enrolments in higher Although in times of recession, protec- education greater than the rate of increase tionist policies are popular, most lead to a of real income and disproportionate in- reduction in world income. Despite many creases in outlays for medical care. nations adhering to liberal trade policies, a

© 2002 Donald Rutherford variety of covert practices and agreements reduces IMPLEMENTATION LAGS in UK fiscal are used to protect domestic industries. policy. Seealso:effectiverateofprotection; proxy (G0) Multi-FibreArrangement;non-tariffbar- An agent of an absent voter empowered to rier;Smoot–HawleyTariffAct;tariff;vo- cast his/her vote, e.g. a person attending a luntaryexportrestraint company meeting who votes on behalf of an absent shareholder. References Belassa, B. and associates (1971) The pseudo production function (E1) Structure of Protection in Developing Joan ROBINSON’s term for a PRODUCTION Countries, Baltimore, MD: Johns Hop- FUNCTION based on imaginary equilibrium kins University Press. positions which ignores the idea of produc- Corden, W.M. (1971) The Theory of Pro- tion as a long-term accumulation process. tection, Oxford: Clarendon Press. Kierzkowski, H. (ed.) (1987) Protection P-star model (E3) and Competition in International Trade: A model based on the QUANTITY THEORY OF Essays in Honor of W.M. Corden, Ox- MONEY and the belief that a price level ford: Basil Blackwell. tends to its equilibrium level. It is used to Shutt, H. (1985) The Myth of Free Trade: forecast inflation by calculating the gap Patterns of Protectionism since 1945, between the current price and the equili- Oxford: Basil Blackwell. brium price (P-star, P*). This equilibrium protective labour legislation (J5) price is determined by potential output, Laws attempting to ensure that a worker the quantity of money in the ECONOMY and does not suffer financially, physically or the equilibrium VELOCITY OF MONEY. If the mentally from injury or unemployment. equilibrium price is more than the current price, there is the possibility of inflation. Seealso:SocialCharter psychic income (D3) proto-industrialization (N6) The subjective pleasures flowing to an Domestic manufacture controlled by inter- individual person in a specified period. mediaries who use manufacturers as This can be the consequence of the receipt homeworkers, taking away their indepen- of money or of non-pecuniary rewards to dence as sole proprietors. employment (e.g. job satisfaction). BEN- Seealso:homework THAM and later JEVONS and Bo¨HM-BAWERK were to base much of economic theory on References subjective sensations and experiences. Mendels, F.E. (1972) ‘Proto-industrializa- tion: the first phase of the industrializa- Seealso:utility tion process’, Journal of Economic psychological economy (P1) History 32: 241–61. A capitalist ECONOMY that produces and proto-proletariat (I3) administers the needs demanded by the The very poor who scrape a living in the system. This major view of the German- informal TERTIARY SECTOR. In a sense, they born US philosopher and social theorist live like refugees. Herbert Marcuse (1898–1979) influenced New Left writers in the 1960s. Seealso:lowpay;poverty Seealso:capitalism;needsstandard;radi- Provisional Collection of Taxes Act caleconomics (H2) UK statute permitting changes in INDIRECT References TAXES to be made before that year’s Marcuse, H. (1964) One Dimensional Man, Finance Act has been passed. This Act London: Sphere.

© 2002 Donald Rutherford psychology(D0)seeeconomicsand rently high ratios for Greece and Italy and psychology a lower ratio for the UK. public choice theory (E6) Seealso:debtserviceindicators;matur- Explanation of policy making in the pub- ity;overlappinggenerationsmodel;Third lic sector by analysis of the nature of Worlddebtproblem policy selection. There are two ap- proaches: the spatial analysis of political public economics (H0) parties and their response to vote pres- A study of the economic decisions of sures (Downs) and the institutional ap- government – taxation, public expenditure, proach (Brennan and BUCHANAN) which PUBLIC GOODS and public sector pricing. predicts the consequences of voters’ Seealso:publicfinance choices in a specific institutional context. It is a form of applied WELFARE ECONOMICS References with libertarian assumptions. Atkinson, A.B. and Stiglitz, L.E. (1980) Lectures on Public Economics, Maiden- References head, London and New York: McGraw- Brennan, G. and Buchanan, J.M. (1980) Hill. The Power to Tax, Cambridge: Cam- bridge University Press. public enterprise (L3) Downs, A. (1957) An Economic Theory of An independent business organization Democracy, New York: Harper. McLean, I. (1987) Public Choice, Oxford: owned by a government and subject to Basil Blackwell. some political control. The name for these Mueller, D.C. (1989) Public Choice II, enterprises varies between countries, e.g. in Cambridge: Cambridge University the UK they are called NATIONALIZED INDUS- Press. TRIES or PUBLIC CORPORATIONS. The motives for taking firms into the public sector public commodities problem (H4) include the desire to achieve a better Deciding how much of a public commod- allocation of goods and services than the ity to have when it is not clear whether market can produce, to alter the distribu- the commodity is a GOOD at all in the tion of income, to aid macroeconomic sense of conferring a net benefit on a policy by having direct control over basic society. industries, to exploit for the country as a Seealso:publicgood whole the benefits of NATURAL MONOPOLY and to advance socialism. In order to public debt (H6) encourage public enterprises to be effi- The total volume of government BONDS, cient, various goals are set for them, the BILLS and other SECURITIES outstanding at a most common being the requirement to particular date. A large public debt accu- achieve a minimum rate of return to mulates by public borrowing over a num- capital employed and to price according ber of years, especially to finance wars, to the MARGINAL COST of producing their infrastructure investments and welfare goods and services. programmes. The burden of this debt can be measured as the ratio of the cost of Seealso:privateenterprise servicing it to that country’s GROSS DOMES- References TIC PRODUCT. The OECD provides informa- Borcherding, T.E., Pommerehne, W.W and tion on government debt interest payments Schneider, F. (1982) ‘Comparing the effi- as a percentage of gross domestic product. ciency of private and public production: The ratio rises when inflation and growth the evidence from five countries’, Zeits- are low and real rates of interest are high chrift fu¨r Nationalo¨konomie 42: 127–56. and positive. OECD figures record cur- Bos, D. (1986) Public Enterprise Economics:

© 2002 Donald Rutherford Theory and Application, Amsterdam: determined by many factors: the growth in North-Holland. per capita income (which increases the Rees, R. (1984) Public Enterprise, 2nd edn, demand for both private and public London: Weidenfeld & Nicolson. goods), technical change (the advent of Rosenau, P.V. (ed.) (2000) Public-private the motor car led to a demand for more partnerships, Cambridge, MA, and Lon- don: MIT Press. and better roads), population growth and change (more schools, hospitals and senior public expenditure (H5) citizens’ facilities), the relative cost of PUB- The expenditure of central, regional and LIC GOODS and urbanization (the cause of local governmental organizations on inter- congestion which requires an improved mediate and final goods and services. This infrastructure to remedy it). As modern is undertaken to achieve a variety of goals electorates expect governments to respond including the redistribution of benefits in to all these changes, controlling public kind, the provision of PUBLIC GOODS, the expenditure can be very difficult. correction of disequilibria in markets and Seealso:cashlimit;Medium-termFinan- the regulation of industry. In several coun- cialStrategy tries, the increasing ratio of public expen- diture to the national income has excited References political debate. The ratio has, of course, Buchanan, J.M. and Wagner, R. (1977) increased when a collectivist ideology has Democracy in Deficit: The Political Le- influenced policy-makers or special inter- gacy of Lord Keynes, New York and est groups have succeeded in obtaining London: Academic Press. public subsidization. But in many types of Public Expenditure Survey Committee national economy the increase can be (H5) attributed to an expanding or ageing The UK committee of officials from the population, to public sector output being Treasury and spending departments relatively more costly than production in charged with the task of updating public the private sector, or to a greater use of expenditure programmes. It was created as bureaucratic methods. a result of the Plowden Committee’s 1961 public expenditure control (H5) report that recommended annual and five- A variety of administrative controls to year plans of public expenditure and the keep the total of public expenditure within resources to finance it. This medium-term a certain limit, or to keep its rate of method of control included figures for growth within a predetermined percentage spending according to the functions of government. of its present level. Before KEYNES, the principal mechanisms for ensuring that References public expenditure did not get out of hand Lord Plowden (1961) The Control of Pub- were the GOLD STANDARD and the practice of lic Expenditure, London: HMSO, Cmnd balancing budgets. Since 1945, more direct 1432. methods have been employed in the peri- ods when FISCAL POLICY was used to reduce public finance (H0) aggregate demand which had increased The study of the taxing and spending through the accumulation of large govern- decisions of governments. Taxation is used ment deficits. In Great Britain in 1790, the instead of charging for government ser- total expenditure of the public authorities vices or borrowing. Public expenditure is was about 12 per cent of GROSS NATIONAL incurred because governments attempt to PRODUCT and reached a peak of 60 per cent improve the distribution of income, to in 1975–6 and started rising again in the maintain FULL EMPLOYMENT and to produce 1980s. The volume of public expenditure is goods and services which the market

© 2002 Donald Rutherford would not produce (or not produce at low distinguish between a public and a private enough prices). At the macro level, public good as some private goods gratuitously finance examines the effectiveness of benefit third parties, e.g. maintaining a governmental attempts to achieve a tax- garden in a beautiful condition confers spending mix intended to achieve simulta- pleasure on many people in the vicinity. neously desired levels of employment, See also: club good; local public good; inflation and balance of payments surplus mixed good; private good (deficit); at the micro level, it examines the effects of public expenditure and taxation public interest company (L3) on allocation and economic behaviour A proposed type of UK PUBLIC ENTERPRISE (e.g. labour supply and saving). Although (e.g. telecommunications or gas) substan- public finance has commanded the atten- tially owned by private shareholders who tion of writers as early as XENOPHON, have no ultimate control as their shares HOBBES, PETTY and SMITH, the subject has are without voting rights. The public now expanded into a broad analysis of the interest is chiefly represented by regulatory public sector. bodies, e.g. Oftel, which have the task of Seealso:debtpolicy monitoring and controlling pricing, invest- ment and standard of service. This form of References public enterprise was proposed in the UK Atkinson, A.B. and Stiglitz, J.E. (1980) by the Labour Party in 1988 as a vehicle Lectures on Public Economics, Maiden- for reconverting privatized firms into pub- head, London and New York: McGraw- lic sector undertakings, without the ex- Hill. pense of renationalization. Cullis, J. and Jones, P. (1998) Public finance and public choice, 2nd edn, Seealso:nationalizedindustry Oxford and New York: Oxford Univer- sity Press. public interest theory (D6, K2) Musgrave, R.A. (1959) The Theory of An analysis of the net economic welfare Public Finance: A Study in Public Econ- resulting from REGULATION or DEREGULATION omy, New York: McGraw-Hill. often employing the notions of CONSUMER —— (1969) Fiscal Systems, New Haven, SURPLUS and PRODUCER SURPLUS. CT: Yale University Press. public pricing (L3) public good (H4) The pricing of the goods and services A commodity or service which is available produced by PUBLIC ENTERPRISES, or the to everyone in a particular catchment area, governmental regulation of private sector cannot be withheld from non-payers and pricing. Such government intervention is is ‘non-rival’, i.e. one person’s consump- undertaken to prevent the MONOPOLY ex- tion does not diminish that of others. The ploitation of consumers, to stabilize COB- main examples are national defence, sew- WEB markets (especially in agriculture), to erage, street lighting, lighthouses, public provide MERIT GOODS, to prevent MERIT BADS health measures such as mass vaccination, and to achieve a better distribution of and scientific research. As individuals incomes and benefits. The methods used cannot be charged according to consump- include the setting of formulae to deter- tion for goods and services collectively mine the prices of public enterprises and provided, it is usual to finance their REGULATED PUBLIC UTILITIES, the setting of production by taxation. Although the maximum prices (e.g. rent controls), the provision of public goods was small until provision of free services (e.g. libraries and the twentieth century, writers as early as museums) and the establishment of finan- PETTY, SMITH and John Stuart MILL argued cial rules (e.g. the interest rates and reserve for their existence. It is not always easy to requirements to be followed by banks).

© 2002 Donald Rutherford Seealso:pricespolicy cuts in public expenditure plans or more stringent controls of existing spending public sector (H1, L3) programmes. The concept only became All organizations at central and lower important to UK economic policy making levels of government possibly together in the 1970s, a period when the PSBR with firms subject to majority ownership relatively increased: in 1975 it was 19 per by state or municipal bodies. The mea- cent of total government expenditure and surement of the size of the public sector is 10 per cent of gross domestic product. debatable. One method is to add up the Despite the central importance given to number of activities undertaken by gov- the PSBR by many Treasury ministers, it ernmental organizations; another is to is difficult to achieve a target for it as calculate the total volume of its output. there can be many changes in the compo- Measuring output is a difficult and crude nents constituting both revenue and ex- task in the case of non-marketed outputs, penditure. UK government saving in the e.g. defence. For such it is usual to 1980s caused the concept to be replaced calculate output by measuring the sum of by PUBLIC SECTOR DEBT REPAYMENT. the value of inputs used: this, by ignoring factor PRODUCTIVITY, makes the bold asser- References tion that an input increase leads to an Peacock, A.T. and Shaw, G.K. (1981) The output increase. Analysts of public policy Public Sector Borrowing Requirement, increasingly demand more direct measures Buckingham: University College at of output; for example, in the case of Buckingham. health services, output can be measured public sector debt repayment (H6) directly using the number of patients UK budget surplus; a negative PUBLIC SEC- treated rather than indirectly using the TOR BORROWING REQUIREMENT. A term coined number of staff employed. by Chancellor of the Exchequer Nigel public sector balance sheet (H0) Lawson in his UK budget speech in March 1988. This consists of a range of ASSETS (social overhead capital (non-marketable) + public service employment (J2) equity in public enterprises (partially mar- Jobs provided by national, state, regional ketable) + land and mineral assets + net or local governments to reduce the foreign exchange reserves + present value amount of unemployment. Some are of of future tax programme + imputed net short duration, a temporary expedient to value of the government’s cash monopoly) cope with a recession or to reintroduce to and balancing LIABILITIES (net interest-bear- work long-term unemployed persons ing debts in domestic and foreign curren- whose skills have diminished or become cies + stock of high-powered money + obsolete. But the increased role of the present value of social insurance and other state in many countries has expanded the entitlements + public sector net worth). number of publicly financed jobs. public sector borrowing requirement Seealso:publicworks;workfare (H6) The excess of expenditure over receipts of public spending ratio (H5) central and local government. In more Total governmental expenditure as a pro- detail, it can be regarded as finance portion of the GROSS DOMESTIC PRODUCT. provided to the public sector by borrowing See also: public sector to provide for current and capital expen- diture and for lending to the private sector public utility (L2, L3) and overseas. The public sector borrowing An industry or enterprise providing basic requirement (PSBR) is reduced by either services to the public, such as energy, water,

© 2002 Donald Rutherford postal services or telephones, which is than market exchange rates which are sometimes owned by the state but even if more volatile. privately owned (as is often the case in the References USA) is usually subject to public REGULA- Kravis, I.B., Heston, A. and Summers, R. TION. It is argued that because these (1978) A System of International Com- industries are NATURAL MONOPOLIES (at least parisons of Gross Product and Purchas- in a local area), a special policy towards ing Power, Baltimore, MD: Johns them is essential if the public is not to be Hopkins University Press. exploited. Regulatory bodies pay great attention to the prices charged, safety pure bundling (M3) standards and the quality of service of The sale of goods or services only as part these utilities. of a joint package deal. Seealso:regulatorycapture Seealso:bundling;mixedbundling public works (E6, J2) pure competition (L1) Schemes financed by central or local gov- PERFECT COMPETITION without the assump- ernment to create employment. Although tions of perfect knowledge and an absence such recommendations have long been of friction. associated with KEYNES, they have a longer pure credit economy (P1) history: the MERCANTILISTS were in favour An economy that finances all of its trans- of them and the French government set up actions with bank loans. An idea attribu- national workshops as early as 1848. ted to Wicksell. Seealso:crowdingout;Treasuryview References pump priming (E6) see deficit financing Wicksell, K. (1935) Lectures on Political Economy, Vol. 2, trans. E. Classen, purchase tax (H2) London: Routledge & Kegan Paul. A tax levied on a particular sale, often at different rates for different types of goods pure discretion (E6) and services. Persons with a preference for The conduct of an economic policy with- the higher taxed goods suffer discrimina- out following any policy rule. tion. In the UK, it was replaced by the Seealso:rulesversusdiscretion VALUE-ADDED TAX in 1973. pure economic rent (D3) Seealso:expendituretax The permanent return to a factor of purchasing power parity (F3) production in excess of its TRANSFER EARN- An equilibrium exchange rate such that INGS. This arises from the unique nature of two currencies purchase the same amount that factor which causes its supply to be of goods and services in the two econo- INELASTIC. Examples of such factors in- mies. This theory, first suggested by the clude land, works of art exhibited at a MERCANTILISTS, then eloquently expressed charge to the public and exceptionally by CASSEL in 1916, asserts that monetary talented persons. flows would affect domestic prices until pure inflation (E3) parity is achieved. This approach has been An extreme case of INFLATION such that the criticized for being unrealistic: many goods prices of all products and FACTORS OF PRO- and services do not enter into interna- DUCTION are increasing at the same rate. tional trade and there are many non- market determinants of exchange rates. pure interest rate (E4) However, PPP is a more useful way of The RATE OF INTEREST on a riskless invest- comparing international living standards ment.

© 2002 Donald Rutherford pure monopoly (L1) prepared to carry out the transaction on A MONOPOLY with a demand for its pro- more favourable terms because the risk of ducts equal to the whole of consumer unsold stock is eliminated. Sometimes it is expenditure. called a ‘block trade’. pure profit (D3) putty-clay (E2) Profit earned from the sale of a good or According to CAPITAL THEORY, a technology service after the full OPPORTUNITY COST of that in the short run allows little substitu- employing all FACTORS OF PRODUCTION, in- tion between capital and labour. The con- cluding NORMAL PROFIT for the ENTREPRE- sequence is that changes in capacity and in NEUR, is subtracted from sales revenue. employment and output are closely linked. pure public good (H4) putty-putty (E2) A good or service which is both non- The complementary character of inputs in excludable and non-exhaustible. an economic model. Capital is subject to adjustment costs in its slow response to put option (G1) prices. A right to sell a financial instrument or commodity at the current price within a pyramiding (G3, L1) specified period, normally of three Acquiring many small companies to build months. them into a large HOLDING COMPANY. Seealso:calloption pyramid selling (M3) The sale by companies of goods and put price (G1) services to individuals who then act as The price at which a PUT OPTION is sold. retailers, often in their own homes. Goods Also known as an exercise price and strike such as cosmetics and kitchen utensils price. have been sold in this way. This marketing put-through (G1) method, which first appeared in the USA The simultaneous purchase and sale of a in the late 1940s and in the UK in the block of SECURITIES. This is a cheaper 1960s, has often been criticized because of method of dealing for INSTITUTIONAL INVES- the pressure applied by firms to persuade TORS as there is a smaller margin between their agents to buy the goods themselves buying and selling prices and a lower rate and to recruit others. Also known as of broker’s commission: the broker is multilevel marketing.

© 2002 Donald Rutherford Q

Q ratio (M2) Seealso:protection;tariff SeeTOBIN’SQ. quantity theory of money (E4) quadriad (H1) A macroeconomic theory relating the The Treasury, the COUNCIL OF ECONOMIC AD- stock of money to the price level. VISERS, the OFFICE OF MANAGEMENT AND BUD- Although discussions of this theory are GET and the FEDERAL RESERVE: the key evident in MERCANTILIST writings (especially formulators of the USA’s economic policy. in LOCKE), it is to , PIGOU and quality-adjusted life years (I1) Milton FRIEDMAN one looks for twentieth- A year of life adjusted by expected health century expositions. The Fisher or Yale or illness. A year of healthy life expectancy equation is = 1, of unhealthy life expectancy 5 1. Health care is beneficial if it generates MV ¼ PyT positive QALYs; efficient health care ac- tivity occurs where cost per QALY is as where T is the total volume of transac- low as possible. As low cost per QALY tions, V is the weighted average velocity of health care is prioritized, this approach to circulation, PY is an index representing the allocating health resources is criticized for weighted average of prices of the commod- its bias against the old and very sick. ities transacted and M is the total quantity of money. Seealso:healtheconomics The Cambridge equation, attributed to References MARSHALL and PIGOU,is Harris, J. (1987) ‘Qualifying the value of life’, Journal of Medical Ethics 13: M ¼ kPcR 117–23. where M is the total quantity of money, R quality circle (J5) is the total resources enjoyed by the An alternative approach to INDUSTRIAL RE- community, k is the proportion of those LATIONS, enabling workers to participate resources which the public desires to hold more in the management of their enter- in the form of money and P is an index prises. C number which values resources in terms of quantitative restrictions (F1, F3) consumption goods. QUOTAS, especially on imports and foreign FRIEDMAN revived interest in the theory exchange, imposed to reduce a BALANCE OF by expounding it as a theory of demand PAYMENTS deficit. for real balances.

© 2002 Donald Rutherford Seealso:monetarism from funding councils. This market is different from a conventional market in References that consumers effect their purchases using Fisher, I. (1911) The Purchasing Power of vouchers or by agents. Also non-profit- Money, New York: Macmillan. making public organizations compete with Keynes, J.M. (1923) A Tract on Monetary Reform, London: Macmillan. traditional profit-making firms. Laidler, D. (1991) The Golden Age of the References Quantity Theory. The Development of Le Grand, J. (1991) ‘Quasi-markets and Neoclassical Monetary Economics 1870– social policy’, Economic Journal 101: 1914, Oxford: Philip Alan. 1256–67. Locke, J. (1823) Some Considerations of the Lowering of Interest and Raising the quasi-rent (D3) Value of Money. Collected Works, Vol. V, MARSHALL described this as the income an London (originally published in 1691). owner receives from allowing others to use machines and other productive appliances quartiledeviation(C1)seesemi- made by man. This return is in excess of interquartilerange the OPPORTUNITY COST of using that piece of quasi-autonomous non-governmental FIXED CAPITAL. Marshall proposed the con- organization (L3) cept as part of his explanation of profits. A UK non-elected agency set up by a Quebec Declaration (F1) government department to act as a task The accord of thirty-four American coun- force or to undertake activities contracted tries, apart from Cuba, agreed in 2001 to out by government. These ‘quangos’ have create a FREE TRADE AREA OF THE AMERICAS by been criticized for having their members 2005. appointed under ministerial patronage and usurping many of the functions of local Quesnay, Franc¸ois, 1694–1774 (B3) government. By 2000 there were hundreds French physician-cum-economist who of these. founded the PHYSIOCRATIC school of eco- quasi-fixed factor (J3) nomics, the first French school of econom- A factor of production, especially labour, ics. His position as a court physician to whose price has almost become a fixed Louis XV made him an influential person, cost to firms. Statutory protection of but it was not until his sixties that he employment and changes in employment wrote on economics. He did so in Encyclo- contracts have made it more difficult to pe´die articles on ‘Fermiers’ (1756) and vary the amount of labour employed in ‘Grains’ (1757) and in subsequent articles the short run. on ‘Hommes’ and ‘Impot’. But his Tableau Economique (first edition 1758), showing References the CIRCULAR FLOW between landlords, Oi, W.Y. (1962) ‘Labor as a quasi-fixed farmers and manufacturers, anticipated IN- factor’, Journal of Political Economy 70: PUT–OUTPUT ANALYSIS and was to be much 538–55. admired by Adam SMITH and MARX. Ques- nay made economics a major talking point quasi-market (L3) of the day: the salons were fascinated by An attempt in the public sector to intro- ‘les zigzags’, their nickname for the Ta- duce market discipline. In the UK in the bleau. 1980s this principle was applied to the contracting out of catering and cleaning References and through the INTERNAL MARKET in the Barna, T. (1975) ‘Quesnay’s Tableau in National Health Service, and in the uni- modern guise’, Economic Journal 85: versities where they had to bid for funds 485–96.

© 2002 Donald Rutherford Meek, R.L. (1962) The Economics of also known as the ‘ACID TEST RATIO’. It Physiocracy, London: Allen & Unwin. should be at least 1. Vaggi, G. (1987) The Economics of Fran- c¸ois Quesnay, London and Basingstoke: quit rate (J6) Macmillan. The proportion of workers leaving their jobs in a particular time period. This rate queuing system (D0, P4) is used as a measure of labour turnover. A method of resource allocation which distributes resources on the principle of Seealso:exit–voice ‘first come, first served’. It is used to avoid quota (D2, F1) congestion in many European bond mar- A restricted supply of a good or service. kets and is an alternative to control by a Import quotas are used to protect domes- central monetary authority. Potential is- tic industries; export quotas, to stabilize suers of bonds are placed in the queue export earnings. Under any system of according to their financial need, their rationing, a quota will be the amount current creditworthiness and current allocated to a particular person or organi- monetary policy. Countries with this sys- zation. tem include Germany and France. In general, queuing can be used as a method Seealso:non-tariffbarrier;protection; of allocation in any market. tariff;voluntaryexportrestraint Seealso:pricesystem quotedcompany(K2)seelisted company quick assets ratio (M4) Liquid assets divided by current liabilities;

© 2002 Donald Rutherford R

racial discrimination (J7) form of MULTINATIONAL CORPORATIONS, DE-IN- Treating persons of another race un- DUSTRIALIZATION, UNEMPLOYMENT, MARKET equally, especially with regard to wages FAILURE, defence expenditure and the low and employment opportunities. provision of many PUBLIC GOODS. The hu- mane concerns of these writers have influ- Seealso:discrimination enced a great deal of policy making but Radcliffe Report (E5, G2) have yet to form the basis of a new society A Royal Commission report, published in and economy in any major country. 1959, on the working of the UK monetary References system. It promulgated the view that Linder, M. (1977) The Anti-Samuelson, money is only one ASSET in the spectrum Vols I and II, New York: Urizen Books. of LIQUIDITY and that, as its VELOCITY OF Sawyer, M. (1989) The Challenge of Poli- CIRCULATION is unstable, the control of it is tical Economy: Radical Alternatives to incidental to interest rate policy. Although Neo-Classical Economics, Hemel Hemp- opposed to the control of the money stead: Harvester Wheatsheaf. supply, given the sophistication of the Rambouillet Summit (F3) post-war UK financial system, from day Economic summit held in France in 1975 to day it recommended that interest rates at which it was agreed that CENTRAL BANKS should be used rather than credit controls would co-ordinate their policies to stabi- as instruments of MONETARY POLICY: this lize currencies. This was the first interna- was difficult to achieve given the need for tional monetary agreement after the stable interest rates to maintain an orderly collapse of the BRETTON WOODS system. gilts market. It also suggested changes in monetary statistics. Ramsey prices (D0) References PARETO-optimal prices which achieve a required level of profits. These prices Committee on the Working of the Mone- maximize the sum of an industry’s prices tary System (1959) Report, London: HMSO, Cmnd 827. and its PRODUCER’S SURPLUS. The pricing rule Ramsey asserted was that, for a regulated radical economics (A1) firm (e.g. a PUBLIC UTILITY such as electri- An application of Marxist and socialist city), the excess of price over MARGINAL theories to the analysis of the problems of COST will be highest for those goods which advanced CAPITALIST countries. The major have low ELASTICITIES of demand. This is concerns of radical economists are income second-best pricing when first best is not inequality, international capitalism in the available. It was adopted as a pricing rule

© 2002 Donald Rutherford by the INTERSTATE COMMERCE COMMISSION in random walk theory (G1) 1985. A theory concerning successive prices independent of each other in SECURITY or References commodity markets which asserts that Baumol, W.J. and Bradford, D.F. (1970) there are no trends in prices with the ‘Optimal departures from marginal cost consequence that today’s prices cannot be pricing’, American Economic Review 60: 265–83. used to predict future prices. Bachelier was the first to note this, in 1900, in a study of Ramsey saving rule (E2) French commodity markets. The rate of saving multiplied by the MAR- Seealso:chartism GINAL UTILITY of money should always be equal to the amount by which the total net References rate of enjoyment of utility falls short of Cootner, P.H. (ed.) (1964) The Random the maximum possible rate of enjoyment. Character of Stock Market Prices, Cam- bridge, MA: MIT Press. References Ramsey, F.P. (1928) ‘A mathematical the- Randstad (R1) ory of saving’, Economic Journal 38: A continuous urban area of the Nether- 543–59. lands from Amsterdam to Rotterdam. For centuries, it has been noted for its high Ramsey taxes (H2) population density. Taxes which raise a given revenue from proportionate taxes on commodities with range (C1) the decrease in utility being kept to a The difference between the largest and minimum. Ramsey suggested that the so- smallest numbers in a set, e.g. 5 is the lution to this problem posed by PIGOU was range of 2, 3, 4, 5, 6, 7. to increase tax revenue in the same pro- Seealso:semi-interquartilerange portion as the production of the taxed commodities. rank correlation (C1) References The correlation between variables repre- sented by the ranks they have in an Ramsey, F.P. (1927) ‘A contribution to the ordered list, e.g. the relationship between theory of taxation’, Economic Journal 37: 47–61. cities ranked by population size and by average per capita income to see if the Randall Commission (N7) larger a city ranks, the greater the average US commission which reported on foreign income per capita. economic policy in 1954. It took the view See also: Spearman’s rank correlation for- that the policy of the USA should be to mula guide the world economy back to the liberal policies holding before 1914 – if rank-order tournament (C7) not in trade, certainly in the movement of An economic game in which the partici- private long-term capital and in the con- pants compete according to what is judged vertibility of currencies. The main type of their rank. aid proposed by the commission was technical assistance. rank size rule (J1, R1) This states that the population of a city or random variations (C1) town in an urban hierarchy of a country is Irregular movements in time series calcu- approximately the population of the lar- lated by dividing the original data by the gest city divided by the rank of the place TREND, seasonal variations and CYCLICAL concerned. For example, if the largest city VARIATIONS. has a population of 2 million, then the

© 2002 Donald Rutherford fourth-largest city will have 500,000 inha- make the loan, he or she should be bitants. compensated. References Seealso:Islamicbanking;loanablefunds Madden, C.A. (1956) ‘On some indicators theory;Senior;usury of stability in the growth of cities in the United States’, Economic Development rate of return (G0, M2) and Cultural Change 4: 236–52. The ratio of the earnings from an asset to the value of that asset, usually expressed ratchet effect (E2) as a percentage. Companies calculate this An upward shift in aggregate demand. as the ratio of pre-tax profit to the capital This higher level of consumption and employed. Private and social rates of investment is permanent, preventing an return of HUMAN CAPITAL and of major economy in recession from reverting to a public investments are often calculated. level of output lower than at the beginning An alternative measure is the INTERNAL of the previous expansion. The RELATIVE RATE OF RETURN which takes into account INCOME HYPOTHESIS asserts that when in- the timing of earnings. comes are failing, consumption will not rate of return regulation (L3, L5) fall by the same amount as it will be Regulation of a PUBLIC UTILITY by insisting difficult for households to make a swift that product prices should be set to obtain adjustment to a new standard of living. a desired rate of return to capital em- ployed. rateofexploitation(D3)seesurplus value rates (H7) A tax on non-agricultural property long rate of interest (E4) used in the UK to finance local govern- 1 The charge for borrowing money, ment expenditure. Periodically, property usually measured as the percentage was revalued on the basis of the expected ratio between the sum payable to the rental income from property of that type lender and the amount borrowed, at an to calculate its rateable value. Each local annual rate. authority decided, knowing the total rate- 2 The bridge between income and capital. able value of all properties in its area, 3 The amount of money contractually what rate in the pound must be levied to promised at certain specified future obtain a desired level of revenue. Each dates as a proportion of the principal property owner paid an amount equal to borrowed. the rateable value of the property times 4 The rate of capitalization. the rate in the pound. As such local Theories of the rate of interest have taxation has long been condemned for explained this factor price as being deter- being full of anomalies, many proposals mined by either real forces (productivity for reforming it have been made. In 1989 and thrift) or monetary forces (the de- in Scotland and in 1990 in England and mand for and supply of money). KEYNES Wales, the domestic rate was replaced by took the latter approach, as did some the COMMUNITY CHARGE (nicknamed ‘the poll tax’); in 1990, the UNIFORM BUSINESS writers as early as the MERCANTILISTS. The Judaic, Islamic and Christian religions RATE replaced business rates. have often condemned interest charges for References exploiting persons who borrow out of Foster, C.D., Jackman, R.A. and Perlman, necessity. However, interest has been justi- M. (1980) Local Government Finance in fied on the grounds that, as the lender has a Unitary State, London: Allen & Unwin. to abstain from current consumption to Layfield Committee (1976) Local Govern-

© 2002 Donald Rutherford ment Finance. Report on the Committee There have been many criticisms of ra- of Inquiry, London: HMSO, Cmnd tional expectations, including questions 6453. about the assumption of rationality, the recurrence of economic processes and the rate support grant (H7) adequacy of information. An expenditure subsidy previously paid by the UK government to local authorities References which resulted in less having to be raised Attfield, C.L.F., Demery, D. and Duck, by rates (local property tax). This grant on N.W (1985) Rational Expectations in average was equal to about one-half of Macroeconomics, Oxford: Basil Black- total local government expenditure. Cen- well. tral government, in order to ensure that Begg, D.K.H. (1982) The Rational Expec- minimum standards of services, e.g. in tations Revolution in Macroeconomics: education, are maintained, has to provide Theories and Evidence, Oxford: Philip Alan. this subsidy. After the domestic rates were Muth, J.F. (1961) ‘Rational expectations replaced by the COMMUNITY CHARGE, the and the theory of price movements’, rate support grant was replaced by a REV- Econometrica 29: 315–35. ENUE SUPPORT GRANT. Pesaran, M.H. (1987) The Limits to Ra- tional Expectations, Oxford: Basil ratingagency(G2)seebondrating Blackwell. agency Sheffrin, S.M. (1996) Rational expecta- tions, 2nd edn, Cambridge, New York ratio analysis (M4) and Melbourne: Cambridge University Percentages calculated in financial analysis Press. to discover solvency, OVERTRADING and PROFITABILITY. Financial ratios, using bal- rationing (D0) ance sheet data, include quick, current, A method of allocating a limited supply. stock and capital (or earnings) ratios; The person or organization in control of operating ratios include TURNOVER (or the supply of a factor of production, good sales) ratios and cost ratios. The most or service distributes it to individual con- important measure of overall profitability sumers according to set criteria or a QUEU- is the ratio of profit before tax to operat- ING SYSTEM. Although the price system will ing assets. ensure that a supply is assigned to the highest bidders, governments are reluctant rational decision (D0) to use such a method for essential goods. A choice that best serves a decision-maker In socialist economies (and in other in pursuit of a particular objective. economies under the strain of conducting a war) extensive use is always made of rational expectations (E0) rationing by the issue of vouchers and A view of how individuals form their EX- coupons which must be exchanged to PECTATIONS of the future values of eco- obtain goods and services. nomic variables first advanced by Muth in 1961 and now a central pillar of NEW raw data (C8) CLASSICAL ECONOMICS. Individuals, when Data not yet arranged in numerical order. making decisions, it is assumed, have all Seealso:frequencydistribution relevant information, including knowledge of the structure of the economic system, Rawlsian difference principle (D3, D6) and any errors in the analysis of that The toleration of inequalities only if it is information are attributable to random to the advantage of the worse off through forces. This approach has been used to making that person as well off as possible analyse asset markets, the business cycle in terms of rights, freedoms, opportunities, and the NATURAL RATE OF UNEMPLOYMENT. income and wealth. Also, inequalities must

© 2002 Donald Rutherford provide economic incentives to work 1980s that attempted to stimulate the harder and increase production. economy. The policies it advocated in- cluded the reduction of taxes, of govern- Seealso:egalitarianism;Rawlsianjustice mental regulation of business, of References governmental interference in the market Rawls, J. (1999) A Theory of Justice,rev. and a switch in federal expenditure so that edn, Oxford : Oxford University Press. more was spent on defence and less on social programmes. Reaganomics were for- Rawlsian justice (D3) cefully expounded by the US COUNCIL OF 1 A revival of social contract theory with ECONOMIC ADVISERS in the Economic Report general application to basic social and of the President to the Congress of Febru- political institutions. ary 1982. 2 Anti-meritocratic EGALITARIANISM. 3 A non-utilitarian approach to justice. Seealso:Thatcherism The view that justice is ‘fairness’ is based References on two principles. Firstly, that each person Boskin, M. (1989) Reagan and the Econ- is entitled to the most extensive amount of omy, San Francisco: Institute for Con- liberty compatible with the liberty of temporary Studies. others. Secondly, that the arrangement of Niskanen, W.A. (1988) Reaganomics: An social and economic inequalities is such Insider’s Account of the Policies and the People, New York: Oxford University that they are reasonably expected to be to Press. everyone’s advantage and attached to po- sitions and offices open to all. real assets (L2, Q0) Seealso:utilitarianism LAND and reproducible tangible assets in the form of inventories, business fixed References capital stock and dwellings. Daniels, N. (ed.) (1975) Critical Studies on Rawls’ ‘A Theory of Justice’, Oxford: real balance effect (E0) Basil Blackwell. A change in the aggregate demand for goods resulting from a change in the reaction curve (D0) quantity of real money balances. This A diagram indicating a firm’s price and effect was noted by both PIGOU and PATIN- output as a function of the price or output KIN. The effect asserts that unemployment set by another firm. causes a fall in prices, a rise in the real reaction function (C7, E6, L1) value of people’s money holdings, a rise in This shows the preferences of decision- aggregate demand and thus full employ- makers as revealed by an analysis of their ment. As this effect takes years to operate, actions. These functions have been used to the Keynesian ‘unemployment equili- study both economic policy making by brium’ is most of the time a case of DIS- governments and the behaviour of non- EQUILIBRIUM. It should be contrasted with collusive oligopolists. the KEYNES EFFECT. References References Theil, H. (1964) Optimal Decision Rules Patinkin, D. (1956) Money, Interest and for Government and Industry, Amster- Prices: An Integration of Monetary and dam: North-Holland; Chicago: Rand Value Theory, New York: Oxford Uni- McNally. versity Press. Reaganomics (B2, E6) real bills doctrine (B1) An application of SUPPLY-SIDE ECONOMICS to Adam SMITH’s doctrine that there can the running of the US economy in the never be an inflationary excess issue of

© 2002 Donald Rutherford COMMERCIAL BILLS and other paper money of inflation over a given period. A PRICE because each bill represents a real transac- INDEX is used to deflate money income. tion. Henry THORNTON, in his Paper Credit If, for example, prices have risen by 10 (1802), criticized the doctrine for ignoring per cent and money incomes by the the fact that the same sum of money can same amount, real income will remain support many bills. constant. 2 The amount of goods and services Seealso:BankingSchool;lawofreflux which can be purchased with a given real business-cycle theory (E3) money income. An account of BUSINESS CYCLES generated by technological or monetary shocks, or real interest rate (E4) by changes in expectations. 1 The money RATE OF INTEREST adjusted by the rate of inflation. When there is a References positive real interest rate, increased sav- King, R. and Plosser, C. (1984) ‘Money, ings will be encouraged and investment credit and prices in a real business cycle discouraged; negative real rates will model’, American Economic Review 74: make borrowing more attractive. Real 363–80. interest rates are zero when the money Kydland, F.E. and Prescott, E.C. (1982) ‘Time to build and aggregate fluctua- rate of interest is equal to the rate of tions’, Econometrica 50: 1345–70. inflation. The high real interest rates of Long, J.B. and Plosser, C.J. (1983) ‘Real the UK and US economies in the 1980s business cycles’, Journal of Political were regarded as a major cause of low Economy 91: 39–69. industrial investment in some years. Because of their effect on profit mar- real estate investment trust (G2) gins, high real interest rates are, in a A trust which manages real estate assets in sense, equivalent to administered price the form of equities and mortgages and is controls. financed by stock, bond and bill issues The real rate is calculated by the and loans from financial institutions. The formula high leverage of these trusts led to many of them going bankrupt in the 1970s. 100 þ x 100 100 real exchange rate (F3) 100 y A currency’s value in terms of its real purchasing power. A basket of goods and where x is the nominal rate of interest services representative of an average con- and y is the percentage rate of infla- sumer’s purchasing is valued in the two tion. currencies. This calculation is often made 2 The interest rate measured in goods. to show the relative cost of living for Seealso:ownrateofinterest executives moving between the major cities of the world or to establish the real value real option theory (G2) of investment projects. An extension of financial option theory to Seealso:purchasingpowerparity the study of real, non-financial, options. Real options are embedded in investments real growth (O4) rather than being contractual terms. This An increase in the output of goods and theory is used to value private companies. services measured at constant prices, i.e. after price changes have been eliminated. References Amram, M. and Kulatilaka, N. (1999) real income (E3) Real Options, Cambridge, MA: Harvard 1 Money income adjusted by the amount Business School Press.

© 2002 Donald Rutherford real price (D0) recession exposure scoring system (E3, 1 The nominal price of a good adjusted E6) by a price index. Assigning a value in a range of +3 to 3 2 A relative price showing how much of to show the effects of a recession in one good exchanges for other goods. another economy with +3 being the great- These prices show economic scarcity as est effect. Taking the USA as an example, they make possible a comparison be- income from US-based assets, capital tween the price increases of particular flows from the USA, commodity price commodities and of all commodities in declines, US dollar weakness and asset general. price effects have been used as relevant indicators. This is more sophisticated than real property tax (H2) regarding the exposure of one country to A tax based on the value of buildings and another in terms of the proportion of land. Such taxes are known as RATES in the exports sent to the other country. UK. RECHAR (Q4) real rate of return (G0) ‘Reconversion charbon’: a EUROPEAN COM- The rate of return to capital assets after MUNITY scheme introduced in 1990 to help allowing for inflation. This rate, used as a the revitalization of areas hit by coalpit target for UK nationalized industries in a closures. White Paper of 1978, was intended to be related to the real rate of return on private reciprocal demand law (F1) sector assets, taking into account the cost A refinement of the law of COMPARATIVE of finance, SOCIAL TIME PREFERENCE and the ADVANTAGE used to determine the TERMS OF social objectives set for that particular TRADE between countries according to the industry. relative demand measured in the amount of goods offered for the goods of another real-wage hypothesis (E0) country. John Stuart MILL, in his first essay The view that real wages are inflexible of his collection Essays on Some Unsettled downwards. This is a considerable expan- Questions of Political Economy (1844), and sion of KEYNES’s assumption that money TORRENS refined RICARDIAN international wages are inflexible downwards. trade theory in this way. real wages (J3) Reciprocal Trade Agreements Act 1 Money wages adjusted for inflation. 1934 (F1) Real wages can only increase if money US federal trade statute of the Roosevelt wages rise faster than inflation. Administration that attempted to undo 2 The amount of goods and services a the PROTECTIONISM of the SMOOT–HAWLEY TAR- money wage can purchase. IFF ACT by authorizing the president to recession (E3) negotiate bilateral, reciprocal trade agree- 1 A phase of the business cycle which ments to reduce the tariffs introduced in succeeds a boom and precedes a trough. 1930. The US Congress repeatedly voted 2 A six-month fall in GROSS DOMESTIC PRO- three-year extensions of the powers under DUCT according to the NATIONAL BUREAU this Act. OF ECONOMIC RESEARCH of Washington, recognition lag (E6) DC. The length of time elapsing before an The principal indicators of this are falling economic decision-maker is aware of a output and rising UNEMPLOYMENT. change in economic circumstances. This can occur because economic statistics take recessionarygap(E0)seedeflationary time to collect and are published less gap frequently than a decision-maker needs.

© 2002 Donald Rutherford Seealso:implementationlag OPEC’spriceincreasesof1973–4,the surplusesoftheoilproducerswerelent (K2) recognizedprofessionalbody onEuromarketstopoorcountries,par- AninstitutionregulatingpartoftheUK ticularlyoftheThirdWorld,helpingto financialsectorthathasreceivedrecogni- acceleratetheworlddebtproblem tionbytheFINANCIALSERVICESACT1986. Theseareinstitutions,suchastheInstitute RedBook(H6)seeFinancialStatement ofCharteredAccountants,whicharenot andBudgetReport involvedintradingbutinotherinvestment services. redchip(G1) AshareinaChinesestateenterprisethat Seealso:self-regulatoryorganization hasbeenpartiallyprivatized.Thecom- panycanbeeitheraMainlandChinese reconciliationbill(H6)seeappropriation companywithHongKongsubsidiaries,or bill aHongKongcompanywhosebusinessis recontract(D0) mainlyinMainlandChina. EDGEWORTH’snotionthatbuyersandsellers redemptiondate(G0) initiallymakeprovisionalcontractsatDIS- Thedatebywhichafixed-termstockmust EQUILIBRIUMPRICESandthensubsequently, berepaidbythegovernment,companyor asaresultoftheirexchange,makeanew corporationwhichhasissuedit. contractat,orapproaching,anequili- briumprice. redemptionyield(G0) Theyieldonastockrepayablebyafixed Seealso:taˆtonnement date which includes both the interest on References that stock and the capital gain if the Walker,D.A.(1973)‘Edgeworth’stheory current price is less than the redemption ofrecontract’,EconomicJournal83: price. A net redemption yield adjusts the 138–49. yield for income and capital gains taxes payable. recovery(E3) Thephaseinabusinesscycle,afteraSLUMP redlining (G2, R2) andbeforeaBOOM,inwhichoutputis 1 Giving an area the status of a slum by risingand,often,unemploymentisfalling. making it ineligible for mortgage fi- nance. Once this status has been given, rectification(E6) redlining accelerates the decline of such Cuba’scampaignforgreaterefficiency. areas. This has occurred in several US ComparabletotheUSSR’sPERESTROIKA. urban areas, including parts of New recurrentspotcontracting(G0)see York City. employmentcontract 2 Refusing to grant credit because the lender cannot obtain a required return recursivesystem(C3) at any rate of interest. There can be Asystemofeconometricequationssuch passive redlining when a credit institu- thatifweknowthevaluesofvariablesup tion avoids contact with some cate- tothetimet1wecanobtaintheir gories of lender. valuesattimet.Systemsofthiskind demonstrateunilateralcausaldependence. red tape (L5) Regulations on business which incur high recycling(F3,Q3) COMPLIANCE COSTS. 1Thereuseofscarcerawmaterials,espe- ciallypaper,glassandmetals. reduced form equation (C1) 2Theredistributionoffinancialreserves An equation which has been manipulated fromcreditortodebtorcountries.After to show each endogenous variable as the

© 2002 Donald Rutherford function of the set of exogenous and, if Temple, M. (1994) , present, error terms. New York: St Martin’s Press; London: Macmillan. reference cycle (E3) The basic series of economic statistics, e.g. regional employment premium (H2, J2) GROSS NATIONAL PRODUCT or industrial out- UK wage subsidy to firms in depressed put, which is chosen to indicate fluctua- regions in force from 1967 to 1977. Initi- tions in an economy. ally, it was a subsidy of £1.50 per man per week, with lower rates for women and Seealso:coincidentindicators;economic juveniles. indicators;laggingindicator;leadingindi- cator regional multiplier (R1) The number of times the income or refugeecapital(F2,G0)seecapital employment of a region will multiply as a flight;hotmoney consequence of an increase in AUTONOMOUS refunding (E5, H6) EXPENDITURES. Issuing new government securities to re- Two approaches are often used: the place bonds or other securities which have economic base multiplier and the modified matured. KEYNESIAN approach. The economic base approach assumes that regional income Seealso:overfunding can be divided into two parts – what arises regional banking pacts (G2) from the BASIC INDUSTRIES of the region and US banking agreements used to overcome what springs from other regional indus- the restrictive banking legislation that tries. This multiplier is then calculated as l banned interstate commercial banking to /(l s) with s the ratio of income earned create, in effect, interstate banks. The first in the non-basic sector to total regional pacts were between neighbouring states, income, i.e. the regional multiplier is e.g. in New England, excluding MONEY CEN- TRE BANKS. 1 1 ð1 tÞðc mÞ regional economics (R1, R3) The analysis of firms’ location decisions with t the income tax rate, c the marginal and the causes of regional growth. Econo- propensity to consume and m the marginal mists, with geographers, have the same propensity to import. There are many analytical foundations in the works of problems in calculating this multiplier, von THUNEN and Losch. It is mainly in including the fact that basic industries times of high national growth that regio- may vary greatly in the extent to which nal imbalances attract much interest. they export to other regions. The KEYNE- Seealso:economicgeography SIAN approach merely applies a national multiplier formula to a region. A multi- References plier for a particular region is usually Armstrong, H. and Taylor, J. (1985) Re- smaller than that for the national economy gional Economics and Policy, Oxford: of which it is part as regions are more Philip Allan. open, thus suffering from leakages of Isard, W. (1965) Methods of Regional Analyses: An Introduction to Regional expenditures to other regions. Science, Cambridge, MA: MIT Press; Seealso:multiplier New York: Wiley. Nijkamp, P. and Mills, E.S. (1986–7) regional policy (R5) Handbook of Regional and Urban Eco- nomics, 2 vols, Amsterdam and New 1 Measures to reduce the imbalance in York: North-Holland. prosperity between the regions of a

© 2002 Donald Rutherford particular country, particularly between enjoying free trade within the bloc and the region around the capital city and fixing a COMMON EXTERNAL TARIFF against peripheral provinces. other countries. Prominent examples are 2 Government aid to especially deprived the EUROPEAN ECONOMIC COMMUNITY and the cities, inner cities and other relatively NORTH AMERICAN FREE TRADE AREA. small parts of a country. Seealso:newregionalism regional wage bargaining (J3) Many countries have used incentives to Wage negotiations for an industrial or encourage the location of expanding in- occupational group covering workers in part dustries in the depressed regions and to of a country. This departure from national reduce the POPULATION DENSITY of major wage bargaining is popular with many cities. In the UK a succession of measures employers. It enables pay to reflect more since 1929 to subsidize the GEOGRAPHICAL closely LOCAL LABOUR MARKET conditions; MOBILITY OF LABOUR, the building of fac- unions have often objected to this as it tories, the training of workers and the gives rise to regional wage differentials payment of RATES have been used. Regio- thus departing from the hallowed union nal policies are measured by the number tradition of setting the same pay for all wor- of jobs created in depressed regions and kers of the same occupation or industry. by the extent of convergence in interregio- nal incomes, unemployment rates and regrating (L1) rates of output growth. Regional policy is Large purchasing of goods in order to sell most active in times of fast national them nearby at a profit. economic growth as it is then easier to finance assistance to regions. regression(C1)seeleastsquaresmethod; linearregression Seealso:enterprisezone;growthpole regressioncurve(C1)seeleastsquares References method Diamond, D.R. and Spence, N.A. (1983) Regional Policy Evaluation: A Methodo- regressive expectations (E0) logical Review and the Scottish Example, EXPECTATIONS that the value of an economic Aldershot: Gower Press. variable, e.g. the PRICE LEVEL, will be a Folmer, H. (1986) Regional Economic Pol- weighted average of its present and past icy. The Measurement of its Effect, values. Dordrecht and Lancaster: Nijhoff. Vanhove, N. (1999) Regional policy: A Seealso:adaptiveexpectations;rational European approach, 3rd edn, Aldershot, expectations Brookfield, VT and Sydney: Ashgate. regressive tax (H2) regional selective assistance (R5) A tax falling disproportionately on lower UK government subsidization of capital income groups. If there is regression as and training costs of projects under the INCOME decreases, the AVERAGE RATE OF TAX Industrial Development Act 1984, which increases. Many INDIRECT TAXES, e.g. EXCISE aimed to create or maintain employment DUTIES and sales taxes, are regarded as in designated depressed areas. As many regressive, but the extent to which they projects were of a capital-intensive nature are depends on the consumption patterns with little impact on local employment, of different income groups. POLL TAXES are this programme has been managed in- the simplest case of regression. creasingly carefully. regret (C7, D8) regional trading bloc (F0) The difference between an actual pay-off A group of states with adjoining borders and the pay-off that would have resulted

© 2002 Donald Rutherford from choosing the correct strategy when New Perspectives on Institutions and making decisions under UNCERTAINTY. Un- Policies, Cambridge, MA: MIT Press. der a MINIMAX strategy, the aim is to Kahn, A. E. (1988) The Economics of minimize the maximum regrets. Regulation: Principles and Institutions,2 vols, New York: Wiley. References Stigler, G.J. (1971) ‘The theory of econo- Loomes, G. and Sugden, R. (1982) ‘Regret mic regulation’, Bell Journal of Econom- theory: an alternative theory of rational ics and Management Science 2: 3–21. choice under uncertainty’, Economic Utton, M.A. (1986) The Economics of Journal 92: 805–24. Regulating Industry, Oxford: Basil Blackwell. regrettable (D0) Regulation D (E5, G2) A good or service not producing UTILITY An arbitrary rule of the US FEDERAL RE- directly for a consumer, e.g. health care or SERVE SYSTEM that classified bank deposits transport to work. held for less than thirty days as DEMAND regular economy (D0, P0) DEPOSITS. This regulation was modified in An ECONOMY with a typical set of equili- 1980 when this classification of demand brium prices linked to characteristic data. deposits conflicted with the new type of TIME DEPOSIT that has a minimum maturity regular labour (J3) of fourteen days. The regulation is subject Employment bound by labour contracts to the requirement that banks keep to a which is expected to last a fixed period or required reserve ratio. until usual retirement age. Regulation K (E5, G2) Seealso:casualization A regulation of the US FEDERAL RESERVE regulated firm (L5) SYSTEM governing the international bank- A firm subject to detailed government ing operations of US commercial banks. It regulation of its pricing and investment is reviewed every five years to ensure that decisions. PUBLIC UTILITIES are often con- these banks remain internationally compe- trolled in this way because the goods and titive. services they provide constitute a major Regulation Q (E4, E5) part of the costs of all firms and a high The ceiling to the rate of interest US percentage of the consumption expendi- COMMERCIAL BANKS could pay on deposits ture of households. of less than thirty days’ maturity in the regulation (L5) period 1933–85. This maximum rate was Partial or complete intervention in the fixed from time to time by the US FEDERAL economic decision making of a firm or RESERVE SYSTEM. One of the aims of the other economic institution by the govern- regulation was to reduce the cost of ment or one of its agencies. The usual housing finance as THRIFTS would be able justification for this departure from free to operate with low interest rates. As the regulation was evaded by bankers borrow- market principles is MARKET FAILURE. The ing abroad to replace domestic deposits, major forms of intervention include CON- the growth of the EURODOLLAR market was SUMER PROTECTION, the creation of PUBLIC encouraged and much DISINTERMEDIATION ENTERPRISES to run industries that are natural monopolies and the fixing of occurred. In 1980, it was decided to phase prices. out the regulation over a five-year period. Seealso:regulatorycapture Regulation School (B2) A group of French economic thinkers References founded in the 1970s and centred on Paris Bailey, E.E. (ed.) (1987) Public Regulation: and Grenoble consisting of Michel Aglietta,

© 2002 Donald Rutherford Robert Boyer and Alain Lipietz. It derives Reid, Margaret, 1896–1991 (B3) its inspiration from the French philosopher Born in Cardale, Manitoba, and educated Louis Althusser. Recognizing the success of at the Universities of Manitoba, Winnipeg FORDISM, it advocates local government and Chicago where she was awarded a economic strategies to promote employ- PhD in 1931 for a thesis on ‘The econom- ment and revive industry. ics of household production’. She taught consumer economics at Iowa State College References as a colleague of SCHULTZ, and was em- Grahl, J. and Teague, P. (2000) ‘The Regu- ployed by the federal government from lation School, the employment relation 1943 to 1948 rising to be head of the and financialization’, Economy and So- ciety, 29: 160–78. Family Economics Division of the Depart- ment of Agriculture. She measured food Regulation U (E5, G2) expenditures to produce the consumption US banking regulation issued by the US standards reported in her Food for People FEDERAL RESERVE SYSTEM under the Securities (1943). Professor at the Universities of Exchange Act 1934 to limit the amount a Illinois from 1948 to 1951 and Chicago commercial bank can lend to its customers from 1951 to 1961. She was an inspiration for the purchase or holding of securities. for MODIGLIANI, BECKER and FRIEDMAN who The aim of this regulation was to reduce acknowledged her pioneering work on the speculation in stock markets. PERMANENT INCOME HYPOTHESIS of 1950. The first female economist to be chosen by the regulatory agency (L5) American Economic Association as a Dis- A governmental organization at national/ tinguished Fellow. federal or state/local level with the task of References supervising the decision making of firms in a particular industry. These agencies Yi, Yun-Ae (1996) ‘Margaret G. Reid: life approve price increases, as well as mon- and achievements’, Feminist Economics, 2(3): 17–36. itoring the quality of service and other matters of concern to consumers. There reinsurance (G2) are many in the USA, especially for Spreading an insurance risk by making a energy, water and transportation indus- treaty with other insurance companies to tries; in the UK, several ministries have accept part of the risk in return for a share the task of regulating PUBLIC ENTERPRISES, of premium income – hence this has been e.g. the Home Office has powers over the described as ‘insuring the insurer’. Large British Broadcasting Corporation. assets such as ships and aircraft could not be insured if reinsurance were not avail- regulatory capture (L5) able. The perversion of the aims of a regula- tory agency by one of the organizations it reintermediation (G2) is supposed to control. An organization The return to the use of banks and other can acquire power over the agency sup- financial intermediaries after a period in posed to supervise it by its political which individuals and companies directly influence, superior technical knowledge financed each other. or by an interchange of personnel. This has occurred often to evade ANTITRUST Seealso:disintermediation policy. relational capital (J0) References A form of HUMAN CAPITAL consisting of the Stigler, G.J. (1971) ‘The theory of eco- information obtained through contact nomic regulation’, Bell Journal of Eco- with clients. Lawyers, management and nomics 2: 3–21. financial consultants, bankers and accoun-

© 2002 Donald Rutherford tants particularly possess this capital. Part Seealso:opportunitycost;price of remuneration, especially to older mem- relative surplus value (D0) see surplus bers of staff, can be considered a return to value relational capital. Unlike most types of human capital, it is transferable. religion(Z1)seeeconomicsofreligion; Christiansocialism;Islamiceconomics relational wealth (Q0) Non-material WEALTH based on service to remittance (E4, F3) the community and other people, a healthy A sum of money transferred to another environment and the time to develop and person. A major type is a transfer to a maintain personal relationships, rather than relative or friend, often by a migrant worker on consumer goods produced by the market. to his or her family. For poor countries and This concept has been suggested as a poor agricultural regions, remittances can foundation for economic policy making. be a major source of income. References remuneration committee (G3, J3) Diwan, R. (2000) ‘Relational wealth and A subcommittee of a board of directors the quality of life’, Journal of Socio- charged with the task of independently economics 29: 305–40. fixing the pay and other benefits of directors and senior executives. It is ex- relative concentration (L1) pected to link directors’ rewards to share- A measure of the distribution of economic holder value. activity, or of values of an economic Seealso:GreenburyCode variable, using Lorenz curves and Gini coefficients. This is used to examine the renewable resource (Q2) distribution of the size of firms and the A NATURAL RESOURCE that, because of its size of individual incomes. biological nature, is self-renewing, e.g. game, fish, woodland. A greater yield can relative income hypothesis (E2) be obtained from it by growing it in an Duesenberry’s theory of the CONSUMPTION artificial environment as, for example, in a FUNCTION that consumption is a function fish farm. of current income relative to income in preceding time periods and relative to the Seealso:non-renewableresource income of households which are regarded Rengo (J5) as models to follow. The theory was used Japanese labour union federation created to reconcile a conflict between time series in November 1987 through the merger of and cross-section evidence. DOMEI and CHURITSUROREN. By 1989, it had References 5.4 million members of whom 2.8 million Duesenberry, J. (1949) Income, Saving and were in manufacturing and 1 million were the Theory of Consumer Behavior, Cam- in transport. bridge, MA: Harvard University Press. Seealso:enterpriseunion;Sohyo relative price (D0) rent (D3, Q0) The price of one good expressed in terms The charge made by the owner of property of another, rather than money. The rela- to another person wishing to use it. From tive price of apples can be expressed in PETTY onwards, it was recognized that the terms of oranges if a consumer has a amount of rent would vary according to choice between consuming either apples the location and fertility of land: ANDERSON or oranges from a given income. Relative and RICARDO refined this view into a DIF- prices can be expressed by the slope of a FERENTIAL THEORY OF RENT. Without the BUDGET LINE. private ownership of property, rent would

© 2002 Donald Rutherford not be paid – although in the public sector which will appeal to another part of the an imputed rent for the use of land and market, e.g. reissuing a fixed rate bond as buildings is often charged in order to take a FLOATING RATE NOTE. into account the full cost of using factors of production. repeated game (C7) A game with a modified strategy from Seealso:economicrent period to period which recognizes the rival’s strategy. rental payment (D3) The payment for the use of a FACTOR OF replacement cost (M4) PRODUCTION. Such payments are common The current value of an asset measured by in the hire of capital equipment but, in a how much it would cost to be replaced. sense, the concept applies to labour as This is a more accurate measure of the wages are paid for labour services, not for value of an asset than HISTORIC COST. thepurchaseoftheworkeraswouldbethe case in slavery. replacement investment (E2) Investment undertaken to keep a capital renter illusion (H2) stock intact which is equal to the amount A form of FISCAL ILLUSION which assumes of capital which has depreciated. In NA- that only property owners will correctly TIONAL INCOME accounting, net investment perceive the property taxes levied by local + replacement investment = gross invest- governments with the consequence that ment. renters of property will not correctly match the valuation of publicly provided Seealso:depreciation;netinvestment local services with the tax passed on in replacement labour force (J2) rents. Because of this illusion voters who The use of migrant labour to fill job rent property will be willing to approve of vacancies created by the movement of higher local public expenditure. indigenous workers from areas of decline Seealso:debtillusion to the more prosperous regions of a country. In the UK, for example, immigrant labour rentier (D3) in the 1950s took up employment in A person whose income is entirely derived declining areas, especially northern Eng- from the ownership of FINANCIAL CAPITAL or land and the West Midlands, where infer- other property. KEYNES in his GENERAL THE- ior jobs existed as a consequence of the ORY forecast the disappearance of this class shift of UK workers to the south east of of persons through an abundance of capi- England. tal reducing its return to zero. replacement ratio (I3) rent seeking (D0, L1) 1 The ratio of welfare benefits paid to the Monopolizing activity. This is much criti- unemployed to the average after-tax cized as it produces a social waste rather earnings of people in work. than a social surplus. 2 The ratio of a pensioner’s social security reoffering yield (G1) benefits and other TRANSFER INCOMES to The yield based on the price a syndicate pre-retirement income. These ratios can offers a government bond to the public indicate that welfare payments are so after its original acquisition from the generous as to discourage work effort or issuer. It takes into account the premium too low to prevent pensioners suffering or discount since the launch of the bond. a very large income loss. repackaging (G2) representative firm (I2) Selling a portion of a BOND issue by A term coined by MARSHALL to denote that reissuing it as a different type of security a firm is characteristic of a particular

© 2002 Donald Rutherford industry or sector. It is the average firm, maintain a particular level of product with ‘a fairly long life, and fair success, quality or to give its workers permanent which is managed with normal ability, and employment. A firm gains from not mak- which has normal access to the economies, ing such promises explicit in the terms of external and internal, which belong to that its contracts: it can abandon its under- aggregate volume of production’. It is not takings in extreme circumstances and keep to be equated simply with the OPTIMUM employees from monitoring its assurances. FIRM except, perhaps, in the sense of being Seealso:goodwill;intangiblewealth the firm most likely to survive. References Seealso:economyofscale MaCaulay, S. (1963) ‘Non-contractual re- reproduction (E2) lations in business’, American Sociologi- A new cycle of production created by a cal Review 28: 55–69. given amount of capital. Simple accumula- required rental on capital (M2) tion is a cycle with no accumulation; That rental equal to the OPPORTUNITY COST expanded reproduction, when accumula- of owning the capital. tion is more than zero; contracted repro- duction when accumulation is less than required reserve ratio (E5) zero. This is a term popular in MARXIAN Ratio of reserve assets to the total deposits ECONOMICS. of a bank or other regulated financial repurchase agreement (E5) institution set by a central bank. For UK CLEARING BANKS the ratio was set at 12½ A finance method used by the BANK OF per cent in the period 1971–81, after which ENGLAND and the FEDERAL RESERVE BANKS of the USA to give banks and other financial the proportion of reserves they hold is at institutions extra liquidity by buying gov- their own discretion. ernment securities for a short period, resale price maintenance (L1) usually a day, the borrower agreeing to A RESTRICTIVE PRACTICE of manufacturers repurchase at a stated price. It is very who insist on supplying goods subject to popular with financial institutions as a the condition that the goods are sold at means of maintaining their inventories of recommended prices. By 1938 in the UK securities at a low cost. at least a third of consumer expenditure reputational equilibrium (E3) was on goods subject to this rule. In 1956, That rate of price INFLATION at which the collective enforcement of RPM was out- benefit to a monetary authority from lawed by the Restrictive Trade Practices reneging from a monetary policy rule Act; in 1964, the Resale Prices Act made equals the cost of reneging, measured by individual enforcement illegal, unless the future loss of reputation. class of goods was exempted by the Restrictive Practices Court. Sale of books References was subject to RPM under the Net Book Backus, D. and Driffill, J. (1985) ‘Inflation Agreement until 1996. As there was so and reputation’, American Economic Re- much evasion of RPM before 1964 view 75: 530–8. through discounting, stamp schemes and Barro, R.J. and Gordon, D.B. (1983) violation of manufacturers’ recommenda- ‘Rules, discretion and reputation in a tions by the large supermarket chains, it model of monetary policy’, Journal of Monetary Economics 12: 101–21. was difficult to measure the effects of abolishing RPM on retail distribution. In reputation capital (M2) the USA, since 1940 it has been outlawed An intangible asset of a firm created by at the federal level as a violation of the the making of implicit promises, e.g. to SHERMAN and FEDERAL TRADE COMMISSION

© 2002 Donald Rutherford ACTS and also under state fair trade laws. of Technological Change: Selected Read- The most that manufacturers legally can ings, Harmondsworth: Penguin. do is to ‘suggest’ to retailers an appro- research programme (B4) priate retail price and reinforce that sug- A cluster of interconnected theories consti- gestion by printing it on the packaging. tuting the principal ideas of a group of See also: competition policy economists who have agreed on certain basic assumptions, e.g. NEW CLASSICAL ECONOMICS. rescheduling of debt (F3) Lakatos is particularly associated with this The conversion of short-term debt into approach to economic methodology. long-term debt negotiated by countries or Seealso:economicmethodology companies finding it difficult to repay debt when payment is due. Countries resche- References dule their debt by applying to the Paris Lakatos, I. and Musgrave, A. (eds) (1972) Club. Criticism and the Growth of Knowledge, Cambridge: Cambridge University Press. Seealso:GroupofTen;worlddebtpro- blem reservation price (D0) The minimum price a seller will accept; the research and development (O3) maximum a buyer will offer. Reservation The activity of inventing new processes prices commonly occur in AUCTIONS. and products and applying them in indus- try, especially those which are science reservation wage (J3) based and dependent for their survival The minimum wage a worker is prepared and long-term growth on imaginative to accept. The magnitude of this wage will change. The study of this is often termed depend on a worker’s previous wages. In ‘the economics of science’. Globally, much job search, a worker will continue to seek of R&D is concentrated in the USA job offers until a job at or above the because of large space and defence expen- reservation wage is offered. ditures contracted out by federal agencies Seealso:minimumsupplypriceoflabour to private corporations and universities. Since 1890 larger industrial corporations, reserve army of labour (J6) e.g. in the electrical industry, have con- The Marxian description of the unem- ducted research in their own laboratories. ployed portion of the labour force. It was Research based in Europe is on a much MARX’s view that, under CAPITALISM, CAPI- smaller scale, although many schemes have TAL–LABOUR RATIOS would increase and that been introduced to increase Europe’s capitalists would need an excess supply of R&D activity. In the EUROPEAN COMMUNITY, labour to keep down money wage rates. to encourage R&D reciprocal arrange- However, it is the experience of some ments are negotiated with the USA: these countries, e.g. the UK, for both REAL aim to open public purchasing to Eur- WAGES and unemployment to rise. opean co-operation; joint ventures are reserve assets (E5, G2) established and national government re- Cash and highly liquid monetary assets search grants are refused to non-European required to be held by financial institu- high-technology companies in competition tions, especially banks, under the rules of with European enterprises. a CENTRAL BANK. In the UK these have been References defined as balances with the BANK OF ENG- HMSO (annual) Annual Review of Govern- LAND (other than SPECIAL DEPOSITS), TREAS- ment Funded Research and Development, URY BILLS, company tax reserve certificates, London. some local authority and commercial bills Rosenberg, N. (ed.) (1971) The Economics and UK government stocks with less than

© 2002 Donald Rutherford one year to maturity. In the USA required COMMERCIAL BANK, or other deposit-taking reserves take the form of vault cash and institution, which a CENTRAL BANK insists deposits with Federal Reserve Banks. should be kept in cash or short-term From 1971 to 1981 in the UK, under the securities, usually with less than two years rules set out in the COMPETITION AND CREDIT to maturity. Altering reserve requirements CONTROL statement of 1971, banks, and is a means of expanding or contracting the several other financial institutions, were total money supply of an economy. In the required to observe a ratio of reserve USA, reserve requirements were instituted assets of 12½ per cent. The Board of as early as the First Bank of the United Governors of the FEDERAL RESERVE SYSTEM States, founded 1791, in the twentieth can impose reserve requirements. century they were in force from 1913 to 1980. Reserves could be held in vault cash, See also: reserve requirements a balance kept at a reserve bank or at a reserve base (G2) member bank which keeps reserves at the The high-powered money of the banking FEDERAL RESERVE. system. A CENTRAL BANK requires a certain In the USA after the implementation of proportion of cash or near-cash assets to the MONETARY CONTROL ACT 1980 various be held: this forms the basis for the reserve requirements have been set: for creation of bank deposits. net transaction accounts, 3 per cent of deposits (12 per cent for deposits over Seealso:monetarybase;moneymultiplier $40.4 million); for non-personal time de- posits, 3 per cent if maturity of less than reserve currency (F3) 1½ years (zero if greater maturity) and 3 A currency widely used for the financing of per cent on Eurocurrency liabilities. international trade and held as an alter- native to gold or SPECIAL DRAWING RIGHTS of residentpopulation(J1)seedejure the INTERNATIONAL MONETARY FUND. The population most popular currency is the dollar. As a residualization (I3) percentage of official holdings of foreign Downgrading the status of a public asset exchange of all countries in 1988, the US or part of a population so that only the dollar accounted for 54.5 per cent, com- poorest members of society can benefit. pared with sterling 15 per cent, the yen 6.7 This can happen if health care and public per cent and the DM 1.6 per cent. In the sector housing are offered only to the past, the greater role of sterling as a lowest income groups of a nation. MAR- reserve currency put a tremendous strain SHALL discussed the ‘residuum’, a class of on the UK economy as the volatility of persons physically, mentally and morally sterling balances made it more difficult to incapable of doing a good day’s work and keep the pound at its fixed parity. attracting good wages: exceptional treat- References ment, especially in education, was recom- Group of Thirty (1982) Reserve Currencies mended. in Transition, New York: Group of Thirty. Resolution Trust Corporation (G2) Grubel, H. (1984) International Monetary US federal government’s liquidation agency System, 4th edn, Harmondsworth: Pen- set up in 1989 with the task of winding up guin. hundreds of bankrupt THRIFTS. It is super- vised by the FEDERAL DEPOSIT INSURANCE COR- reserve ratio (E5) see cash–deposits PORATION and funded by federal ratio; required reserve ratio government grants and bond issues. reserve requirements (E5) resource economics (Q2, Q3) The proportion of the total assets of a The economic analysis of environmental

© 2002 Donald Rutherford issues, especially exhaustible resources, en- practising RESALE PRICE MAINTENANCE,by ergy and pollution. As early as 1866 JE- collusion to fix common prices and share VONS, in writing of an impending coal out a market or by PRICE LEADERSHIP. TRADE shortage, applied economic reasoning to UNIONS, particularly of the craft type, can the study of resources. However, it was restrict LABOUR SUPPLY in the long term by particularly PIGOU’s discussion of the costs agreeing with employers to limit the num- of pollution in his pioneering work on bers of apprenticeships and in the short WELFARE ECONOMICS and HOTELLING’s seminal term by STRIKES. Labour restrictive prac- article on the principles concerning ex- tices can also take the form of minimum haustible resources that provided the ana- staffing levels which, although increasing lytical stimulus which set this subject the number of hours of labour supplied, going. Today, this branch of economics increase wages at the expense of profits. relies on the concept of externalities and The COMPETITION POLICY of many industria- COST–BENEFIT ANALYSIS and provides recom- lized countries has attacked firms carrying mendations for many forms of economic out these practices; trade union and in- regulation. dustrial relations legislation has played a smaller role than employers in eliminating References them. Conrad, J.M. (1999) Resource economics, Cambridge, New York and Melbourne: Seealso:craftunion;demarcation Cambridge University Press. Hotelling, H. (1931) ‘The economics of re-switching (D2) exhaustible resources’, Journal of Politi- Returning to the use of a production cal Economy 39 (April): 137–75. technique previously abandoned when its Norton, G.A. (1984) Resource Economics, rate of return was too low because now London: Edward Arnold. the rate of return to the technique subse- Perman, R. et al. (1999) Natural resource quently used has fallen lower. SRAFFA,in and environmental economics, 2nd edn, his Production of Commodities by Means New York and Harlow: Pearson Educa- of Commodities (1960), identified this as a tion. problem for capital theory arising from the Peterson, F.M. and Fisher, A.C. (1977) ‘The exploitation of extractive re- heterogeneity of capital. sources: a survey’, Economic Journal 87: retail bank (G2) 681–721. A bank attracting deposits from the gen- resource monotonicity (Q0) eral public and offering a wide range of The rule that as a common resource services, including transfer of funds, perso- grows, each agent should not lose thereby nal loans, investment advice, insurance remaining at least as well off as before. and foreign exchange. It is to be con- trasted with a WHOLESALE BANK. restoration cost (Q2) The cost of returning a polluted or da- retail price index (E3) maged environment to its original state The UK index of consumer prices, pre- rather than compensating for the loss. viously known as the cost of living index. Costs include current market costs of By a monthly repricing of a bundle of equipment, materials and labour. goods and services representative of an average consumer’s expenditure, it shows restrictive practice (L1, L2) how much the price level has increased. An anti-competitive practice of a firm, a The prices of more than 600 goods and group of firms or a TRADE (LABOR) UNION services on sale in 180 towns are collected; usually to restrict supply with a view to data from the FAMILY EXPENDITURE SURVEY increasing that organization’s income. are also used. The weights used are 17.5 Firms can do this in many ways, e.g. by per cent for housing, 15.4 per cent for

© 2002 Donald Rutherford food and 4.2 per cent for local domestic returns to scale (D2) taxation. Its emphasis on consumer prices The change in output resulting from an makes it a crucial indicator of the welfare increase in the quantities of factor inputs effects of inflation and is of central im- employed. Returns to scale can be shown portance to wage negotiators. In the UK, by their effect on long-run average costs there were changes of the base in 1974 and (LRAC). They can be increasing (output 1987. The inclusion of mortgage payments growing faster than inputs), constant (in- and local taxation is unusual by interna- puts and output increasing at the same rate) tional standards. or decreasing (output growing at a slower Seealso:consumerpriceindex;headline rate than inputs). The returns which are rateofinflation;Laspeyresindex;Paasche most characteristic of a particular economy index will determine whether it is growing, sta- tionary or in decline. Central to CLASSICAL retained earnings (M2) ECONOMICS was the assertion that there are The ACCOUNTING PROFITS of a firm after tax diminishing returns to land. Allyn YOUNG, and other charges which, instead of being SRAFFA and Joan ROBINSON in their post- distributed to shareholders or its other Marshallian study of the firm examined owners, are kept as an asset available for the implications of increasing returns. investment in working and fixed capital. When these earnings are used, the cost of References using this form of finance is the rate of Young, A. (1928) ‘Increasing returns and interest forgone by not employing them economic progress’, Economic Journal outside the firm. 38: 527–42. retirement age (J2) The age when a person finally leaves the labour force. This is mainly determined by the employment and pensions legislation of a country. In developed countries it is between 60 and 65; in socialist countries 60 for males and 55 for females; in devel- oping countries between 50 and 60 years. Uruguay has the most generous scheme: men can retire after thirty years of work and women after twenty-five, receiving a pension equal to 100 per cent of the wage rate received in the five years since reaching the age of 50. Equal opportunities legisla- tion has led to a convergence between male and female retirement ages. Before 1900, the retirement age of workers was less of an issue as life expectancy was much lower and the provision of pensions rare. retrophobia (J2) Fear of going back to work and coping with the changes, including recently in- stalled technology, which have occurred during one’s absence. This problem parti- cularly afflicts women after a mid-career break.

© 2002 Donald Rutherford surplus from the agricultural sector to provide sustenance for public servants. The PHYSIOCRATS in eighteenth-century France provided an early theory of it. In the twentieth century, many socialist economies have been of this type.

revenuemaximization(L2)seesales maximization

revenue neutral (H2) The characteristic of a tax reform which revalorization (E3, H2) does not alter total tax revenue. Changing prices or tax rates, e.g. periodic revenue seeking (F1) increases in excise duties in line with IN- Attempting to gain part of the revenue FLATION so that these INDIRECT TAXES are from protective tariffs. constant in real terms. References revaluation(F3)seecurrencyrevaluation Bhagwati, J.N. and Srinivasan, T.N. (1980) ‘Revenue-seeking: a generalisation of revealed preference (D1) the theory of tariffs’, Journal of Political An approach to consumer theory pio- Economy 88: 1069–87. neered by SAMUELSON in place of CARDINAL UTILITY or INDIFFERENCE CURVE methods; an revenue sharing (H7) empirical utility theory. It does not require The transfer of the revenue from federal or complete information about a consumer’s central government taxes to state, county or tastes but only knowledge of the combina- local governments. In countries with federal tions of goods actually purchased out of a constitutions, e.g. Australia, Canada, Ger- consumer’s total income. It is assumed many or the USA, the principles for allocat- that the consumer is consistent in never ing revenues are set out in fundamental choosing a combination more expensive national constitutional documents. In the than that previously preferred. UK, revenue sharing in the form of the RATE References SUPPORT GRANT and, later, the REVENUE SUP- PORT GRANT, has been decided within the Houthakker, H.S. (1950) ‘Revealed prefer- framework of local government law. ence and the utility function’, Econom- ica New Series, 27: 159–74. Seealso:federalfinance Samuelson, P.A. (1938) ‘A note on the pure theory of consumers’ behaviour’, References Economica New Series, 5: 61–71, 353–4. Hunter, J.S.H. (1977) Federalism and Fiscal —— (1948): ‘Consumption theory in terms Balance, Canberra: Australian National of revealed preference’, Economica New University Press and the Centre for Re- Series, 15: 243–53. search on Federal Financial Relations. revenue (H2, M2) revenue support grant (H7) 1 The proceeds obtained by a firm during UK central government grant to local auth- a given time period from the sale of its orities. It consists of a needs grant reflect- output of goods and services. ing the needs of individual authorities and 2 The amount raised by a government a standard grant on a per capita basis. from taxation and trading activities. reverse auction (D0) revenue economy (P4) An auction in which there are many sellers A non-market economy that extracts a but only a single buyer.

© 2002 Donald Rutherford reverse causation hypothesis (E4) Seealso:merger;takeover The view that the level of national income reverseyieldgap(G1)seeyieldgap determines the size of the money stock, i.e. money has a passive role. This view, which reversionary bonus (G2) was fervently advanced by KALDOR and A bonus given by an insurance company to Joan ROBINSON, is a frontal attack on the a policyholder for every year the policy is in QUANTITY THEORY OF MONEY and the use of force. It is paid out at the termination of the TRANSMISSION MECHANISM in modern the policy or on the death of the insured. MONETARIST theory which asserts that Seealso:terminalbonus money has an effect on real variables, particularly output and employment. revolving credit (G2) Credit available for an indefinite term for reverse discrimination (J7) the same amount because the credit used Favouring a disadvantaged group by giv- is matched by regular payments from the ing it better education or employment or debtor. An example is permitting credit wages to correct its social status and card holders to use the card up to a income rather than to reward its merit. particular limit, $10,000: when that limit This form of discrimination is evident if has been reached and the amount due workers with different levels of productiv- paid, the credit is available again. ity are paid the same wages. revolving underwriting facility (G2) Seealso:affirmativeaction;discrimina- An extended NOTE ISSUANCE FACILITY in the tion;positivediscrimination form of a conventional bank loan at low reverseincometax(H2)seenegative short-term interest rates offered because a incometax money market has not purchased all of the short-term commercial paper offered. reverse J-shaped frequency curve (C1) rhetoric(A1)seeeconomicsasrhetoric A FREQUENCY CURVE with a negative slope. Rhinelands hourglass (R1) The belt of prosperous EUROPEAN COMMU- NITY cities stretching from the Benelux countries and Germany to Northern Italy, with Paris as an offshoot. Also known as the Lotharingian axis. Ricardian equivalence theorem (D9, H2, H6) This states that deficit finance has exactly the same economic impact as current taxation. This is because individuals take into account future taxes, e.g. the bonds created to finance a deficit can be given to one’s children who can use them to pay future taxes. Thus, individuals increase their savings by an amount equal to tax reverse takeover (G3, L1) cuts or the increases in government spend- A takeover of the firm that was originally ing with the consequence that deficit the bidding company. A case of this would finance does not stimulate the national be if Alpha Products bids for Beta Pro- economy. This form of CROWDING OUT is ducts unsuccessfully and is then taken over named after RICARDO but formally ex- by Beta Products. plained by Barro.

© 2002 Donald Rutherford Seealso:overlappinggenerationsmodel of his day and was to be an important starting point for John Stuart MILL, MARX References and MARSHALL. As a Member of Parlia- Barro, R. (1974) ‘Are Government bonds ment from 1819 for Portarlington, a rotten net wealth?’, Journal of Political Econ- omy 82: 1095–175. borough, he was to be an influential debater on central issues, especially on Ricardian theory of value (D0) see monetary questions, later being a major Ricardo inspiration for the Currency School. His home at Gatcombe Park, Gloucestershire Ricardo, David, 1772–1823 (B3) (later the home of HRH The Princess A leading English CLASSICAL ECONOMIST who Royal), was used as the venue of the came to economic study after a rigorous Political Economy Club, the only forum Talmudic education at the Portuguese for the leading economists of the time to Synagogue of Amsterdam, a lucrative discuss economics. He died, much ad- career as a London stock jobber and a mired, leaving the immense fortune of chance reading of SMITH’s Wealth of Na- £775,000, including agricultural estates, tions at Bath in 1799. The great inflation despite having created an economic theory of the Napoleonic Wars period brought so despised by the landed interest. him to write a pamphlet on monetary economics, The High Price of Bullion,in Seealso:neo-Ricardians;Sraffa 1811. The CORN LAWS controversy inspired References An Essay on the Influence of a Low Price Blaug, M. (1958) Ricardian Economics: A of Corn on the Profits of Stock, his first Historical Study, New Haven, CT: Yale attempt to create a model of the economy University Press. using the DIFFERENTIAL THEORY OF RENT, the Hollander, S. (1979) The Economics of law of DIMINISHING RETURNS and the inverse , Toronto: University of relationship between wages and profits. Toronto; London: Heinemann Educa- James MILL encouraged him to expand it tional Books. into the larger, and very influential, Prin- Morishima, M. (1989) Ricardo’s Econom- ciples of Political Economy and Taxation, ics, Cambridge: Cambridge University first published in 1817. What originally Press. Sraffa, P. and Dobb, M.H. (eds) (1951–73) had been a theory to show that restricting The Works and Correspondence of David corn imports would lead to an extension Ricardo, Cambridge: Cambridge Uni- of cultivation to marginal land and a fall versity Press. in the rate of profit became an integrated theory of value, distribution, international Ricardo effect (D2, O3) trade and taxation. The most controversial The substitution of machinery for labour aspect of it was, perhaps, his theory of as a consequence of a rise in wages. This value. This was narrower than SMITH’s in occurs because the ratio of wages to that it emphasized labour quantities as an product prices changes, affecting the prof- explanation of relative values at all stages itability of an industry. of society and was more concerned with the quest for an invariable standard of References value, seen by contemporaries as impor- Hayek, F.A.von (1942) ‘The Ricardo effect’, tant at a time when INDEX NUMBERS were Economica New Series, 9: 127–52. not available to show the extent of infla- tion. Although many of his key theories rights issue (G1) were not original (e.g. DIFFERENTIAL THEORY An issue of shares which existing share- OF RENT, the law of COMPARATIVE ADVANTAGE) holders of a company have the right to his central model dominated the thinking buy: this can be either exercised or sold.

© 2002 Donald Rutherford The issue of these extra shares will bring ness of bank assets makes it possible to about a fall in the existing share price. ascertain the level of capitalization suitable for a particular bank. US and European Seealso:bonusissue;scripissue adoption of this system is a step towards right-to-work state (J5) the international harmonization of bank- US state which has made it illegal to ing standards. require a worker to join a US LABOR UNION. (D0) Most of these twenty states are in the Choosing assets with little risk of either South. capital loss or an uncertain return. Risk ringfencing(H5)seeearmarking aversion can be expressed in different ways, including the choice of only very risk (D0) safe assets, e.g. government BONDS, or the The chance of an event occurring in diversification of an investment portfolio. accordance with a known probability. Many investors associate high risk with a Actuarial calculations based on past ex- high return. perience make it possible to insure against the occurrence of such event. A person References who is risk averse would require very Tobin, J. (1958) ‘Liquidity as behaviour favourable odds to make a bet; a RISK towards risk’, Review of Economic Stu- LOVER would take a gamble even when the dies 25 (February): 65–86. odds are unfavourable; a risk-neutral per- risk-based banking standards (G2) see son will be concerned not about the like- risk asset system lihood of particular bets being successful but on average with making a profit. risk-based premium (G2) An insurance premium that varies accord- References ing to the riskiness of the subject of the Bernstein, P. (1996) Against the gods: the insurance. The past record of the party remarkable story of risk,NewYork, insured and of persons with similar char- Chichester and Toronto: Wiley. Dembo, R.S. and Freeman, A. (1998) acteristics is the main determinant of the Seeing tomorrow: rewriting the rules of premium. risk, New York, Chichester and Tor- risk capital (G0) onto: Wiley. 1 Ordinary shares. risk-adjusted discount rate (G0) 2 Common stock. A risk-free discount rate augmented to 3 VENTURE CAPITAL. take into account the risk factor. These constitute the part of long-term risk asset system (G2) financial capital without a claim on the A method of assessing the amount of RISK assets of a firm and which will be lost if a bank is taking which weights bank assets the enterprise goes bankrupt. according to the length of time banks risk-free asset (G0) could lose profits on them. The FEDERAL An asset with a known return unlikely to RESERVE SYSTEM recommends the adaptation default. of this system now in use in the EUROPEAN COMMUNITY countries and suggests weights risk lover (D0) of 0 per cent for cash (and its equivalents), A person who will gamble even when a 30 per cent for money market assets, 60 mathematical calculation shows the odds per cent for moderate risk assets (e.g. local are unfavourable. Risk lovers will accept a authority bonds) and 100 per cent for lower expected income in the hope of standard bank loans. Weighting the riski- obtaining a greater capital gain.

© 2002 Donald Rutherford risk management (M2) the Board of Governors from 1968 to The calculation of the probability of an 1974. Before the Second World War he unfortunate event occurring and the devis- established his fame as an economic theor- ing of strategies to minimize its impact ist through articles on Marshall’s REPRE- through the use of insurance, reinsurance, SENTATIVE FIRM, the ELASTICITY of demand DERIVATIVES, the avoidance of particular for income in terms of effort and the activities and the removal of hazards. stationary equilibrium. His famous Essay on the Nature and Significance of Eco- risk neutral (D0) nomic Science (1935) firmly separated NOR- Indifference between certain and uncertain MATIVE from POSITIVE ECONOMICS and outcomes with the same expected return. asserted that economics was concerned risk package (G2) with means and not ends: this greatly The mixture of types of finance used to influenced the course of economics provide credit for a particular project, e.g. throughout the Western world. By bring- a fixed interest loan and an issue of ing HAYEK, with his knowledge of AUSTRIAN ordinary shares. ECONOMICS, to the London School of Eco- nomics in 1931 he was able to provide an risk pooling (G2) alternative to the Marshallian economics The adding together of the risks of many of Cambridge. In his methodological persons to reduce the cost of RISK; a basic works, Robbins asserted that the proposi- principle of INSURANCE. Those who face the tions of economics are deductions from same risk are charged the same insurance indisputable facts of experience, particu- premium. A major example of this is the larly the scarce nature of resources. The underwriting system of Lloyd’s insurance Austrian influence made him a strong market in London. opponent of KEYNESIANISM in the 1930s Seealso:reinsurance but his work with the War Cabinet (he was Director of the Economic Section) led risk premium (D0) him to make peace with his academic The amount of income given up to leave a enemies. After 1950, he wrote a series of person indifferent between a risky choice elegant works on the history of economic and a certain one. thought, including studies of Robert TOR- risky asset (G0) RENS and the classical theories of economic An asset with an uncertain rate of return. development and LAISSEZ-FAIRE. The Rob- Assessments of riskiness depend on con- bins Report of 1963 on higher education sumption plans and the nature of other in the UK helped to bring about a decade assets held by investors. of university expansion. rival good (D0) References A GOOD which can only be consumed by Lord Robbins (1952) The Theory of Eco- one individual so his or her consumption nomic Policy in English Classical Politi- prevents rivals from benefiting from it. cal Economy, London: Macmillan. —— (1958) Robert Torrens and the Evolu- Seealso:clubgood;privategood;public tion of Classical Economics, London: good Macmillan; New York: St Martin’s Press. Robbins, Lionel (Lord), 1898–1984 (B3) —— (1971) Autobiography of an Econo- UK economist who was educated at the mist, London: Macmillan. London School of Economics where he subsequently became lecturer from 1925 to Robertson, Dennis Holme, 1890–1963 1927, professor from 1929 to 1961 and the (B3) Director and Chairman of the Court of Major UK economist of the twentieth

© 2002 Donald Rutherford century. He was educated at Trinity Col- order to make that possible, at the same lege, Cambridge, where he held a fellow- time to the over-use of restraint – an ship almost continuously from 1916, outcome which many people have felt that interrupted by a chair at the London he was right to fear.’ School of Economics from 1939 to 1944. References He succeeded PIGOU as professor of eco- nomics at Cambridge from 1944 to 1957. Presley, J.R. (1979) Robertsonian Econom- ics: An Examination of the Work of Sir His most famous works are A Study in D.H. Robertson on Industrial Fluctua- Industrial Fluctuations (1915), Money tion, London: Macmillan. (1922) and Banking and the Price Level (1926). Robertsonian lag (E0, E2) Until 1929 he worked closely with KEY- A LAG lasting one period, e.g. a year or a NES but the rupture of their friendship led quarter. ROBERTSON applied this type of lag to Robertson’s severe criticisms of him in his savings function: savings in one after 1936. Robertson disputed the use period were regarded as a function of the made of the MULTIPLIER concept and fa- income of the previous period. voured a dynamic method, rather than Keynesian COMPARATIVE STATICS. In the References post-war period he championed tradi- Robertson, D.H. (1926) Banking Policy tional monetary policy and was suspicious and the Price Level, London: P.S. King of the use of fiscal policy to maintain FULL (reprinted New York: Augustus M. Kelly, 1949). EMPLOYMENT. He was one of the trio con- stituting the Cohen Council on Productiv- ity Prices and Incomes (1957–9), a body economy (E1) An abstract model ECONOMY, based on which attempted to restrain INFLATION by exhortation. Keynes was his supervisor. ’s 1719 novel, which engages He was a literary economist with an in simple capital accumulation. Although excellent writing style: not surprisingly he he has an initial capital endowment won the Chancellor’s Medal for English through salvaging goods from the ship- Verse three times. He rarely used mathe- wreck, he establishes himself as a farmer matics. Banking and the Price Level was on a desert island through using ROUND- ABOUT METHODS OF PRODUCTION. He learns his turning point, changing from the QUAN- that production is only possible when he TITY THEORY OF MONEY approach to saving and investment, on the road to Keynes’s has first attended to his security and that money is useless in an isolated economy EFFECTIVE DEMAND. His wartime work for the Civil Service on the balance of pay- without exchange. Robinson Crusoe has ments led to collaboration with Keynes at long been used as an example of an optimizing economic man who abandons BRETTON WOODS. Robertson thought that in AUTARKY for EXCHANGE and as the embodi- the post-war world KEYNESIANISM would be ment of bourgeois values, the independent as rigid as the earlier tradition. The modern economic man. difference between Robertson and Keynes was, according to HICKS, ‘a difference in References point of view’; Robertson was interested in Grapard, V. (1995) ‘Robinson Crusoe: the stabilizing the cycle and so wanted judi- quintessential economic man?’ Feminist cious encouragement at the right time. Economics 1: 33–52. Hicks, assessing Robertson’s life for the Dictionary of National Biography, con- Robinson, Joan Violet, 1903–83 (B3) cluded: ‘what Robertson feared was that UK economist, educated at Cambridge Keynes’s teaching would lead, in practice, University where she met her husband to the over-use of encouragement and, in Austin Robinson and taught in the

© 2002 Donald Rutherford Economics Faculty from 1929 to 1971, no storm, deluge or frost could persuade being appointed a professor in 1965. her to sleep in the house. . . . In the early A passionate theorist and socialist, she spring she was often woken by tits pecking made major contributions to economics at her hair for material for their nests.’ through her Economics of Imperfect Com- Seealso:bastardKeynesianism;Cambri- petition (1933) which influenced the teach- dgecontroversies ing of microeconomics thereafter by producing independently of CHAMBERLIN a References theory of the firm for markets both Gram,H.andWalsh,V.(1983)‘JoanRobinso- competitive and monopolistic. Her long n’s economics in retrospect’, Journal of guardianship of the KEYNESIAN heritage Economic Literature 21: 518–50. began with Introduction to the Theory of Feiwel, G.R. (ed.) (1989) Joan Robinson Employment (1937). However, the influ- and Modern Economic Theory,New York: New York University Press; Lon- ence of SRAFFA and KALECKI led her to develop Keynesian theory from compara- don: Macmillan. —— (1989) The Economics of Imperfect tive statics to a dynamic growth theory, Competition and Employment. Joan Ro- particularly in her The Accumulation of binson and Beyond, London: Macmillan. Capital (1956). Many of her works, espe- Harcourt, G.C. (1988) Joan Robinson, cially An Essay on Marxian Economics Brighton: Wheatsheaf. (1942), attempted a synthesis of socialist Robinson, J. (1951–80) Collected Economic and Keynesian economics. Papers, Oxford: Basil Blackwell. Although trained in Marshallian analy- —— (1969) The Accumulation of Capital, sis she became increasingly opposed to his 2nd edn, London: Macmillan. time analysis: she moved from studying —— (1969) The Economics of Imperfect Competition perfect competition to oligopoly, selling , 2nd edn, London: Macmil- lan. costs and product differentiation. In doing so, she provided a new box of tools in her Robinson–Patman Act 1936 (L4) theory of imperfect competition. Increas- US federal statute outlawing particular ingly she saw her role as a developer of forms of PRICE DISCRIMINATION which were Keynesian theory but her attempt to do so in favour of large purchasers. A discount in her Accumulation of Capital was not to a larger buyer has to be either based on broad enough to achieve a satisfactory differences in cost or justified as a price to model of long-term development. Her meet the low price of a competitor. interest in development was long-standing, dating back to her first visits to India in Seealso:antitrust the 1920s and later including an on-the- spot study of Mao’s China. rolling settlement (G1) For the last thirty years of her life she A system allowing investors to pay a few was engaged in controversies with SOLOW days after the sale or purchase of secu- and SAMUELSON about CAPITAL THEORY. The rities, e.g. in the USA, five days. This ferocity of her polemical and entertaining method of settling accounts has been pen is evident in her Collected Papers adopted by the INTERNATIONAL STOCK EX- (1951–79). In a supplementary obituary CHANGE (UK) as a successor to its long- notice in The Times, her lodger of ten established method of dividing the trading years’ standing, Dr Carmen Blacker, wrote year into two- or three-week periods with of ‘her spartan way of life’: ‘A strict accounts payable on settlement day. vegetarian, she slept all the year round in a small creeper-covered hut at the bottom rollover ratio (F3) of the garden. It was entirely unheated, The reciprocal of the value of the average and open on one side to all weathers, but MATURITY of a country’s external debt

© 2002 Donald Rutherford which is used as a measure of a country’s a need for incentive mechanisms. It is creditworthiness. assumed that there is transferable utility within the family. Seealso:debtserviceindicators Seealso:invisiblehand Rooker–Wise Amendment (H2) An amendment to the UK’s 1975 Finance References Bill requiring the government to raise tax Becker, G. (1974) ‘A theory of social allowances by the rate of increase of retail interactions’, Journal of Political Econ- prices every March, unless parliament omy 82: 1063–94. Bergstorm, T. (1989) ‘A fresh look at the decided otherwise. In 1981 this principle rotten kid theorem – and other house- was ignored. This attempted to reduce the hold mysteries’, Journal of Political depressing effect of FISCAL DRAG. Economy 97: 1138–59.

Rostow, Walt Whitman, 1916– (B3) roundabout method of production (D2) US economic historian and development A method of production using CAPITAL economist, educated at Yale and Oxford, goods to increase the future PRODUCTIVITY where he was a Rhodes Scholar. He has of factors of production. In a simple case been professor of economic history at the such as fishing, the roundabout method Massachusetts Institute of Technology would be used if labour were first ex- since 1951 apart from an interlude at the pended on producing rods and nets, rather University of Texas in 1961–9. His cele- than attempting to catch fish with one’s brated non-Marxian account of the pro- bare hands, so that fish can be caught in cess of industrialization in The Stages of greater numbers in a given time period. Economic Growth (1960) was further de- This concept was central to Bo¨HM-BAWERK’s veloped in several works, including The capital theory. Economics of Take-off into Sustained Growth (1963), The World Economy: His- Seealso:capitalism tory and Prospect (1978) and Why the Poor roundtripping (G1) Get Richer and the Rich Slow Down (1980). Purchasing and reselling the same lot of His NEOCLASSICAL approach to economic securities or commodities or money when history was to inspire much of the later market prices are rising. An example would econometric analysis of long time series. be if £X were borrowed for three months Seealso:industrialrevolution;stagesthe- and interest rates rose before the end of ory;take-off that period; then the sum borrowed could be relent at a profit. This type of ARBITRAGE is References made possible by market distortions. Rostow, W.W. (1971) The Stages of Eco- nomic Growth: A Neo-communist Mani- Royal Economic Society (A1) festo, 2nd edn, Cambridge: Cambridge The leading UK association of economists University Press. founded in 1890 and known for its publica- rotten kid theorem (J2) tion of the Economic Journal, which has In a household in which its head transfers always been edited by leading economists resources to all members of the family including EDGEWORTH and KEYNES. each member, however selfish, will max- References imize the family income. A selfish child Hey, J.B. and Winch, D. (eds) (1990) A can only have extra consumption by in- Century of Economics: 100 Years of the creasing the family income. According to Royal Economic Society and the Eco- this theorem, there are no FREE RIDERS and nomic Journal, Oxford: Basil Blackwell.

© 2002 Donald Rutherford RPI X (E3) runawayinflation(E3)seehyperinflation UK retail price index excluding mortgage runaway shop (J5) interest payments. A workplace relocated from an area of RPI Y (E3) high UNIONIZATION to one of low union- UK retail price index excluding the effects ization. This relocation is inspired by a of indirect taxes on final consumption, desire to reduce labour costs and the mortgage interest payments and local incidence of industrial disputes. authority taxation. running broker (F1) rules versus discretion (E5) A London money market broker who Alternative approaches to economic pol- ‘runs a book’ recording sales and pur- icy, especially monetary policy. Rules ne- chases of short-term monetary assets. cessitate predetermined responses to events; discretion, a response decided in run on a bank (G2) the light of each economic situation and The simultaneous demands of the deposit requiring specific governmental action. holders of a retail bank for their deposits There is a continuum of policy stances to be paid. As it is difficult for banks to be sufficiently liquid to meet such concerted between, in the case of MONETARY POLICY, action against them without sacrificing the rigid rules such as the CURRENCY SCHOOL’s principle for the expansion of the note more profitable business of making loans, in the nineteenth and twentieth centuries issue and FRIEDMAN’s idea of an OPTIMUM CENTRAL BANKS emerged. They acted as the QUANTITY OF MONEY, and, on the other hand, LENDER OF LAST RESORT to maintain the the repeated discretionary use of OPEN MAR- liquidity of DOMESTIC BANKING SYSTEMS as a KET OPERATIONS, THE DISCOUNT RATE, RESERVE whole and increasingly to supervise the REQUIREMENTS and MARGIN REQUIREMENTS as operations of commercial banks. DEPOSIT practised on many occasions by the FED- INSURANCE is also a device to reduce bank ERAL RESERVE SYSTEM. TOBIN regarded it as an overworked dichotomy because if we runs as there is less point in the public incorporate new information for the deter- demanding the return of its deposits in mination of policy, the policy is bound to cash if there is a guarantee that the become discretionary. Other economists deposits will not be lost in a bank collapse. argue that rules are used in theoretical Seealso:financialcrisis;financialpanic; models, rather than in policy making, as lifeboatoperation politicians and others are quick to deviate from their own rules. rustbelt (R1) US geographical area where the older References manufacturing industries are located, espe- Van Lear, W. (2000) ‘A review of the rules cially Ohio, Michigan, Indiana and Illi- versus discretion debate in monetary nois. As the labour forces of firms in that policy’, Eastern Economic Journal 26: area are high cost and UNIONIZED, there are 29–39. many incentives for relocation of plants to runaway industry (L0) the US South or to Mexico. An industry which moves from its original Seealso:snowbelt;sunbelt location, often to benefit from reductions in costs, especially the lower costs of using Rybczynski theorem (F1) non-unionized labour. Many US MULTINA- The effect on production, consumption TIONAL CORPORATIONS have chosen foreign and the TERMS OF TRADE of an increase in countries for manufacturing as a means of the quantity of one factor of production. avoiding the use of expensive labour. As the same rates of substitution in

© 2002 Donald Rutherford production hold, when the quantity of the See also: Heckscher–Ohlin trade theory factor is increased there is an expansion in References the production of the commodity using Rybczynski, T.M. (1955) ‘Factor endow- relatively more of it so that there is a ments and relative commodity prices’, deterioration in the relative price, or terms Economica New Series, 22: 336–41. of trade, of that commodity.

© 2002 Donald Rutherford S

sacrifice ratio (E3) Inhabitant of Geneva to his Contemporaries The fall in the number of percentage points (1803), Du Systeme Industriel (1821) and of annual output associatedwith a reduction Catechisme des Industriels (1823–26) he ar- in price inflation by one percentage point. gued for a new industrial system of military and industrial associations ruled by scien- sacrifice theory (H2) tists but administered by bankers to estab- The assertion that taxation should be lish full employment and equality. based on ABILITY TO PAY. This approach to taxation can be traced back to Adam saitori(G1)seespecialist SMITH and John Stuart MILL. It has been criticized for assuming that INTERPERSONAL sales maximization (L2) UTILITY COMPARISONS are possible and for An aim of a firm to maximize its TOTAL ignoring DISINCENTIVE EFFECTS of taxation. REVENUE. Managers of large firms having Seealso:canonsoftaxation this goal will continue to expand output to increase sales revenue, even if there is a saddle point (C7) reduction in total profits, provided that The determinate solution, in some games, profits do not fall below a minimum level. in which all players follow a MAXIMIN This goal is thought to be attractive as STRATEGY. sales revenue is more quickly and easily Seealso:gametheory known than profits; also a larger volume of sales indicates greater market power. safe asset (G0) An asset with a fixed and certain rate of Seealso:managerialmodelsofthefirm return, e.g. a bond of a reputable govern- References ment. Baumol, W.J (1967) Business Behavior, Saint-Simon, Claude-Henri de Rouvroy Value and Growth, rev. edn, New York: de, 1760–1825 (B3) Harcourt, Brace & World. French aristocrat educated by tutors. He sales ratios (M4) fought in the American War of Indepen- Sales as a proportion of stock, debtors, fixed dence and then in the French Revolution- assets, share capital or working capital. ary Wars when he took the name of Bonhomme. His commercial speculations sales tax (H2) reduced him to poverty but he nevertheless A tax on a good or a service at the point of studied physics and attempted to formu- sale. Some of these taxes are levied on late a theory of society. In Letters from an specific goods, as is the case with excise

© 2002 Donald Rutherford duties; others are related to general cate- nomic theory in an attempt to move the gories of expenditure, e.g. the VALUE-ADDED subject towards comparative dynamics and TAX. showing how essential a mathematical ap- proach is to economics. To the majority of Seealso:expendituretax economics students his fame rests on his Samaritan’s dilemma (D0) highly successful textbook Economics, first The vulnerability of the compassionate published in 1948 and now jointly written person who suffers predatory attacks from with Nordhaus: to date it has sold over 10 those helped. Excessive encouragement of million copies. It introduces students to a parasites can lead to self-destruction. This wide range of economic theory and its is a modern interpretation of the parable applications – over its twelve editions it has of the Good Samaritan in St Luke’s broadened its approach from an emphasis Gospel 10: 30–37. on the determinants of aggregate demand to References a consideration of supply factors also. He is known to the economics profession as a Buchanan, J.M. (1975) ‘The Samaritan’s theoretician of exceptional brilliance, with dilemma’, in E.S. Phelps Altruism, Mor- ality and Economic Theory,NewYork: hundreds of technical papers attesting it. In Russell Sage Foundation. many outstanding technical contributions he has provided a MULTIPLIER–ACCELERATOR sample (C1) theory of the TRADE CYCLE, a simplification A part of a POPULATION which is examined of GENERAL EQUILIBRIUM theory to make it in order to ascertain the characteristics of applicable to concrete problems, a RE- the whole of that population. Random VEALED PREFERENCES theory for WELFARE ECO- sampling (or probability sampling) is used NOMICS, a pure theory of public expenditure to obtain unbiased estimates. Sampling which takes into account both PRIVATE AND can produce better evaluations by increas- PUBLIC GOODS and a rigorous factor–price ing the size of a sample or by stratification equalization theorem. His eminence has of the sampled population. made some describe this as ‘the age of References Samuelson’. But his NEOCLASSICAL approach Kish, L. (1965) Survey Sampling, New has aroused much opposition. His articu- York: Wiley. late expositions of current economic policy have long been available to the readers of Samuelson, Paul Anthony, 1915– (B3) Newsweek and the New York Times. His The leading post-war US economist who long distinguished career has done much to graduated from the Universities of Chi- deal with the conclusion to his Foundations: cago and Harvard. He was fortunate in ‘Economics is a growing subject in which having as mentors men as distinguished as very much is left to be done.’ KNIGHT, SCHUMPETER, VINER, LEONTIEF and HANSEN. Throughout his academic career References he has been at the Massachusetts Institute Brown, E.C. and Solow, R.M. (eds) (1983) of Technology where he became a full Paul Samuelson and Modern Economic professor in 1947. He was awarded the Theory, New York: McGraw-Hill. Feiwel, G.R. (ed.) (1982) Samuelson and NOBEL PRIZE FOR ECONOMICS in 1970. Neo-Classical Economics, Boston: His vigorous rewriting of the theory of Kluwer. many branches of economics began with his Samuelson, P.A. (1965) Foundations of Eco- paper on CONSUMER’S SURPLUS in 1938, deriv- nomic Analysis, New York: Atheneum. ing a demand curve from the revealed —— (1960, 1972, 1977) The Collected preferences of consumers. He published his Scientific Papers of Paul A. Samuelson, doctoral dissertation as Foundations of Vols I–IV, Cambridge, MA, and Lon- Economic Analysis (1947), surveying eco- don: Harvard University Press.

© 2002 Donald Rutherford samurai bond (G0) Saudi Arabia in 1977 used this approach A bond issued in yen in Japan by a foreign to change the ownership of foreign-owned concern and purchasable by non-residents commercial banks. of Japan. Seealso:multinationalcorporation;pub- Sandilands Report (E3) licenterprise UK report of 1975 of a committee on savings (E2) inflation accounting which recommended The residue of INCOME of a government, a CURRENT COST ACCOUNTING. It asserted that firm or a household after all their expen- assets should be revalued at either their ditures have been incurred. There are many replacement or their economic value, as motives for saving. A government may do representative of their value to the busi- so to deflate the national economy, a firm ness at the time; items in PROFIT AND LOSS to provide self-financing of investment, a ACCOUNTS should be valued at their current household to provide for illness, retirement cost at the time of the sale of the output. and the needs of descendants and favour- The main income measure used was CUR- ite charities. In the long debate on the RENT OPERATING PROFIT. determinants of saving, it has been con- satisficing (L2) sidered too simplistic to regard the rate of Aiming to reach a satisfactory level of interest as the sole determinant because performance, rather than to maximize, for the level of prices is important too. Also, it example, sales or profits. Modern theories, has been noted that a strong personal recognizing the complexity of managerial motivation to save is independent of most objectives, have noted that satisficing is a macroeconomic variables. The AVERAGE common aim. PROPENSITY TO SAVE of households varies from country to country. Seealso:managerialmodelsofthefirm; revenuemaximization;salesmaximization Seealso:lacking;life-cyclehypothesis;re- lativeincomehypothesis Saudi Arabian Monetary Agency (E5) An Arab banking organization founded in savings and loan association (G2) see 1952 to perform the functions of a CENTRAL thrift BANK but called an agency because of the savings function (E2) association between ‘a bank’ and pay- The relationship between a nation’s aggre- ments for interest which is condemned by Islamic law. SAMA is now responsible for the coinage and note issue of Saudi Arabia, the supervision of commercial banks and the fiscal operations of the government. Seealso:Islamicbanking;usury References Abdeen, A.M. and Shook, D.W. (1984) The Saudi Financial System in the Con- text of Western and Islamic Finance, Chichester: Wiley.

Saudi-ization (L5) A method of taking foreign businesses into national ownership, not by NATIONALI- ZATION but by demanding the sale of the majority of shares to private citizens.

© 2002 Donald Rutherford gate savings and its total disposable in- Traite´ d’e´conomie politique. Opposing Na- come. In the simplest models of an econ- poleon’s policies he resigned his post as omy, in which national income (Y) is equal tribune and established a cotton mill. In to consumption (C) plus savings (S), the 1814 he returned to England to report on savings function is, diagrammatically, the its economic condition for the French inverse of the CONSUMPTION FUNCTION. government, publishing a pamphlet, De l’Angleterre et des Anglais. In 1819 he was savings ratio (E2) appointed to a new chair of industrial 1 The AVERAGE PROPENSITY TO SAVE. economy at the Conservatoire des Arts et 2 Household savings as a proportion of Metiers and in 1831 to the chair of its disposable income. political economy at the Colle`ge de 3 The proportion of a government’s or France. His Traite´ was expanded into firm’s income retained. Cours comple`t d’e´conomie politique pra- In the UK the savings ratio, in the case of tique (1829), a larger work with many households, fell from 14 per cent in 1980 practical applications. KEYNES revived the to 4 per cent in 1987, much lower than fame of Say by referring to ‘Say’s law’, a Japan’s 18 per cent and West Germany’s law which ruled out permanent unemploy- 13 per cent. The fall in the UK ratio in the ment and had been largely accepted by 1980s and 1990s is not entirely caused by RICARDO and many major classical writers, the greater availability of consumer credit although MALTHUS and John Stuart MILL as the fall in the rate of inflation has disputed aspects of it. Say’s supply and reduced the incentive to save as a means of demand analysis, incorporating the con- retaining the real value of assets. Also, the cepts of UTILITY and SCARCITY, make him life-cycle effect of an ageing population one of the forerunners of NEOCLASSICAL has been to reduce savings. The extent to ECONOMICS. Much of his economics was, in which low household saving is a problem the French style, very abstract – as Mal- has been exaggerated as there has been thus was quick to note. compensating increased saving in the cor- Say’s law (E1) porate and governmental sectors. Move- A law of markets often summarized as ments in the savings ratio are always ‘supply creates its own demand’. This view imprecise if there are deficiencies in NA- of macroeconomics was based on the idea TIONAL INCOME statistics, e.g. non-recording that production creates factor incomes of BLACK ECONOMY activities (the black which bring about a demand for the goods economy understates incomes but not produced elsewhere in the economy. The consumer expenditure so official savings consequence of this ‘law’ for CLASSICAL ECO- figures are depressed). NOMICS was that there could never be a general and permanent ‘glut’, i.e. a defi- Say, Jean Baptiste, 1767–1832 (B3) ciency in AGGREGATE DEMAND. Although this Born in Lyons and trained in insurance in view is particularly attributed to Say by Croydon (London) and France, in the KEYNES and his followers, many CLASSICAL course of which his proprietor, Clavie`re, ECONOMISTS, e.g. James MILL, held to the same encouraged him to read SMITH’s WEALTH OF theory. The classical conclusion derived NATIONS, the beginning of his interest in from this law is that through price flexibility economics. During the French Revolution an economy will always reach a FULL-EM- he was a journalist and secretary to PLOYMENT equilibrium in the long run. Clavie`re, then rose to be Finance Minister and editor from 1794 to 1800 of La References De´cade Philosophique, Lite´raire et Poli- Mill, J.S. (1877) Essays on Some Unsettled tique which expounded Smithian doctrines. Questions of Political Economy, 3rd edn, In 1803 he produced his major work No. 2, London: Longmans & Green.

© 2002 Donald Rutherford Sowell, T. (1972) Say’s Law: An Historical The psychological impact of past unem- Analysis, Princeton, NJ: Princeton Uni- ployment. It is measured by subjective versity Press. well-being. scalar principle (M1) References Within organizations, this principle dic- Clark, A.E., Georgellis, Y. and Sanfey, P. tates that managerial authority and re- (2001) ‘Scarring: the psychological im- sponsibility should flow continuously pact of past unemployment’, Economica from the highest person to the lowest in 68: 221–41. the hierarchy. scatter diagram (C1) scarcity (D0, D2) A scatter of points with X, Y values to 1 The limited quantity of a resource, FAC- which a curve is fitted as a means of TOR OF PRODUCTION or output. making a preliminary study of the rela- 2 Insufficient means to satisfy all of tionship between the variables X and Y. society’s demands for resources. As population increased and there was competition for a fixed supply of natural resources, scarcity was viewed by many economists, including ROBBINS, as the princi- pal economic problem: it raises all the major issues of allocation and pricing and is the reason why rent is paid. Because of scarcity, if goods or services are offered freely, a non- price method of allocation must be used, e.g. RATIONING. The importance of scarcity as a concept is challenged by Marxists who identify other concepts as central. Seealso:absolutescarcity References Robbins, L. (1935) An Essay on the Nature Seealso:leastsquaresmethod and Significance of Economic Science, London: Macmillan. schedular tax (H2) scarcity index (D0) 1 A tax with different rates published in a The real cost of capital and labour inputs per schedule, especially a progressive tax on unit of an extractive output which is ex- incomes. pressed as an index of the prices of extractive 2 A tax which is related to a particular outputs relative to non-extractive outputs. schedule devised for that type of income rather than a global income tax on all References types of income. Barnett, H.J. and Morse, C. (1963) Scar- city and Growth: The Economics of Scholes, Myron S., 1941– (B3) Natural Resource Availability, Baltimore, Born in Timmins, Ontario, and educated MD: Johns Hopkins University Press. at McMaster and Chicago Universities. An early passion for mathematics led to scarcity pricing (D4) an interest in computer programming and Setting prices equal to MARGINAL SOCIAL then financial economics. For his PhD he COST. An approach often used in transport wrote a dissertation on constructing a economics. demand curve for securities. After teaching scarring (J6) at the Sloan School of Management, MIT

© 2002 Donald Rutherford and Chicago University, he has held a pal proponent of INTERMEDIATE TECHNOLOGY chair at Stanford since 1972. In several and of self-help to solve the rural poverty collaborations with Robert Merton and problems of less developed countries. His Fischer Black he has produced definitive famous attack on materialism and consu- work on asset pricing and derivative pri- merism was in his immensely popular set cing models. He shared the Nobel Prize in of essays Small is Beautiful; as its subtitle Economics with Merton in 1997 for pro- A Study of Economics as if People Mat- ducing a new method to determine the tered claimed, there can be an economics value of derivatives. based on humanitarian considerations. Schultz, Theodore William, 1902– (B3) References Leading US authority on HUMAN CAPITAL Schumacher, E. F. (1973) Small is Beauti- theory. Educated in ful: A Study of Economics as if People at South Dakota State College and the Mattered, London: Blond & Briggs. University of Wisconsin. Since 1943, he Wood, B. (1984) Alias Papa: A Life of Fritz has been professor at the University of Schumacher, London: Jonathan Cape. Chicago. His NOBEL PRIZE FOR ECONOMICS, jointly awarded in 1980 with Arthur LEWIS, Schumpeter, Joseph Alois, 1883–1950 was for his work in agricultural economics. (B3) Although he published a major work on A leading US economist who was educated this topic, The Economic Organization of at Vienna University where he was a pupil Agriculture (1953), his major contribution of Bo¨HM-BAWERK, without becoming a whole- to mainstream economics has been in hearted convert to the AUSTRIAN SCHOOL.He leading the modern human capital move- held chairs at the Universities of Czerno- ment, especially with his The Economic witz and Graz from 1911 to 1918, was Value of Education (1963) and Investment briefly Austrian Minister of Finance in in Human Capital: The Role of Education 1920 and president of the Biederman Bank and Research (1971). before moving to Bonn where he was professor from 1925 to 1932, completing Schumacher, Ernst Friedrich, 1911–77 his career as professor at Harvard from (B3) 1932 to 1950. His major contributions to UK economist and prophet who was born economics were the study of capitalist in Bonn and educated at Berlin, Bonn, development and industrial fluctuations Oxford and Columbia Universities. When and the analysis of a vast economics he was interned in the UK in 1940–5, he literature that produced an unsurpassed worked first as an agricultural labourer history of economic theory. He empha- and then at the Oxford Institute of Statis- sized the role of ENTREPRENEURS and INNO- tics on the problem of a new INTERNA- VATION in a number of works: Capitalism, TIONAL MONETARY SYSTEM, which he Socialism and Democracy (1942), The The- discussed with KEYNES. He was naturalized ory of Economic Development (1951; origi- British at the end of the war so that he nal German edition, 1912); and his could become a member (1946–50) of the monumental Business Cycles (1939). His British section of the Control Commission wife posthumously completed his colossal in Germany. From 1950 to 1970 he was History of Economic Analysis (1954), a economic adviser and subsequently Direc- work which in a schoolmasterly fashion tor of Statistics to the National Coal separated economists of many centuries Board. His increasing interest in Bud- into the sheep and the goats. dhism gave his economics a distinctively ecological character and prompted his References appointment as economic adviser to the Frisch, H. (ed.) (1981) Schumpeterian Eco- government of Burma. He was the princi- nomics, New York: Praeger.

© 2002 Donald Rutherford Schwartz, Anna Jacobson, 1915– (B3) 1970, at Stanford from 1970 to 1976 and Leading US monetary historian and econo- back at the London School of Economics mist. Educated at Barnard College, New from 1976 to 1978. He is particularly York,and Columbia University.Apart from famous for his WELFARE ECONOMICS, princi- some academic posts, she has been a re- pally set out in his Welfare and Competi- search associate of the NATIONAL BUREAU OF tion (1951). His numerous other interests ECONOMIC RESEARCH since 1941. Her colla- include international economics, e.g. Eco- boration with Milton FRIEDMAN in the ana- nomic Theory and Western European Inte- lysis of long time series to examine monetary gration (1958), and an interesting work changes and their effects is very well known. which uses behavioural psychology to challenge consumer sovereignty theory: References The Joyless Economy (1976). Schwartz, A. and Bordo, M.D. (1980) A Retrospective on the Classical Gold Stan- screening (J2, J3) dard, Chicago: University of Chicago An explanation of the higher pay of more Press. educated workers used as an alternative to Schwartz, A. and Friedman, M. (1963) A Monetary History of the United States HUMAN CAPITAL theory. It is asserted that 1867–1960, Princeton, NJ: Princeton firms choose graduates on the basis of University Press. their qualifications as these indicate nat- —— (1970) Monetary Statistics of the ural abilities and training potential rather United States, New York: Columbia than particular skills. Also applied to the University Press. study of UNEMPLOYMENT. scissors diagram (D4) scrip issue (G1) The standard diagram of a market show- SHARES offered as an alternative to dividends. ing normal demand and supply curves Seealso:bonusissue;rightsissue intersecting at an EQUILIBRIUM. MARSHALL suggested this analogy. scriptural currency (F3) Scitovsky reversal test (D6) A currency without issued notes and coins. The euro was originally issued in this form An enlargement of the KALDOR–HICKS com- pensation test with the extra condition in 1999. that there is no increase in social welfare S-curve (O4) through a return to the original situation The path of long-term ECONOMIC GROWTH. on the part of losers. Scitovsky’s consid- eration of changes in real income took into account its distribution. Seealso:welfareeconomics References Scitovsky, T. (1941) ‘A note on welfare propositions in economics’, Review of Economic Studies 9: 77–88.

Scitovsky, Tibor, 1910– (B3) Hungarian, educated at Budapest and the London School of Economics where he also taught before emigrating to the USA in 1946. From 1958 to 1968 he worked at the ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, at Yale from 1968 to

© 2002 Donald Rutherford sealed bid auction (D0) Seealso:unemploymentspell Bids are submitted in sealed envelopes. References The highest bidder wins. Also known as Fitzgerald, T.J. (1998) ‘An introduction to the YANKEE BID. the search theory of unemployment’, search cost (D0, J0) Federal Reserve Bank of Cleveland Eco- The costs to a buyer or seller of acquiring nomic Review, 34: 2–15. information about prices and quantities seasonal adjustment (C1) available in a market. Some markets, The elimination of seasonal fluctuations particularly the LABOUR MARKET, have suf- from a TIME SERIES, often by the method of fered for a long time from imperfections MOVING AVERAGES. such as ASYMMETRIC INFORMATION. Both employers and workers have to incur seasonal unemployment (J6) many costs (e.g. of advertising, travel, The state of being without a job for a few time taken from other activities) to come months of a year because of month-to- into contact with each other. Search costs month fluctuations in demand for labour are a form of investment by a worker, of a particular industry. In the hotel and with higher wages being the return to agricultural industries, especially, there is such expenditure. If buyers and sellers are this type of unemployment. rational profit maximizers in their search secondary action (J5) activities, they will continue seeking for INDUSTRIAL DISPUTES organized by a TRADE what they desire until the marginal cost (LABOR) UNION against an employer or em- of search equals the marginal benefit ployers not in dispute with the union with derived from it. STIGLER was a pioneer in the aim of making the original industrial his application of search theory to labour action more effective. This form of action markets. can take the form of STRIKES and BOYCOTTS References of goods of related firms. Both US and Lippman, S. and McCall, J.J. (1976) ‘The UK union law restricts the range of these economics of job search: a survey’, actions. Economic Inquiry 14: 115–89 , 347–68. Pissarides, C.A. (1976) Labour Market secondary bank (G2) Adjustment, Cambridge: Cambridge A wholesale bank obtaining its funds from University Press. other banks and not from the general Stigler, G.J. (1962) ‘Information in the public, as is the case with RETAIL or COM- labor market’, Journal of Political Econ- MERCIAL BANKS. omy 70 (October Supplement): 94 –105. Seealso:investmentbank;merchant search good (D0) bank A good infrequently purchased, e.g. a secondary banking crisis (G2) major consumer durable, legal services; A crisis in 1973–4 amongst UK MERCHANT hence the consumer has to search for BANKS which had lent to property compa- information about its quality. nies fuelling speculation in the early 1970s Seealso:experiencegood and then suffered from many bad debts when the property market collapsed. Some search unemployment (J6) of these banks survived by being rescued FRICTIONAL UNEMPLOYMENT; being without a in a ‘lifeboat operation’ mounted jointly job during a period of looking for an- by the BANK OF ENGLAND and leading CLEAR- other one. Many workers will endure ING BANKS. lower incomes during periods of unem- ployment in the hope of increasing life- secondary capital (G2) time earnings. Bank capital consisting of LIMITED-LIFE PRE-

© 2002 Donald Rutherford FERRED STOCK, BANK-SUBORDINATED NOTES and second-degree price discrimination DEBENTURES, and unsecured long-term debt (L2, M3) of the parent company and its non-bank Setting different prices for different quan- subsidiaries. tities, e.g. offering discounts for purchas- ing larger quantities, but subjecting all Seealso:primarycapital customers to the same price schedule. secondary employment (E0) see Seealso:pricediscrimination employmentmultiplier second economy (P4) secondary labour market (J4) The market-oriented part of a socialist That part of a national labour market economy run by private persons. It can be consisting of small firms employing work- legal or illegal; increasingly, private enter- ers at low wages and offering them little prise has been permitted in the service training. sector in Eastern Europe. Seealso:externallabourmarket;primary Seealso:firsteconomy labourmarket References (G1) secondary market Grossman, G. (1977) ‘The second econ- A financial market for trading in SECURI- omy of the USSR’, Problems of Com- TIES already in existence, which usually munism 26: 25–40. takes the form of a stock exchange. The growth of the number of types of tradable second-generation product (M3) financial asset has led to the creation of A product in many respects similar to an new markets. existing product capturing its market from it. In science-based industries such as Seealso:primarymarket pharmaceuticals, a new drug is often secondary mortgage market (G2) supplanted by a related compound. The The sale and purchase among banks and cost and riskiness of industrial research other investors of first mortgages made to has increased because of the need to obtain loans. extend a product range to replace sup- planted products. Seealso:primarymortgagemarket second market (G1) secondary standard (Q2) UNLISTED SECURITIES MARKET (UK). In A standard for pollution levels necessary France, a second market was established to protect vegetation, buildings and visi- in 1983 to allow smaller companies to go bility. It is assumed that pollution control public with lower costs and small share is already sufficient to protect human issues. health. Seealso:ambientstandard;primarystan- second-price auction (D4) dard A method of selling consisting of potential buyers submitting sealed written bids for second best (D0) an item with the item being sold to the An allocation falling short of being PAR- highest bidder at the second-highest price ETO-EFFICIENT by not fulfilling all of Par- offered. The London stamp auctions are eto’s conditions for optimality. conducted in this way. References Seealso:auction Lipsey, R.G. and Lancaster, K. (1956) ‘The general theory of the second best’, Second World (P2) Review of Economic Studies 24: 11–32. CENTRALLY PLANNED ECONOMIES of the SOVIET

© 2002 Donald Rutherford TYPE. These were chiefly the economies of CHANGE COMMISSION and sets out the infor- Eastern Europe from 1948 to 1990. mation which corporations have to provide to have their securities listed on Seealso:FirstWorld;FourthWorld; an exchange. ThirdWorld Section 20 subsidiary (L4) securities market (G1) A subsidiary of a US bank holding com- A market where new or existing stocks and pany or a bank foreign to the USA shares are sold. PRIMARY MARKETS are con- cerned with new issues, SECONDARY MARKETS permitted by the FEDERAL RESERVE on a case-by-case basis to engage in underwrit- with maintaining a market in bills, bonds, ing and security dealing. The section is stocks and shares already issued: securities part of the Bank Holding Act. markets often combine both functions. In recent years, the principal developments in sector adjustment lending (H2) these markets have been a movement from An aid-assisted loan given to improve the the use of specialist trading to FINANCIAL performance of a specific sector of an CONGLOMERATES and the devising of meth- economy. As such targeting neglects other ods of REGULATION appropriate to markets sectors of an economy, it reduces the which have been transformed by interna- number of linked benefits of providing tionalization and rapid electronic commu- finance more generally, e.g. the advanced nication. sectors by receiving finance could bring about a general improvement through SPIL- securitization (G1) LOVER EFFECTS. The conversion of bank loans into trad- able securities. Borrowers, instead of rais- Seealso:softloan ing loans, request merchant or investment Securities and Exchange Commission banks to raise money for them by the issue (G2) of shares. The collapse of stock markets in US regulatory body set up in 1933 with 1987 made it more difficult to raise the task of regulating US SECURITIES mar- finance by new issues. kets, the offer of securities to the public, Seealso:monetization mutual funds, investment companies, pub- lic utility securities and investment advi- References sers. Bonsall, D.C. (1990) Securitisation, Lon- don: Butterworth. Seealso:blue-skylaws Henderson, J. and Scott, J. (1988) Secur- Securities Association (G1) itisation, Cambridge: Woodhead Faul- kner. The UK body regulating stock market and related securities firms, having taken over security (G1) from the Stock Exchange its regulatory A financial instrument in bearer form or function. This is the largest of the SELF- registered form, i.e. its owner is the bearer REGULATORY ORGANIZATIONS set up by the or the person listed in a register for that FINANCIAL SERVICES ACT. It covers more security. Securities take many forms, in- financial firms than did the Stock Ex- cluding bonds, stocks and shares. change Council and vets both member firms and staff who have dealings with Seealso:bearerbond;bearershares the public. seed capital (G0) Securities Exchange Act 1934 (G1) A form of VENTURE CAPITAL used to Basic US federal statute which regulates finance entrepreneurs attempting to set securities exchanges and OVER-THE-COUNTER up businesses. In the EUROPEAN COMMUNITY, trading, set up the SECURITIES AND EX- the European Seed Capital Fund Net-

© 2002 Donald Rutherford work co-ordinates the provision of this the former. It led to a decline in service capital in several European Community sector employment but did not revive countries. manufacturing industry whose problems were more severe than a shortage of segmented labour market theory (J4) labour. The supposition that the LABOUR MARKET is divided into a number of subgroups with References little mobility between them and different Reddaway, W.B. (1970) Effects of the rules for determining wages and allocating Selective Employment Tax. First Report. labour within them. The best example is The Distributive Trades, London: HMSO. DUAL LABOUR MARKET theory. self-employment (J2) seignorage (E4) Being engaged in work for pay or profit 1 The levy charged by states for convert- and not under the direction of another. ing precious metals into coins (the UK The self-employed are part of the labour abolished that charge in 1666). 2 The net earnings received by a country force and are present in every sector. The peasant farmer, the professional lawyer, with a RESERVE CURRENCY from the assets it acquires through other countries the actor and the small shopkeeper are holding its currency. leading cases of self-employment. Inabil- 3 The revenue, net of the cost of produc- ity to gain employment may force a tion, gained from issuing banknotes or person to attempt to gain an income another form of currency. Seignorage is through self-employment. Often self-em- a major source of government revenue ployed businesses are undercapitalized in high-inflation economies as a govern- because of the poor availability and ment can finance its deficits by creating higher cost of small-scale finance. Self- more money. employment produces a hybrid income of wages and profits. An estimate of residual Seealso:freebanking profits can be extracted from total in- selection bias (C1) come by applying a market wage rate to A deviation from the random selection the number of hours worked; an estimate method of sampling. Although selections of wages, by applying the market rate of which depart from the random method of interest to the amount of capital em- selection fail to provide an accurate de- ployed to see how much of total income scription of the population sampled, mod- remains. els of self-selection have often been used in economics, e.g. to study occupational self-insurance (G0) choice, the returns to training and the The absorption of unusual losses by an returns to schooling. organization itself, without resort to insur- ance companies and markets. Many gov- References ernmental organizations follow this Roy, A.D. (1951) ‘Some thoughts on the principle. distribution of earnings’, Oxford Eco- nomic Papers, New Series 3: 135–46. self-interest (D0) Selective Employment Tax (H2, O4) Private interest. This desire for personal A tax designed by KALDOR and in force in gain prompts productive activity. It is not the UK from 1966 to 1973 which sought to be equated with selfishness as co- to encourage the movement of workers operative behaviour yields private returns. from service industries to manufacturing The idea was central to Adam Smith’s industries by imposing a PAYROLL TAX on WEALTH OF NATIONS.

© 2002 Donald Rutherford References University. His first research was in co- Meyers, M.L. (1983) The Soul of Modern operative GAME THEORY and his first paper Economic Man: Ideas of Self-Interest, on an oligopoly experiment before begin- Thomas Hobbes to Adam Smith, Chi- ning a long study of bounded rationality. cago: Chicago University Press. He introduced experimental economics into Germany. Professor at the Free Uni- self-regulation (K2, L5) versity, West Berlin, from 1969 to 1972, Control of a profession or a market by the Bielefeld from 1972 to 1984 and at Bonn members of it, rather than by the govern- since 1984. He shared the NOBEL PRIZE FOR ment. In the UK, the Stock Exchange has ECONOMICS in 1994 with NASH and HARSA- the INTERNATIONAL SECURITIES REGULATORY NYI. ORGANIZATION, IMRO, LAUTRO, Fimbra and AFBD; in the USA, the American Medi- semi-colonial country (P1) cal Association is a prominent example of A politically independent country whose self-regulation. If such a form of regula- economy, according to MARXIAN ECONOMICS, tion is unsuccessful in preventing and is dominated by international imperialist prosecuting offenders, there is usually a CAPITALISTS. call for governmental control. semi-interquartile range (C1) self-regulatory organization (K2, L5) The UPPER QUARTILE minus the LOWER QUAR- An organization set up by a profession or TILE divided by 2, for a particular data set. group of specialist financial traders to regulate the conduct of its members in- Sen, Amartya K., 1933– (B3) stead of being subject to direct govern- Leading social choice theorist, born in mental control. In the UK, examples of Bengal and educated at the Presidency these organizations include LLOYD’S, the College, Calcutta, and Trinity College, SECURITIES ASSOCIATION, AFBD, Fimbra, Cambridge. His academic posts have been IMRO and LAUTRO. professor at the Jadavpur University, Cal- cutta, fellow of Trinity College, Cam- Seealso:FinancialServicesAct;regula- bridge(1957–63), professor at Delhi (1963– tion 71), professor at the London School of self-sufficient economy (P4) Economics (1971–7), professor of econom- An ECONOMY in which the domestic supply ics then Drummond Professor of Political and domestic demand are equal for all Economy at Oxford (1977–86), professor at goods and services. Some US policy-ma- Harvard (1987–98) and subsequently Mas- kers regard this notional state as an ter of Trinity College, Cambridge. Awarded optimal goal for the US economy. the NOBEL PRIZE FOR ECONOMICS in 1998. His distinguished career has embraced SOCIAL Seealso:autarky CHOICE THEORY and DEVELOPMENT ECONOMICS. sellers’ market (D4) His rigorous works Collective Choice and A market where sellers have a dominant Social Welfare (1971) and On Economic influence on price because of EXCESS DE- Equality (1973) show his ability to wrestle MAND. with the IMPOSSIBILITY THEOREM and to cast doubt on PARETO OPTIMALITY. As a noted Seealso:buyers’market contributor to development economics, he sellingshort(G1)seeshortselling has offered practical advice in Choice of Techniques (1960) and Employment, Tech- Selten, Reinhard, 1930– B3 nology and Development (1975) as well as Born in Breslau, then in Germany. His illuminating the poverty problem in Pov- early interest in mathematics developed erty and Famines: An Essay on Entitlement into the study of game theory at Frankfurt and Deprivation (1981) which looked at

© 2002 Donald Rutherford poverty in terms of a lack of income, not lished his originality as an economic of food supply. theorist. References senior debt (G0) A debt secured by collateral which has to Levy, S.L. (1970) Nassau W. Senior 1790 – 1864, Newton Abbot: David & Charles. be repaid before any other stockholders or Senior, N.W. (1831) Three Lectures on the creditors in the event of liquidation. Rate of Wages, London: Murray (rep- Seealso:juniordebt rinted Thoemmes Press, Bristol, 1998, ed. Ronald Sutherland). —— (1836) An Outline of the Science of seniority principle (J3) Political Economy, London (reprinted A feature of the structure of pay, benefits, New York: Augustus M. Kelley, 1965). promotion and redundancy procedures. —— (1966) Selected Writings on Econom- Although in the USA this ‘wage for age’ ics: A Volume of Pamphlets 1827–1852, principle has its strongest effects on the New York: Augustus M. Kelley. pay of non-unionized workers and on the (D0, Q0) FRINGE BENEFITS of unionized workers, in sequential externality general it is most visible as the underlying An economic activity affecting the produc- principle of pay determination under tivity of another activity in a later time period, e.g. chemical production which TRADE (LABOR) UNIONS. In Japan, ENTERPRISE reduces the effectiveness of fishing through UNIONS used seniority as the basis for sharing out increases to the total wage pollution. bill. As an economic justification for this Seealso:contemporaneousexternality approach to wages and salary policy, it is argued that experience should be re- sequential game (C7) warded. Also, a worker aware that this An ordered game in which the move by principle underlies the pay structure will one firm is followed by the reaction of its be more reluctant to move to another rival. employer, thus increasing the private re- sequestration (H6, K0) turn to the employer of any investment in 1 Spending cuts in the US Federal Budget training. imposed under the GRAMM–RUDMAN–HOL- Seealso:humancapital LINGS ACT. 2 Temporary seizure of assets under a Senior, Nassau William, 1790–1864 (B3) court order, e.g. of union funds under Leading CLASSICAL ECONOMIST educated at UK employment legislation. Magdalen College, Oxford, and Lincoln’s serial correlation (C1) see Inn where he was called to the Bar in autocorrelation 1819. His first literary work as a reviewer for the Quarterly Review included com- service industry (L8) menting on the usage of key economic An industry not producing goods but terms and the CORN LAWS. As Drummond performing various tasks, including trans- Professor of Political Economy at Oxford portation, distribution, professional ad- University from 1826 to 1830 and from vice, finance. This sector has expanded 1847 to 1851 he published lectures on rapidly in Western countries since 1950, precious metals, population, money and partly as the result of firms becoming wages. His views on the POOR LAWS and the more specialized and buying in services Factory Acts made him a prominent which were previously provided in-house adviser to governments. His ABSTINENCE and partly through increased consumers’ theory of savings and his inclusion of MAR- real incomes making possible the purchase GINAL UTILITY as a cause of value estab- of others’ labour.

© 2002 Donald Rutherford Seealso:productivelabour groups: those predominantly carried out by men and those where women are in the services (D2) majority. As early as John Stuart MILL it The non-physical output flowing from the was recognized that female employment employment of a FACTOR OF PRODUCTION. was crowded into comparatively few occu- The major example is labour services. These can be as menial as cleaning, or as pations. This concentration arose from the demanding as the provision of profes- belief that women are only capable of doing jobs similar to their household sional advice. As an ECONOMY reaches an advanced stage of development its activ- tasks, i.e. cleaning, cooking, nursing, ities are increasingly of this nature. bringing up young children and secretarial tasks. BARRIERS TO ENTRY created by male- Seealso:Petty’slaw dominated TRADE UNIONS, e.g. in printing, servicing a debt (G0) perpetuated this concentration. Legislation Repaying the interest due on a debt. such as the UK’s SEX DISCRIMINATION ACT 1975 has earnestly sought a higher proportion Seealso:debtserviceindicators;world of women in each occupational group. debtproblem Seealso:crowdinghypothesis;occupa- set aside (Q1) tionalsegregation A payment to farmers to take land out of agricultural production. The success of References farmers in increasing productivity in Eur- Mill, J.S. (1948) Principles of Political ope in recent decades has made necessary Economy, Book II, ch. XIV, section 5. this approach to reducing mountains of stored produce. Shackle, George Lennox Sharman, severe correction (G1) 1903–92 (B3) A sharp fall in stock market prices leading UK economist noted for his works on to widespread losses. EXPECTATIONS. After an education at New College, Oxford, and the London School Sex Discrimination Acts 1975, 1986 (J7) of Economics, he worked at the Oxford UK legislation requiring equal treatment Institute of Statistics and, during the war, of men and women. in the Economic Section of the Cabinet sexual discrimination (J7) Secretariat before being appointed Reader The unfavourable treatment of one sex in in Economic Theory at Leeds University matters of wages, recruitment or promo- from 1950 to 1951 and Brunner Professor tion. In the USA federal legislation first of Economic Science at the University of addressed itself to this in civil rights Liverpool from 1951 to 1969. He delved legislation of the 1960s; in the UK under deeply into the central issues of KEYNES’S the EQUAL PAY ACT 1970 and SEX DISCRIMINA- GENERAL THEORY, EXPECTATIONS and UNCER- TION ACTS 1975, 1986; in the EUROPEAN COMMU- TAINTY, e.g. in his Expectations, Investment NITY under Article 119 of the TREATY OF and Income (1938) and Expectations in ROME. The economic analysis of discrimi- Economics (1949). A lively account of the nation dates back to John Stuart MILL’s renaissance of economics in the 1930s is writings on the wages of women in his detailed in The Years of High Theory Principles. (1967). The principal questions he exam- Seealso:crowdinghypothesis;occupa- ined were the significance of time, the tionalsegregation meaning and process of human choosing and the role of information in choosing. sexual division of labour (J2, J7) The division of occupations into two Seealso:potentialsurprisefunction

© 2002 Donald Rutherford References This type of trading is central to the idea Ford, J.L. (ed.) (1990) Time, Expectations of a FUTURES market. and Uncertainty. Selected Essays of G.L.S. Shackle, Aldershot: Edward El- Shapley value (C7) gar. The UTILITY that a participant in an n- person game with an uncertain outcome, shadow director (G3) e.g. a LOTTERY, expects to obtain. The game A person who has a considerable influence assumes that utility is transferable between over a company without being a registered the players and that it is a zero-sum game. director. Shapley values have been used in models shadow economy (K4, L0) of taxation, the allocation of joint costs The activities of the BLACK ECONOMY and of and the study of voting systems. households and voluntary organizations. References The value of all the goods and services Shapley, L.S. (1953) ‘A value for n-person produced in this way does not enter into games’, in H.W. Kulin and A.W. Tucker the official NATIONAL INCOME accounts. (eds) Contributions to the Theory of References Games, Princeton, NJ: Princeton Uni- versity Press. Brezinsti, H. (1991) The Shadow Economy, Boulder, CO: Westview Press. share (G1) Smith, S. (1986) Britain’s Shadow Econ- A portion of the financial capital of a omy, Oxford: Basil Blackwell. limited company which gives the holder an shadow price (D0) entitlement, in the case of ordinary shares, An imputed price used where a market to a variable dividend decided by the price does not exist. These prices are used board of directors, or in the case of by large firms for their internal transac- preference shares, to a fixed return. Ordin- tions, by central planners for accounting ary shares are also known as EQUITIES. purposes and in COST–BENEFIT ANALYSIS to measure the effects of a particular invest- share borrowing (G1) ment. There are shadow rates of interest, The borrowing of shares, usually from the shadow exchange rates and shadow wage holdings of large INSTITUTIONAL INVESTORS, rates. The purpose of such pricing is to by MARKET-MAKERS in order to effect deliv- correct distortions introduced by mono- ery of shares more speedily. This enables poly, taxes and unemployment. The con- payment to be received immediately, at the cept has many applications in both low fee of about 2 per cent of the value of developed and less developed countries the borrowed shares. This practice was (because they tend to overvalue their previously permitted for JOBBERS who labour and undervalue their foreign ex- wanted to sell short, i.e. sell shares they change). did not own and then borrow to effect delivery. In the UK, the Stock Exchange References restricts the practice now to MARKET-MA- Little, I.M.D. and Scott, M.F.G. (eds) KERS to encourage more firms to under- (1976) Using Shadow Prices, London: take that role. Stock borrowing has long Heinemann Educational. been permitted in US markets. shallow market (D0) share buy-back (G1) A market with little trading with the conse- Purchase by a company of its own shares, quence that an individual transaction can if permitted by its Articles of Association. have a great influence on the market price. This practice, which aims to enhance the sham trading (D0, G0) earnings per share of a company, is more Buying or selling not backed by goods. prevalent in the USA than in the UK.

© 2002 Donald Rutherford sharecropper (Q1) to examine portfolio risk into its systema- A tenant farmer who pays the rent in kind tic and unsystematic elements. In 1990 he as a percentage of his or her crops. In shared the NOBEL PRIZE FOR ECONOMICS with return the landlord provides seed, fertili- MARKOVITZ and MILLER. zers, implements and other non-labour Seealso:beta inputs. This type of JOINT VENTURE is a common feature of agriculture in less shelf registration (G0) developed countries and regions. The re- A company or government bond approved lative shares of landlord and tenant will prior to issue. When the market is favour- depend on the scarcity of labour relative to able, this provisional bond is issued at capital and local culture. The landlord’s short notice. This method of issue was share is much larger in Middle Eastern introduced in the USA in 1982. countries than in southern Europe. In developed countries, unlike Third World shell company (L2) countries, sharecroppers will be compen- A company which has ceased to engage in sated for permanent land improvements its original activities, has few assets and and will be granted longer leases to earnings but usually has a stock market encourage the development of agriculture. quotation. Some former plantation com- References panies are of this kind. These companies provide an easy way for a new company to Byres, T.J. (ed.) (1983) Sharecropping and Sharecroppers, London: Cass. acquire a stock market quotation by a ‘shell operation’. sharedmonopoly(L1)seeoligopoly shell operation (G3) (G1, J3, P4) share economy Acquisition of a shell company as a means 1AnECONOMY whose industry is widely of obtaining a stock market quotation. owned through the distribution of EQUITY shares to employees and other sheltered employment (J2) small shareholders. Employment specially provided for dis- 2 The sharing of the revenues of a firm abled persons. In the UK, the firm Re- with its employees. mploy was set up in 1945 to implement the Seealso:widershareownership Disabled Persons (Employment) Act, but other firms were expected to offer at least share fisherman (Q1) 3 per cent of their jobs to the disabled. A fisherman whose remuneration is a Remploy by using a fine subdivision of proportion of the profits from each catch. labour is capable of providing more tech- This method of pay has long been used in nically simple jobs than other employers. Scotland. Sherman Act 1890 (L4) share support operation (G3) The founding statute of the US federal The purchase of the shares of a company ANTITRUST legislation. This Act prohibits by its directors and their associates that is ‘all contracts, combinations and conspira- intended to boost the share price, espe- cies in restraint of trade’ (section 1) and cially during a takeover. monopolization in interstate and foreign Seealso:sharebuy-back trade (section 2). The Act was followed by further federal legislation and similar sta- Sharpe, William, 1934– (B3) tutes for individual states. Educated at the University of California, Los Angeles, and professor of economics Seealso:antitrust;Celler–KefauverAnti- at Stanford University since 1970. He has mergerAct;ClaytonAct;FederalTrade developed the CAPITAL ASSET PRICING MODEL CommissionAct;Robinson–PatmanAct

© 2002 Donald Rutherford References zations: this Japanese national-level trade Bork, R.H. (1978) The Antitrust Paradox, union federation had a membership of New York: Basic Books. 56,000 persons in October 1988 at the time of its dissolution. shifting of taxes (H2) Passing the burden of a tax from the Seealso:Rengo person originally paying it to another. A principal example is the shifting of a tax shirking model (J3) on commodities from producers to con- A model of wage determination that sumers (forward shifting); there can also asserts a wage is fixed at a high enough level to ensure that workers do not shirk be backward shifting, e.g. when an AD because they fear that if they were caught VALOREM TAX has to be paid by a producer because the final prices are the same pre- they would lose their high incomes. This and post-tax. model takes into account the MORAL HA- ZARD problem arising from a firm only Seealso:taxincidence periodically observing worker effort. shift share analysis (R1) References A technique in regional analysis for ana- Shapiro, C. and Stiglitz, J.E. (1984) ‘Equi- lysing the effects on a region’s growth of librium unemployment as a worker its share of national industrial activity, discipline device’, American Economic usually measured by employment, being Review 74: 433–44. structurally different from that of the country as a whole. Thus, for example, if shock inflation (E3) region X were growing faster than the A once-and-for-all change in the price country of which it was part, this analysis level which may be caused by a change in would indicate how much of that regional INDIRECT TAX rates or import prices or a growth could be attributed to it having a major change in the supply of a major higher proportion of rapidly growing in- commodity, e.g. oil. dustries than the country as a whole. The Seealso:oil-priceincreases shift can be split into a proportional shift, reflecting differences in the mix of indus- shoe leather costs of inflation (E3) trial sectors at national and regional levels, Costs in time and effort to carry out and a differential shift caused by different economic transactions because the falling employment growth rates in a region and value of money in times of inflation brings the nation of which it is part. about a reduction in money holdings. shifts in demand or supply curves (D0) Seealso:menucostsofinflation;transac- An upward or downward movement of a tions cost whole demand or supply curve because a shop steward (J5) variable, other than price, has changed. A An elected official of a TRADE UNION who change in consumer tastes, in consumer represents a group of workers within an incomes or in the prices of other goods establishment or factory. He or she parti- can move a demand curve; a change in cipates in local bargaining on pay, condi- technology or governmental regulation can tions of work and disciplinary procedures. move a supply curve. These shifts are It was argued in the 1960s by the DONOVAN always the result of a failure of the CETERIS COMMISSION that in the UK they were PARIBUS condition. central actors in an informal system of Seealso:identificationproblem factory-level industrial relations. Shinsanbetsu (J5) short (F3) National Federation of Industrial Organi- A deficit: a foreign exchange dealer is ‘in

© 2002 Donald Rutherford short’ when he or she has a deficit in a new markets of this kind have been particular currency. established in the City of London, New York and European financial capitals. The Seealso:long items traded include CERTIFICATES OF DE- shortage economy (P4) POSIT, TREASURY BILLS, COMMERCIAL BILLS, An economy characterized by EXCESS DE- local authority bills, discount house de- MAND for many goods and services for posits, local authority deposits, ECUS and substantial periods of time. This often SPECIAL DRAWING RIGHTS. happens because prices of basic necessities Seealso:discountmarket are kept below their market clearing levels for welfare reasons. In a CENTRALLY short-time working (J2) PLANNED ECONOMY, there is a tendency to Working fewer hours than the standard adhere to the same set of prices for many working week, as defined by a collectively years, not raising them as demand rises. bargained agreement or an individual Also, if the prices set by a government employment contract. This is a method of reflect its priorities and not those of con- making a short-term adjustment to a fall sumers excess demand can easily develop. in demand for labour; it often precedes Seealso:Soviet-typeeconomy redundancies. short selling (G1) Seealso:workinghours;overtime Selling a SECURITY not owned by the seller who subsequently buys sufficient volume Shoup Mission (H2) of that security to effect delivery. Such A mission of inquiry headed by the US behaviour, the activity of a bear, is popular economist Carl S. Shoup who recom- when markets are falling in price. mended in 1949 a complete overhaul of the Japanese taxation system, bringing it Seealso:shareborrowing closer to the US system than to Western Europe’s. short-termism (E6) Preferring the short to the long term in References economic decision making, particularly Bronfenbrenner, M. and Kogiku, K. (1957) preferring to spend current income rather ‘The aftermath of the Shoup tax re- than invest long term. This attitude is forms’, National Tax Journal 10: 236– manifest in the low proportion of total 54. expenditure on research and development, Shoup Mission (1949) The Report on inadequate investment in technology and Japanese Taxation, Tokyo: General poor control over the total wages bill. UK Headquarters, Supreme Commander Chancellor of the Exchequer Nigel Law- for the Allied Powers. son coined the term in 1986 to character- ize much of the thinking of industrialists shunto (J3) and financiers. Also, it has been argued The Japanese Spring Wage Offensive. Since 1955, the union federations have that major INSTITUTIONAL INVESTORS, e.g. pension funds, despite their ability to presented simultaneous wage claims to make long-term investments, are too inter- employers with one union being chosen to ested in capital gains from short-term advance the first wage and conditions market movements. claim to act as a pacemaker for other unions. The system gives more power to a short-term money market (G1) trade union movement which is character- A market in financial securities with a life ized by 34,000 small unions mostly at the of several months at most based in a enterprise level and provides macroeco- major financial centre. Since 1970, many nomic guidelines for enterprise bargaining.

© 2002 Donald Rutherford Seealso:enterpriseunion;patternsettle- change in the relationship between de- ment;wageround mand and supply in that market. If prices rise, producers will be aware of a supply shutdown price (D0) deficiency and encouraged to increase A minimum price equal to the short-run their output and, if necessary, their capital average VARIABLE COST. Below this price, stock. Similarly in labour markets an firms would prefer to shut down rather increase in occupational pay will encou- than accept a lower price and incur losses, rage persons to acquire the appropriate including payments needed to cover FIXED training and to apply for jobs of that kind. COSTS. Seealso:Hayek siege economy (P4) A national ECONOMY cut off from economic significance test (C1) relationships with the rest of the world, A procedure that calculates a statistic to usually through war or ECONOMIC SANC- ascertain whether an observed deviation TIONS. To maintain the availability of a from the NULL HYPOTHESIS is real or the wide range of goods, such economies have product of chance. to diversify into activities new to them. It Seealso:chi-squareddistribution;Ftest; has been argued in favour of tariffs that Student’stdistribution some high-cost industries should be pro- tected from international competition in silver ring (G2) case a country is under siege in the future The two or three City of London DISCOUNT and needs the output from those indus- HOUSES that principally run the books tries. which determine the discount market. Seealso:autarky;openeconomy Simon, Herbert Alexander, 1916– (B3) US theorist of corporate behaviour who sight deposit (G2) was educated at Chicago University. He A bank deposit immediately payable on taught at the Illinois Institute of Technol- demand. ogy from 1942 to 1949, at the Carnegie Seealso:currentaccount;timedeposit Institute of Technology from 1949 to 1955 and subsequently at Carnegie-Mellon Uni- signal extraction (C1) versity. His eclectic knowledge of psychol- The statistical removal of the trend, seaso- ogy, computer science and economics has nal and irregular components in a TIME enabled him to write extensively on admin- SERIES, especially using an ARIMA model. istrative behaviour and corporate decision making. His famous textbook Administra- signal jamming (L1) tive Behavior was first published in 1947. A type of BARRIER TO ENTRY that ‘jams’, or His celebrated contribution to economics prevents, a potential entrant from gaining has been the concept of BOUNDED RATIONAL- information about the profitability of the ITY. He was awarded the NOBEL PRIZE FOR existing firms of an industry. ECONOMICS in 1978. References Simons, Henry Calvert, 1899–1946 (B3) Fudenberg, D. and Tirole, J. (1986) ‘A Educated at the University of Michigan ‘‘signal jamming’’ theory of predation’, Rand Journal of Economics 18: 211–31. and professor successively at Iowa, from 1920 to 1927, and Chicago from 1927 to signalling (D8) 1946. He was a founder of the CHICAGO Providing information for economic deci- SCHOOL, a prominent tax theorist whose sion making, particularly by the price ideas underlie the US federal INDIVIDUAL mechanism. Changes in prices ‘signal’ to INCOME TAX and a noted libertarian in his producers and potential producers a attitude to economic policy.

© 2002 Donald Rutherford References Single European Act 1986 (F0) Simons, H.C. (1938) Personal Income An amendment to the TREATY OF ROME that Taxation: The Definition of Income as a has changed the nature of decision making Problem of Fiscal Policy, Chicago: Uni- in the EUROPEAN COMMUNITY by permitting versity of Chicago Press. majority voting instead of unanimity. It —— (1948) Economic Policy for a Free also limited the harmonization of policies Society, Chicago: University of Chicago to essential standards, granted the Eur- Press. opean Parliament a greater role in the —— (1950) Federal Tax Reform, Chicago: University of Chicago Press. creation of legislation, reaffirmed the need to increase the European Community’s simulation model (C9) economic and social cohesion in labour A model of economic reality concentrating and scientific matters and added to the on the main and crucial features of an treaty a recognition of organizations, such ECONOMY and attempting to estimate the as the EUROPEAN MONETARY SYSTEM, created relationships between those features with a since 1958. The features of the Act were view to estimating the effects of changing derived from Lord Cockfield’s report the values of those variables. Such models Completing the Internal Market (1985) have been used in the study of cyclical which listed 300 changes essential by 1992 fluctuations, in corporate decision making to remove barriers to movement and trade. and national ECONOMIC PLANNING. single factorial terms of trade (F1) References NET BARTER TERMS OF TRADE multiplied by a Bonini, C.P. (1963) Simulation of Informa- PRODUCTIVITY change index for the export tion and Decision Systems in the Firm, trades. This enables a nation to calculate Englewood Cliffs, NJ: Prentice Hall. what its factors of production earn in Duesenberry, J.S., Eckstein, O. and Fromm, foreign goods. G. (1960) ‘A simulation model of the United States economy in recession’, Seealso:termsoftrade Econometrica 28: 749–809. single market (F1) simultaneous ascending auction (D0) The INTERNAL MARKET of the EUROPEAN COM- An auction for multiple items. Bidding MUNITY created by 1992 as a consequence occurs in rounds with each bidder making of the Single European Act of 1986. It was a sealed bid. At the end of each round there hoped that the European Community is a standing high bid which goes on to the market would be unified by the removal next round. This method was used for the of all barriers to movement and trade, as sale of radio spectrum licences in the USA. well as unifying the financial market. Member countries were expected to gain single-capacity trading (G1) an extra 4.25–6.5 per cent of GROSS DOMES- The method of trading which separated TIC PRODUCT through the internal market jobbers from brokers on the London leading to an exploitation of ECONOMIES OF Stock Exchange in force from 1908 to SCALE and the efficiency which arises from 1986. London’s deregulation, usually increased competition and COMPARATIVE AD- termed BIG BANG, gave stock exchange VANTAGE. This stage of removing the final members the right to combine both func- barriers to trade in the European Commu- tions and be MARKET-MAKERS. nity concerns the removal of remaining single currency (E4) differences in the technical regulations of The only currency acceptable as LEGAL TEN- member countries, waiting at frontiers to DER in a particular country or countries, conform with customs regulations, the different from a COMMON CURRENCY. restriction of competition for public

© 2002 Donald Rutherford contracts to the nationals of one country the principle of one union in charge of and the limits to competition in financial, worker representation. transport and some other service indus- References tries. These gains were expected to be realized in a period of five or six years. Bassett, P. (1986) Strike Free: New Indus- trial Relations in Britain, London: Mac- References millan. Emerson, M., Anjean, M., Catinat, M., sin tax (H2) Goybet, P. and Jacqueman, A. (1988) The Economics of 1992, Oxford: Oxford An indirect tax on a good regarded as a University Press. minor vice such as tobacco or alcohol. size distribution (C1) single-tax movement (H2) A frequency distribution classifying an The campaign in the USA by Henry economic entity according to size classes. GEORGE for existing taxes to be replaced Personal incomes can be classified to show by a single tax on land, which would what proportion falls into each range of absorb all pure rents. This view was based income; likewise, data on firms can be on the observation that landlords have an presented in this way. Endowments of unearned income arising from land as it human and non-human capital are major rises in value through being fixed in supply determinants of the size distribution of but increasingly demanded as the popula- income. tion grows. A century before, the PHYSIO- CRATS, too, proposed a single tax on land. Seealso:personalincomedistribution For such a change in taxation to be fair to References all factors of production, ECONOMIC RENT Champernowne, D.G. (1953) ‘A model of wherever it occurs, including a portion of income distribution’, Economic Journal the earnings of talented performers, would 63: 318–51. have to be taxed. Meade, J.E. (1964) Efficiency, Equality, Seealso:Turgot and the Ownership of Property, London: Allen & Unwin. References size of an economy (E0) George, H. (1918) Single Tax – What It Is and Why We Urge It, Los Angeles: A national ECONOMY’s GROSS DOMESTIC PRO- Golden Press. DUCT. This is used as a measure because NATIONAL INCOME accounting attempts to single-union deal (J5) measure all the output from all economic An agreement between an employer and a activities in a given time period. Land TRADE UNION which excludes other unions areas and populations are used to measure from organizing workers in that firm or its the size of a country. workplaces. This simplification of INDUS- skewed frequency curve (C1) TRIAL RELATIONS has increasingly been re- A FREQUENCY CURVE whose maximum is quested by firms setting up new plants and near the beginning (skewed to the right, is accepted by trade unions who fear that positively skewed) or near the end (skewed the alternative is a non-union plant. Japa- to the left, negatively skewed) of the range nese-owned companies have been major of values of a variable (see the figures). pioneers of this approach in the UK where it was deeply resented by the trade unions skewness (C1) who often were rejected as recognized The degree of asymmetry of a distribution. representatives of workers. Countries with This is measured as the ARITHMETIC MEAN INDUSTRIAL UNIONS, e.g. Germany, or ENTER- minus the MODE divided by the STANDARD PRISE UNIONS, e.g. Japan, have long accepted DEVIATION. (See the figure.)

© 2002 Donald Rutherford skilldifferential(J3)seewagedifferentials Seealso:stagflation skimming (M2, M3) Slutsky effect (D0) A pricing policy for new products which A consumer’s reaction to a change in price. sets prices at a high level to ‘skim’ the This fundamental equation of price theory expenditure of higher income customers. splits the effect of a price change into an These high prices are intended to cover the INCOME EFFECT and a SUBSTITUTION EFFECT. costs of RESEARCH AND DEVELOPMENT. The effect can also be applied to the effect on the labour supply of a LUMP-SUM TAX. sleeping beauty (G3) HICKS in Value and Capital attributed this A company worthy of takeover which is to the Russian mathematician and statisti- yet to receive a bid. cian SLUTSKY who contributed suggestions sleeping economy (G2) about consumer theory to economics. Forgotten bank deposits and savings certi- Slutsky, Evgeny Evgenievich, 1880–1948 ficates. (B3) Seealso:monetaryoverhang;orphanas- Born in Russia. Educated in mathematics sets and political economics at Kiev University and Munich Polytechnikum. He taught at sliding parity (F3) the Kiev Institute of Commerce and Mos- A fixed exchange rate whose central value cow University, as well as being a govern- changes frequently by small amounts. ment statistician and later working at the sliding scale (F1, J3) Institute of Mathematics of the USSR A variable schedule of wages, payments or Academy of Sciences from 1938. His tariffs. wide-ranging work on statistical methods included a study of stochastic processes slump (E3) and price theory. A long period of low national output and References high unemployment, e.g. the early 1930s. Allen, R.G.D. (1950) ‘The work of Eugen Seealso:depression;recession Slutsky’, Econometrica 18: 209–16. slumpflation (E3) small firm (L2) FRIEDMAN’s assertion that rising levels of A FIRM often defined as having less than UNEMPLOYMENT and rising rates of price 200 employees and managed by its owner. INFLATION occur simultaneously. Diagram- Despite the growth in the size of firms in matically this is shown by a positively the twentieth century, there is still a role sloped PHILLIPS CURVE. for small businesses where the market is

© 2002 Donald Rutherford limited in size, ECONOMICS OF SCALE do not moral philosophy, whose utilitarian ideas exist (e.g. in craft industries) or larger were to influence the early stage of Smith’s firms prefer to subcontract out many economic theorizing. An unhappy period operations (e.g. in Japanese shipbuilding). as Snell Exhibitioner at Balliol College, In the UK many incentives are offered to Oxford, from 1740 to 1746 enabled him to small firms as there is the belief that they spend long solitary hours in acquiring the are a major source of INNOVATION and will basis of his erudition. Returning to Scot- be tomorrow’s large employers. land, he was successively professor of logic, from 1751 to 1752, and professor of References moral philosophy, from 1752 to 1764, at Bannock, G. (1981) The Economics of Glasgow University. His wide duties as a Small Firms, Oxford: Basil Blackwell. professor included lecturing on jurispru- Curran, I., Stanworth, J. and Watkins, D. (eds) (1986) The Survival of the Small dence which he broadly interpreted to Firm, Vols I and II, Aldershot: Gower. include economics, as the police in France had the task of regulating markets. In his smart card (G2) extant Lectures on Jurisprudence for the A CREDIT CARD with a built-in store of winter of 1762–3 there is an early sketch of information about the holder and his or the ideas which were to appear in THE her financial state. The information is WEALTH OF NATIONS: the DIVISION OF LABOUR, stored in a wafer-like microchip embedded the distinction between VALUE IN USE and in the plastic. These were pioneered in VALUE IN EXCHANGE, the importance of FREE France where 3 million had been issued by TRADE and the stages of economic develop- the end of 1986. Banks and credit compa- ment are discussed. More importantly for nies are prepared to pay the greater his career, he produced in that period his production cost of these as they are less Theory of Moral Sentiments (1759; repub- likely than earlier types of card to be lished five times in his lifetime) which was fraudulently misused. They could be the based on the Stoics’ view of the natural dominant card for financial transactions order and provided an exposition of his in the USA and many OECD countries in concept of the INVISIBLE HAND which was to the near future. play an important role in the theoretical Seealso:cartea`memoire framework of The Wealth of Nations.A leading government minister, Charles smart money (F3) Townsend, was so impressed by the The- The short-term volatile deposits of very ory that he persuaded Smith to abandon rich persons which in times of national his Glasgow professorship and become crisis are moved to safer havens overseas. travelling tutor to his stepson, the young Duke of Buccleuch. This Grand Tour to Seealso:capitalflight France and Switzerland in the years 1764– Smith, Adam, 1723–90 (B3) 6 enabled Smith to meet QUESNAY and TUR- Scottish economist and philosopher who GOT, the prominent PHYSIOCRATS who were was the founder and leader of the classical perhaps the most important economists of school of economics. He was born in the day: not surprisingly, their influence is Kirkcaldy, a Fife town to the north of evident in The Wealth of Nations. Edinburgh, the only son of a Customs The Grand Tour, cut short by the death Commissioner who died before his birth, of the Duke’s brother, brought Smith back leaving his mother to be a major influence to Kirkcaldy where, supported by his throughout 61 years of his life. He was continued stipend of £300 per annum from educated at the local burgh school and at the Duke, he spent six years preparing his Glasgow University from 1737 to 1740 great work on economics. In London, in under Francis Hutcheson, professor of 1773–6, he completed it, as well as giving

© 2002 Donald Rutherford government ministers advice on major the Smithsonian Institute, Washington, policy issues, including the problem of the DC. This agreement was forced on the American colonies. His highly acclaimed international financial community by US Wealth of Nations (1776 and four more President Nixon when he ordered the US editions in his lifetime) provided a power- Treasury to suspend its gold sales in ful theory of economic growth. This was August 1971. Wider fluctuations of 4.5 built upon the division of labour principle per cent against the US dollar were and the consequence of man’s desire for permitted, the US dollar was devalued betterment that leads to savings which are against gold by 7.9 per cent and the productively invested. Also theories of official gold price was raised from $35 to value, distribution, international trade $38 per fine ounce. The subsequent float- and public finance were presented. ing of currencies, e.g. of STERLING in June Although sharing much with LAISSEZ-FAIRE 1972, quickly abrogated the principal economists, he allowed many exceptions to terms of the agreement. completeeconomicliberty:forexample, Seealso:BrettonWoodsAgreement on the grounds of national defence he praised the NAVIGATION ACTS which excluded smokestack American stocks (G1) foreign ships from carrying British trade. The COMMON STOCK of basic US industries. From 1778 to his death he resided as a Commissioner of Customs in Edinburgh – Smoot–Hawley Tariff Act 1930 (F1) perhaps a strange occupation for the The major US federal statute to establish apostle of free trade but a useful £600 per PROTECTIONISM in the twentieth century. It annum addition to his income. Also, this included TARIFF schedules for over 20,000 appointment was a major mark of govern- products, proposing increases in many ment approval and an opportunity to cases. It led to BEGGAR-MY-NEIGHBOUR poli- undertake empirical research into the mer- cies which some economists claim was a cantile system he so forcefully attacked. major cause of the world-wide depression Any reader of his works is soon impressed in the 1930s. by their breadth, humanity and funda- mental arguments. Justifiably, he was then Seealso:ReciprocalTradeAgreements and is now regarded as one of the world’s Act greatest thinkers and economic theorists. snake in the tunnel (F3) Seealso:AdamSmithInstitute;classical The exchange rate regime constituting part economics;mercantilism;WealthofNations of the SMITHSONIAN AGREEMENT and existing December 1971 to March 1973. The ‘tun- References nel’ was the permitted range of 4.5 per Hollander, A. (1973) The Economics of cent fluctuations around the dollar; the Adam Smith, Toronto: University of ‘snake’, the band of 2.25 per cent to which Toronto Press. the participating currencies were confined Ross, I.S. (1995) The Life of Adam Smith, Oxford: Oxford University Press. at a particular time. It also applies to the Skinner, A.S. and Wilson, T. (eds) (1975) EUROPEAN MONETARY SYSTEM’s currency Essays on Adam Smith, Oxford: Oxford movements since 1979. University Press. Smith, A. (1976–7) Collected Works, ed. snugging (E5) A.S. Skinner and T. Wilson, Oxford: The tightening of US MONETARY POLICY by Oxford University Press. pushing up interest rates and thereby low- ering bond prices. An expression intro- Smithsonian Agreement (F3) duced by Paul Volcker when he was A realignment of major world currencies Chairman of the FEDERAL RESERVE SYSTEM by the GROUP OF TEN in December 1971 at in the 1980s.

© 2002 Donald Rutherford socialaccounting(E0,M4)seenational Arrow, K.J., Sen, A. and Suzumura, K. income (eds.) (1997) re- examined, New York: St Martin’s Press; socialadjustmentcost(D0) London: Macmillan. Thesocialproductioncost,awelfareloss Hoag, G.C. and Hallett, G. (1940) Propor- toaproducer,broughtaboutbyincreased tional Representation: The Key to De- competitionfromimports.Amajorcostof mocracy, New York: National thiskindistheunemploymentcausedby Municipal League. Rothenberg, J. (1961) The Measurement of importsreplacingdomesticproduction. Social Welfare, Englewood Cliffs, NJ: Seealso:TradeAct Prentice Hall. social capital (E2, H4) socialcompact(J5)seesocialcontract 1Assetscollectivelyownedforthebenefit social conscience fund (G2) of the community at large. A MUTUAL FUND whose portfolio excludes 2 The benefits resulting from feelings of investments in morally dubious corpora- sympathy and obligation. These feelings tions and companies. Tobacco, alcohol, underlie terms of trade, the provision of arms and South African investments in health and education, and access to the days of apartheid have all been candi- goods and services. dates for exclusion. Seealso:infrastructure social contract (J5) SocialCharter(J2)seeEuropeanSocial An agreement, also known as the ‘social Charter compact’, lasting from March 1974 to July 1975 between the UK Labour government social choice theory (D7) and TRADE UNIONS to grant various social An attempt to provide a normative ratio- benefits, pro-labour union laws, price con- nale for social decisions in societies where trols and higher public expenditure in individuals have different preferences return for the trade-unions-organized re- about the options available. BERNOULLI was straint of wages. The government kept its the first to discuss individual decision promises; the unions failed to restrain pay making systematically. This theory is rising in twelve months by 32 per cent. based on utilitarian WELFARE ECONOMICS Rather different from Rousseau’s cele- and assumes that full information is avail- brated philosophy of that name. able to a decision-maker who is then in a position to maximize SOCIAL WELFARE.As social cost (D0) there are so many methodological pro- The OPPORTUNITY COST to society of the blems in aggregating individual prefer- resources it uses. This is equal to all the ences, social choice theory has made an costs incurred by a society in producing a extensive examination of VOTING PROCE- good or service. In most cases of produc- DURES as a means of creating aggregated tion there is a divergence between private social preferences. This complex theory is and social costs. criticized for its unrealistic assumption of Seealso:privatecost full information and for the dictatorial method of decision making it proposes. A References major application of it is the study of the Pearce, D.W. (ed.) (1978) The Valuation of appropriate extent of the public sector and Social Cost, London: Allen & Unwin. the mechanism for controlling it. social cost of monopoly (D6) References The welfare losses resulting from the Arrow, K. (1966) Social Choice and Indivi- restriction of output and higher prices dual Values, 2nd edn, New York: Wiley. under monopolistic production. There is

© 2002 Donald Rutherford also the social cost that occurs through based on the idea of producers’ CO-OPERA- striving to attain a monopoly position. TIVES, were suggested by OWEN, FOURIER and ST SIMON and were soon analysed in John Seealso:externality Stuart MILL’s Principles of Political Econ- social cost of unemployment (D6, J6) omy (1848). Later socialist writings de- The reduction in national output resulting parted from the co-operative principle from an economy operating at a produc- and based their theories on wider pre- tion level less than FULL EMPLOYMENT. mises. MARX, ENGELS and their followers were more ambitious in their theorizing, Seealso:privatecostofunemployment and provided a long-term analysis of the (H3) emergence of capitalism (mythically de- A scheme advanced by Major C.H. Dou- scribed by TURGOT and SMITH) and late glas in the 1920s to advance discounts to classical theories of value and distribution. retailers, and dividends to citizens, to solve Today, socialism for a whole economy is the problem of underconsumption. This often associated with PLANNING (as in SO- attempt to cure unemployment in the VIET-TYPE ECONOMIES). Some economies interwar years (based on a theory of the modified central planning by combining TRADE CYCLE) was partially implemented in planning with market mechanisms, e.g. Alberta, Canada, in 1935 when a scheme Hungary and Yugoslavia, to create MARKET to distribute to all citizens social dividends SOCIALISM. As socialism coincided with the based on the real wealth of the country rise of TRADE UNIONS in the countries first was introduced. to industrialize, it is not surprising that References there has often been an intimate associa- tion between labour and socialist parties. Douglas, C.H. (1933) Social Credit,3rd The remaining idealists who desire to live edn, London: Eyre & Spottiswoode. in societies following strict EGALITARIAN social dividend scheme (H3) principles would be best to choose sub- An integration of income maintenance economies such as the Israeli KIBBUTZIM or with income taxation. The state fixes an the US Hutterite communities. income maintenance payment related to Seealso:egalitarianism;guildsocialism; household size in order to prevent dire industrialdemocracy poverty. Income above this payment is subject to progressive taxation but income social liberalism (P4) below it is supplemented by ‘dividends’ in The political philosophy that advocates the form of a cash sum. Although long that collective action increases individual advocated by many political parties, such welfare and liberty. It is argued that this schemes are difficult to implement. type of MIXED ECONOMY preserves markets Seealso:negativeincometax;poverty and political freedom, as well as giving a trap greater role to government. KEYNES and BEVERIDGE were the chief proponents of socialgood(H4)seepublicgood this view. socialism (P2) A way of organizing an economy so that socially necessary labour time (J0) the society owns productive capital and The amount of time a worker devotes to distributes the NATIONAL INCOME for the the production of a particular good under benefit of all. It is the alternative to normal conditions of production at the uncontrolled CAPITALISM and to some ex- current standard of labour PRODUCTIVITY. tent a rejection of market mechanisms. MARX found it necessary to refine the Early idealistic forms of socialism, often notion of labour quantity in this way to

© 2002 Donald Rutherford avoid the implication of his theory – that aims, including, for example, a fairer laziness increases value. income distribution. (P4) Seealso:cost–benefitanalysis An ECONOMY combining private ownership of industry and market methods of alloca- social rate of discount (D9) tion with high welfare expenditures and 1 The rate at which society transfers industrial policies. Germany has been a resources between time periods. major example of this type of economy 2 The rate at which a government makes since the late nineteenth century. an intertemporal transfer as represent- ing the wishes of society. The concept is social opportunity cost of foreign ex- central to COST–BENEFIT ANALYSIS change (F3) Seealso The effective local currency cost to a :privaterateofdiscount country of the foreign exchange it spends plus the effective local currency yield to it social responsiveness of corporations of the foreign exchange it generates by (G3) Expenditures and programmes in response exporting and by IMPORT SUBSTITUTION. to social problems. This takes the form of socialoverheadcapital(H4)seesocial expenditure on training, educational scho- capital larships, disaster relief, contributions to charities, the improvement of employment (L3) and living standards and the protection of A form of public ownership similar to the global environment. NATIONALIZATION. It is different from the type of UK nationalization introduced in social security (H2) the 1940s in that members of the public TRANSFER INCOMES, especially retirement hold non-voting shares and there is a pensions and unemployment benefits. The greater degree of WORKERS’ PARTICIPATION in provision of such benefits varies greatly management. from country to country, being particu- Seealso:co-operative;industrialdemoc- larly generous in Scandinavian countries racy and Germany. The ratio of employer and employee contributions (used to finance social political economy (P4) social security) to wages is high in coun- A diffuse set of normative economic the- tries such as the Netherlands but much ories based on the idea that the individual lower in countries such as Japan and the cannot be separated from the community. USA. Many studies show that an increase All economics is regarded as the product in social security charges is shifted to the of social values. Early practitioners of this wage earner if he or she regards the form of POLITICAL ECONOMY were associated corresponding benefits as part of his or with the Catholic Economic Association. her wage. Social security schemes increase distortions in the LABOUR MARKET by in- social product (E0) creasing the cost of labour to the firm The national product of a particular coun- without increasing it to wage earners who try or community. do not regard the benefits as a full addi- Seealso:nationalincome tion to their incomes. Social security can be financed in two ways. It can be fully social profit (E2) funded so that investments are accumu- The total return to an economy of an lated to produce an income for future investment project which includes both recipients of social security grants, or it money profit and the achievement of other can be financed on a ‘pay-as-you-go’ basis,

© 2002 Donald Rutherford i.e. by current contributions, mainly by tion and as they are indivisibly supplied present members of the labour force. they cannot be charged to individuals. Prominent examples of such wants include References POLLUTION CONTROL and expenditure on law Gramlich, E.M. (1998) Is it time to reform and order. social security?, Ann Arbor, MI: Uni- versity of Michigan Press. Seealso:meritwant Hicks, A. (1999) Social democracy and : a century of income social welfare (H0) security politics, Ithaca, NY, and Lon- The economic well-being of a society as a don: Cornell University Press. whole, often measured by the total volume Social Security Act 1935 (H2) of goods and services becoming available US federal legislation establishing a sys- to it over a given period, i.e. real income. tem of welfare payments financed by the An appropriate measure of welfare is contributions of employers and employees. disputable as NATIONAL INCOME accounting Initially it was set up to finance retirement does not cover all GOODS and BADS of an and survivor benefits but subsequently it economy and total income measure has been extended to cover disability ignores income distribution. As changes benefits and the cost of medical care. in social welfare are used to judge the efficacy of economic policies, a variety of social spending (H5) tests have been used to see whether there Public expenditure on health, education has been an unambiguous increase in and the provision of welfare benefits. After welfare. The stark PARETO approach has excluding expenditure on defence and been challenged and replaced by other grants to industry, most of a nation’s approaches, notably by SCITOVSKY and public expenditure is now of this type. Rawls, to deal with the problem of the extent to which losers’ reduction in welfare Seealso:peacedividend is more than compensated for by gainers’ social time preference rate (D9) increase, after redistribution of real in- The rate at which society trades consump- come. Much of WELFARE ECONOMICS is con- tion of one time period with consumption cerned with this difficult problem which, of another. A positive rate means that the as Little has shown, reflects the value- present is preferred to the future. loaded nature of many welfare discussions. Although the market rate of interest has Seealso:measureofeconomicwelfare; been used as a proxy for this rate, it is not Rawlsiandifferenceprinciple in all cases suitable. There is a variety of markets and rates according to the term References and the purpose of the loan. The prefer- Little, I.M.D. (1957) Critique of Welfare ences of persons, including children, who Economics, 2nd edn, Oxford: Oxford neither borrow nor lend at interest are University Press. ignored. Market rates can be pushed up by the monopoly power of banks and by the social welfare function (H0) risk of non-repayment. The shorter life The total well-being of a society as a expectancies and time horizons of the function of its resource allocation. Origin- poor, especially in less developed coun- ally this was regarded as the sum of tries, limit the usefulness of this concept. individual utilities but ARROW showed the impossibility of this when individuals have social wants (H4) divergent opinions. The four conditions of The collective demand by a community to collective rationality – the PARETO princi- increase its welfare. Individuals do not ple, non-dictatorship and independence of desire these solely for their own consump- any alternative in an environment other

© 2002 Donald Rutherford than where the social choice is made – soft dollar services (G2) cannot simultaneously be satisfied. Investment research and related services offered by brokers without any charge Seealso:Arrow;Bergson;impossibility added to dealing fees. theorem soft landing (E6) Society for Worldwide Interbank Fi- Reaching a desired macroeconomic posi- nancial Telecommunications (G2) tion for a country painlessly. Usually a A private network established in 1973 in landing of this kind makes possible the Brussels and operational from 1977 by reduction of inflation without causing a European banks for the transfer of funds; recession. by 1988 this financial information service had been extended to Asia, Australia and soft loan (G0) Latin America. A loan on easy terms, i.e. at a lower than sociological utility theory (D1) market rate of interest and repaid over a This states that utilities are systematically longer period of time than is customary. interdependent as wants are formed by This easing of the terms of credit has often observing the consumption of other indi- been used to encourage the development viduals. of Third World countries and the de- pressed regions of industrialized countries. References Duesenberry, J.S. (1949) Income, Saving soft modelling (C5) and the Theory of Consumer Behavior, A form of factor analysis with as few Cambridge, MA: Harvard University PARAMETERS as possible. This approach is Press. used to build socioeconomic models where there is little information on the place of soft budget (H6) each variable in a causal chain. A budget with a flexible limit. In CEN- TRALLY PLANNED ECONOMIES, the budgets of References many firms were ‘soft’ because loss-mak- Joreskog, K. and Wold, H. (1982) Systems ing firms are kept in business by subsidies, under Indirect Observation, Amsterdam: tax concessions and credits. North-Holland. soft commission (G2) sogo bank (G2) Commission for a stockbroker’s services A Japanese mutual bank set up after the based on actual services supplied, and Second World War to finance small and thus lower than a standard commission. medium-sized local firms with a minimum capital of 400 million yen (compared with soft commodity (Q1) 1 billion yen for commercial banks). When An agricultural product such as coffee, faced with the competition of deregulated cotton or sugar. COMMERCIAL BANKS and of local CREDIT UN- See also: primary product IONS, many sogos have turned to very risky lending; others have converted into com- soft currency (F3) mercial banks. A currency few people want to hold as it is continuously depreciating, except in the sogo shosha (L2) periods when the inducement of high Japanese transnational trading company. interest rates encourages foreigners to hold Sohyo (J5) deposits of it. The currencies of Italy, General Council of Trade Unions of Iceland and Mexico were of this kind for Japan: this national federation of trade many years. unions had a membership of 3.9 million See also: hard currency by 1989, of whom 1.2 million worked in

© 2002 Donald Rutherford the government sector, 1.1 million in sophisticated leader (L1) services, 0.84 million in transport and A firm that employs a strategy to obtain communications and 0.52 million in man- the best profit level consistent with the ufacturing. reaction curve of its rivals. Seealso:enterpriseunion;Rengo South African Customs Union (F0) A customs union of , Lesotho, sole proprietor (L2) Swaziland and the Republic of South A person who is both the sole owner and Africa set up in 1969. manager of a firm, receiving all its post- tax profits and entirely responsible for its South African Development Co- liabilities. The growth of SELF-EMPLOYMENT ordination Committee (O0) is some indication of the increasing popu- An organization formed in April 1980 to larity of this form of enterprise. co-ordinate the transport, trade and devel- Seealso:partnership;smallfirm opment of Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanza- Solow neutral (O3) nia, Zambia and Zimbabwe. TECHNICAL PROGRESS which increases capital but does not affect the distribution of sovereign loan (G0) GNP between labour earnings and capital A commercial loan to a sovereign state. yield. Collateral is not offered with such loans and so there is little redress in the case of References default. Much of the large foreign debts of Solow, R.M. (1956) ‘A contribution to the Third World countries today are of this theory of economic growth’, Quarterly nature. The only way of enforcing repay- Journal of Economics 70: 65–94. ment of capital and interest is by negotia- Solow residual (O4) tion and by refusing further credit facilities. That part of economic growth that cannot Seealso:seniordebt;worlddebtproblem be explained by the growth of the labour force or the stock of capital. sovereign risk (G1) The rating given to an issue of government References bonds by Standard & Poor or another Solow, R.M. (1957) ‘Technical change and rating agency. The grades are AAA, AA, the aggregate production function’, Re- A, BBB, BB and B. view of Economic Studies 39: 312–20. Soviet Material Product System (E0, P3) Solow, Robert M., 1924– (B3) The distinctive system of NATIONAL INCOME A leading US capital and growth theorist, accounting used in the USSR. Govern- at SAMUELSON’s side in the CAMBRIDGE CON- ment services and many private services TROVERSIES. After a university education at were excluded. This attitude to national Harvard, since 1950 he has spent his entire income accounting, so different from that academic career at the Massachusetts In- used by Western countries, is founded on stitute of Technology. Some of his con- the distinction between PRODUCTIVE and tributions to growth theory are evident in UNPRODUCTIVE LABOUR used by CLASSICAL his text Growth Theory: An Exposition ECONOMISTS. (1969). His NEOCLASSICAL position in capi- tal theory emerges in his Capital Theory Soviet-type economy (P2) and the Rate of Return (1963). Later works A CENTRALLY PLANNED ECONOMY of the kind included research into the economics of set up under the five-year plans of the non-renewable resources. His major con- 1920s and 1930s which was adopted by tributions to MACROECONOMICS earned him most East European economies after 1948 the NOBEL PRIZE FOR ECONOMICS in 1987. and increasingly abandoned after 1989.

© 2002 Donald Rutherford This economy was based on a one-party spatial benefit limitation (H4) state, largely organized in state-owned The benefits derived from LOCAL PUBLIC enterprises reporting in vertical hierarchies GOODS. to industrial ministries which handed See also: Tiebout hypothesis down detailed orders on every aspect of production within the framework of five- spatial duopoly (R1) year and annual operational plans. TRADE Two firms located at different places UNIONS, also organs of the state, were given competing for the same group of dispersed the tasks of overseeing the welfare of customers. workers and contributing to the audit of individual enterprises. When the system spatial equalization (R1) failed to be efficient and supply the needs The reduction in interregional inequalities of consumers, reforms were attempted. in incomes or another economic variable. These included devolving more decision See also: regional policy making to individual enterprises, allowing them to trade directly with each other and spatial monopoly (R1) with foreign enterprises, allowing more A dominant firm controlling a market incentives to managers and workers to because of its remote distance from others. encourage better use of resources, and The growth of transport systems in the twentieth century has caused the disap- more flexible pricing including MARGINAL pearance of most monopolies of this type. COST PRICING. References spatial oligopoly (R1) Several firms of the same industry located Ellman, M. (1979) Socialist Planning, Cambridge and New York: Cambridge at different places competing for the same University Press. group of dispersed customers. Spearman’s rank correlation coeffi- spaceman economy (P4) cient (C1) An economy which aims to minimize the This measures the interrelatedness of the amounts of inputs needed to produce a ranks of two variables. The coefficient is stable stock of goods, consistent with a given by stability of life-supporting environmental P systems. BOULDING devised this notion in 6 N ðX Y Þ2 keeping with the idea of a ‘Spaceship i¼1 i i rs ¼ 1 2 Earth’ with finite resources and fragile NðN 1Þ biological life-support mechanisms. where X and Y are the two variables and N Seealso:cowboyeconomy is the number of pairs of values of X and Y. Spanish customs/practices (J2) Restrictive labour practices, often un- special bracket firm (G2) authorized, which result in a worker being An INVESTMENT BANK or similar financial paid for doing little work, e.g. the ways of institution at the top of a list of a avoiding work which were for a long time syndicate of UNDERWRITERS on a TOMBSTONE. rife amongst Fleet Street, London, prin- special deposit (E5) ters, merchant seamen and television tech- An additional cash deposit by COMMERCIAL nicians in the UK. These customs are BANKS required on occasions by the BANK ‘Spanish’ in the sense of making possible OF ENGLAND. The purpose of these deposits a siesta-like existence. has been to reduce the total volume of Seealso:featherbedding;restrictiveprac- bank deposits and hence the MONEY SUPPLY tice by a shrinkage of the LIQUID ASSETS of

© 2002 Donald Rutherford banks. This UK technique of credit con- market in stocks assigned to him or her by trol was first used in 1958; in 1971 it was a particular stock exchange and corrects also applied to the larger finance houses. imbalances in . This system is used by both the New York and Seealso:‘corset’ Toronto Stock Exchanges (in the latter, the special drawing rights (F3) specialist is called a ‘professional trader’ or International reserve assets under the con- ‘pro’). Also, on these exchanges, the specia- trol of the INTERNATIONAL MONETARY FUND lists are permitted to deal on their own available for settling intercountry indebt- account. On other exchanges there are edness since 1968. This ‘paper gold’ was similar but government-appointed stock- created after the Washington Communi- brokers, e.g. at Frankfurt the Kursmakler que´ of March 1968 closed the Gold Pool and at Paris l’agent de change; similarly, on because leading countries saw no need for the Tokyo exchange, the saitori. more official holdings of official gold. Special drawing rights have a gold guaran- specialization (D2, L0) tee and carry a small amount of interest; 1 Subdivision or DIVISION OF LABOUR. they are 70 per cent wholly owned and 30 2 A reduction in the number of economic per cent credit. Over a five-year period activities of a country with a view to each participant country must keep, on reducing costs and maximizing output. average, 30 per cent of its reserves in One of the major examples of speciali- special drawing rights to avoid a few zation is in international trade, first countries having all. On 1 January 1970, justified by the doctrine of absolute $3,500 million were distributed, followed advantage and subsequently by COM- by $3,000 million on 1 January 1971 and PARATIVE advantage. Advocates of spe- $3,000 million on 1 January 1972. A cialization always point out the general country can use its special drawing rights increase of real incomes which results from factors of production being em- to finance a BALANCE OF PAYMENTS deficit or to support its exchange rate. When draw- ployed in their best uses. ing on them, a country informs the mana- specie (E4) ging director of the IMF who finds a Gold or silver coins. partner to swap special drawing rights for currency. Special drawing rights grew to specie-flow mechanism (F4) about one-twentieth of world reserves The automatic means under the GOLD BUL- within twenty years of their creation. LION STANDARD that brought about a bal- Without the large US balance of payments ance of payments equilibrium. An outflow deficit and the resources of the EURODOL- of gold lowered the prices of domestic LAR market, a larger volume of special production, thereby improving that coun- drawing rights would be needed. try’s BALANCE OF TRADE and inducing an inflow of BULLION (the reverse would hap- special employment measures (J2) pen when there is an inflow). David HUME, A variety of UK schemes to reduce unem- one of the earliest proponents of this view, ployment of particular types. The Job used this argument to refute the early Release Scheme aims to cut labour supply; MERCANTILIST view that a country should, the Community Programme and Enterprise and can, have a permanent balance of Allowance aim to create jobs, especially for payments surplus. Although this approach the long-term unemployed; and the Youth is appropriate to fixed exchange rate Training Scheme and Young Workers systems, it has inspired modern theories Scheme aim to cut youth unemployment. of the balance of payments which concen- specialist (G1) trate on the supply of, and demand for, A stockbroker who creates a continuous money.

© 2002 Donald Rutherford specification (C1) condemned as an unreal activity for private An initial stage in REGRESSION analysis in gain, it does contribute to price stability. which an econometrician obtains assump- tions by making inferences from data. speculative attack model (F3) These assumptions can be selected by A balance of payments model describing examining the data or by repeated at- the nature of the speculation which attacks tempts using one assumption after another a currency. The first-generation models to ascertain what inferences follow. indicated how declining reserves effected the collapse of a fixed exchange rate See also: identification problem system. The second-generation version de- References monstrated that declining economic fun- damentals and inconsistent government Leamer, E.E. (1978) Specification Searches, New York: Wiley. policies make fixed exchange rates unsus- tainable. specific duty (H2) References An INDIRECT TAX of the same amount whatever the value of the good or service Flood, R.P. and Garber, R.M. (1984) taxed. Taxes on spirits and tobacco are ‘Gold monetization and gold discipline’, Journal of Political Economy 92: 90–107. often taxed in this way so that the duty Krugman, P. (1979) ‘A model of balance levied does not change with producers’ of payments crises’, Journal of Money, prices. Many import duties are specific in Credit and Banking 11: 311–25. nature. The opposite of a specific duty is an AD VALOREM TAX. speculative demand for money (E4) The DEMAND FOR MONEY arising from stock specific egalitarianism (H5) market speculators leaving the market The assignment of particular goods to because of their expectation that no groups regarded as being most in need to further capital gain can be obtained from ensure equal distribution of them. A major investing their cash holdings. As bond example is RATIONING in wartime. prices and interest rates are inversely See also: egalitarianism related, when bond prices are thought to have reached a peak, interest rates will be specific risk (G1) at their minimum – the LIQUIDITY TRAP. The RISK uniquely associated with an There is thus an inverse relationship be- individual asset. tween the rate of interest and the spec- specific training (J2) ulative demand for money. Training of use to only one employer speculative price data (C8, F0, G0) because of its specialized nature, e.g. Numerical information on stock market knowledge of a particular production pro- prices, DERIVATIVES, exchange rates and cess. Employers are encouraged to invest interest rates. in training of this kind as they, and not others, will receive the return from it. Spence, Andrew Michael, 1943– (B3) Seealso:Becker;generaltraining;human Born in Montclair, New Jersey, and edu- capital cated at Princeton, Oxford and Harvard Universities. He has held chairs at Har- speculation (G1) vard (1973–90) and subsequently at Stan- Buying and selling in commodity or finan- ford. John Bates Clark medal 1981; NOBEL cial markets which are subject to many PRIZE FOR ECONOMICS with AKERLOF and STI- price fluctuations in order to make a GLITZ in 2001. An authority on competi- capital gain. It has been described as tion policy and the market signalling ‘arbitrage through time’. Although much aspects of information economics.

© 2002 Donald Rutherford spiders (G1) lower the more LIQUID and efficient a stock Standard & Poor’s Depository Receipts market. which are units in the unit investment trust that tracks the prices and dividend spread effect (O4) yields of the S&P 500 index. The transmission of ECONOMIC GROWTH in one region to another. spillover effect (J3, J5) The indirect effect on another person(s) of See also: backwash effect a gain or loss to the original person(s). In UK COLLECTIVE BARGAINING in which an spreading (F3) increase in wages granted to UNIONIZED Price ARBITRAGE over time, often practised workers is given to non-unionized workers, in commodity markets. It involves the this effect is commonplace. Other spillover purchase of a contract in one delivery effects in the labour market include un- month and the selling of a contract for a employment amongst unionized workers related commodity in a different delivery because of pay increases and a shrinkage month. In option markets, ‘spreading’ is of WAGE DIFFERENTIALS when there is an buying a CALL OPTION at one striking price increased supply of less skilled workers and selling it at another. (e.g. through mass immigration). In some markets injurious spillover effects can be Sraffa, Piero, 1898–1983 (B3) compensated for by actions in tort/delict. Born in Turin, the son of a law professor, But in the labour market the extent to and educated at Turin University. He was which those responsible pay for the indir- a professor at the Universities of Perugia ect effects of their actions is often re- and Cagliari from 1924 to 1926 before his stricted under labour relations legislation. long and influential Cambridge, UK, ca- reer successively at King’s and Trinity Seealso:externality;insiderwagesetting; Colleges from 1927 to his death. His move secondaryaction;socialcost to Cambridge was made possible by an sponsor demand (D0) article attacking the Marshallian THEORY OF A demand for a good or service paid for THE FIRM published by the Economic Jour- by a person other than the consumer, e.g. nal (1926), the first indication of his the commercial financing of sporting theoretical brilliance. His greatest contri- events. bution to economics was his edition of the works of RICARDO (1951–73) and his most Seealso:marketdemand;optiondemand controversial a short book, Production of spot market (F3) Commodities by Means of Commodities A market where currencies or commodities (1960), which began a critique of econom- are traded for immediate delivery. In ics that founded the NEO-RICARDIAN School. currency markets, the spot market is LEONTIEF and Pasinetti saw his work more as another example of linear production linked to a FORWARD MARKET by interest theory. rate differences between countries, by SPEC- ULATION and by HEDGING. References spot price/rate (F0, G0) Roncaglia, A. (1977) ‘The Sraffian revolu- The present price of an asset, currency or tion’, in S. Weintraub (ed.) Modern Economic Thought commodity for immediate delivery. , Oxford: Basil Black- well. Seealso:future;option Steedman, I. (1988) , Brighton: Wheatsheaf. spread (G1) —— (ed.) (1989) Sraffian Economics, Vols The range of a share price between its I and II (Schools of Thought in Econo- buying and selling prices. Spreads are mics No. 4), Aldershot: Edward Elgar.

© 2002 Donald Rutherford stabex system (F3) output. Each firm desires to act as a A scheme that assists African, Caribbean follower knowing the other will do so also. and Pacific countries to make up the (F1) shortfalls in their agricultural export earn- stag A speculator who attempts to make a ings. profit from subscribing to new issues of Stability and Growth Pact (F0) shares and selling them immediately they An agreement of the EUROPEAN UNION on are marketable. For the stag to be success- fiscal policy agreed in Dublin in 1996. ful, the offer price has to be lower than the Although it attempts to produce a stable market price. Stagging is encouraged by long-term fiscal policy, it allows some financial press reports that attempt to budgetary flexibility in times of economic assess the true value of the issuing com- weakness. A decline in real GDP of more pany and predict the market price when than 0.75 per cent over a year is regarded trading starts. as a serious setback. When a fiscal deficit See also: grey market is more than 3 per cent of GDP, reasons for the shortfall have to made in writing to stages theory (O0) the European Commission for decision by A theory of economic development show- the Council of Ministers. Sanctions can be ing the transition of an economy from its imposed by the EU countries in the EUR- most primitive state to modern CAPITALISM. OPEAN MONETARY SYSTEM. These include an TURGOT and SMITH independently advanced interest-free deposit of 0.2 per cent of such views in 1750 but the late classical GDP in the first year and then in sub- use of it in the hands of MARX immorta- sequent years 0.1 per cent of GDP for lized it. Smith divided history into four every percentage point of an excess deficit ages – hunters, shepherds, agriculture and up to 0.5 per cent of GDP. If the deficit is commerce. More recently ROSTOW has sug- still excessive after two years, the deposit gested a five-stage theory which is as becomes a fine. ambitious as Marx’s but without a theory of class conflict incorporated into it. stabilization policy (E3) see Rostow’s theory has been regarded as countercyclical policy being essentially an account of a WALRA- SIAN moving equilibrium. stable equilibrium (D0, E0) stagflation (E3) An EQUILIBRIUM state maintained by the An unhappy combination of high price rules of the system concerned. INFLATION, high unemployment and low Stackelberg duopoly model (D4) economic growth. Although the phenom- A model of DUOPOLY in which one firm is enon was first extensively discussed in the the price leader and the other the price 1960s, it was present in Western economies follower. Market equilibrium is reached before the First World War. It was re- only if one firm is the leader and one the garded as an indication of the failure of follower; there is DISEQUILIBRIUM if both KEYNESIAN-style demand management and want to be price leaders or price followers. led to a call for INCOMES POLICIES, including a TAX-BASED INCOMES POLICY. Stackelberg model (L1) See also: infession A model of DUOPOLY devised by Heinrich von Stackelberg in his 1934 book Markt- References form unter Gleichgewicht. This describes Cornwall, J. (ed.) (1984) After Stagflation: the relationship between a leading firm Alternatives to Economic Decline, Ox- and a follower in their output decisions. A ford: Martin Robertson. follower chooses the profit-maximizing Helliwell, J.F. (1988) ‘Comparative macro-

© 2002 Donald Rutherford economics of stagflation’, Journal of Standard & Poor 100 (G1) Economic Literature 26 (March): 1–28. A stock market index derived from the Okun, A. M. (1981) Prices and Quantities, Standard & Poor 500 stock index: it covers Washington, DC: Brookings Institution; about 60 per cent of the value of stocks Oxford: Basil Blackwell. traded on the New York Stock Exchange Weitzman, M.L. (1984) The Share Econ- omy, Cambridge, MA: Harvard Univer- on most days. Its base date is 1976. sity Press. Standard & Poor 500 (G1) staggered wage contract (J3) This stock index represents 80 per cent of Contracts made at different times with the the value of stocks traded on the New consequence that the later contracts are York Stock Exchange and is one of the influenced by the terms of the previously twelve leading indicators used by the US concluded contracts. Department of Commerce to gauge eco- nomic performance. The index, with a See also: wage round base date of 1941–3, consists of 400 company stocks, 40 financial stocks, 20 stakeholder (G0, M1) transportation stocks and 40 public utility 1 A person with an interest in a business, stocks, each weighted in the index by the a fund or a community. The interest can number of shares issued. arise from financial investment, employ- ment or citizenship. standard commodity (D0) 2 A member of society aware of collective COMPOSITE COMMODITY whose price does not obligations and freedoms. change when there is a change in the 3 A trustee of society balancing the inter- distribution of income. The components ests of one group against another. of the standard commodity are in the 4 A person relying on shared values and same proportions as in aggregate produc- co-operative behaviour opposed to INDI- tion. This concept was introduced by VIDUALISM. SRAFFA to solve RICARDO’s search for an References invariant standard of value. Plender, J. (1997) A Stake in the Future. References The Stakeholding Solution, London: Ni- Sraffa, P. (1960) Production of Commod- cholas Brealey. ities by Means of Commodities: Prelude to a Critique of Economic Theory, Cam- stamp duty (H2) bridge: Cambridge University Press. An indirect tax or duty collected by affixing a stamp on the article or docu- standard deviation (C1) ment representing a transaction to be A measure of the dispersion of values of a taxed. Sales of property and stock market variable about its ARITHMETIC MEAN that is securities attract this form of taxation. calculated as the square root of the sum of The British Stamp Act of 1765 on goods the differences between each of those bound for the American colonies caused values and the arithmetic mean divided agitation for American independence. by the number of values minus one. stand-alone cost (D0) Seealso:meandeviation;variance The cost of production equal to a simu- standard error of estimate (C1) lated market price that is the maximum A measure of the scatter of values about a which can be charged without buyers regression line of Y on X which is mea- going to a rival firm. sured by the square root of the sum of See also: constrained market pricing deviations of Y values from the estimated

© 2002 Donald Rutherford value of Y divided by the number of dard Industrial Classification Manual values. 1987. See also: linear regression Standard International Trade Classifi- cation (F1) Standard Industrial Classification (L0) A classification of commodities and man- A way of arranging economic data accord- ufactured goods almost universally em- ing to the major divisions of a country’s ployed to describe imports and exports. industrial structure, using industry codes. The ten principal sections are as follows: In the USA, the classification used eleven divisions: 0 food and live animals 1 beverages and tobacco A agriculture, forestry and fishing 2 crude materials, inedible, except fuels B mining 3 mineral fuels, lubricants and related C construction materials D manufacturing 4 animal and vegetable oils, fats and E transportation, communication, elec- waxes tric, gas and sanitary services 5 chemical and related products not F wholesale trade elsewhere specified G retail trade 6 manufactured goods, classified chiefly H finance, insurance and real estate by material I services 7 machinery and transport equipment J public administration 8 miscellaneous manufactured articles K non-classifiable establishments 9 commodities and transactions not classified in the previous sections Each division is divided into major groups and each industry is assigned a four-digit These sections are further subdivided into classification. In the UK, the revised 1980 two-digit sections and subsequently into classification also has a divisional struc- three-, four- and five-digit sections. ture: Standard Metropolitan Statistical Area 0 agriculture, forestry and fishing (J4) 1 energy and water supply industries A term used in the wage statistics of the 2 extraction of minerals and ores other Bureau of Labor Statistics (USA). This than fuels, manufacture of metals, concept was introduced into the US cen- mineral products and chemicals sus in 1950 to describe a metropolitan 3 metal goods, engineering and vehicles labour market in which COMMUTING con- industries nected cities and the surrounding areas. 4 other manufacturing industries 5 construction See also: local labour market 6 distribution, hotels and catering, re- pairs Standard Statistical Metropolitan Area 7 transport and communication (J4) 8 banking, finance, insurance, business An urban area of the USA. This concept services and leasing was used until June 1963 when it was re- 9 other services placed by the METROPOLITAN STATISTICAL AREA. References staple export (F1) CSO (1979) Standard Industrial Classifica- A product internationally traded which is tion, London: HMSO (revised 1980). based on the exploitation of natural re- Executive Office of the President, Office of sources; a PRIMARY PRODUCT. In some devel- Management and Budget (1987) Stan- oping countries, the performance of this

© 2002 Donald Rutherford sector has a crucial effect on the develop- When reviewed in 1985, SERPS was ment of the economy as a whole. criticized for its costs, for not targeting on the needy, for giving too large a role to the See also: one-crop economy state and for discouraging private schemes. staple theory of growth (O4) It was initially proposed then to replace An explanation of the growth of newly the scheme with the requirement that at settled regions in terms of their interac- least 4 per cent of earnings be contributed tions with the international economy, the to an occupational or private scheme to purchaser of exported staple products. It is purchase an ANNUITY; subsequently this a version of export-led growth. was modified to the recommendation to reduce contributions by setting pension References levels lower so that they would only re- Pomfret, R. (1981) ‘The staple theory as place 20 per cent of employment earnings. an approach to Canadian and Austra- lian economic development’, Australian See also: Old Age, Survivors, Disability Economic History Review 21: 133–46. and Health Insurance

Star Chamber (H1) state enterprise (I3, P3) Popular name for the UK governmental A firm owned by the state. These have committee chaired by the Deputy Prime often been founded because of the lack of Minister. It considers the public expendi- private initiative and capital to establish ture proposals of the spending ministers them, e.g. Dutch state mines in Holland with a view to reducing their aggregate to around 1900 and various enterprises in the planning total. The name derives from Turkey in 1923. It was John Stuart MILL an English court of justice, abolished in who argued that there should be state 1640, noted for its arbitrary procedure. enterprises where an undertaking was ne- cessary but no private concern would (P2) establish or run it. A transitional stage to COMMUNISM,as There are various ways of organizing typified by the original Soviet economic state enterprises, e.g. the UK method of system. The state owns almost 100 per creating separate public corporations and cent of industrial capital and agricultural the Italian method of creating holding land, using a hierarchy of industrial min- companies (IRI and ENI). In Germany, istries, agencies and enterprises to run the the government has major or majority productive sector of the economy. stakes in 900 businesses, including Lufth- See also: Soviet-type economy ansa and Volkswagen. As many state enterprises make trading losses, it is un- State Earnings-Related Pension Scheme likely that they would be able to raise (I3) capital without government help. Since UK state PENSIONS SCHEME introduced in 1978, China has allowed a variety of 1975 and intended to be fully implemented enterprises, e.g. collective, individual (two by 1998. It originally entitled employees to helpers can be employed plus five appren- 25 per cent of indexed qualifying earnings tices) and joint ventures between state- during the best twenty years of indexed owned and individual enterprises with earnings in a working life. The size of the profits distributed as dividends. pension would be within the range of a Seealso:privatization;publicenterprise flat rate for a single person to an upper limit of 6.5–7.5 times the minimum level. Statements of Standard Accounting Contracting out was permitted, provided Practice (M4) that a guaranteed minimum pension was Accounting standards issued by the Ac- paid. counting Standards Committee for the UK

© 2002 Donald Rutherford andIrishinstitutesofcharteredaccoun- by government departments and their tants in 1975 and subsequently revised. The appointed agencies. This occurs not only goal of these statements is to ensure that when industry is extensively owned by the accounts provide a TRUE AND FAIRVIEW of the state. Even in countries with a large financial position of the organization de- private sector this form of regulation is scribed in a set of accounts. preferred to SELF-REGULATION because of The standards cover the treatment of the hope that it is more impartial, has accounting policies, the results of asso- more sanctions to employ and is less risky. ciated companies, earnings per share, gov- ernment grants, extraordinary items and state theories (D7) prior year adjustments, changes in the Explanations of government behaviour in purchasing power of money, taxation un- terms of voting systems, the goals of der the imputation system, stocks and bureaucrats and class interests. All these work in progress, source and application involve conflict – between different voters’ of funds, deferred taxation, depreciation, wishes or between bureaucrats and legisla- current cost accounting, post-balance- tors or between labour and capital. The sheet events, contingencies, investment relative power of each group will be properties, foreign currency translation, influenced by the amount of information leases and hire purchase contracts, good- possessed. will, acquisitions and mergers, and re- state trading organization (P4) search and development. An agency of an East European economic ministry under communism which had the state monopoly capitalism (P2) task of importing and exporting on behalf A type of economic system, particularly of domestic industrial enterprises. Gradu- the SOVIET-TYPE ECONOMY, in which the state ally reform came in countries such as owns all the means of production (except Hungary and Russia where enterprises for a few minor services and agricultural were given a limited power to engage enterprises) and exploits scale economies directly in international trade. by running each branch of production as a state-owned monopoly. MARX regarded static gains from trade (F1) such a stage of economic development as The immediate benefits to a country and the prelude to full communism when the to factors of production of engaging in state itself would wither away. international trade. The gains include an improved TRADE BALANCE and higher profits See also: monopoly capitalism through more specialization. References See also: dynamic gains from trade Cowling, K. (1982) Monopoly Capitalism, London: Macmillan. static model (E1) Fine, B. and Marfin, A. (1984) Macroeco- An equation, or equations, describing nomics and Monopoly Capitalism, economic relationship(s) with all the constit- Brighton: Wheatsheaf. uent variables measured at the same time. state preference theory (D8) Seealso:comparativestatics;dynamic An approach to uncertainty pioneered by economics Arrow and Debreu. It asserts that choices under uncertainty by agents maximizing stationary state (E0) their utility functions are between commod- The position of an economy with zero ities differentiated by their contextual states. output growth, the rate of profit at a minimum and only subsistence wages. state regulation (L5) CLASSICAL ECONOMISTS, with economic DEVEL- The monitoring of the conduct of business OPMENT as one of their central concerns,

© 2002 Donald Rutherford feared the movement of an economy Seealso:minimumwage;wagescouncil towards this state, with the major excep- Statutory Reserve Deposit (G2) tion of John Stuart MILL who welcomed an An account of an Australian trading economy not concerned with ruthless ex- bank at the Reserve Bank which must be pansion that could instead pay attention equal to 7 per cent of the bank’s total to income distribution and the quality of deposits. life. steady state economy (E0) See also: steady state economy An economy with a constant size of References population and stock of capital goods. Mill, J. S. (1965) Principles of Political The number of births and immigrants is Economy: With Some of Their Applica- equal to the number of deaths and tions to Social Philosophy, ed. J.M. emigrants; investment is only undertaken Robson, Book IV, ch. VI, Toronto: to maintain the existing capital stock. University of Toronto Press. See also: stationary state (C1) statistical population steady state equilibrium (D0) A group, finite or infinite in size, of An EQUILIBRIUM whose stability is such that persons or things with at least one com- the market to which it refers returns to its mon characteristic. Statisticians attempt to original state after a temporary change in learn about the nature of a population by an EXOGENOUS VARIABLE, or moves to a new taking samples. equilibrium after a permanent change in an exogenous variable. statistics (C1) A set of methods for the collection, steady state growth (O4) presentation, summary and analysis of Growth such that capital, labour, total data with a view to the drawing of valid consumption and output change at the conclusions. same rate. As the rate of growth of capital References depends upon savings, steady state growth requires the savings function to have Hughes, A.J. (1971) Statistics: A Foundation stable characteristics: debt policy can pro- for Analysis, Reading, MA: Addison- Wesley. mote stability by keeping the rate of interest constant. Steady state growth statutory incidence (H2) see tax does not entail FULL EMPLOYMENT as it is incidence compatible with various levels of unem- ployment. statutory minimum wage rate (J3) stealth tax (H2) The minimum wage set in the UK by a An indirect tax hardly noticed by the tax- WAGES COUNCIL for the group of workers paying public. Usually, as in the UK in the covered by that council. Trade union and late 1990s, these taxes are gradually in- employer representatives sit with indepen- creased as part of complex tax legislation dent members of a council to make the to avoid much public reaction. recommendation of a new minimum wage rate to the Secretary of State for Employ- step cost (M2) ment. The reduction in the number of such A cost which is fixed over a range of councils in the 1980s reduced the number output and then rises to a new level, or of these wage rates. The new UK govern- plateau, over a range of larger output. ment introduced a national minimum Fixed costs have to be paid when output is wage in 1998. zero. (See the figure.)

© 2002 Donald Rutherford arose out of the dominance of the UK economy before 1914 but declined in the 1950s when many of these countries diversi- fied their reserves, much to the relief of the UKwhich was often threatened with the sale of such sterling holdings and a consequen- tial attack on the pound. To cope with these sterling balances, UK governments succes- sively negotiated dollar guarantees in Basle in 1968 and 1977. Today, few countries can be said to be in the sterling area. See also: overseas sterling area References Strange, S. (1971) Sterling and British stepped bond (G0) Policy: A Political Study of an Interna- A bond with an interest rate increasing tional Currency in Decline, Oxford: Ox- over its lifetime. This method of financing ford University Press. a company pushes up the company’s rate sterling commercial paper (G1) of profit in the short term as it reduces its Commercial bills of exchange denomi- interest charges. nated in sterling which are short term and negotiable. These are popular with firms sterilization (E5) seeking an additional source of finance for Isolating the domestic money supply from WORKING CAPITAL and with institutional the effects of BALANCE OF PAYMENTS deficits investors wanting a short-term investment. and surpluses. This is achieved by a cen- tral bank’s OPEN MARKET OPERATIONS;for sterling M3 (E4) example, in the case of a balance of pay- Broad definition of the MONEY SUPPLY now ments deficit it will buy bonds from domes- known as M3. It is measured as M1 plus tic bond-holders to increase the amount of private sector sterling time bank deposits cash available. Under the GOLD STANDARD, plus private sector holdings of sterling sterilization required preventing an inflow bank CERTIFICATES OF DEPOSIT. It was used of gold from increasing the quantity of to target the UK money supply in 1979– money domestically in circulation. 85. Overshooting of targets for its growth has made it less useful for policy making. sterling (E4) The UK’s domestic currency which is See also: M3c extensively used internationally as a UNIT sterling warrant into gilt-edged stock OF ACCOUNT (e.g. in the invoicing of trade), (G1) as a MEANS OF PAYMENT (e.g. an intervention An OPTION to buy or sell a specific gilt currency) and as a STORE OF VALUE (espe- cially as a reserve currency). stock which was introduced in July 1987 in London. They have a life of up to twelve See also: sterling area months. They are popular with securities houses as a hedging device. Gilt options (F0) sterling area are also traded by the LONDON INTERNA- The group of countries, mainly of the TIONAL FINANCIAL FUTURES EXCHANGE and the Commonwealth, defined in the Exchange INTERNATIONAL STOCK EXCHANGE. Control Act 1947 of the UK, which pegged their currencies to sterling and held their sticky price (D0) foreign exchange balances in sterling. It A price with limited flexibility. The princi-

© 2002 Donald Rutherford pal examples of these are money wage Yale (1967–74), Stanford (1974–76, 1976– rates inflexible downwards and interest 79) and Princeton (1979–88) Universities. rates with a minimum level. Prices of this Chairman of the Council of Economic kind are fundamental to the KEYNESIAN Advisers from 1995 to 1997. John Bates macroeconomic model. Clark Medal 1979; NOBEL PRIZE FOR ECONOM- ICS, with AKERLOF and SPENCE, in 2001. A cen- Seealso:fixprice;liquiditytrap tral theme of his work has been References incomplete information and uncertainty Barro, R. and Grossman, H. (1976) and their applications to labour, credit Money, Employment and Inflation, Cam- and agricultural markets. Also noted for bridge and New York: Cambridge Uni- his work on public finance; his Lectures in versity Press. Public Economics written with A.B. Atkin- son (1980) quickly became a leading text- Stigler, George Joseph, 1911–91 (B3) book. Through his work at the World A leading twentieth-century US microeco- Bank since 1997 he has become a tren- nomist. After an education at Washington, chant critic of the free market philosophy Northwestern and Chicago Universities, of the World Bank and the IMF. he became a professor at Brown Univer- sity in 1946 and then was professor at stochastic process (C1) Columbia from 1947 to 1958 and subse- A distribution with random probability quently at Chicago from 1958 to 1981. that can be analysed statistically. Also, he worked for the NATIONAL BUREAU OF stochastic term (C1) ECONOMIC RESEARCH from 1943 to 1959. He A random variable. was awarded the NOBEL PRIZE FOR ECONOMICS in 1982 for his theory of economic regula- See also: disturbance term tion. His PhD thesis, supervised by Frank stock adjustment principle (E2) KNIGHT and published as Production and The adjustment made to the ACCELERATOR Distribution Theories (1941), began his PRINCIPLE to allow for unused capacity. The extensive writings on the history of eco- accelerator equation would produce too nomic thought, as is evident in his Essays high a prediction of the required level of in the History of Economics (1965). But his net investment if the amount of excess eminence is derived from a lifetime of capacity were not subtracted. work on microeconomics, beginning with The Theory of Price (1942) and continuing stock and flow concepts (E0, M4) with more specialized topics, e.g. his em- A stock (e.g. wealth) is measured at a pirical refutation of the KINKED DEMAND point in time; a flow (e.g. income) is CURVE (Journal of Political Economy Octo- measured over a period. A BALANCE SHEET ber, 1947) which challenged many writers uses stock concepts; a PROFIT AND LOSS AC- on the subject. An article on information COUNT, flow concepts. This distinction, in labour markets (Journal of Political crucial to MACROECONOMICS, is increasingly Economy, Supplement October, 1962) in- used in the analysis of UNEMPLOYMENT. spired much work on search models of unemployment. His contribution to the stock borrowing (G1) see share economics of regulation is notable: con- borrowing troversially, he has held that regulatory stock buy-back (G3) see stock repurchase agencies act in the producer’s, and not the consumer’s, interest. stock exchange (G1) A physical and electronic market in which Stiglitz, Joseph Eugene 1943– (B3) government BONDS and the SECURITIES of Born in Gary, Indiana and educated at companies are regularly traded. The Amherst College. He has held chairs at world’s leading exchanges are usually com-

© 2002 Donald Rutherford pared in terms of the volume and dollar Seealso:exantevariables;expostvari- value of stocks traded, the range of ables financial products marketed and the num- References ber of members entitled to trade. Hansson, B.A. (1982) The Stockholm See also: International Stock Exchange; School and the Development of the Dy- NationalAssociationofSecuritiesDealers namic Method, London: Routledge. AutomatedQuotationSystem Sandelin, B. (ed.) (1991) The History of Swedish Economic Thought, London References and New York: Routledge. Goldenberg, S. (1986) Trading inside the World’s Leading Stock Exchanges, Lon- stock index arbitrage (G1) don: Sedgwick & Jackson. An investment strategy to gain from the difference between the prices included in Stock Exchange Automated Quotation stock indices on the futures market and System (G1) the underlying cash value of stocks. A screen-based dealing system which al- stock index futures market (G1) lows all MARKET-MAKERS in a particular security to display their buying and selling US market for HEDGING and ARBITRAGE to prices to all users simultaneously. For a minimize risks and maximize returns in screen price quotation, there must be a the stock market. This Chicago-based minimum of 1,000 shares; the system is market, inspired by Chicago commodity open from 9 a.m. to 5 p.m., Monday to futures, started in 1980; New York now . This system had to be introduced has a similar market. The item traded, stock indices, can be regarded as baskets in London in 1986 after DEREGULATION of the Stock Exchange. of shares. Institutions and corporations have found them attractive as portfolio stock externality (Q0) insurance. SOCIAL COSTS resulting from the stock rather stock market correction (G1) than the flow of pollution; for example, as A small fall in the stock price index of a the consequence of the decay of a stock. leading stock market. stockholder diffusion (G1, L2) stock market crash (G1) The extent to which ownership of a A fall of 20 per cent or more in the index company/corporation is spread amongst of a leading stock market. several investors. stock market indices (G1) see world See also: wider share ownership stockmarketindices(AppendixB) Stockholm School (B1, B2) stock market price index (G1) A group of Swedish economists, particu- An indicator of the change in value of the larly MYRDAL, OHLIN, LINDAHL and HAMMERS- stocks and shares traded on a particular KOLD, who developed their own macro- stock exchange. This is calculated by add- economic theory and policy in the 1920s ing together the price changes in the and 1930s. Although there are certain leading stocks. See Appendix B. similarities with the work of KEYNES, this school was particularly noted for its use of stock–output ratio (M4) the dynamic method, introducing the dis- The ratio of stocks of raw materials, tinction between EX ANTE and EX POST values components and semi-finished goods to of variables. Its principal recommendation the output of a firm. Stocks are held was the use of FISCAL POLICY as a means of during the period of production to safe- reducing unemployment. These economists guard against late delivery of supplies able were the lineal descendants of WICKSELL. to hold up production schedules.

© 2002 Donald Rutherford stock ratios (M4) Statistical Office of the UK War Cabinet 1 Raw material stock divided by total from 1940 to 1945 before returning to turnover. Cambridge to be Director of the Depart- 2 Work in progress divided by total turn- ment of , from 1945 to over. 1955, and Professor of Financial Account- 3 Raw material stock divided by pur- ing, from 1955 to 1980. His first work, an chases. article on costs, appeared in Econometrica 4 Finished stock divided by total turn- as early as 1936. Not only national income over. accounting but demand analysis, INPUT– OUTPUT ANALYSIS and aggregate consump- stock repurchase (G3) tion and savings functions have been The purchase by a company of the stocks central to his research. He was awarded or shares it has already issued to the the NOBEL PRIZE FOR ECONOMICS in 1984. investing public. A repurchase is popular with existing shareholders as the value of References their investment is increased. It is regarded Deaton, A. (ed.) (1981) Essays in the as a good practice when a company’s Theory and Measurement of Consumer shares have a low price–earnings ratio. Behaviour in Honour of Sir Richard Stone, Cambridge: Cambridge Univer- stocks (D0, G0) sity Press. 1 Fixed interest securities issued by gov- Stone, R. (1954–66) The Measurement of ernments or companies. Consumers’ Expenditure and Behaviour 2 Accumulated raw materials, semi-fin- in the United Kingdom, 1920–38, Cam- bridge: Cambridge University Press. ished goods and unsold finished goods. —— (1959) Social Accounting and Econo- Changes in such stocks can be very mic Models, London: Bowes & Bowes. volatile, being responsible for much of the stop–go (E3) annual change in the NATIONAL INCOME and UK macroeconomic policies of the 1950s the BALANCE OF PAYMENTS. and 1960s that alternately deflated and See also: common stock stimulated the economy. The expansion was often with a view to winning an Stolper–Samuelson theorem (F1) imminent General Election; the retrench- An international trade theorem which ment, a recognition that the economy had states that, when the relative price of one become so overheated that the balance of of two commodities increases, the factor of payments was suffering. When FINE-TUNING production used more intensively in its became increasingly unsuccessful, stop–go production has an increased real rate of policies disappeared. return and the factor less intensively used has a lower rate of return. Sometimes Seealso:Butskellism;politicalbusiness called ‘a magnification effect’. cycle References store of value (E4) Stolper, W. and Samuelson, P.A. (1941) A function of money making it possible to ‘Protection and real wages’, Review of defer the use of income received. In times Economic Studies 9: 58–73. of high INFLATION money ceases to have this use and non-monetary assets are Stone, John Richard Nicholas, 1913– preferred to money. 1991 (B3) Cambridge economist and statistician who storming (P2) pioneered much of NATIONAL INCOME analy- Leaving most of a required amount of sis. He was educated at Cambridge Uni- work to the weeks or days immediately versity and a member of the Central preceding a production deadline. This was

© 2002 Donald Rutherford a common practice under Soviet central including price controls on exports and planning. export subsidies, can make an efficiency gain. St Petersburg paradox (C7) A paradox of game theory identified by References BERNOULLI and so called because of its first Meza, D. de (1989) ‘Not even strategic being stated in the Commentarii of the St trade theory justifies export subsidies’, Petersburg Academy. This paradox in a Oxford Economic Papers 41: 720–36. game of chance is that the mathematical streaker (G1) see zero coupon bond expectation of gain is infinite but the fair price to the player is finite. Bernoulli’s stress test (G2) approach to this problem was to replace A test of CAPITAL ADEQUACY related to an mathematical expectation (probabilities of optimal debt–equity funding mix. For a winning multiplied by monetary prices) by bank this shows the capacity of the bank’s moral expectation (probabilities of win- capital to absorb potentially large losses. ning multiplied by personal utilities). As a result of the test, there is an estimate of the amount of risk-free collateral re- References quired. Samuelson, P.A. (1977) ‘St Petersburg paradoxes: defanged, dissected and his- strike (J5) torically described’, Journal of Economic A work stoppage by a group of workers Literature 15: 24–55. undertaken to enforce a particular de- mand, in most cases a wage increase. The straddle (G1) legalization of TRADE UNIONS and, in some Buying a futures contract in one market countries, the protection of them by mak- and simultaneously selling it in another. ing them immune from actions in tort/ straight bond (G0) delict for the losses caused by the strike A bond carrying a set rate of interest, have increased the incidence of strikes in redeemable over a set period at the price the twentieth century. International com- on the bond. parisons of strikes are difficult because of different definitions of strikes, especially straight-choice arbitration (J3, J5) see whether to include political strikes and pendulum arbitration very small stoppages. It does seem that strategic bequest motive (D1) some countries, e.g. Switzerland and Nor- A calculated reason for making a bequest: way, have few strikes, but others, e.g. the wealth is bestowed in a manner likely Australia and Italy, have recorded a high to influence conduct rather than express level of strike activity in many years. Determinants of strike activity include a ALTRUISM. country’s industrial structure as some in- References dustries (e.g. mining and transport) are Bornheim, B.D., Shleifer, A. and Sum- particularly strike-prone, the COLLECTIVE mers, L.H. (1985) ‘The strategic bequest BARGAINING system, the phase of the TRADE motive’, Journal of Political Economy CYCLE and the extent of industrial CONCEN- 93: 1045–76. TRATION in large organizations. In the UK strategic tax planning (H2) in the 1960s and 1970s there were many strikes in General Election years as these The use of TAX AVOIDANCE schemes to reduce tax liability. invariably coincided with the breakdown of an incomes policy. The effects of strikes strategic trade theory (F1) are difficult to calculate. There has to be a A theory of international trade which aims comparison between output on a ‘normal to show that some forms of PROTECTION, day’, which may be rare, and output on a

© 2002 Donald Rutherford day that there was a stoppage; also the stripped security (G1) allocation of fixed costs may be too A mortgage-backed SECURITY which is se- arbitrary to identify the extent of losses parated into two securities – the principal caused by strikes. Some would view strikes and the interest. These have the attractions as an inevitable frictional cost of a collec- of being guaranteed by the US federal tive bargaining system. Certainly, in a few government and having a higher yield than industries it is a well-tried tool in wage treasury bonds. Changes in the rate of bargaining. Strikes can be PARETO OPTIMAL prepayments causes a fluctuation in their ex ante in that not striking would make value. the employer or trade union worse off, See also: mortgage strip despite the strike being suboptimal ex post. strong efficiency (G1) See also: ex ante, ex post The pricing of a security to take into account all publicly and privately available References information. Hayes, B. (1984) ‘Unions and strikes with asymmetric information’, Journal of La- See also: weak efficiency bor Economics 2: 57–83. Hyman, R. (1972) Strikes, London: Fon- strong equilibrium (C7) tana Collins. An EQUILIBRIUM such that there is no Jackson, M.P. (1988) Strikes: Industrial coalition of players which can gain by a Conflict in Britain, USA and Australia, simultaneous deviation from it. Hemel Hempstead: Harvester Wheat- sheaf. structural adjustment policy (O4) Knowles, K.G.J.C. (1952) Strikes: A Study An attempt to effect a major change to an in Industrial Conflict, Oxford: Basil economy, often after an external shock. Blackwell. This policy aims to get the economy back strike-free deal (J5) to its pre-shock growth path, improving its A legally enforceable employment contract BALANCE OF PAYMENTS over the medium under which a TRADE UNION promises to term, i.e. about five years. The main policy refrain from striking for a period of time. instruments used are incentives to increase This can take the form of a COLLECTIVE production, saving and investment in the BARGAIN explicitly stated as being enforce- public and private sectors, together with able under section 18 of the TRADE UNIONS supporting monetary and budgetary poli- AND LABOUR RELATIONS ACT or an individual cies. Also, there are often specific policies contract with an employee. for energy and agriculture. The oil-price increases of 1973 made policies of this kind See also: strike an urgent priority in many economies. strike price (G1) structural deficit (H6) A pre-fixed price to buy or sell an OPTION. The excess of a government’s expenditure See also: put price over its income when that economy is at FULL EMPLOYMENT. strike replacement legislation (J5) Laws preventing an employer from hiring structural inflation (E3) new workers during a STRIKE. These mea- INFLATION caused by supply shortages espe- sures attempt to increase job security and cially in the agricultural and exporting prevent dismissal but can reduce employ- sectors of an economy. This type of infla- ment. Canadian provinces including Que- tion was thought to be the main cause of bec, Ontario and British Columbia have inflation in several Latin American econo- such legislation. mies.

© 2002 Donald Rutherford References American Economic Review, Papers and Seers, D. (1962) ‘A theory of inflation and Proceedings 29: 61–74. growth in underdeveloped economies Reid, G.C. (1987) Theories of Industrial based on the experience of Latin Amer- Organization, Oxford: Basil Blackwell. ica’, Oxford Economic Papers, New Ser- ies 14: 173–95. stub equity (G1) That part of the equity of a company structural model (E1) retained by the vendor of that company A set of equations based on an economic when it is sold. A stake of this kind theory showing endogenous variables as expresses confidence in the new manage- equal to a mixture of exogenous variables ment. and constants. For example, if one of the See also: vendor finance equations is a CONSUMPTION FUNCTION, then C = a + cY, i.e. aggregate consumption C Student’s t distribution (C1) is equal to a constant a plus national A statistical distribution (named after W.S. income Y multiplied by the marginal Gosset, 1876–1937, a chemist working at propensity to consume c. the Guinness brewery in Dublin who used the pseudonym ‘Student’) which is calcu- structural unemployment (J6) lated as follows: UNEMPLOYMENT caused by a difference be- tween the structure of employment vacan- X mp t ¼ ðN 1Þ cies and the structure of unemployment, s usually brought about by technological change. Unemployed persons have differ- where X is the sample mean, m is the ent skills from those being demanded by population mean, s is the sample standard employers or are located in a different deviation and N is the sample size. These t place from a potential employer. Critics of statistics are calculated for the testing of this concept regard it as only a case of hypotheses. extreme FRICTIONAL UNEMPLOYMENT. Seealso:chi-squareddistribution;null structure–conduct–performance hypothesis model (L0) stylized fact (E0) An approach to industrial economics, A fact of the real world simplified and often applied to the study of OLIGOPOLY, made more abstract to be usable in an showing how tastes, technology and insti- economic model. Each school of econom- tutions produce market structures which ics has its favourite stylized facts, e.g. that dictate a firm’s conduct and subsequent there are steady long-term capital–output performance. The aspects of ‘structure’ ratios and KUZNETS’ view that the AVERAGE considered include CONCENTRATION, BRAND- PROPENSITY TO CONSUME is relatively constant ING and BARRIERS TO ENTRY; ‘conduct’ in- over long periods. cludes deciding what to produce and at what prices and carrying out all the func- References tions of a firm; ‘performance’ is measured Kaldor, N. (1961) ‘Capital accumulation by efficiency, profitability, technical pro- and economic growth’, in F. Lutz (ed.) gress and employment creation. A policy The Theory of Capital. Proceedings of a conclusion of this model has been the Conference held by the IEA, London: demand for tougher ANTITRUST policy. Macmillan. References subordinate debt (G0) Mason, E.S. (1939) ‘Price and production A loan with less claim to earnings or policies of large-scale enterprises’, assets than SENIOR DEBT.

© 2002 Donald Rutherford subsidiarity (H1) include sufficient income to function in The principle of limiting the powers of the that society. higher levels of government and devolving Seealso:ironlawofwages;poverty economic decision making as far as possi- ble downwards so that those affected by References governmental actions have the maximum Townsend, P. (1979) Poverty in the UK, amount of control over them. Subsidiarity Harmondsworth: Penguin. is constantly mentioned as a goal for the EUROPEAN COMMUNITY. subsistence theory of wages (J3) see iron See also: economic devolution law of wages substitute (D0) subsidiary (L2) A good or service that a consumer regards A subordinate part of a firm or other as providing as much utility as its alter- organization. MULTINATIONAL ENTERPRISES in native. The character of being a substitute particular have many subsidiaries which can be established by measuring the CROSS can specialize in marketing or production, PRICE ELASTICITY OF DEMAND between the two or concentrate on a single activity different goods (services). If that elasticity measure from the rest of the firm or pioneer new is positive, then the goods (services) are products and activities. substitutes. subsidy (H2) substitution effect (D0) see income and A negative tax, a payment by the govern- substitution effects ment to a firm or household. In most cases these are payments to a firm to sunbelt (L6, R3) reduce the cost of the labour or capital it An area of a country with new growing employs. Subsidies can distort the pattern industries, e.g. California or the UK belt of production and, if used for a long from Cambridge through Berkshire and period of time, will become increasingly Hampshire to Bristol. The expansion of expensive as the economy’s output will such an area often poses a threat to the diverge more and more from the pattern prosperity of an older industrial area. of demand. Households can also be sub- (D0) sidized to reduce the cost of goods and Costs incurred by a firm which remain services they purchase: many countries even if it leaves that industry. have subsidized food to increase the wel- fare of lower income households. The SO- sunk cost fallacy (D2) VIET-TYPE ECONOMY made extensive use of The mistaken view that a firm should take subsidies. into account the fixed costs it has incurred Seealso:correctivesubsidy;exportsub- when deciding whether to continue with sidy;Pigoviansubsidy;wagesubsidy production. Concern for sunk costs rejects the marginal approach to decision making subsistence (I3) and ignores the notion of SHUTDOWN PRICE. The minimum amount of resources, parti- sunrise industry (L6, R3) cularly food, that a worker needs to An industry based on new technology, e.g. survive. By the time of Adam SMITH, the a computer software industry. In the USA, idea of subsistence in physiological terms these industries are concentrated in Cali- had been replaced by psychological sub- fornia and around Boston; in the UK, sistence, which takes into account differ- around Cambridge and in the Thames ences in custom, the nature of societies Valley. and time periods. Social-policy-makers emphasize today that subsistence must Seealso:sunbelt

© 2002 Donald Rutherford sunset clause (L5) financial help when a country is suffering A statement in a regulation of the date on from a structural problem with its balance which it expires. of payments. sunspot theory (D6, E3) supplementary special deposits 1ATRADE CYCLE theory first enunciated by scheme (E5) see ‘corset’ JEVONS which asserted that fluctuations in an economy are caused by periodic supplier-induced demand (D0) spots over the sun which cause bad Demand for a good or service determined weather, poor harvests, output decline by the producer because of the consumer’s and commercial crises. ignorance of the need for it. The best 2 Random phenomena, an extrinsic un- example is medical services where consu- certainty without an effect on tastes, mers lack the knowledge required to endowments or production possibilities. diagnose a condition and prescribe a treatment. References Cass, D. and Shell, K. (1983) ‘Do sunspots supply control (D2, Q1) matter?’, Journal of Political Economy A reduction in production undertaken to 91: 193–227. maintain or increase prices and producers’ Jevons, W.S. (1884) Investigations in Cur- incomes. This policy, much used in the rency and Finance, London: Macmillan. agricultural sectors of a number of econo- mies, has been criticized for its effects on super-multiplier (E2) efficiency and land values. The double effect of investment as invest- ment increases income and the level of Seealso:CommonAgriculturalPolicy; investment raises the equilibrium level of set aside income. supply curve (D0) References 1 The relationship between product prices Hicks, J.R. (1950) The Trade Cycle, Ox- and quantities supplied in a product mar- ford: Oxford University Press. ket, holding all other factors constant. 2 The relationship between amounts of a superneutrality (E6) FACTOR OF PRODUCTION and its peculiar Economic policies with no real effects as factor price – wage rate, RENT or RATE OF they only bring about nominal changes in INTEREST. It shows how much is supplied an economy. at each price. supernormal profit (D0) Profits in excess of NORMAL PROFIT. This can occur under PERFECTCOMPETITION in the short run but is often a permanent feature of many MONOPOLISTIC and OLIGOPOLISTIC firms. supplementary cost (D0) The general expenses of running a firm which are incurred even if output is zero; a term used by MARSHALL. Seealso:fixedcost;primecost

Supplementary Financing Facility (F3) The provision by the INTERNATIONAL MONE- TARY FUND in February 1979 of $7.8 billion of special drawing rights to add further

© 2002 Donald Rutherford Under PERFECT COMPETITION there is a lution in Britain, Aldershot: Edward supply curve that is independent of the Elgar. demand curve because price is equal to supply-side shocks (F4) marginal cost and the market supply curve Events external to an economy affecting is the aggregation of individual firms’ MAR- its production of goods and services. GINAL COST curves. Under MONOPOLY, de- Major recent shocks have been the KEN- mand and supply are interdependent NEDY ROUND of tariff reductions in 1968– because when a monopolist decides how 70, the oil-price increases of 1973 and much to produce, both marginal revenue 1979 and the INFORMATION TECHNOLOGY and MARGINAL COST have to be considered as revolution. both are affected by output. This usually upward-sloping curve was first devised by supply-side socialism (P2) MARSHALL. The economic policy stance of the UK government headed by Clement Attlee, supply function (D0) 1945–51, which used planning and severe The relationship between the amount of a rationing in order to release resources for good or service produced and its price. the export industries. See also: aggregate supply suppressed inflation (E3) Inflation restrained by price controls. supply price (D0) Although this ECONOMY has EXCESS DEMAND, The minimum price at which a FACTOR OF it has not yet experienced factor and PRODUCTION, especially labour, is willing to product price increases. be employed. surplus approach (D0) See also: reservation wage The view of classical theories of VA LU E and supply-side economics (B2) DISTRIBUTION that they are dependent on A major US school of economics which there being a surplus above the necessary inspired the economic policies of the USA inputs required for production. This ap- under President Reagan and of the UK proach was most emphasized in MARX’s under Prime Minister Thatcher. Opposing analysis of capitalist economies. the KEYNESIAN view that AGGREGATE DEMAND Seealso:Physiocrats;surplusvalue is central to determining the level of economic activity, supply-siders place em- References phasis on aggregate supply. Thus there has Marx, K. (1969–72) Theories of Surplus been a revival in the respectability of Say’s Value, trans. E. Burns, London: Lawr- law and a concern for the DISINCENTIVE ence & Wishart. EFFECTS of taxation. The LAFFER CURVE has surplus economy (E0) been a major innovation of the school. An economy producing a surplus product The adherents of supply-side economics in excess of the amount needed to main- and MONETARISM often coincide. The NEW tain that society. QUESNAY in his Tableau CLASSICAL ECONOMISTS have formalized many e´conomique postulated that the agricul- of their insights. tural sector had the unique characteristic Seealso:Reaganomics;Thatcherism of producing a produit net (surplus). Clas- sical economists, especially SMITH and RI- References CARDO in their use of the concept of profit Bartlett, B. and Roth, T.P. (1984) The in their DISTRIBUTION theory, extended the Supply-side Solution, Manhattan Insti- notion of ‘a surplus’ to all sectors of a tute for Policy Research; London and national economy. Basingstoke: Macmillan. Minford, P. (1991) The Supply Side Revo- Seealso:surplusvalue

© 2002 Donald Rutherford surplus value (J0) and animal species is recommended for the The value produced by labour in excess of sake of future generations. Sustainable the amount needed to maintain it. This development is more difficult if there are concept is used as a measure of the extent trade-offs to be considered between differ- of EXPLOITATION of workers in MARXIAN ECO- ent economic activities. NOMICS. See also: Brundtland Report Absolute surplus value arises from the lengthening of the working day or the sustainable economic growth rate (O4) increased speed of the production process The annual rate of growth of real GROSS so that a worker works more hours than DOMESTIC PRODUCT which is in line with the required to provide SUBSISTENCE. Relative growth of productivity and the present surplus value is the result of decreasing the level of . A growth rate amount of labour needed to produce in excess of this leads to inflation and/or subsistence for the worker, i.e. increasing an increase in a balance of payments labour productivity. In early stages of current account deficit. capitalist development, surplus value is absolute in nature but it is largely relative swap market (G1) in later stages. The rate of surplus value, The market for the exchange of debt obligations that aims to take advantage of also known as the rate of EXPLOITATION,is measured by the ratio of surplus value to conditions in different financial markets. VARIABLE CAPITAL. swap network (E5) An arrangement in the USA between the survival process (D4) FEDERAL RESERVE SYSTEM and fourteen for- An application of Darwinism to the price eign central banks, together with the BANK system. ALCHIAN asserted that the price FOR INTERNATIONAL SETTLEMENTS, which per- system selects firms as fit to survive mits short-term currency swaps between according to their ability to make greater the Federal Reserve System and other profits than their competitors. central banks. References swaption (G1) Alchian, A. A. (1950) ‘Uncertainty, evolu- tion and economic theory’, Journal of An OPTION to enter an interest rate swap Political Economy 58: 211–21. agreement by a certain date. survivor firm (L2) sweated trade (J2) A firm of a particular size which is the An arduous set of occupations with long modal firm over a long period of time. For hours, tedious work and low pay. Most example, in a series of censuses of produc- common examples are in the clothing tion, if most firms have 51 to 100 employ- industry. Often the trade is characterized ees then a firm of that size is the survivor by small firms and a lack of UNIONIZATION. firm. sweat equity (G1) An asset in a company created by the hard sustainability (W0) work of the owner. Meeting the needs of both the present and future generations by choosing a particu- Swedish budget (H6) lar range of economic activities. A budget balanced not annually but over a period of years. This principle was origin- sustainable development (O2) ally followed by UK NATIONALIZED INDUS- Long-term development including the es- TRIES. tablishment of the basic social and economic institutions necessary for continuing eco- Swedish School (B2) see Stockholm nomic growth. The conservation of plant School

© 2002 Donald Rutherford sweetener (D0, G3) symmetrical frequency curve (C1) An amount of cash given to encourage an A FREQUENCY CURVE with the shape of a bell economic agent to agree to an economic with one-half the mirror image of the transaction, e.g. the purchase of a state- other. This symmetrical curve is also owned company. Also known as a ‘kick- called ‘bell shaped’. (See figure.) back’. sympathetic impartial observer (D6) sweetheart contract (J2) Sympathy and the impartial observer are An employment contract whose terms are crucial to the moral philosophy ex- fixed by management. pounded by Adam SMITH in his Theory of Moral Sentiments. Economists have made Seealso:companyunion use of this notion to show that INTERPERSO- swing producer (L1) NAL UTILITY COMPARISONS are possible. A producer who agrees with the other producers of an industry to absorb the syndicalism (P4) fluctuations in demand for the industry’s Co-operative worker control of industry products by producing whatever is required brought about by direct strike action. This above the output level set for the other extreme form of trade unionism has at- producers. Saudi Arabia agreed to assume tracted more support in France than else- where. this role for the ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES in the 1980s. Seealso:industrialdemocracy;workers’ participation symmetallism (F3) MARSHALL’s plan for an international cur- References rency based on gold and silver. This BIME- Sorel, G. (1941) Reflections on Violence, TALLIC version of RICARDO’s plan was trans. T.E. Hulme, New York: P. Smith. proposed by Marshall to the Gold and Silver Commission, 1888. The interna- syndicated loan (G2) tional currency was based on a gold bar A loan underwritten or managed by a of 100 grams and a silver bar of 2,000 syndicate of financial institutions. Since grams. 1970, there have been many cases of these in Euromarkets and through the recycling References of the revenues of OPEC. Marshall, A. (1923) Money, Credit and Commerce, Book I, ch. VI, London: synergy (L1) Macmillan. The extra dynamic caused by the merging of two or more organizations together. The new larger structure is more effective than the sum of the two previous firms, particularly because of a variety of types of ECONOMY OF SCALE. This principle has often been appealed to as a justification for mergers. systematic risk (G1) 1 The RISK of holding a set of stocks representative of a particular stock market constituting a stock market in- dex. 2 An insurance risk affecting the whole class of the insured, e.g. householders in a given city.

© 2002 Donald Rutherford Seealso:specificrisk pilation of the Statistical Balance of the National Economy, Moscow. systemic risk (G2) A system-wide failure because of the System of National Accounts (E0) interconnectedness of economic agents. A set of accounting conventions drawn up Shocks are communicated through a by the United Nations. This provides a chain, especially in a banking system framework for the systematic recording of which is highly interconnected by nature: transaction flows in a national economy. banks are in frequent contact with each The sectors in the accounts are as follows: other through borrowing and lending. A . General government local event or shock is transmitted rapidly . Corporate and quasi-corporate enter- to affect a whole market. prises . systemism (P4) Households and private unincorporated Understanding a system as a comprehensive enterprises . set of functional relations. This is an ap- Non-profit institutions serving house- holds proach between INDIVIDUALISM and HOLISM. . Rest of the world. System of Material Product Balances For each country, the flows are defined as (P2) follows: The framework for the national income statistics of centrally planned economies 1 Total supply of goods and services used by the United Nations. It uses as Gross output of goods and services basic sectors the socialist sector and the Imports of goods and services private sector. The principal tables of these statistics are as follows: 2 Disposition of total supply: intermediate and final uses 1 Net material product by use 2 Net material product by kind of activity Intermediate consumption 3 Primary incomes by kind of activity in Government final consumption expen- the material sphere diture 4 Primary incomes from net material pro- Private final consumption expenditure duct Gross capital formation 5 Supply and disposition of goods and Exports of goods and services material services 3 Cost components and income shares 6 Capital formation 7 Final consumption Value added and gross domestic pro- 8 Personal consumption duct 9 Total consumption of the population Compensation of employees Operating surplus The differences between this national in- Consumption of fixed capital come accounting system and the SYSTEM OF Indirect taxes NATIONAL ACCOUNTS include different meth- Subsidies ods of treating depreciation, different defi- Withdrawals from quasi-corporations nitions of residents for the purposes of Property income recording external transactions and the exclusion of non-material services. 4 Taxes and unrequited transfers References Casualty insurance transactions Standing Statistical Commission, Council Taxes and other government receipts of Mutual Economic Assistance (1969) Household transfer receipts Basic Methodological Rules for the Com- Transfers received by private non-profit

© 2002 Donald Rutherford institutions 1 Summary information Other current transfers 2 Final expenditures on gross domestic product: detailed breakdowns and sup- 5 Finance of gross accumulation porting tables Net saving 3 Institutional sector accounts: detailed Surplus of the nation on current trans- flow accounts actions 4 Production by kind of activity: detailed Purchases of land, net breakdowns and supporting tables. Purchases of intangible assets, net This accounting framework is used for all Capital transfers national income statistics of United Na- Net lending tions countries except for CENTRALLY 6 Financial assets and liabilities PLANNED ECONOMIES which use the SYSTEM OF MATERIAL PRODUCT BALANCES. 7 Other assets References Reproducible tangible assets A System of National Accounts, Studies in Non-reproducible tangible assets Methods, Series F, No. 2, New York: Non-financial intangible assets. United Nations, 1968. These flows are recorded in tables divided into four parts:

© 2002 Donald Rutherford T

Tableaue´conomique(B2)seeQuesnay munist infiltration of US labor unions by requiring union officials to swear anti- tacit knowledge (O3) see locked-in communist affidavits before they could knowledge use the National Labor Relations Board, Taft–Hartley Act 1947 (J5) and banning unions and corporations ‘The Labor–Management Relations Act’, from political expenditures. Many of these a major US federal labour statute amend- new prohibitions could be enforced under ing the WAGNER ACT particularly by at- the criminal law. For years, the labour tempting to balance the rights and movement attacked Taft–Hartley for creat- responsibilities of labour and manage- ing ‘slave labor’ as organizing labour ment. Section 8(c) listed six unfair labour became more difficult. practices by unions: (1) restraining/coer- Seealso:Norris–LaGuardiaAct;right- cing employees in their rights to engage in to-workstate;USlaborunion or refrain from collective bargaining; (2) causing an employer to discriminate References against non-union workers; (3) refusing to Getman, J.G. and Blackburn, J.D. (1983) bargain with an employer despite being Labor Relations: Law, Practice and Pol- the representative of its workers; (4) en- icy, Mineola, NY: Foundation Press. gagement in or inducement of workers to Morris, C.J. (ed.) (1983) The Developing engage in strikes, refusals to work and Labor Law, Vols 1 and 2, Washington, boycotts when, for example, union recog- DC: Bureau of National Affairs. nition has not been certified by the NA- TIONAL LABOR RELATIONS BOARD; (5) charging take-off (N0, O0) an excessive or discriminatory fee to enter The crucial stage of economic DEVELOP- a union under a union shop clause; and MENT when an economy ‘takes off’ into (6) extorting a payment from an employer steady growth because its capital–output for services not performed or about to be and savings ratios rise to at least 10 per performed. cent of national income. This first oc- Taft–Hartley also banned the closed curred in the older industrialized countries shop, authorized states to have right-to- – in Great Britain in the 1780s, in the work laws, gave the US President the USA in the 1820s, in France and Germany power to direct the Attorney-General to in the 1850s. Critics of this approach to petition for an eighty-day injunction development have asserted that it ignores against a strike or lockout which consti- the interplay between economic, social and tuted a national emergency, attacked com- technological determinants. However, the

© 2002 Donald Rutherford proponent of this theory, ROSTOW, argued See also: intangible wealth from an examination of economic trends that there are five stages of growth: the tap stock (G1) traditional society, preconditions for take- A government bond issued, e.g. in the UK or USA, at a fixed price but not sold in its off (e.g. INVENTIONS, the rise of ENTREPRE- entirety as some of it is held back ‘on tap’ NEURS), take-off, the drive to maturity and the age of mass consumption. to be released gradually when market conditions are favourable. Other govern- References ment stocks are sold by tender. Rostow, W.W. (1960) Process of Economic Growth, 2nd edn, Oxford: Clarendon targeting (E6) Press. The use of specific policy instruments to —— (1971) The Stages of Economic reach particular targets, e.g. a low rate of Growth: A Non-communist Manifesto, inflation. This principle of macroeconomic 2nd edn, Cambridge: Cambridge Uni- policy making is suboptimal if there are versity Press. side effects from targeting which create distortions in allocation. takeover (G3, L1) A method of merging two firms by which target price (Q1) one firm bids for another and, if success- The price of an agricultural product of the ful, acquires it. Acquisition by the stealthy EUROPEAN COMMUNITY which is annually purchase of shares in public companies is fixed by the agricultural ministers of now outlawed under the strict rules of member countries. This is higher than an major stock exchanges. INTERVENTION PRICE. See also: merger See also: Common Agricultural Policy takeover panel (G1) target variable (E6) UK non-statutory committee founded in A quantified policy goal, e.g. 5 per cent 1968 and supervised by the Bank of unemployment. England. It regulates the code of takeovers in the UK having the power to suspend tariff (D0, F1) access by a company to securities markets 1APRICE.ACHARGE. temporarily or permanently. In its work it 2 An import tax. The superiority of a attempts to achieve fair play. tariff to import licensing arises from its lower administrative costs and the pro- take-up rate (I3) duction of revenue; few tariffs succeed The proportion of those eligible for a in excluding all imports and so they particular benefit who claim it. Pecuniary earn revenue. As a form of taxation, and psychic costs (including embarrass- tariffs have been used from earliest ment) cause the rate always to be less than recorded history as in primitive econo- 100 per cent. Many voluntary organiza- mies they had the advantage of invol- tions attempt to publicize benefits avail- ving fewer valuation problems than able to claimants, thereby increasing the taxes on income or on capital. In the take-up rate and making it more difficult post-war period, tariff reductions aimed to maintain the present rate of benefit. to reduce the protectionism of the 1930s; most of these had withered away tangible net worth (G1, M4) before the DILLON, KENNEDY, TOKYO and Shareholders’ EQUITY minus intangible as- URUGUAY ROUNDS. sets. In the figure, DD is the demand curve, SS tangible wealth (M4) is the supply curve, p1 p is the tariff and The FIXED CAPITAL and INVENTORIES of firms. p2 p is a prohibitive tariff which

© 2002 Donald Rutherford excludes all imports. QQ1 is the protective by local production rather than through effect, i.e. an increase in domestic produc- international trade. tion, Q2Q3 is the consumption effect, i.e. the reduction in total consumption, and taste (D0) The view of an individual of the relative QQ3 are the imports at price p before a tariff is imposed. a is the redistribution merits of several things or possibilities. effect, i.e. additional economic rent to Assumptions about tastes are crucial to the analysis of choice in economics and domestic producers continuing in produc- are usually represented by INDIFFERENCE tion and economic rent to new domestic CURVES. In the study of consumer beha- producers, b and d are deadweight losses viour, tastes are depicted as a choice of the tariff and c is the revenue effect, i.e. between goods with different UTILITIES;in the tax revenue obtained by the govern- labour market analysis as a choice be- ment by imposing the tariff p p. 1 tween work and leisure; in the analysis of risk as a choice between outcomes with different probabilities. Assumptions about tastes are central to NEOCLASSICAL ECONOM- ICS.

taˆtonnement (D0, D5) A process of market clearing in which, by bargaining, an EQUILIBRIUM is reached be- tween buyers and sellers. WALRAS intro- duced this term, meaning ‘groping’, into economics with his example of bidding.

taxable capacity (H2) The extent to which households and firms can pay a tax and a fiscal authority can collect it. Seealso:freetrade;protection taxable income (H2) References Income subject to DIRECT TAXATION. Perso- Ratner, S. (1972) The Tariff in American nal and other allowances are deducted History, New York: Van Nostrand. from total pre-tax income to ascertain Scott, M.F., Corden, W.M. and Little, what is taxable. I.M.D. (1980) The Case Against General Import Restrictions, London: Trade Pol- taxation (H2) icy Research Centre. A method of raising revenue for a govern- ment by levies on persons and firms. Taxes tariffication (D4) can be direct or indirect and can be raised The introduction of charges for services centrally or locally. A government will which were previously free. A recent ex- choose its taxation policy with reference ample has been the introduction of bank to its effects on income distribution post- tax, on incentives and on investment and charges for many client transactions. economic growth. Also, the taxation raised will be decided as part of its FISCAL tariff jumping (F1) STANCE. Instead of taxation, a government A response to PROTECTION. International can finance its activities by charging for companies avoid import taxes and restric- the services it offers or by borrowing. tions by investing in the protected coun- tries so that a local market can be supplied See also: canons of taxation

© 2002 Donald Rutherford References References Blinder, A.S., Solow, R.M., Break, G.F., Seidman, L.S. (1978) ‘Tax-based incomes Steiner, P.O. and Netzer, D. (1974) The policies’, Brookings Papers 2: 301–48. Economics of Public Finance, Washing- ton, DC: Brookings Institution. tax bracket creep (H2) see bracket creep Kay, J.A. and King, M.A. (1990) The British Tax System, 5th edn, Oxford: tax buoyancy (H2) Oxford University Press. The growth of total tax revenue at the Pechman, J. (1977) Federal Tax Policy,3rd same, or a greater, rate of the growth of edn, Washington, DC: Brookings Insti- income or output. tution. See also: tax elasticity tax avoidance (H2) tax burden (H2) Taxpayers’ careful arrangement of their 1 The ratio of the total tax revenues of a activities and business affairs to minimize country to its GROSS DOMESTIC PRODUCT. liability to taxation. 2 The total effects of a country’s taxes on See also: tax evasion all its residents or on certain sectors or types of taxpayer, e.g. firms or house- tax base (H2) holds. That which is taxed, especially income, wealth, property, expenditure or consump- Although objectively this burden is the tion. A government can raise its total tax transfer to government of part of tax- revenue by using several tax bases. If the payers’ resources, many taxpayers would country has a federal structure, then a subjectively regard the burden as greater. different tax base can be used for each Governments impose taxes primarily to level of government. Originally little was finance expenditure, but they can uninten- taxed because of problems of valuation tionally inhibit the growth of incomes and and collection; gradually, there has been a the capital stock. A guide to tax burdens in OECD countries is published annually movement from INDIRECT TAXES on imports in the May issue of Economic Trends and various types of consumption to IN- (UK). The tax burden is high in industria- COME TAX and PROPERTY TAX. lized Europe but low in less industrialized Seealso:federalfinance;taxablecapacity Europe, e.g. Portugal and Turkey. An approximate measure of the tax burden tax-based incomes policy (E3) often used is the AVERAGE RATE OF TAX. More A method of controlling the growth of elaborate assessments of a tax burden take wages and salaries by increasing the taxa- into account collection costs, the effect on tion of firms which have paid more than productivity of a tax structure, the extent the prescribed maximum for pay increases. to which taxpayers can plan because the Firms would be liable for taxation on the tax system is stable, and the degree of unauthorized addition to their average horizontal and vertical equity. wage bills. In the USA, this policy has frequently been advocated on the grounds References of its supposed administrative simplicity. Pechman, I.A. and Okner, B.A. (1974) The version of this policy suggested by Who Bears the Tax Burden?, Washing- OKUN was to offer an anti-inflationary tax ton DC: Brookings Institution. credit of 1½ per cent of salary (on salaries tax capitalization (H2) up to $20,000 per annum) in return for the The effects on the price of a taxed good, employer not increasing pay by more than e.g. a house, of the discounted present 6 per cent. value of future tax payments. Thus if a See also: market anti-inflation plan house is expected to be liable to high

© 2002 Donald Rutherford property taxes in the future, a present lysis’, Journal of Public Economics 1: valuation of it will take that into account. 323–38. As high local property taxes lower prop- Ehrlich, I. (1973) ‘Participation in illegiti- erty values, residents are encouraged by mate activities: a theoretical and empiri- cal investigation’, Journal of Political this capitalization effect to move to other Economy 81: 521–65. areas. Tax Exempt Special Savings Account Seealso:fiscalmobility;Tiebouthypoth- (H2) esis The savings incentive scheme, known as tax competition (H3) ‘Tessa’, introduced by the UK government The fiscal rivalry of national governments in 1990 and effective from January 1991. who attempt to have lower taxes than their Tax on interest was exempt provided that competitors in order to attract investors. capital is not withdrawn for five years and no more than £9,000 was accumulated. If See also: fiscal union interest were withdrawn it was taxed at the tax credit (H2) basic rate of income tax. Savings were An amount subtracted from the taxes accumulated in either bank or BUILDING owed to a government to lower tax liabi- SOCIETY accounts. lity. tax expenditure (H2) tax effort (H2) A tax incentive or tax subsidy, a departure The extent of success in collecting a tax from the normal tax structure, e.g. TAX from a tax base. CREDIT, deductions and deferrals of tax liabilities. This loss of a government tax See also: taxable capacity revenue is intended to further social goals, tax elasticity (H2) e.g. raising the post-tax income of the The responsiveness of tax revenue to an lower paid, encouraging education or pro- increase in income or output. If tax moting residential investment. This con- revenue grows faster than the TAX BASE, cept was introduced in the USA by the the tax is elastic. Treasury in 1968 and is now a spending programme of the US Internal Revenue See also: tax buoyancy Service. tax erosion (H2) References The reduction in tax revenues brought Surrey, S.S. and McDaniel, P.R. (1985) about by exemptions from the comprehen- Tax Expenditures, Cambridge, MA, and sive taxation of income, e.g. capital gains London: Harvard University Press. allowances and the tax exemption of fringe benefits. tax farming (H2) Delegation of the right to collect taxes to tax evasion (H2) private tax collectors who then have the Reduction of one’s tax burden by inaccu- freedom to raise more than the quota rate statements of income and other cir- requested by government. This ancient cumstances relevant to tax liability. The system is open to much exploitation of amount of evasion depends on the prob- taxpayers. ability of being detected in such conduct and the penalties for such offences. See also: goal system Seealso:incometax;taxavoidance taxflation (E3) see wage–tax spiral References Tax Freedom Day (H2) Allingham, M.G. and Sandmo, A. (1972) The day in the year when people in effect ‘Income tax evasion: a theoretical ana- stop working to pay taxes. This is deter-

© 2002 Donald Rutherford mined by calculating the average tax rate regions, industries, countries or genera- for the population and applying that tions. percentage to the number of days in the The incidence is shifted forward to the year. For national economies with an consumer if the price of the final good average tax rate around 40 per cent the rises because of the tax; backward, if there day occurs in May or June. is a decline in demand for final goods and the price of intermediate goods falls. The tax harmonization (H2) incidence is shifted to future generations if The standardization of tax rates, tax rules current public expenditure is debt fi- and tax definitions throughout a number nanced. Tax incidence can be analysed of countries. Usually, in a harmonization through a PARTIAL EQUILIBRIUM approach as exercise the most common existing prac- is the case when taxes on goods are tice is adopted as the standard. Sometimes analysed and the demand and supply harmonization is necessary to achieve elasticities are calculated, or with a GEN- other policy goals, e.g. in the EUROPEAN ERAL EQUILIBRIUM approach when, e.g. with COMMUNITY the harmonization of INDIRECT a CORPORATION TAX, the effects on output TAXATION is necessary if the goal of unim- and on CAPITAL–LABOUR RATIOS are exam- peded movement of goods is to be ined. Statutory incidence shows liability achieved. under tax laws. Economic incidence shows References how taxation affects economic behaviour, European Parliament (1990) The Economic e.g. the number of hours worked or the Consequence of Fiscal Harmonization in amount saved: such incidence traditionally Europe, Luxemburg: Office for Publica- concentrated on the effect of taxation on tions of the European Communities. the FUNCTIONAL INCOME DISTRIBUTION. In- Shibata, H. (1969) Fiscal Harmonization creasingly it has been examined in the under Freer Trade: Principles and their context of the SIZE DISTRIBUTION OF INCOME. Applications to a Canada-US Free Trade Tax incidence was discussed as early as the Area, Toronto: University of Toronto eighteenth century by the PHYSIOCRATS. Press. Seealso:absolutetaxincidence;differen- tax haven (H2) tial tax incidence A country with very low rates of taxation References that attracts companies and individuals wishing to minimize tax liability. The Harberger, A.C. (1962) ‘The incidence of countries benefit from the influx of cur- the corporation income tax’, Journal of Political Economy 70: 215–40. rency and the consequential commercial Pechman, I.A. (1985) Who Paid the Taxes, activity. Most of these havens are small 1966–85?, Washington, DC: Brookings islands or countries off the USA, e.g. the Institution. Bahamas and the Virgin Islands, or on the —— (1989) Tax Reform: The Rich and the perimeter of Europe, e.g. Monaco and the Poor, Brighton: Harvester Wheatsheaf. Channel Islands. Larger countries would Shoven, J.B. (1976) ‘The incidence and find it difficult to finance public expendi- efficiency effects of taxes on income ture if they adopted such a low-tax policy. from capital’, Journal of Political Econ- omy 84: 1261–84. tax incidence (H2) Reduction of personal or corporate in- tax reform (H2) come caused by the imposition of a tax. A change in a tax system attempting to Incidence is classified according to the improve allocation, efficiency and EQUITY. group or sector on which a tax falls. These Tax reform usually takes the form of groups can be producers or consumers, reducing the number of separate rates of those with a particular size of income, tax and abolishing many tax allowances.

© 2002 Donald Rutherford Because tax reform is motivated by a The transition to a new system can desire to reduce administrative costs, as produce undesired effects, e.g. a decline in well as to reduce TAX AVOIDANCE, there have the capital value of assets. To implement a to be fewer tax allowances, a simpler tax reform, either a gradualist approach of progression of tax and the abolition of dealing with a particular tax at a time or a certain types of tax, e.g. on capital. package approach of widespread change Tax reform is high on the political can be adopted. Civil servants prefer the agenda of many countries, including the former but it leads to more confrontation UK, Canada, New Zealand, France, Japan with lobbies; there is likely to be support and Sweden. Common to many of these for the package approach only if there is proposals is a switch from income to widespread discontent with the current expenditure taxes and a reduction of the system. top marginal income tax rates. Indexation Seealso:UStaxreform of personal allowances is often removed, thus increasing tax yields in times of References inflation. In the UK, the top marginal rate Aaron, H.J. and Galper, H. (1985) Asses- of income tax was reduced in 1979 from sing Tax Reform, Washington, DC: 83 per cent to 60 per cent and value-added Brookings Institution. tax was raised from two rates of 8 per cent Ballantine, J.G. (1986) Tax Reform in and 12.5 per cent to a single rate of 15 per Japan and the United States – A Stimu- cent; in stages, corporation tax has been lus to New Economic Vitality?,New York: Japan Society. reduced from 52 per cent to 35 per cent. Boskin, M.J. (1996) Frontiers of tax re- But in the Budget of 1988 income tax was form, Stanford, CA: Hoover Institution simplified by the reduction in the number Press. of bands to two – at 25 per cent and 40 Feldstein, M.S. (1976) ‘On the theory of per cent. In the USA, the Reagan Admin- tax reform’, Journal of Public Economics istration quickly reduced the top marginal 6: 77–104. rate of income tax from 70 per cent to 50 Kay, J.A. (1990) ‘Tax policy: a survey’, per cent and in 1986 the top rate was cut Economic Journal 100: 18–75. to 28 per cent. Japan reduced the top Pechman, J. (1989) Tax Reform: The Rich income tax rate from 85 per cent to 65 and the Poor, London: Harvester Wheat- sheaf. per cent; great reductions in corporate tax rates are envisaged and to maintain tax Tax Reform Act 1986 (H2) revenue a value-added tax at 5 per cent US federal statute that undertook the and a withholding tax of 20 per cent on sweeping reform of the US tax system postal savings and bank accounts are to be from January 1987. It simplified the struc- introduced. West Germany also cut in- ture of taxation by introducing two rates come tax and corporation tax rates: the of individual tax at 28 per cent and 15 per top income tax rate from 56 per cent to 53 cent instead of the fifteen rates previously per cent, minimum rates from 22 per cent in force; given the loss of previous allow- to 19 per cent and corporation tax from 56 ances, in practice the top MARGINAL TAX per cent to 50 per cent with cuts in many RATE became 33 per cent. The corporate allowances. Australia proposed cutting top rate was cut from 46 per cent to 34 per income tax rates from 60 per cent to 49 cent with a minimum rate of 21 per cent. per cent in harness with an incomes policy. To compensate for the loss of revenue Tax cuts to a top rate of 50 per cent have from cutting tax rates, many tax deduc- no redistributive effect but a cut below 50 tions have been phased out. Consumer per cent does. Curiously some countries, interest on debt (except for housing), e.g. Japan, have known both high eco- lower tax rates for capital gains, pension nomic growth and high marginal tax rates. plans, real estate investments and business

© 2002 Donald Rutherford meals and entertainment ceased to attract marginal tax rate on incomes above OA concessions. and OBEFG shows the course of income under a progressive income tax with See also: tax reform higher marginal rates on higher income References bands). Davies, D.G. (1986) United States Taxes and Tax Policy, Cambridge: Cambridge University Press. tax revenue (H2) The yield from a particular tax, or of the tax system as a whole. The amount of revenue depends on the TAX BASE chosen, the tax rates set and the amount of compliance with tax legislation. In some countries, there is a heavy reliance on one particular tax, e.g. the USA uses an INDIVI- DUAL INCOME TAX to raise a high proportion of federal government revenues. The growth in tax revenue can be measured by INCOME ELASTICITY OF DEMAND. See also: direct–indirect taxes ratio See also: Laffer curve tax threshold (H2) tax smoothing (H2) The income level where income becomes 1 The linear relationship between a fore- liable to taxation. cast of future government expenditure and the current value of a variable tax unit (H2) consisting of the fiscal deficit, private The person or group subjected to taxation, saving and the average tax rate. e.g. a single person, a married couple or a 2 A fiscal policy minimizing the economic household. costs of raising taxes to finance varying amounts of public expenditure. It sets tax wedge (H2) an average tax rate over a period to 1 The difference between the marginal yield budget surpluses followed by bud- cost of producing a good and the get deficits when expenditure rises. marginal benefit from consumption in the case of indirect taxes. tax structure (H2) 2 The difference between the marginal The set of tax rates applying to a particular value of leisure sacrificed by a worker tax base, e.g. different rates of income tax and the marginal value to society of or different rates of VALUE-ADDED TAX.For another hour of work in the case of income taxes, the simplest tax structure is personal income taxes. based on the principle of a constant 3 The difference between gross and net, average tax rate: this is rare as so many after tax, rates of return in the case of tax structures are regressive or progressive. investors. In a diagram the tax structure is apparent 4 The difference between the total cost of by plotting post-tax income against pre- employing a worker and the money tax income (OC is changes in income in wages the worker receives. the absence of an income tax, OA is income exempt from tax, OBD shows the Tax wedges produce a distortion in eco- course of income when there is a constant nomic welfare.

© 2002 Donald Rutherford Taylorism (M1) References The US creed of scientific management Marshak, J. and Radner, R. (1972) Eco- suggested by F.W. Taylor (1856–1915) who nomic Theory of Teams, New Haven, applied at the Bethlehem Steel Company CT: Yale University Press. the principle of work study and a greater subdivision of labour as a means of team work (D2) achieving increased efficiency. A method of organizing production which rejects a hierarchical organization in fa- References vour of collaboration. Merkle, J.A. (1980) Management and Ideology: The Legacy of the Interna- TechMARK (G1) tional Scientific Management Movement, Part of the London Stock Exchange which Berkeley, CA: University of California provides a market in the shares of innova- Press. tive technology companies. This ‘market Taylor, F.W. (1911) The Principles of Scien- within a market’ began in November 1999 tific Management, New York: Harper. with over 100 companies quoted.

Taylor’s rule (E5) technical change (O3) A suggested REACTION FUNCTION for the FED- The process which begins with INVENTION ERAL RESERVE named after John B. Taylor and then proceeds to INNOVATION. concerning the appropriate FEDERAL FUNDS RATE to achieve FULL EMPLOYMENT and price technical efficiency (D2) stability. The nominal federal funds rate Production using a method that maximizes should equal the targeted real funds rate + production from given quantities of factor actual inflation. The real funds rate is to inputs. equal the potential growth rate + (actual See also: allocative efficiency targeted inflation)/2 + (% actual % potential GDP)/2. technical progress (Q3) References The use of new techniques; the introduc- Taylor, J.B. (1993) ‘Discretion versus pol- tion of new products. Historically techni- icy rules in practice’, Carnegie-Rochester cal progress has taken the form of the Conference Series on Public Policy 39: saving of labour and of raw materials, 195–214. mechanization and the application of in- ventions. In most cases, changes in the team briefing (J5) capital stock are necessary to achieve it. Direct communication between managers Technical progress can be measured by and employees as an alternative to indirect examining changes in the proportion of contact with workers via trade unions. output using a particular technique, by Although it reduces the role of trade increases in speed or by improvements in unions, it sometimes exists in unionized product quality. Technical progress is a firms. major determinant of ECONOMIC GROWTH. Seealso:diffusionrate;disembodied team theory (D7) technicalprogress;embodiedtechnical A study of the efficient joint choices of progress;innovation;invention;labour- several persons. A team has common augmentingtechnicalprogress;research interests and beliefs and performs various and development tasks. The theory is concerned with the optimal allocation of tasks and informa- References tion within the team. Heertje, A. (1977) Economics and Techni-

© 2002 Donald Rutherford cal Change, trans. Z. St-Gallay, London: years but only has to be paid up after Weidenfeld & Nicolson. forty years. technological rent (D0, O3) Tennessee Valley Authority (L3) That part of monopoly profits created by A public corporation established in 1933 TECHNICAL PROGRESS. and owned by the US federal government. telecommuting (J2) Its tasks include flood control, wholesale Working for a firm at home, connected by power supply to parts of seven states, telephone lines to supply work from a economic development of tourism and personal computer. This is a major devel- natural resources, and job training. It opment in the small-firm sector. receives appropriations from the US Con- gress to finance its activities, apart from its Seealso:homework;networker self-financing power programme. temporary equilibrium (D0, E0) tenure profile (J2) HICKS’s idea that over a short period of a A description of a firm’s labour force ‘week’ variations in prices can be ne- showing the proportions of it with differ- glected. During this period both current ent lengths of service. prices and expected prices are allowed to influence plans for consumption and pro- terminal bonus (G2) duction. The stability of this equilibrium A bonus given by an insurance company depends on the ELASTICITY of price expecta- to the policyholder at the time when an tions. This concept of equilibrium is cru- insurance policy matures. cial to Hicksian dynamic analysis. See also: reversionary bonus References term premium (G0) Hicks, J.R. (1939) Value and Capital, chs The difference between the yields of fixed 10, 11, 12, Oxford: Oxford University income securities of different maturities Press. not attributable to current or anticipated tender (D4, G1) future levels of short-term interest rates. 1 A method of selling shares by which Expected returns on exogenous securities, prospective buyers specify the price at the quantity of extant securities, the dis- which they are willing to buy. tribution of asset holdings and the flows 2 Direct sale of government securities. of new wealth across different classes of 3 A method of fixing the price of a investors, classified according to their contract often used in the construction attitude to risk, have all been suggested as and heavy engineering industries. determinants of these premiums. See also: tap stock terms of trade (F1) 1 The ratio of the values of the goods and 1040 (‘ten forty’) (H2) services traded between countries. 1 The basic tax form used in the USA for 2 The weighted or unweighted ratio of individuals and families to report their export price indices to import price personal incomes. A taxpayer first cal- indices. culates his or her adjusted gross income, subtracts a standard deduction (perso- As changes in the terms of trade have so nal exemptions) and then deducts TAX great an effect on the GROSS NATIONAL PRO- CREDITS. Persons with lower incomes DUCT of OPEN ECONOMIES there are many and no deductions against tax use a policy responses to deteriorating terms. simplified version of this form. These include changing the underlying 2 A US government bond redeemable at bargaining relations in international trade, the option of the government after ten the collective self-reliance of less developed

© 2002 Donald Rutherford countries in trade and investment, import cluding HICKS, have attempted to explain substitution and changes in types of export. this structure in terms of EXPECTATIONS; Some studies suggest that the deterioration others have attributed the structure to the in the terms of trade has been more the attitudes of borrowers and lenders to LI- result of the characteristics of countries QUIDITY and RISK or to market segmenta- than of commodities. tion that prevents funds being shifted from The best measures of the terms of trade short-term to long-term markets. Long- have been the INTERNATIONAL MONETARY term interest rates are often more than FUND’s index of thirty primary commod- short-term rates as many investors cannot ities exported by less developed countries lend long term and so have to be paid a deflated by the United Nations’ index and premium to be encouraged to lend. the WORLD BANK’s indicators of market References prices divided by a unit value index of total manufactures exported from devel- Meiselman, D. (1962) The Term Structure of Interest Rates, Englewood Cliffs, NJ: oped market economies to less developed Prentice Hall. countries. Nelson, C.R. (1972) The Term Structure of Seealso:commoditytermsoftrade;dou- Interest Rates, New York: Basic Books. blefactorialtermsoftrade;factorialterms tertiary sector (L8, P0) oftrade;incometermsoftrade;netbarter That part of an economy producing SER- termsoftrade;singlefactorialtermsof VICES. The formal part of this sector is trade dominated by schools, hospitals, retailing, terms of trade argument (F1) banks and insurance; the informal part is A reason for PROTECTION. A large country dominated by self-employed persons in the by imposing a TARIFF, quota, or export tax BLACK ECONOMY. In the USA and the UK, can obtain imports at lower relative prices as a consequence of DE-INDUSTRIALIZATION, it has become, as measured by employ- term spread (E4) ment, the major sector of the economy. The difference between a long-term and a short-term interest rate. test rate of discount (E2, L3) The real rate of return that UK public term structure of interest rates (E4) sector investments are expected to achieve The relationship between interest rates on at the margin. The UK government, in its SECURITIES of different maturities, particu- continuing attempts to improve investment larly the relationship between short- and appraisal in NATIONALIZED INDUSTRIES,pro- long-term interest rates. Economists, in- posed this rate in a White Paper of 1967. It was originally set at 8 per cent, to represent ‘the minimum rate of return to be expected in a marginal low-risk project undertaken for commercial reasons’ with the hope that there would be greater consistency in the granting of approval for projects. It has subsequently been changed to reflect market changes in interest rates. References The Chancellor of Exchequer (1967) Na- tionalized Industries: A Review of Eco- nomic and Financial Objectives, London: HMSO, Cmnd 3437.

© 2002 Donald Rutherford test statistic (C1) 2 A form of Christian reconstruction The distribution of a standardized variable, especially applied to the economy. also known as a z score. For a normal References distribution the z score is the statistic minus the mean of the sample all divided Rushdoony, R.S. (1973) The Institutes of Biblical Law, Nutley, NJ: Craig Press. by the STANDARD DEVIATION of the sample. (H4) Thatcherism (E6) theory of clubs An attitude of frugality towards public An explanation of the nature of CLUB expenditure and a belief in the supremacy GOODS sharing some of the characteristics of market forces. Mrs Margaret Thatcher of PUBLIC GOODS without non-excludability. in 1970 as UK Secretary of State for This theory can be traced back to PIGOU Education, by abolishing free school milk, and KNIGHT; recent writers on this subject gained the former reputation; as Prime include BUCHANAN and Tiebout. Minister of the UK from 1979 to 1990, References her emphasis on monetary control (instead Buchanan, I.M. (1965) ‘An economic the- of extensive government intervention ory of clubs’, Economica New Series, 32: backed by public funds), on the PRIVATIZA- 1–14. TION of nationalized industries and on the Sandler, T. and Tschirhart, J. (1980) ‘The removal of LABOUR MARKET RIGIDITIES ex- economic theory of clubs: an evaluative pressed her desire to unleash free market survey’, Journal of Economic Literature forces. She frequently used the analogy of 18: 1481–521. good household management for such theory of the firm (L2) policies and is thus the contemporary An explanation of how the aims of a firm expounder of Gladstonian finance. Sir are related to its decision making. Since Geoffrey Howe in his first Budget speech MARSHALL, economists have studied the of 1979 outlined the programme of rationale for managerial decisions on pri- Thatcherism in his four principles: the cing, product mix, output, advertising and strengthening of economic incentives, the investment. Earlier theories were built on reduction of the burden of financing the the assumption of PROFIT MAXIMIZATION; public sector, the reduction in the role of later theories have attempted to incorpo- the state to increase freedom of individual rate wider theories of managerial behaviour choice and increased responsibility in col- and to recognize different organizational lective bargaining. In practice MONETARISM forms. The theory of the firm constitutes a was short-lived and public spending pro- major part of microeconomics. digal in many years. Seealso:Coase;structure–conduct–per- References formance model Johnson, C. (1991) The Economy under Mrs Thatcher, 1979–90, Harmonds- References worth: Penguin. Baumol, W.J. (1967) Business Behavior, Thompson, G. (1986) The Conservatives’ Value and Growth, New York: Harcourt, Economic Policy, London: Croom Helm. Brace & World. Walters, A.A. (1986) Britain’s Economic Clarke, R. and McGuinness, T. (eds) Renaissance: Margaret Thatcher’s Re- (1987) The Economics of the Firm, forms, 1979–84, Oxford and New York: Oxford: Basil Blackwell. Oxford University Press. Marshall, A. (1920) Principles of Econom- ics, 8th edn, London: Macmillan. theonomy (B2) Ricketts, M. (1994) The economics of 1 The application of biblical theology, business enterprise: an introduction to especially the Law of Moses set out in economic organisation and the theory of the Old Testament. the firm, 2nd edn, New York, London

© 2002 Donald Rutherford andToronto:SimonandSchuster;Har- companiespromotedbytheBUSINESSEXPAN- vesterWheatsheaf. SIONSCHEME. Stigler,G.I.(1952)TheTheoryoftheFirm, rev.edn,NewYork:Macmillan. third-partyeffect(D0,Q0)see Williamson,O.E.(1963)Economicsof externality;spillovereffect DiscretionaryBehavior:ManagerialOb- jectivesinaTheoryoftheFirm,Engle- thirdway(P4)seemarketsocialism woodCliffs,NJ:PrenticeHall. ThirdWorld(O0) Developingeconomiesapartfromoilpro- theta(G1) ducers,withlowpercapitaincomes,large Theratioofthechangeinthepriceof agriculturalsectorsandashortageofmost optiontothedecreaseintimetoexpira- kindsofcapital.Somehavedefinedthe tion.Alsoknownastimedecay. ThirdWorldasthosecountriesinreceipt thintrading(G1) ofFOREIGNAID. LittletradingofaSECURITYorother Seealso:FirstWorld;SecondWorld marketableitem.Alowturnoverofa security,orofthemarketasawhole, References indicatesthinness.Aconsequencewillbe Reitsma,H.A.andKleinpenning,I.M.G. adivergencebetweentheobservedand (1985)TheThirdWorldinPerspective, truevaluesofBETA. AssenandMaastricht:VanGorcgum. Reynolds,L.G.(1985)EconomicGrowthin thirdage(J1) theThirdWorld,1850–1980,NewHa- Theperiodofaperson’slifefromtheage ven,CT,andLondon:YaleUniversity of50years.Thisagegrouphasadomi- Press. Worsley,P.(1967)TheThirdWorld,2nd nantroleinmanyconsumermarketsof edn,London:Weidenfeld&Nicolson. industrializedcountriesinthelatetwenti- ethcentury. ThirdWorlddebtproblem(F3,O0)see worlddebtproblem Seealso:greysociety ThirtyShareIndex(G1)seeFinancial third-degreepricediscrimination(D4, TimesIndustrialOrdinaryShareIndex M3) Chargingdifferentpricestodifferentcus- Thomson Report (R5) tomers.Thisisthemostcommonformof Report on the Regional Problems in the pricediscrimination.Discriminationisof- Enlarged Community, a report of a EUR- tenonthebasisoftheincome,age, OPEAN COMMUNITY Commissioner in 1973 studentorunemployedstatusofthecon- which surveyed the economic and social sumer. problems of the member countries on the eve of the first oil crisis. Seealso:pricediscrimination Thornton, Henry, 1760–1815 (B3) thirdmarket(G1) London banker and leading monetary TheUKstockexchangefoundedinJan- theorist of the early nineteenth century uary1987toallowthetradingofsmall who was a member of the Clapham Sect, a companies’SECURITIES.Thefirstandsec- group of Evangelical social reformers who ondmarketsconsistofthemainlistofthe succeeded in abolishing British participa- INTERNATIONALSTOCKEXCHANGEandtheUN- tion in the slave trade. Member of Parlia- LISTEDSECURITIESMARKET.Asthecompanies ment for Southwark from 1782 to 1815. usingthismarketaresmall,andoftennew, His famous book Paper Credit (1802), investmentintheirsharesisveryrisky. much praised by SCHUMPETER, HAYEK and Nevertheless,itisamarketwithgreat HICKS, defended the issue of inconvertible growthpotential,partlybecauseofthe banknotes, showed the relationship be-

© 2002 Donald Rutherford tween interest rates and international gold ics thrift is attacked because a hoarding flows, analysed the market for loanable of income lowers aggregate demand. funds, defined the nature of inflation and 2 A mutual savings bank or SAVINGS AND presented a definition of FULL EMPLOYMENT. LOAN ASSOCIATION (USA), similar to a UK BUILDING SOCIETY through providing References MORTGAGES. In the 1980s, the US thrifts Hicks, J.R. (1967) Critical Essays in Mone- went further into insolvency as a con- tary Theory, ch. 10, Oxford: Clarendon sequence of financial deregulation, in- Press. Thornton, H. (1939) An Enquiry into the cluding the ending of REGULATION Q and Nature and Effects of the Paper Credit of the diversification of their investments; Great Britain, ed. F. von Hayek, Lon- lax supervision and the guaranteeing of don and New York: George Allen & deposits contributed to poor financial Unwin. control. 3 Careful management of resources. threat effect (J3, J5) Effect on the wages of a non-unionized Seealso:paradoxofthrift;Resolution labour force of the threat of a TRADE (LA- Trust Corporation BOR) UNION organizing to raise wages. A Thu¨nen, Johann Heinrich von, 1783– non-unionized employer wanting to pre- 1850 (B3) vent unionization raises wages to the A Prussian landlord who can be credited union level. Threat effects contribute to with creating MARGINALISM and managerial the spread of wage inflation. economics and presenting one of the first three-digit industry (L0) general equilibrium models and models of An INDUSTRY defined according to a fine locations. classification such that the economy’s in- References dustrial structure is broken down into as Samuelson, P.A. (1983) ‘Thunen at two many as 999 industries. ¨ hundred’, Journal of Economic Litera- Seealso:two-digitindustry ture 21 (December): 1469–88. three-stage least squares (C1) tick (G1) A rewriting of TWO-STAGE LEAST SQUARES One thirty-secondth of a percentage point, estimators and the application of general- especially of the interest rate of UK gilts. ized least squares to all the relations in the Tiebout hypothesis (H7, R1) model to obtain a simultaneous estimate The view that there should be small local of all parameters. government areas in order to increase the References amount of citizen choice between different Zellner, A. and Theil, H. (1962) ‘Three- combinations of facilities and local taxes. stage least squares: simultaneous esti- Individuals would be able to obtain the mation of simultaneous equations’, combination closest to their preferences by Econometrica 30: 54–78. moving between these small areas. threshold population (J1, R1) See also: fiscal mobility The minimum size a population must be References to carry out the functions of a town or city. A major determinant of this size will Mieszkowski, P. and Zodrow, G.R. (1989) ‘Taxation and the Tiebout model: the be AGGLOMERATION ECONOMICS. differential effects of head taxes, taxes See also: central place theory on land rents, and property taxes’, Journal of Economic Literature 27 (Sep- thrift (E2, G2) tember): 1098–1146. 1 Excessive saving. In KEYNESIAN econom- Oates, W.Y. (1969) ‘The effect of property

© 2002 Donald Rutherford taxes and local public spending on their premises for payments to customers. property values: an empirical study of Until 1971 it could be included in the tax capitalization and the Tiebout hy- RESERVE ASSETS of these banks: it was pothesis’, Journal of Political Economy excluded then as cash needed for transac- 77: 957–71. tions purposes could not be regarded as a Tiebout, C. (1956) ‘A pure theory of local government expenditures’, Journal of reserve. Political Economy 64: 416–24. time budget survey (C8, J2) tied aid (F3, O2) An investigation into the allocation of FOREIGN AID given on condition that the time between paid work, unpaid work recipient purchases the exports of the (e.g. household cleaning) and leisure which donor country. This has been called ‘deva- aims to discover the range of a person’s lued aid’ as the recipient may have to activities. Data are collected from the purchase goods higher in price and lower diary entries of volunteers. Surveys of this in quality than are available on interna- kind have been used to assess the extent of tional markets; in extreme cases the aid is the INFORMAL ECONOMY and to measure LA- supplied in physical amounts, e.g. food BOUR FORCE PARTICIPATION RATES. and medicines. However, many donor References countries with their own BALANCE OF PAY- Birdsall, N. (1980) ‘Measuring time use MENTS problems would give little aid at all and nonmarket exchange’, in W.P. if it were not in this form. McGreevy (ed.) Third World Poverty: Seealso:bilateralaid;multilateralaid New Strategies for Measuring Develop- ment Progress, Lexington, MA: Lexing- tied cottage (Q1, R2) ton Books. A house provided to a worker holding a Stafford, F.P. (1985) Time, Goods and Well particular job, especially in the agricul- Being, Ann Arbor, MI: Survey Research tural sector. When the worker ceases to Center, Institute for Social Research, hold that job, he or she has to seek University of Michigan. alternative accommodation. time decay (G1) see theta tied house (L8) In the UK brewery industry, a public time deposit (G2) house (inn) which can only sell the pro- A sum of money that the depositor does ducts of the brewery to which it is con- not have the right to withdraw within six nected, usually by ownership. days of making the deposit, unless the deposit is subject to an early withdrawal tight fiscal policy (H3) penalty of at least seven days’ simple Low government expenditure, high taxa- interest. tion or both. time rate (J3) tight monetary policy (E5) A wage rate per unit of time, often an A strict MONETARY POLICY attempting to curb hour. the growth of the money supply and raising interest rates. This policy is often See also: piece rate employed by economies with an unaccep- time series (C1, C8) table rate of inflation and/or balance of A collection of data showing the values of payments problems. These goals are sought an economic variable at different dates, by reducing aggregate demand and indu- e.g. expenditure on clothing for each year cing capital inflows from other countries. of a decade. Movements of time series can till money (G2) be divided into secular (long term), cycli- The cash that UK clearing banks have on cal, seasonal and random changes.

© 2002 Donald Rutherford Seealso:cyclicalvariations;randomvar- Rotterdam, from 1955 to 1973, and Pro- iations;seasonaladjustmenttrend fessor of International Co-operation at Leiden from 1973 to 1975. With FRISCH, References he won the first NOBEL PRIZE FOR ECONOMICS Box, G.E.P. and Jenkins, G.M. (1970) in 1969; four years later his brother shared Time Series Analysis: Forecasting and the Nobel Prize for Medicine. His skills as Control, San Francisco: Holden-Day. an econometrician yielded many books, timeshare (R2) directly arising from the jobs he held. His The property right to use a house or apart- first works were on business cycles but his ment, usually for holiday purposes, for experience with the Central Planning Bu- specified weeks of a year, either over a fixed reau produced renowned works on eco- term of years or in perpetuity. The right can nomic policy that asserted that be bought and sold. Timesharers often have government policy must have the same to pay an annual maintenance charge to the number of instruments as it has quantified firm organizing these properties. targets. Later he turned to DEVELOPMENT ECONOMICS and the study of income dis- time span (J3) tribution. The amount of time an employee can work References without reporting to his or her immediate superior. These spans have been used as a Tinbergen, J. (1952) On the Theory of proxy measure of all the attributes of a job Economic Policy, Amsterdam: North- Holland. giving rise to occupational pay differentials. —— (1956) Economic Policy: Principles Elliott Jaques extensively applied this to the and Design, Amsterdam: North-Hol- rationalization of organizations’ pay struc- land. tures, e.g. at Glacier Metals (UK) and —— (1968) Statistical Testing of Business Honeywell Computers (USA). Cycle Theories, New York: Agathon Press. See also: wage differentials References tit-for-tat strategy (L1) The behaviour of a firm which deliberately Jaques, E. (1956) Measurement of Respon- imitates the initial strategy of its rivals. sibility, Cambridge, MA: Harvard Uni- versity Press. Tobin, James, 1918–2002 (B3) —— (1964) Time-span Handbook, London: US economist educated at Harvard Uni- Heinemann. versity and an economics professor at Yale time value of money (E4) University since 1947; in 1981 he was The enhanced value of money arising from awarded the NOBEL PRIZE FOR ECONOMICS.A it being invested at interest over a time prominent KEYNESIAN who has attacked the period. narrowness of MONETARISM with his wider PORTFOLIO SELECTION theory. In a paper on Tinbergen, Jan, 1903–94 (B3) LIQUIDITY PREFERENCE in 1958, he extended Prominent Dutch econometrician who, Keynesian analysis by asserting that li- after studying physics at Leiden University quidity preference is a response to the risk and gaining a PhD for a thesis on extre- associated with the probability distribution mum problems in economics and physics, of interest rate expectations. In many conducted business cycle research from papers, he has repeatedly used a GENERAL 1929 to 1945 at the Dutch Central Bureau EQUILIBRIUM approach to a study of finan- of Statistics. He was Director of the cial INTERMEDIATION and flow of funds Netherlands Central Planning Bureau analysis. In 1961–2 he served on President from 1945 to 1955, Professor of Develop- Kennedy’s COUNCIL OF ECONOMIC ADVISERS. ment Planning at Erasmus University, His wide-ranging interests include STABILI-

© 2002 Donald Rutherford ZATION POLICIES, growth policies and the than its face value, e.g. a pound note in poverty problem. He originated the TOBIT the UK costs only several pence. MODEL method. See also: fiat money See also: flow of funds account Tokyo Round (F1) References A series of tariff cuts arranged under the Purvis, D. and Myhrman, J. (1982) ‘James auspices of the GENERAL AGREEMENT ON TAR- Tobin’s contribution to economics’, IFFS AND TRADE in the period 1973–9. Tariff Scandinavian Journal of Economics 84: reductions were to be implemented in 61–88. equal annual amounts from 1980 to 1987. Tobin, J. (1974 and 1975) Essays in Eco- nomics, Vols I and II, Cambridge, MA: A duty of 20 per cent was reduced by 59 MIT Press. per cent, a 10 per cent duty by 42 per cent —— (1974) The New Economics: One and a 5 per cent duty by 26 per cent. The Decade Older, Princeton, NJ: Princeton EUROPEAN COMMUNITY and Japan made ad- University Press. vance reductions; other countries by 1990. It was the intention that in this round Tobin’s Q (M2) tariff averages weighted by total imports The ratio of the market value of a firm’s of manufactured goods would decline by assets to their replacement value. This is 30 per cent in the USA, 28 per cent in the the driving force of investment decisions European Community and 46 per cent in according to Professor James Tobin of Japan. Smaller reductions in tariffs of Yale University. goods from developing countries (as in Tobin tax (F3, H2) the KENNEDY ROUND) were agreed as they A proposed uniform tax levied by all are sensitive products, e.g. textiles. At the countries of the world on all foreign end of the round, tariffs on manufactured exchange transactions with the aim of goods, weighted by total imports, were to making short-term HOT MONEY movements be cut by 4.9 per cent in the USA, 6 per unprofitable. cent in the European Community and 5.4 per cent in Japan. Tobit model (C5) An econometric model which copes with See also: General Agreement on Tariffs the problem of missing data in the form of andTrade;UruguayRound a shortage of observations beyond a limit toll (D0) point, e.g. zero, so that there are no The charge for the use of a service; in negative values. TOBIN was the first to some cases an excessive charge. Major tackle this problem in his analysis of examples of tolls are those for the use of household expenditure on a durable good. highways and a telephone system to make References long-distance calls. Amemiya, T. (1984) ‘Tobit models: a sur- vey’, Journal of Econometrics 24: 3–61. toll model (J4) Tobin, J. (1958) ‘Estimation of relation- OKUN’s model of a LABOUR MARKET in which ships for limited dependent variables’, a firm hiring a worker has to pay a ‘toll’ to Econometrica 26: 24–36. cover the costs of training and initiation. This model is used to explain cyclical token money (E4) variations in employment and unemploy- Anything accepted as money, not because ment. of its intrinsic value, but because of custom or legal enactment. Thus bank- References notes are token money and gold coins are Okun, A.M. (1981) Prices and Quantities: not. Token money costs less to produce A Macroeconomic Analysis, ch. 2, Wa-

© 2002 Donald Rutherford shington, DC: Brookings Institution; better off. This type of efficiency combines Oxford: Basil Blackwell. both production and exchange efficiencies. tombstone (G1) See also: Pareto optimum A press advertisement recording the de- tails of a new issue or loan. The names on top-sided federalism (H7) the tombstone are the managers and A description of US federalism of the underwriters (or syndicate members) to 1968–78 period in which federal aid and the issue. The amount of the loan and the state spending grew faster than local listing terms are also given. spending. One way in which this occurred was through the COMPREHENSIVE EMPLOY- tontine (G2) MENT AND TRAINING ACT 1973 which replaced A scheme, invented by Lorenzo Tonti, a thirteen separate manpower training pro- Neapolitan banker, in 1653, consisting of grammes to channel additional federal aid several subscribers advancing the same to local governments. amount to a borrower who pays the same amount of interest in total to all the See also: fiscal federalism subscribers until the survivor receives all Torrens, Robert, 1780–1864 (B3) the interest on the amount advanced. Thus A prolific English classical economist who if there are 100 subscribers receiving £50 served in the Royal Marines from 1797 to each in interest, when there are only 50 left 1835 and was a Member of Parliament each subscriber will obtain £100 each and from 1831 to 1835. In a long series of the survivor will receive £5,000 per annum. publications from 1808, he participated in This popular method of raising funds in the major economic debates of the day, the eighteenth and nineteenth centuries particularly on monetary questions, was last used by the British government switching from being an anti-bullionist in to raise a loan in 1789. One of the most the 1820s to membership of the CURRENCY amusing accounts of a tontine is given in SCHOOL. He also formulated the law of Robert Louis Stevenson’s short novel. comparative advantage independently of References Ricardo and the law of reciprocal demand Jennings, R.M. and Trout, A.P. (1976) ‘The independently of John Stuart MILL. tontine: fact and fiction’, Journal of References European Economic History, 5: 663–70. Stevenson, R.L. and Osbourne, L. (1889) Fetter, F.W. (1962) ‘Robert Torrens: Colo- The Wrong Box, London: Longman. nel of Marines and political economist’, Economica New Series, 29: 152–65. top-down linkage model (C5, R5) Robbins, L. (1958) Robert Torrens and the A regional model showing the local reac- Evolution of Classical Economics, Lon- don: Macmillan. tion to national economic change, e.g. cyclical fluctuations in NATIONAL INCOME.It total costs (D0) usually ignores the upward feedback of All the costs of producing a good or economic activity from the region. service. In the short run the total is References divisible into fixed and variable costs, but Klein, L.R. (1969) ‘The specification of in the long run all costs are variable. regional econometric models’, Papers of (J1) the Regional Science Association 23: total fertility rate 105–15. A measure of the average number of live births throughout a woman’s child-bearing top-level efficiency (D0, D6) period. It is calculated by adding the An increase in the total collection of goods average number of live births of all age- available to a society that makes everyone specific groups (15–44 years) together.

© 2002 Donald Rutherford total public debt (H6) which are included in a stock market index, All the bonds and bills issued by the e.g. the FTSE 100. Its aims are a combina- central and local governments of a coun- tion of income and capital growth. try outstanding at a particular time. In the USA this consists only of borrowings by tracking stock (G1) the US Treasury. It is limited in size by the A stock issued by a public company which tracks the value of one part of the GRAMM–RUDMAN–HOLLINGS ACT. company. This permits different valuations Seealso:grossfederaldebt;publicsector of divisions of a firm. The stock can be borrowing requirement issued to the market or to existing share- holders. If the new stock has a high price– total revenue (D0, M2) earnings ratio, the cost of raising capital is 1 All the proceeds from selling a particu- reduced. lar amount of output. 2 The total quantity sold multiplied by tradable discharge permit (Q0) price. A permit allowing the holder to discharge Maximizing total revenue is a practical a specified amount of a pollutant. As this objective of some firms. permit can be sold to another person, the permission can be transferred. See also: managerial models of the firm tradable emission permit (Q0) see total shareholder return (G1) marketabledischargepermit,tradable Dividends + bonus share issues + capital discharge permit gain. trade (D0, F1, G1) tournament model (D0) 1 The sale of goods and services. A model of contracting in which the 2 Exporting and importing. winner receives a carrot and the loser 3 A transaction in a financial market. a stick. This reduces the MORAL HAZARD problem posed by the cost of monitoring Trade Act 1974 (F1) performance. The model is applicable to US federal statute regulating the foreign all compensation schemes which base pay trade of the USA. Under an escape clause, on relative performance, especially those industries can apply for TARIFFS and other for sportsmen or women and top execu- trade restrictions to be erected in their tives. Ever larger prizes are needed to favour if it can be proved that the industry motivate the players. The size of the top concerned has suffered from foreign com- prize should increase with the number of petition as seen in a fall in employment, contestants. output or profits. Under the Act, workers unemployed or threatened with unemploy- References ment as a consequence of imports can be McLaughlin, K.J. (1988) ‘Aspects of tour- given income support, relocation allowan- nament models’, Research in Labor Eco- ces, job search allowances and training. nomics 9: 225–56. town clearing (G2) trade balance (F1) Same-day clearing of a cheque with a A sub-balance of a country’s BALANCE OF value of more than £10,000 within a PAYMENTS showing the relationship between specified central area of the City of Lon- total exports and total imports. It is don after over-the-counter trading has usually divided into a visible balance, closed for the day. referring to goods, and an invisible bal- ance, referring to services. The balance is tracker fund (G1) in surplus if exports exceed imports; in A unit trust investing in the companies deficit if imports are in excess of exports.

© 2002 Donald Rutherford See also: current account trade diversion (F1) The effect of a CUSTOMS UNION in changing trade bill (G2) the flows of goods and services between A BILL OF EXCHANGE payable in one, two, countries with increasing volumes going to three or six months. other members of the union. trade creation (F1) See also: trade creation The effect of a CUSTOMS UNION increasing the volume of trade through the elimina- traded option (G2) tion of previous trade barriers between An OPTION that can be bought and sold members. until its expiry date; at expiry, the last holder can exercise the option. See also: trade diversion Trade Expansion Act 1962 (F1) trade credit (G2) US federal trade statute concerned with 1 Loans between non-financial firms, e.g. the liberalization of trade. a wholesaler’s financing of a new retai- ler by allowing payment months after See also: Kennedy Round the delivery of supplies. 2 Credit offered by a firm to its custo- trade-off (D0) mers. The relationship between two inversely connected variables such that more of one In times of monetary stringency caused by means less of another. Trade-offs occur in a TIGHT MONETARY POLICY, trade credit often many parts of both microeconomics and replaces bank credit. macroeconomics, e.g. the trade-off be- tween work and leisure, between consump- trade cycle (E3) tion of one good and of another of a Fluctuations in the level of national eco- consumer with a fixed income, between nomic activity over a period of years. high wages and high employment, between Although first observed by PETTY, it was efficiency and equity. Famous trade-offs not until MALTHUS, John Stuart MILL and include RICARDO’s between wages and prof- MARX that there were serious attempts to its and PHILLIPS’s between unemployment explain such oscillations. As most trade and inflation. The conflicting aims of cycle theories explain fluctuations in terms individuals and of governments make of changes in investment, the length of the trade-offs inevitable; scarcity necessitates cycle depends on the durability of the choice between competing alternatives. capital good: the shortest are inventory cycles, the longest are infrastructure in- See also: opportunity cost vestment cycles, e.g. in transport systems. trade policy (F1) see commercial policy Seealso:businesscycle;Juglarcycle; Kitchincycle;Kondratieffcycle;Kuznets trade regime (F1, P0) cycle A country, or countries, following a parti- cular trade policy of PROTECTION or FREE References TRADE. Within the policy there can be Haberler, G. (1964) Prosperity and Depres- different rules for various industries and sion, 5th edn, London: Allen & Unwin. products, e.g. import substitution for some Matthews, R.C.O. (1959) The Trade Cycle, and export promotion for others. Cambridge: Cambridge University Press. trade strategy (F1) The balance between production for do- trade deficit (F1) mestic and foreign markets. An outward- An excess of imports over exports. oriented strategy would leave to domestic See also: trade balance producers only those goods that cannot be

© 2002 Donald Rutherford more cheaply produced abroad; an in- proaches and Evidence, Boston: Allen & ward-oriented strategy follows the princi- Unwin. ples of IMPORT SUBSTITUTION and PROTECTION. MacDonald, I.M. and Solow, R.M. (1981) ‘Wage bargaining and employment’, As PROTECTION invites retaliation, a country American Economic Review 71: 896–908. that is inward looking is unlikely to enjoy many ECONOMIES OF SCALE and to be more Trade Union Act 1984 (J5) monopolistic. Outward-oriented econo- UK industrial relations statute that im- mies, e.g. Singapore, Hong Kong and posed a duty on unions to hold secret South Korea, have experienced higher ballots of their memberships for the elec- rates of growth in real national income tion of the officers of the principal execu- per head than inward-oriented countries. tive committee every five years. Also, trade surplus (F1) see trade balance ballots are required every ten years for the setting up of union political funds. trade threat (F1) Political dues cannot be collected from A trade restriction designed to change union members who are certified as exempt non-trade policies of a government, e.g. from contributing or object to doing so. concerning human rights or the cleanliness See also: Employment Act 1980 of the environment. A BOYCOTT is the most common form of threat. Trade Union Reform and Employment See also: economic sanctions Rights Act 1993 (J5) A UK statute which extended the rules for trade union (J5) the balloting of union members, reinforced An association of workers or employers, the union members’ rights, including the especially the former. Trade unions have right, in most cases, not to be excluded or always been concerned with both the expelled from a union, further clarified short- and the long-term welfare of their employment rights and abolished the set- members – with varying degrees of suc- ting of statutory minimum wages by wages cess. These unions have been analysed as councils. monopolists in the labour market, creating market imperfections. Unions are often Trade Unions and Labour Relations criticized for opposing technical change Act 1974 (J5) but they can raise PRODUCTIVITY by en- A UK statute which repealed the Indus- couraging co-operation between manage- trial Relations Act 1971 but retained its ment and labour. Many models of wage provisions on the right not to be unfairly bargaining assume that the employer uni- dismissed and industrial tribunals. It as- laterally selects the level of employment serted trade unions’ immunity from ac- and that the union can only influence the tions in tort and permitted peaceful wage level, but there are models assuming picketing. that unions can bargain about both em- ployment and wages. trade-weighted exchange rate (F3) The exchange rate of one country’s cur- Seealso:closedshop;right-to-workstate; rency for another’s adjusted to reflect the strike;unionshop;USlaborunion;yellow composition of the exports of each coun- dog contract try. References Booth, A.L. (1995) The economics of the trading on the equity (M2) trade union, Cambridge, New York and The effect on the earnings of high GEARING Melbourne: Cambridge University Press. of a company with PREFERENCE SHARES and Hirsch, B.T. and Addison, I.T. (1986) The DEBENTURES as well as ORDINARY SHARES.A Economic Analysis of Unions: New Ap- disproportionate amount of an increase in

© 2002 Donald Rutherford earnings will be available for distribution References to holders of ordinary shares. Coase, R. (1937) ‘The nature of the firm’, Economica New Series, 4: 386–405. trading potential (F1) Commons, J.R. (1934) Institutional Eco- An estimate of the possible volume of nomics: Its Place in Political Economy, exports from one country to another. The Madison, WI: University of Wisconsin greater the NATIONAL INCOME of the coun- Press. tries, the higher the potential; the greater Demsetz, H. (1968) ‘The cost of transact- the cultural and geographical distance ing’, Quarterly Journal of Economics 82: 33–53. between them, the less likely there will be Williamson, O.E. (1975) Markets and exporting. GRAVITY MODELS have been used Hierarchies: Analysis and Antitrust Im- to make this calculation. plications, New York: Free Press. trading price (D0) transaction cost economics (B2) A price that emerges as the consequence of A branch of economics using ‘the transac- a trading activity. tion’ as the fundamental concept of eco- Seealso:listprice;transactionprice nomics and analysing economic problems as contracting problems. This approach to Tragedy of the Commons (Q0) economics considers institutional alterna- The overgrazing of common land through tives and uses as its assumptions BOUNDED each family ignoring the EXTERNALITY of RATIONALITY, opportunism and asset speci- grazing its own sheep. As each family ficity. One of the first economists to ignores the impact of its own land use, emphasize the importance of transactions the quality of the land available to other was COMMONS. families declines. The problem could be References solved by a local government regulation of Groenewegen, J. (ed.) (1996) Transaction the number of graziers or by an AUCTION of cost economics and beyond, Boston, Dor- a fixed number of permits giving access to drecht and London: Kluwer Academic. the land. Williamson, O.E. (1985) The Economic Institutions of Capitalism, New York: See also: common property resources Free Press; London: Collier Macmillan. transaction bonus (J3) transaction price (D4) A reward to a senior executive for the The price actually paid to obtain a unit of successful completion of a TAKEOVER deal. a good or service. This is often different from the LIST PRICE. transaction cost (D0, F3) 1 The running costs of an economic transactions demand for money (E4) system. The amount of money an individual 2 The cost of effecting an exchange or wishes to hold in order to finance current other economic transaction. purchases of goods and services. No These costs, which vary in magnitude from monetary theorist disputes that such a one economic system to another, include demand exists. those of negotiating and drafting contracts See also: demand for money and the subsequent costs of adjusting for misalignments. This concept is fundamen- transferable discharge permit (Q0) see tal to the analysis of economic REGULATION, marketabledischargepermit,tradable labour market hiring, VERTICAL INTEGRATION dischargepermit and competition in the capital market. transfer earnings (D3) See also: Commons The minimum income of a FACTOR OF PRO-

© 2002 Donald Rutherford DUCTION that will keep it in that employ- transformation curve (D0) see ment rather than another, measured by the production possibility frontier earnings of that factor in the best alter- native employment. Any part of a factor’s transformation problem (D0) earnings in excess of transfer earnings is The problem stated in MARX’s Das Kapital ECONOMIC RENT. of deriving prices from values and of deriving profits from SURPLUS VALUE. Solu- See also: opportunity cost tions offered by mathematical economists transfer income (D0) have attracted criticism on account of The income of a person or a firm not their restrictive assumptions. arising from productive activity but, often, References from a governmental grant. The principal Bo¨hm-Bawerk, E. von (1949) Karl Marx examples of these are retirement pensions, and the Close of his System, New York: student maintenance grants and subsidies Augustus M. Kelly. to farmers. If such transfer incomes were Junankar, P.N. (1982) Marx’s Economics, included in the NATIONAL INCOME there ch. 3, Oxford: Philip Alan. would be double counting of FACTOR IN- Roemer, J. (1981) Analytical Foundations COMES – when originally received and when of Marxian Economic Theory, Cam- redistributed as a transfer. bridge: Cambridge University Press. transfer pricing (D4, L2) (P4) The pricing of the goods and services A national ECONOMY in the process of transferred within large organizations, abandoning a CENTRALLY PLANNED ECONOMY especially within MULTINATIONAL CORPORA- for market mechanisms. After 1989 many TIONS. As many of these goods and services of the East European and Soviet econo- are not marketed outside that organiza- mies are of this kind. In Central Europe tion, arbitrary pricing rules, often of a the transition economies are the Czech cost-plus type, are used. It is argued that Republic, Hungary, Poland, Croatia, the transfer pricing can be unfair and used as Slovak Republic and Slovenia; in South a device to avoid corporation taxation in Eastern Europe, Albania, Bulgaria, FYR, high-tax countries. Increasingly tax codes Macedonia and Romania; in the Baltic have insisted on corporations following set states, Estonia, Latvia and Lithuania. rules to produce fair prices. Transfer pri- References cing also has a major impact on the value European Bank for Reconstruction and of international trade as a high proportion Development, Transition Report 1999, of it consists of trade between subsidiaries London. of large international enterprises. Lavigne, M. (1999) The Economics of Transition, 2nd edn, New York: St transfer problem (F2, F3) Martin’s Press. The difficulty of transferring capital in large quantities from one country to an- transitory income (D0) other, e.g. the reparation payments Ger- Unexpected income in addition to perma- many had to make after the First World nent income. Legacies and wins from War. The imposition of a second burden gambling are prominent examples. on countries having to make the transfer raises the possibility of transfers changing transmission mechanism (E4) the TERMS OF TRADE. Whether this happens The means by which changes in the money depends on the relative size of the MAR- supply have an effect on output, employ- GINAL PROPENSITIES TO CONSUME of the reci- ment and prices. The change in the money pient and donor countries for a particular supply leads to a change in interest rates product. in different markets which, in turn, brings

© 2002 Donald Rutherford about a change in expenditures and out- there has been close collaboration with put. However, the speed of reaction to URBAN ECONOMICS. monetary changes depends on the nature References of LAGS in the economy. This mechanism can be regarded as portfolio adjustment as Glaister, S. (1981) Fundamentals of Trans- port Economics, Oxford: Basil Black- a growth in the money supply faster than well. the growth in output will push up prices of Winston, C. (1985) ‘Conceptual develop- non-monetary assets, e.g. property and ments in the economics of transporta- durable goods, and stimulate output of tion: an interpretive survey’, Journal of them. There has always been controversy Economic Literature 23: 57–94. about the mechanism because of the two- way causality between money supply and traveller’s cheque (G2) expenditure changes. A cheque denominated in a major cur- rency and widely accepted throughout the Seealso:Friedman;monetarism world for the purchase of local goods and transnational corporation (L2) services and for exchange into local cur- A firm with substantial operations in rencies. American Express invented this many countries but controlled from its financial instrument in 1891. original home base. This location of activ- traverse (E0) ities in many countries is a response to the The route an economic system takes as it world-wide distribution of resources, gov- moves from one EQUILIBRIUM to another. In ernmental constraints, market opportu- a sense, an economy is in DISEQUILIBRIUM as nities and technology. A firm with this it proceeds along the traverse. wide geographical BASE is able to benefit from increased economies of scale, full References utilization of its management and greater Hicks, J.R. (1965) Capital and Growth, ch. returns to its RESEARCH AND DEVELOPMENT 16, Oxford: Oxford University Press. expenditures. The first examples of trans- treasury (H1, M1) nationals are probably the large overseas A department in charge of finance in a trading monopolies advocated by the MER- government or corporation. CANTILISTS, e.g. the East India Company. See also: multinational corporation treasury bill (G1, H6) A short-term means of government bor- (R4) rowing modelled on a commercial BILL OF The study of the demand for transport EXCHANGE; invented by BAGEHOT in 1877. In and the relative merits of different systems the UK treasury bills effect borrowing for for carrying persons and goods. This ninety-one days, in the USA for three, six, requires applications of consumer theory nine or twelve months. to determine demand for what is both an intermediate and a final service, and an Treasury model (C5) analysis of transport industries to under- The economic forecasting model used by the stand supply problems. Early transport UK Treasury introduced in the 1970s and economists attempted to set out the rules relating 200 variables to each other; by 2001 for optimal pricing, investment and cost in a series of experiments 357 were used. allocation; later there was more interest in References the impact of government regulation on ‘Forecasting in the Treasury’, Economic resource allocation and distribution, con- Progress Report, June 1981. gestion and the multiproduct nature of transportation firms. Increasing use has Treasury view (N1) been made of COST–BENEFIT ANALYSIS and The attitude towards the management of

© 2002 Donald Rutherford the UK economy in the 1920s and 1930s being immune to small probabilities of attacked by KEYNES. The Treasury believed error when players make their choices. in balanced national budgets and attacked trend (C1) PUBLIC WORKS schemes on the grounds that The general movement of a time series in they would not stimulate aggregate eco- the long term; the secular change. This is nomic activity because of ‘CROWDING OUT’. often measured by the LEAST SQUARES This view was abandoned in 1937 when METHOD where the variable examined is the Treasury at last conceded the role of the dependent variable and time is the public works as part of a COUNTERCYCLICAL independent variable. POLICY. trending price (D0) References A price which follows a trend. Middleton, R. (1985) Towards the Mana- ged Economy: Keynes, the Treasury and trend periods (E3) see Kondratieff cycle the Fiscal Policy Debate of the 1930s, London: Methuen. trickle-down theory (O1) Peden, G.C. (1984) ‘The ‘‘Treasury View’’ A theory of economic DEVELOPMENT assert- on public works and employment in the ing that development should follow tradi- inter-war period’, Economic History Re- tional growth patterns with prosperity view 37: 167–81. gradually coming to the least deprived members of society. This theory has also treat effect (J3) been applied to advanced free market A deliberate increase in the wages of non- economies in which the richer members of union employees of a firm undertaken by society through their spending raise the a management to show that UNIONS confer real incomes of the poor. The extent of no benefit on workers. This tactic has been trickling down is usually measured by an used as a means of reducing the UNION- increase in the real incomes of the poor, IZATION of a firm’s labour force. rather than by the removal of all income inequality which would need a ‘flood’. See also: threat effect Seealso:dualeconomy;Mandeville Treaty of Rome (F0) Triffin paradox (F3, N2) The treaty that set up the EUROPEAN ECO- Although extra US dollars were needed NOMIC COMMUNITY in 1958. The signatories after 1945 throughout the world to in- were France, West Germany, Italy, the crease foreign currency reserves, the extra Netherlands, Belgium and Luxemburg. dollars accelerated inflation causing the Subsequent treaties have enlarged the extra dollars to be devalued thereby redu- EEC: in 1973 the UK, Ireland and Den- cing the value of reserves. This problem mark joined, in 1981 Greece and in 1986 seriously undermined the BRETTON WOODS Spain and Portugal. The treaty establishes system. the EEC as a CUSTOMS UNION with mobility of capital and labour within it. trigger mechanism (G2) A method of PROGRAM TRADING. This See also: Maastricht Treaty method of mathematical analysis uses as key market indicators a cash index to trembling-hand perfect equilibrium indicate present values and a futures index (C7) to indicate future values. In GAME THEORY a co-operative equilibrium, e.g. when a player defects for a number of truck (J3) rounds from a game and then returns to A wage payment in goods or in vouchers co-operation. There can be trembling- to obtain goods at the shops of the hand perfection through NASH EQUILIBRIA employer. In the UK, the Truck Acts of

© 2002 Donald Rutherford 1831, 1887 and 1896 made the truck Contro1eur General of France, from 1774 system illegal, replacing it with wage pay- to 1776. His celebrated Re´flexions sur la ments in the current coin of the realm. Formation et la Distribution des Richesses (1776) anticipated many of the central See also: Wages Act 1986 themes of SMITH’s Wealth of Nations in true and fair view (M4) that it discussed FREE TRADE,aLAISSEZ-FAIRE An auditor’s opinion that a set of accounts approach to industry, the effects of the are both devoid of fraud and in conformity DIVISION OF LABOUR, VA LU E and price theory, with measurement conventions regarded by a STAGES THEORY and the determinants of professional accounting institutes as accu- factor prices. rate for portraying the current state of a References business. A major concern since 1970 has Groenewegen, P.D. (1977) The Economics been to ensure that the values used in of A.R.J. Turgot, Dordrecht and Lan- statements of accounts have been adjusted caster: Martinus Nijhoff. to eliminate the effects of inflation. turnkey contract (M2) Seealso:currentcostaccounting;state- A construction and engineering contract ments of Standard Accounting Practice to build and equip a factory, a power trust fund (G2, H5) station or other large capital project so 1 A fund managed by a group of trustees that it is completely ready for use. The for the benefit of others. purchaser merely has to turn the key in 2 The US federal government fund which the front door to start using the capital receives the revenue from a particular asset. Contracts of this kind are popular tax in order to finance a particular in Third World countries. welfare payment. The best known is (M4)seesalesratios the OLD AGE, SURVIVORS, DISABILITY AND turnoverratios HEALTH INSURANCE (founded in 1935 and turnover tax (H2) extended to cover disabled persons in A tax levied on the value of the sales 1956) which is financed out of the revenue of a firm. It is distortionary in that revenue from the payroll tax. Other the total tax paid will be higher for goods trust funds include the Hospital Insur- passing through several firms to their final ance Fund and the Unemployment In- sale than for those which do not. surance Fund. In the USA the balance of a trust fund is either held as a cash turnpike theorem (O4) balance with the US Treasury or in- A proposition in the theory of ECONOMIC vested in US securities. GROWTH for providing an optimal pro- gramme over a finite horizon to reach a Truth in Lending Act 1968 (G2, R2) particular objective. These theorems make US CONSUMER PROTECTION LEGISLATION re- different assumptions about the quantities quiring lenders of money to inform bor- and relative prices of factor inputs re- rowers of the true rate of interest on their quired to follow a particular growth path. loans. The UK parallel is the Consumer Credit Act. References Turgot, Anne-Robert Jacques, 1727–81 Dorfman, R., Samuelson, R.A. and So- low, R.M. (1958) Linear Programming (B3) and Economic Analysis, New York: French PHYSIOCRAT. Educated at a Paris McGraw-Hill. seminary and the Sorbonne, he abandoned careers in the church and the law to tweenies/tweenagers (J1, M3) become a tax administrator as intendant Persons aged 10 to 14 years in the transi- of Limoges, from 1761 to 1774, and tion period from being children to being

© 2002 Donald Rutherford teenagers. Their formidable spending See also: price discrimination power has been noted by marketing ana- References lysts. Feldstein, M. (1972) ‘Equity and efficiency twenty-four-hour trading (G2) in public sector pricing: the optimal two Trading at any time of day on the world’s part tariff’, Quarterly Journal of Econo- stock exchanges because of their being mics 86: 175–87. located in different time zones and often two-speed economy (E6, P0) allowing AFTER-HOURS DEALINGS. A modern national ECONOMY with one two-digit industry (L0) sector in recession and the other booming. An INDUSTRY defined according to a broad Often it is manufacturing that is in decline classification such that an economy’s in- and the services flourishing. dustrial structure is divided into no more two-stage least squares (C1) than ninety-nine industries. This is usually An econometric method which makes use contrasted with a THREE-DIGIT INDUSTRY. of all predetermined variables in an econo- two-dollar broker (G2) metric model so that the parameters of a An independent broker on the NEW YORK single relation can be estimated. The STOCK EXCHANGE who executes orders to independent variable is replaced by a buy and sell on behalf of commission matrix of least squares regressions of that brokers. variable on all the predetermined variables. The final stage is to apply least squares two-gap development model (O2) again to the variables of the equation. A planning model which takes into account a savings gap (savings needed to reach a See also: three-stage least squares growth target less actual domestic savings) two-tailed test (C1) and a foreign exchange gap (between ex- A statistical test to show that a NULL HY- penditure needed on imports to achieve POTHESIS lies between a plus and minus target growth and earnings from exports). range of a statistic. If a 95 per cent CON- References FIDENCE INTERVAL is used, then the null Chenery, H.B. and Bruno, M. (1962) hypothesis is rejected if it lies in the +2.5 ‘Development alternatives in an open or 2.5 per cent tails. economy: the case of Israel’, Economic See also: one-tailed test Journal 72: 79–103. tying (L4) two-part pricing (D4) A restrictive trade practice by which a The separate pricing of the products of a supplier requires a customer to buy with fixed input and a variable input in order to one product associated products; for ex- maximize profit. The prices usually consist ample, with soap, soap dispensers. of a fixed fee and a variable charge. This has long been used for pricing in the tying contract (L4, M3) energy and telecommunications industries. A sales contract which specifies that a particular good or service will only be two-part tariff (D0) supplied if an associated one is purchased, A price consisting of two parts. One part e.g. that oxygen will only be supplied if pays for fixed costs, the other for VARIABLE ancillary equipment is ordered. Under US COSTS. A major example of this is the and UK law this RESTRICTIVE PRACTICE is charging of a telephone rental to cover outlawed. fixed costs and the separate charging for calls to pay for variable costs. See also: upselling

© 2002 Donald Rutherford Type I error (C1) Type II error (C1) The rejection of a NULL HYPOTHESIS which The acceptance of a NULL HYPOTHESIS which should be accepted. should be rejected.

© 2002 Donald Rutherford U

U-form (L2) produce detailed independent forecasts of The unitary form of business enterprise the UK economy. Apart from the Treasury organized in the traditional way of divid- and the BANK OF ENGLAND, forecasting is ing it up according to function. This is an also undertaken by Henley Forecasting, appropriate structure for smaller enter- the NATIONAL INSTITUTE OF ECONOMIC AND SO- prises; for larger organizations, a U-form CIAL RESEARCH, London Business School, imposes high communication costs. Liverpool University, Oxford Economic Forecasting, the CONFEDERATION OF BRITISH Seealso:H-form;M-form;X-form INDUSTRY, Goldman Sachs and the OECD. U hypothesis (O4) Seealso:economicforecasting;linkage A view of the income distribution of less models developed countries advanced by KUZNETS and others that the share of NATIONAL IN- References COME going to the poorest part of the HMSO, Economic Trends, monthly. population declines at the start of eco- Laury, J.S.E., Lewis, G.R. and Ormerod, nomic development and rises only in the P.A. (1978) ‘Properties of macroeco- later stages of development, often because nomic models of the UK economy: a of a change in government policies to help comparative study’, National Institute the poor. The income distribution often Economic Review 83: 52–72. changes over time in this way because UK gilts market (G1) development has taken the form of indus- Market in UK government bonds. About trialization of benefit to only a small part 150 government securities are traded in this of the economy. market. After the London market was See also: Kuznets curve deregulated twenty-nine PRIMARY DEALERS established themselves in the market, using References the USA as a model: with this number of Adelman, I. and Marris, C.T. (1973) Eco- dealers no firm will have a vital proportion nomic Growth and Social Equity in of the market. The Central Gilts Office acts Developing Countries, Stanford CA: Stanford University Press. as the clearing house for transactions in gilts. Kuznets, S. (1966) Modern Economic Growth: Rate, Structure and Spread, UK stock exchanges (G1) see New Haven, CT: Yale University Press. International Stock Exchange UK economic forecasting (E6) UK taxation (H2) The work of organizations that regularly A mixture of taxation on households

© 2002 Donald Rutherford (income tax and national insurance con- change, the business cycle and change of tributions), on firms (corporation tax), on government or governmental policies. wealth (capital gains and capital transfer See also: risk taxes) and on goods and services (VAT and excise duties) with offsetting allowan- References ces at the national level. Local government Borch, K.H. (1968) The Economics of currently has the revenue from the COUNCIL Uncertainty, Princeton, NJ: Princeton TAX and UNIFORM BUSINESS RATE. Recent University Press. statistics indicate both the relative yield of these taxes and the switch from direct to unconditional grant (H7) indirect taxation since 1979. Australian federal grant to an individual state which is a means of sharing tax References revenues to provide public services at Kay, J.A. and King, M.A. (1990) The the same level throughout Australia. As British Tax System, 5th edn, Oxford: the use of these grants is not stipulated, Oxford University Press. it is possible for them to be used to umbrella fund (G2) reduce taxes rather than to maintain A fund set up abroad to evade restrictions services. on investment imposed by a domestic See also: Commonwealth Grants Com- government. mission;federalfinance

Umbrella Group (O2, Q0) uncovered interest parity (E4) The negotiating group of non-EU devel- The assertion that domestic interest rates oped countries at climate conferences con- will equal foreign interest rates when con- sisting of Norway, Russia, the USA, verted into the domestic currency, given Canada, Japan, Australia, New Zealand that investors are risk neutral and capital and Switzerland. controls are absent. unbiased estimator (C1) UNCTAD Liner Code (L9) A PARAMETER of a population that is the The set of rules of UNCTAD allowing same as the corresponding statistic for a shipping conferences to fix cargo rates and sample taken from it, e.g. the ARITHMETIC to share out routes between the ports of MEANS are the same. UNCTAD members. unbundling (G2, G3) undepletable externality (D0, Q0) 1 The separate charging for the services An EXTERNALITY with collective effects so provided by a bank or other financial that if one person is affected by it the institution. effect on others will not be diminished, e.g. 2 A de-merger which involves the selling smog. off of the component parts of a firm. See also: pollution control uncertainty (D8) A state of affairs with an unknown out- underemployment (J2) come not subject to a probability distribu- Work with a low PRODUCTIVITY, e.g. agricul- tion. In economics, there are many states tural labour on small farms; part-time of uncertainty, e.g. of demand, of returns employment of workers who want full- to investment. Uncertainty imposes many time jobs. The extent of underemployment costs, e.g. the holding of higher inventories is reflected in low wages and in a lower to safeguard against an irregular supply of output per person than that of workers in raw materials and components. The forms the most efficient enterprises of that in- of uncertainty are as various as its deter- dustry. Much underemployment occurs in minants – competition, technological the secondary sector of the labour market.

© 2002 Donald Rutherford underground banking (G2) underwriter (G2) A way of transferring money that disguises 1 A financial institution promising to take the transaction; often used for LAUNDERING up the unsold shares of a new issue. MONEY. To effect a secret transfer from X 2 An insurance company or LLOYD’S syn- to Y, X deposits the money with a banker dicate which accepts an insurance risk. who then asks a third party to give that unemployment (J6) amount of money to Y. This type of 1 The state of being part of a LABOUR FORCE, banking has been practised for centuries wanting to work, but without a job. in the Middle East and Asia, especially in 2ADISEQUILIBRIUM phenomenon arising India where it is known as hawala.It from inflexible prices. requires much trust in the banker. underground economy (K4, P0) Unemployment can take many forms – The economic activities of a nation not VOLUNTARY, INVOLUNTARY, FRICTIONAL, STRUC- officially recorded and sometimes illegal. TURAL. It has been measured both as a Seealso:blackeconomy;informalecon- STOCK and as a FLOW, using as statistical omy sources registers of persons declaring themselves to be unemployed and house- References hold surveys. In CLASSICAL ECONOMICS, un- Geige, E.L. (ed.) (1989) The Underground employment is viewed as a temporary Economies, Cambridge: Cambridge Uni- phenomenon until price flexibility restores versity Press. an economy to full employment. KEYNES underlier (G1) challenged the classical view and later The asset delivered under a DERIVATIVE economists have been sceptical about the instrument contract. For example, for a clearing of markets. wheat futures contract, wheat is the under- See also: natural rate of unemployment lier. Also an underlier can be a market variable (such as an interest rate or secur- References ity price) for derivatives settled in cash. Layard, R. (1986) How to Beat Unemploy- ment, Oxford: Oxford University Press. underlying inflation rate (E3) Minford, P. (1983) Unemployment: Cause The adjusted RETAIL PRICE INDEX with sea- and Cure, Oxford: Basil Blackwell. sonal food prices, the COUNCIL TAX and Sinclair, P. (1987) Unemployment: Eco- mortgage interest payments removed. nomic Theory and Evidence, Oxford: Basil Blackwell. Seealso:coreinflation;headlinerate unemployment causes (J6) undertrading (M2) A method of classifying the types of UN- Operating a firm with excess capacity EMPLOYMENT, based on the theory of em- because of a low demand for its products. ployment held by a particular labour economist. CLASSICAL ECONOMISTS, with their Seealso :overtrading;X-efficiency belief that all markets ultimately clear, underwater stock option (G1) believed that unemployment was a short- FRICTIONAL An OPTION whose exercise price is more term phenomenon of a type; if than the current market price. it was longer it could be attributed to a change in the structure of industry. KEYNES underweight on a share (G1) insisted that unemployment could be INVO- Possessing a holding of a stock market LUNTARY, as a consequence of a deficiency security below the desired amount. in demand. Thus, it became popular to

© 2002 Donald Rutherford classify unemployment as FRICTIONAL or statistics are regularly published in the STRUCTURAL. The rapid pace of technologi- Eurostats Labour Force Survey; US statis- cal change and the growth of welfarism in tics are published by the Bureau of Labor many countries in the post-1945 period Statistics (USA); and UK statistics by the suggested new causes of unemployment. Department for Education and Employ- Changes in the relative cost of capital and ment (UK). Governmental bodies charged labour and the relationship between the with the task of collecting these data level of unemployment benefits and the constantly attempt to refine their defini- pay of jobs at the bottom of the earnings tion of unemployment to obtain a more league have also been noted as causing accurate measure: by doing so, they invite unemployment. the accusation that they are distorting the figures. In the UK, for example, there were References fifteen changes in the statistical conven- Sachs, J.D. (1983) ‘Real wages and em- tions used in the period 1979–86 which ployment in the OECD countries’, some critics have claimed illegitimately Brookings Paper on Economic Activity. reduced the numbers unemployed by unemployment compensation (J6) 400,000. A welfare payment to unemployed people unemployment trap (J6) often based on an insurance scheme. This The barrier to employment caused by benefit is a usual provision in developed unemployment benefits. If these benefits countries, but it is as rare in developing are greater than the wages of low-paid countries as it was in the Soviet-type workers, job search and accepting jobs are economies. In those countries offering this often discouraged. The extent of this trap form of compensation, payments have is measured by the ratio of benefits to become more generous over time: after income, the REPLACEMENT RATIO. 1973, the unemployment benefit rate reached 75 per cent of after-tax incomes Seealso:povertytrap in major European countries. unequal exchange (D0, F1) unemployment spell (J6) Trading which is systematically biased A completed period of UNEMPLOYMENT. against one party because of a movement Spells are likely to be longer at higher in the NET BARTER TERMS OF TRADE or because levels of benefit, when workers have sav- of an unequal distribution of productive ings and when the overall rate of unem- assets. ployment is high. The number of spells has unfair labour practice (J2) been increasing in both the US and UK Conduct of an employer or an employee labour markets. attracting penalties under labour relations References legislation. It was possible for employers to Akerlof, G.A. and Main, B.G.M. (1980) commit such practices under the National ‘Unemployment spells and unemploy- Labor Relations Act (WAGNER ACT) of 1935 ment experience’, American Economic in the USA; in 1947, the TAFT–HARTLEY ACT Review 70: 885–93. extended this to US labor unions also. The short-lived Industrial Relations Act of unemployment statistics (J6) 1971 in the UK made use of this concept. Data on the total numbers within a country’s labour force without a job but uniform business rate (H7) seeking employment. It is customary to UK property tax on businesses levied at the subdivide this information by sex, age, same rate throughout England from April industry, occupation and duration of un- 1990, with separate Scottish and Welsh employment. European unemployment business rates, to replace business RATES

© 2002 Donald Rutherford previously fixed by local authorities. By Israel and Eastern Europe but low in the making this form of local taxation uni- USA. Between regions of a country it form, rates rose in the more prosperous varies because of differences in the indus- south of England and fell in the less trial structure and in state laws if the prosperous north. Transitional arrange- country has a federal constitution (e.g. in ments over a five-year period cushioned the USA, southern states with ‘RIGHT-TO- the effects of the change. WORK’ legislation have lower levels of unionization). Unionization is higher in Seealso:communitycharge;rates most large and OLIGOPOLISTIC firms as the Uniform Commercial Code (K2) MARGINAL COST of recruiting an extra mem- A legal code enacted in 1952 in Pennsyl- ber is lower there than in scattered small vania and then copied, with some varia- firms. Before the growth of WHITE-COLLAR tions, by all other US states and territories trade unions it was thought that technical except Louisiana and Puerto Rico. It change would reduce unionization and provides a flexible approach to the forma- also that increases in female LABOUR FORCE tion and performance of contracts. PARTICIPATION would reduce overall partici- pation. These fears have not been entirely uniformity assumption (D4) fulfilled. However, the pattern of increas- CHAMBERLIN’s assumption that under MONO- ing unemployment, particularly the decline POLISTIC COMPETITION each firm of an indus- of heavy industries with many manual try has identical cost and demand curves. jobs, has reduced overall unionization. uniform price (D0) Unionization is also known as union A price that is the same for all groups of density. consumers because no PRICE DISCRIMINATION Union of National Economic Associa- is being practised. tions in Japan (J5) unimodal distribution (C1) Founded in 1950 as the only nation-wide A distribution of numbers with only one Japanese federation of associations of MODE. scholarly economics, commerce and busi- ness administration organizations. Its unintended investment (E3) thirty-five groups include societies for Investment that occurs despite not having accounting, agricultural economics, eco- been planned. It chiefly takes the form of nomic sociology, economic geography, the an accumulation of stocks (inventories) history of economic thought, planning, because sales are less than predicted. public utility economics and socialist union(J5)seeinternationalunion;local economies. It is based at Waseda Univer- union;tradeunion;USlaborunion sity, Tokyo. union density (J5) see unionization union shop (J5) A firm which requires all employees within Union Douanie´re et Economique de a short specified time of taking up em- l’Afrique Centrale (F0) ployment to be members of a US LABOR A CUSTOMS UNION with a common central UNION recognized as having COLLECTIVE BAR- bank set up in 1966 between Cameroon, GAINING rights in that firm,. The US the Central African Republic, the Congo equivalent of the UK post-entry CLOSED and Gabon. SHOP. The looser meaning of a union shop unionization (J5) is a workplace with unionized workers. The proportion of a LABOUR FORCE in Seealso:agencyshop;right-to-workstate membership of TRADE (LABOR) UNIONS. Un- ionization varies greatly from country to union threat model (J5) country, being very high in Scandinavia, An economic model which shows that

© 2002 Donald Rutherford employers pay above the market rate to References discourage unions from recruiting workers Lewis, H.G. (1963) Unionism and Relative into membership. Wages in the United States, Chicago: University of Chicago Press. Seealso:bargainingtheoryofwages —— (1983) ‘Union relative wage effects: a survey of macro estimates’, Journal of Labor Economics 1: 1–27. (J5) union wage effect Mulvey, C. (1978) The Economic Analysis The difference between the wages of un- of Trade Unions, Oxford: Martin Ro- ionized and non-unionized workers. In the bertson. figure, the union raises wages from W0 to union wage policy (J3, J5) W1 by restricting employment to N1.As the principal concern of unions is wage The course of action of US LABOR or TRADE negotiations, this effect is an indicator of UNIONS in wage negotiations, usually with their success. US studies suggest that the the aims of obtaining the same pay for the effect is about 30–40 per cent when union same job within an establishment and the and non-union wages are compared. The equalization of pay for similar workers effect is larger for young than for older across establishments. DUNLOP treated the union as a firm with the overall aim of workers, for non-whites than for whites. It maximizing the total wage bill of its is greater in industries with MONOPOLY members – a view regarded as too simplis- POWER and in sector-wide bargaining. It tic by Ross who encouraged labour econ- was greater in the interwar depression, and omists to examine more facets of union in the late 1970s, because the unionized behaviour in COLLECTIVE BARGAINING. The sector could fight wage cuts. In the UK, greatest achievement of union wage policy the effect is measured by comparing wages is the standardization of wage rates for under COLLECTIVE BARGAINING agreements workers in the same occupational group, with those elsewhere in the economy: the thus preventing labour from competing effect can vary from 10 to 25 per cent. against itself. Pure union wage effects are difficult to measure as there may be a difference in References the quality of unionized and non-union- Dunlop, J.T. (1950) Wage Determination ized workers. under Trade Unions, 2nd edn, New York: Augustus M. Kelly; Oxford: Basil Blackwell. Ross, A.M. (1948) Trade Union Wage Policy, Berkeley, CA: University of Ca- lifornia Press. unipolar concentration (R1) The build-up of the principal economic activities of a country in one centre, as, for example, in the Tokyo area. This concen- tration takes advantage of ECONOMIES OF SCALE, and of regional specialization. unitary elastic (D0) ELASTICITY equal to +1. If a demand curve is of this elasticity throughout, then it will take the shape of a rectangular hyperbola. Over the part, or whole, of a demand curve of unitary elasticity, there will be

© 2002 Donald Rutherford constant TOTAL REVENUE associated with in 1964, it has met subsequently in 1968, each point on the curve because the 1972, 1976, 1979, 1983 and 1987; all percentage change in quantity demanded members of the United Nations and its will be matched by a percentage change in specialized agencies belong to it. price of the same magnitude in the oppo- Its efforts have been less than success- site direction. ful: in the 1980s, international agreements on rubber, coffee, cocoa and tin were incapable of protecting Third World coun- tries from falls in prices and the great increase in their foreign debts. The tin agreement failed in 1985 with the bank- ruptcy of the buffer stock; coffee produ- cers found it increasingly difficult to come to an agreement. Success is unlikely until developed countries reflate their econo- mies to provide bigger markets for pri- mary products and less developed countries diversify their economies. United Nations Development Pro- gramme (O2) A United Nations organization formed in 1965 to render technical assistance to developing countries. It undertakes the work previously done by the UN Ex- unit banking (G2) panded Programme of Technical Assis- A domestic banking system with single tance and the UN Special Fund. It offers banks each operating from only one loca- soft loans for development. tion. US retail banking was originally of this form but gradually in the twentieth United Nations Framework Conven- tion on Climate Change (Q0) century BRANCH BANKING throughout a A set of principles formulated at the Earth county or a state was permitted and BANK Summit in Brazil in 1992. It concentrated HOLDING COMPANIES were permitted. on climate change attributable to human Seealso:correspondentbank;McFadden activity and recommended precautionary BranchBankingAct1927 measures to anticipate this change. The parties to the agreement were expected to unit cost (D2) promote sustainable development, espe- The cost of producing one unit of a cially by reducing carbon dioxide emis- product. This is calculated as the AVERAGE sions. COST of producing a batch or a standard unit for that type of production, e.g. a United Nations Industrial Development book or a barrel of beer, or the MARGINAL Organization (O2) COST of producing the last unit. A Vienna-based organization created in 1967 to promote Third World industriali- United Nations Conference on Trade zation by advising on industrial strategy and Development (F1, O0) and evaluating projects. An organ of the General Assembly of the United Nations with the aim of improving unitization (G2, R1) the trade of less developed countries, The division of real property into tradable particularly through international com- portions to provide a new form of invest- modity agreements. After its first meeting ment. Thus a large building can be sold in

© 2002 Donald Rutherford portions which are regularly traded like extensive branch network. shares in companies. 4 A bank offering a broad range of financial services, including retail bank- See also: timeshare ing, corporate banking and treasury unit of account (E4) operations. A MEDIUM OF ACCOUNT used as a measure or standard of value because of the stability Unlisted Securities Market (G1) of its value. Hard currencies are particu- The second tier of the London Stock larly used for this purpose. Exchange, created in November 1980, to enable directors unwilling to apply for a Seealso:mediumofaccount;nume´raire full listing on the exchange to deal in their unit pricing (D0) company’s shares. For a listing on the Quoting prices per unit of weight, e.g. X USM a company needs a three-year record cents per ounce (or gram), so that goods of successful business and the directors produced in different standard sizes can be must sell at least 10 per cent of the compared. company, whereas for a full listing the company needs a five-year record and a unit tax (H2) minimum sale of 25 per cent. In 1980 A tax per unit sold usually taking the form thirty-five companies were given a listing of a SALES or PURCHASE TAX. on the USM; in 1985 ninety-eight compa- nies joined; about 350 companies were unit trust (G2) listed by 1987. The attraction of a listing A trust that purchases stock exchange SE- on this market is the lower cost compared CURITIES and sells unit portions of the with being listed on the exchange. In the portfolio acquired to the general public. first five years of its existence, the USM Many unit trusts have specialized portfo- raised £882.6 million. It was succeeded by lios, concentrating on property shares or the Alternative Investment Market in securities of a particular country, on the 1995. yield of a portfolio or the rate of growth of its capital value. The trust managers References charge the unit holders for their invest- Bannock, G. and Doran, A. (1987) Going ment management. This investment device, Public: A Report on Unlisted Securities, introduced in the UK from the USA in London: Economist Intelligence Unit. 1931, is attractive to the small investor as a means of diversifying RISK. unpaid work (D1, J3) Productive employment without remu- Seealso:investmenttrust;mutualfund neration that occurs within households unit value index (D0) and family-owned businesses. Such work A price index calculated by dividing the is broadly defined as any activity which is total value of a good by the total quantity perceived to produce utility, satisfying of it. Since technical progress involves the either market or non-market needs. It is substitution of light goods for heavy measured by its OPPORTUNITY COST and is goods, unit value indices underestimate usually excluded from national accounts the magnitude of price changes. calculations of output, excepting in the case of work on family farms. Children are universal banking (G2) often ordered to do this kind of work; 1 World-wide provision of financial ser- adults out of moral obligation often be- vices by one bank. come unpaid CARERS. 2 Provision of banking facilities for a whole population. unproductive labour (J0) see productive 3 A large bank, or a post office, with an labour

© 2002 Donald Rutherford unreported sector (K4, P0) (1979) Current Issues in Urban Econom- That part of a national economy that ics, Baltimore, MD, and London: Johns evades government statisticians and is Hopkins University Press. largely untaxed. Uruguay Round (F1) See also: black economy The GATT negotiations of 1986–91 with 92 participant countries. The principal fea- upcoding (M2) tures of this round were an attempt to A device to obtain higher medical or other reduce the protectionism of developed professional fees by exaggerating the ser- countries, without full reciprocity from less iousness of the condition being addressed. developed countries, and to reduce US and EUROPEAN COMMUNITY subsidies to agricul- upper quartile (C1) ture thereby cutting surpluses and making The value of a set of numbers such that world agricultural markets work more three-quarters of the numbers are lower in smoothly. This is the first time a policy to value. This is often used in the study of deal with agricultural products has been income distributions. The seventy-fifth the subject of GATT negotiations – even PERCENTILE. reductions in agricultural sanitary regula- Seealso:lowerquartile;median tions have been proposed as they can act as a barrier to trade. Trade-related invest- upselling (M3) ment, INTELLECTUAL PROPERTY rights and Selling an extra item allied to the original trade services were also covered. purchase, e.g. selling a side dish to a main course in a restaurant. Seealso:DillonRound;KennedyRound; Tokyo Round upstream firm (L2) A firm engaged in an early stage of user charge (D0, H0) production; for example in the case of the 1 A charge per quantity of an emission oil industry, before refining is done. discharged into a sewerage system. 2 A charge for a service provided by a urban economics (R0) central or local government or by a The study of land use, location decisions and public enterprise, e.g. a ticket for admis- the growth of cities and towns. This broad sion to a swimming pool. These charges subject encompasses the economic dimen- are based on the AVERAGE COST or MAR- sion of all activities in urban areas, including GINAL COST of providing the service. industry, housing, crime and poverty. user cost (M2, M4) See also: land economy 1 The cost of capital depreciation attribu- References table to one unit of output. Alonso, W. (1964) Location and Land Use: 2 The price a firm should pay for using its Toward a General Theory of Land Rent, own capital stock. Cambridge, MA: Harvard University use value (D0) see value in use Press. Evans, A.W. (1985) Urban Economics: An US federal finance (H7) Introduction, Oxford: Basil Blackwell. Finance raised by taxes and borrowing to Fujita, M. (1989) Urban Economic Theory, finance the activities of the federal govern- New York and Cambridge: Cambridge ment of the USA. The power to tax is University Press. Maki, W.R. and Lichty, R.W. (2000) Ur- derived from Article 1, section 8, of the ban regional economics: concepts, tools, US Constitution that gives the Congress applications, Ames, IA: Iowa State Uni- power to levy and collect taxes and duties versity Press. in order to pay debts and provide for Mieszkowski, P. and Straszheim, M. (eds) common defence and the general welfare

© 2002 Donald Rutherford of the USA. This article also requires that cause of the importance of the dollar. Entry the rates of taxation should be uniform to the market is difficult. As a dealer must throughout the states of the union. Most have 0.75 per cent of daily turnover, exclud- of tax revenue at the federal level comes ing trades among dealers, to qualify, entry from the individual income tax and is used means either attracting business away from both to finance federal expenditures and existing dealers or purchasing an existing to give grants to state governments. dealer, as some UK and other banks are now attempting. The margins have to be See also: federal finance very small, sometimes as low as 1/64 of a U-shaped frequency curve (C1) point, to be competitive. A frequency curve in the shape of the letter ‘U’ with maxima at both ends of it. US Treasury market (G1) US securities market in which 35,000 US labor union (J5) different bonds, bills and notes issued by A voluntary association of employees with governmental agencies are traded. Domi- the major aim of COLLECTIVE BARGAINING for nant in the market is the Federal Reserve improvements in wages and other condi- Bank of New York that does 25 per cent tions. These are either LOCAL UNIONS (re- of the clearing. stricting membership to a local area) or INTERNATIONAL UNIONS (covering the whole usury (E4) of the USA). Although unions have ex- An exploitative rate of interest; formerly isted in the USA for 200 years, they have the term for ‘the rate of interest’ as the not achieved the same levels of UNIONIZA- Judaic, Islamic and Christian religions TION as in many other countries, including condemned any rate of interest as wrong. the UK, partly because of the anti-union Usury laws were common either to outlaw legislation in some of the southern states. the charging of interest or to impose a ceiling rate. Economists as far back as the See also: right-to-work state MERCANTILISTS realized that a maximum References rate of interest is often unenforceable. There are still laws in the UK and USA Freeman, R.B. and Medoff, J.L. (1984) What Do Unions Do?, New York: Basic governing the maximum rate of interest Books. that money lenders can charge. Usury is a major issue in ISLAMIC BANKING today. US tax reform (H2) see Tax Reform Act 1986 util (D0) One unit of satisfaction. If it were possible US Trade Representative (H1) to measure CARDINAL UTILITY then the An office set up in 1963 as part of the amount of satisfaction would be expressed Executive Office of the US President to in utils. Most economists have regarded it direct trade negotiations and formulate as impossible to count utils as UTILITY is a trade policy. It now operates under the subjective valuation. authority of the Omnibus Trade and Competitiveness Act 1988. Seealso:ordinalutility;revealedprefer- ence US Treasury bond market (G1) US bond market consisting until 1986 of utilitarianism (B1) only thirty-five PRIMARY DEALERS. Its daily An approach to moral philosophy popu- dealings of $100 billion or more make it larized by BENTHAM and originally devised one of the most influential financial mar- by Beccaria and Helvetius and later used kets in the world, as do the prices it sets of by Godwin and John Stuart MILL.Itis US Treasury bonds which influence the concerned to show that the rightness of an cost of capital throughout the world be- action is to be judged by its consequences

© 2002 Donald Rutherford in terms of pain and pleasure, using a Robertson, Sir D., (1956) Economic Com- ‘balance sheet’ approach to see whether mentaries, ch. II, London: Staples Press. there is a net advantage. The goal of utility function (D0) utilitarians is to achieve ‘the greatest This is generally expressed in the form U happiness for the greatest number’. Critics = f(x1, x2, x3, x4, x5, . . . ). It shows a of utilitarianism have pointed out the consumer’s UTILITY as a function of the difficulties of reducing values to utilities quantities of goods and services 1, 2, 3, 4, and of aggregating the happiness of in- 5, . . . he or she consumes. dividual persons. References Seealso:cardinalutility;felicificcalculus; Green, H.A.J. (1972) Consumer Theory, Hutcheson Harmondsworth: Penguin. References utility possibility frontier (D0) Halevy, E. (1934) The Growth of Philo- This connects the PARETO-EFFICIENT combi- sophic Radicalism, trans. M. Morris, nations of the UTILITIES of two individuals. London: Faber & Faber. A movement from B to A is Pareto Lyons, D. (1965) Forms and Limits of efficient as both Adam and Eve are better Utilitarianism, Oxford: Oxford Univer- sity Press. off; a movement from A to C increases Smart, J.J.C. and Williams, B. (1974) Eve’s utility but reduces Adam’s. Utilitarianism: Pro and Con, Cam- bridge: Cambridge University Press. utility (D0) The satisfaction derived from an activity, particularly consumption. The total amount of such satisfaction is total utility; the satisfaction from the last unit is MAR- GINAL UTILITY. BENTHAM in his suggested calculus of pleasure and pain was influen- tial in introducing this notion into eco- nomics but the MARGINALISTS were the first economists to make it the central concept of economic theory. The measurement of utility has provoked long debates between cardinal utility (utility measured in units) and ordinal utility (utility revealed through preferences). Without this con- utopia (P4) cept, much of NEOCLASSICAL economic the- An ideal state suggested in Plato’s Repub- ory would not be possible. Earlier lic and Thomas More’s Utopia. In subse- economic writers, especially those of the quent centuries many socialists, including CLASSICAL SCHOOL, used ‘utility’ in the ob- OWEN and FOURIER, devised utopian com- jective sense of the inherent worth of munity schemes. Many utopias attempt to something. minimize the amount of work and division of labour in favour of an egalitarian References existence conforming to a regimented life- Majumdar, T. (1961) The Measurement of style. Utility, London: Macmillan. Page, A.N. (ed.) (1968) Utility Theory: A Seealso:dystopia Book of Readings, New York: Wiley.

© 2002 Donald Rutherford V

valorization (D0) 2 An amount equal to the sum of factor The process by which capital increases its incomes at one stage of production. own value. In MARXIAN economics, it is asserted that this occurs because capital value-added network service (L8) increases its own value by the production A service electronically produced, e.g. of SURPLUS VALUE. electronic mail and computerized informa- tion. The provider of the service adds value (D0) value to the transmission and switching Intrinsic worth or price of a good or provided by the telephone company. service. Earlier economic writers from ARISTOTLE made the distinction between Seealso:networker VALUE IN USE and VALUE IN EXCHANGE (prices) value-added tax (H2) with, in many cases, the objective use A tax levied on the value added by a firm. value being measured by the cost of As ‘value added’ can be variously mea- production of that article. CANTILLON, sured, different tax bases are possible. The SMITH, RICARDO and John Stuart MILL ago- tax can be a percentage of the income of a nized over the determinants and measure firm (its wage payments and return to of different types of value, often using the capital net of depreciation). Secondly it so-called ‘water and diamonds paradox’: might be the value of what it produces (its the PARADOX OF VALUE. Apart from Marx income not allowing depreciation). Thirdly and his disciples, interest in the concept of it could be the value of what is consumed INTRINSIC VALUE waned and attention was by its customers minus the firm’s purchases concentrated on prices, except inasmuch as of inputs and expenditure on capital goods. intrinsic value can be equated with long- The sales of small firms and the sale of term equilibrium prices. basic goods, e.g. food and children’s cloth- value added (D0, D2) ing, are often excluded from the tax – as 1 The contribution to total production are export sales (unlike import purchases). made by an industry, a firm or a The principal method of tax collection is worker. In the case of a firm, it is the invoice method of examining the sales calculated by subtracting from its sales invoices of all taxable traders, thus check- its purchases from other firms. It is used ing the accuracy of both intermediate and to measure the NATIONAL INCOME by the final sales simultaneously. It is argued that output method and is a frequently used taxing most goods is more equitable than base for indirect taxation. a more selective tax but the regressive

© 2002 Donald Rutherford effects of value-added tax on all goods and value subtractor (L0, F3) services at a single rate have long been An enterprise with negative VALUE ADDED as debated. As a proportion of the revenue a result of its activities. Such a firm has from value-added taxes in member coun- such high labour and capital costs that it tries of the EUROPEAN COMMUNITY constitu- cannot even cover the cost of the raw tes the major source of European materials it uses: thus the value of the Community revenue, there are pressures inputs it uses is greater than the revenue it for higher and standard rates through the obtains from its sales. Many SOVIET-TYPE European Community. ECONOMIES were discovered to have a sub- stantial number of value subtractors at the References end of the 1980s. Aaron, H.J. (ed.) (1981) The Value-Added Tax: Lessons from Europe, Washington, Vanek, Jaroslav, 1930– (B3) DC: Brookings Institution. A Czech who obtained degrees in statis- value at risk (G1) tics, mathematics and economics at the The maximum loss that occurs with the Sorbonne (1952) and at Geneva (1954). certain probability P in a certain time He emigrated to the USA in 1955, gaining interval. This measure is used to estimate a PhD at the Massachusetts Institute of the amount one can lose from one’s Technology in 1957 and spending most of portfolio in a specified period. his academic career as a professor at Cornell University. He is a leading theorist value discrepancy hypothesis (G3) of labour-managed enterprises. His major The theory that a firm will only bid for work, The General Theory of Labor- another firm if it values it higher than its Managed Market Economies (1970), was present owners do. This attempt to explain modified by the concessions to consumers mergers is based on there being imperfect in his The Participatory Economy: An information and UNCERTAINTY in the private Evolutionary Hypothesis and a Develop- industrial sector. ment Strategy (1971). The development of References his ideas is apparent in his The Labor- Gort, M. (1969) ‘An economic disturbance Managed Economy: Essays by Jaroslav theory of mergers’, Quarterly Journal of Vanek (1977). Economics 82: 624–42. variable capital (J3) value driver (M2) The MARXIAN term for the WAGES FUND. The creator of VALUE ADDED in an organiza- Seealso:organiccompositionofcapital tion. Both the principal productive and ancillary parts of a firm can be creative. variable cost (D0) value in exchange (D0) A cost varying with the level of output. In The price of a good or service. Classical the short run, it is distinct from a fixed economists contrasted this with VA LU E I N cost (the same at all levels of output); in USE. the long run all costs are variable. Labour, the favourite example of such a cost, has value in use (B1, D4) become more fixed in nature in recent The intrinsic value, or usefulness, of a years as a result of employment legislation good. CLASSICAL ECONOMISTS contrasted this and a change in labour contracts. with VALUE IN EXCHANGE. See also: quasi-factor fixed cost value share (M2) The expenditure on a particular commod- variable-sum game (C7) ity or FACTOR OF PRODUCTION divided by A game in which gains are not offset by total expenditure. corresponding losses.

© 2002 Donald Rutherford Seealso:zero-sumgame nomic variables, ignoring their microeco- nomic determinants. An application of variance (C1) vector autoregression has been the study The average of the sum of the squares of of the independence of real macroeco- deviations of data from their MEAN, calcu- nomic variables from nominal variables. lated for a STATISTICAL POPULATION or a Critics have noted that the economic sample taken from it; the square of a hypotheses used are very broad. STANDARD DEVIATION. References vault cash (G2) Sims, C.A. (1980) ‘Macroeconomics and Money kept by US COMMERCIAL BANKS on reality’, Econometrica 48: 1–45. their premises which is included in the banks’ reserves. vector autoregressive model (C5) An econometric model using a vector of Veblen good (D0) two or more variables and a lagged value A good for which there will be a fall in of the dependent variable to be autore- demand if the price falls because of the gressive. It does not make an a priori belief that the quality has fallen. distinction between endogenous and exo- Seealso:conspicuousconsumption;Gif- genous variables. fengood vega risk (G1) Veblen, Thorstein Bunde, 1857–1929 The risk arising from fluctuations in im- (B3) plied VOLATILITY. This risk should be con- sidered when examining portfolios A leading US INSTITUTIONALIST ECONOMIST, containing options. famous for his analysis of CONSPICUOUS CON- SUMPTION. He was educated at Carleton References College and Yale University, subsequently Dumas, B., Fleming, J. and Whaley, R.E. teaching economics at Chicago, Stanford, (1998) ‘Implied volatility functions: em- Missouri and New York. Inspired by a pirical tests’, Journal of Finance 53: Darwinian evolutionary approach to the 2059–106. social sciences, he took a multidisciplinary view of economics, linking it to anthro- vegetative control (D2) pology and sociology. His biting analysis A mechanism for organizing economic of modern industrialism in The Theory of activity in a modern ECONOMY with much the Leisure Class (1899), The Theory of DIVISION OF LABOUR using quantity adjust- Business Enterprise (1904), The Higher ments rather than price signals. It is Learning in America (1918) and Absentee characterized by simple behavioural rules, Ownership (1923) provided a non-Marxist e.g. the rule that production is increased if output stocks fall or the sales of other critique of contemporary CAPITALISM.In some senses he was an inspiration for firms increase and the rule that more inputs are purchased if production in- GALBRAITH. creases. This control is exercised bilaterally References between single pairs of buyers and sellers; Diggins, J.P. (1978) The Bard of Savagery: price signals have no influence on the level and Modern Social of production. A major user of this Theory, Brighton: Harvester Press. mechanism was the West German econ- omy in 1946–8. vector autoregression (C5) An econometric methodology used as the References alternative to large structural models of Kornai, J. (1980) The Economics of Short- national economies which forecasts the age, Vols A and B, Amsterdam: North- joint movements of principal macroeco- Holland.

© 2002 Donald Rutherford vehicle bias (D0) developed countries’, Economic Journal A difference in willingness to pay arising 68: 317–37. from the vehicle or payment instrument venture capital (G2) chosen, e.g. local taxes, entrance fees, Finance for new high-risk companies. higher prices. There are large venture capital industries velocity of circulation (E4) in the USA, the UK and Canada. INVEST- The number of times a stock of money MENT BANKS, MERCHANT BANKS and govern- circulates to finance a level of expenditure mental agencies all supply this capital in or income or output. Thus if the money the hope that new businesses have a supply is £100 million and national expen- potential for long-term growth. diture or NATIONAL INCOME is £500 million, See also: seed capital the velocity of circulation will be 5. Erratic changes in the money supply since 1970 Verdoorn’s law (O4) have made velocities unstable and the The dynamic relationship between the rate relationship between changes in the money of growth of output and the growth of supply and changes in output more diffi- PRODUCTIVITY arising from INCREASING RE- cult to predict. TURNS. This is named after the Dutch economist who first noted the relationship Seealso:monetarism in 1948. It was applied to the UK econ- omy by KALDOR in the 1960s and 1970s. velocityofmoney(E4)seevelocityof Also it was the theoretical justification for circulation his recommendation of the SELECTIVE EM- PLOYMENT TAX in 1966 which was designed vendor finance (G3, M2) to shift the labour force increasingly into 1 Finance provided by the seller of a manufacturing (which was alleged to have company in the form of deferred pay- labour shortages); a higher rate of growth ment for it or retained equity in the of employment was expected to stimulate company. manufacturing productivity. 2 Credit provided by retailers rather than a financial institution, especially for the vertical discrimination (L1) purchase of consumer durables. The different treatment of persons at different levels of an employing organiza- See also: stub equity tion, e.g. new entrants and persons hold- ing the top jobs. A much quoted example vent for surplus (F1) is the easy entry of women and minority An explanation for international trade. races to less skilled and lower paid jobs Adam SMITH asserted that trade arises and their difficulties in gaining promotion. because the domestic market is too small Vertical discrimination is less susceptible to purchase all of an economy’s output to legislative treatment than HORIZONTAL and so trade is necessary. This reflected his DISCRIMINATION as there are fewer records view that the DIVISION OF LABOUR is limited of promotion processes than there are of by the extent of the market. The view was earnings. challenged by John Stuart MILL who won- dered why a surplus was initially created. Seealso:discrimination;horizontaldis- But more recently it has been applied to crimination the study of economic development, e.g. vertical equity (H2) by Myint in the 1950s. The treatment of persons in different References income groups according to the ABILITY TO Myint, H. (1958) ‘The ‘‘Classical theory’’ PAY principle. This principle is used to of international trade and the under- justify a progressive tax system.

© 2002 Donald Rutherford Seealso:horizontalequity;progressive the NOBEL PRIZE FOR ECONOMICS with James tax MIRRLEES and died three days later. vertical expansion (L1) villa economy (P0) The expansion of a firm’s activities into An economy consisting of an extended another stage of production, e.g. by under- household, as in Ancient Rome and An- taking retailing as well as manufacturing. cient Greece. The villa was the centre of This form of internal expansion usually the economic activities of a rural area, takes the form of the creation of new receiving and processing raw produce, subsidiaries; not a VERTICAL MERGER. including the milling of corn and the vertical formation (L2) pressing of grapes. The creation of a firm with several stages Seealso:agriculturalhousehold;Ancient of production. Greeks;economics vertical integration (L1) Viner, Jacob, 1892–1970 (B3) The joining together of two or more stages Canadian economist, born in Montreal and of production either through a VERTICAL educated at McGill and Harvard Universi- MERGER or VERTICAL EXPANSION. ties. He was a professor at Chicago Uni- vertical merger (L1) versity from 1925 to 46 (also editor of the A merger of firms at different stages of Journal of Political Economy from 1928 to production, e.g. a merger between a man- 1946) and at Princeton from 1946 to 1960. ufacturer and a retailer. The search for His career began in international econom- economies in marketing, production and ics as a postgraduate student of Frank W. finance motivates such integration. TAUSSIG: he published his doctoral thesis Dumping. A Problem in International Trade Vickrey auction (D0) in 1923. Then he tested the classical theory Bids are sealed and the item is sold to the of balance of payments adjustments in highest bidder at the price of the second- Canada’s Balance of International Indebt- highest bid. Bidders revise their bids up- edness, 1900–13 (1924). Before KEYNES pub- wards knowing that they will not have to lished his General Theory, Viner was an pay too high a price. This auction has advocate of budget deficits and increased been used for foreign exchange in some public spending to stimulate the economy. African countries. Also, he anticipated many of the ideas of References MONOPOLISTIC COMPETITION. He made many Vickrey, W. (1967) ‘Counterspeculation, outstanding contributions to the history of auctions and competitive sealed tenders’, economic thought, e.g. his critique of MER- Journal of Finance 16: 8–37. CANTILISM in Studies in the Theory of International Trade (1937) and his detailed Vickrey, William Spencer, 1914–96 (B3) biographical essay on Adam SMITH which Born in Victoria, British Columbia, and formed the introduction to the reprint of educated at Yale in mathematics and then John Rae’s Life of Adam Smith (1965). at Columbia University, New York, where he was awarded a PhD for a thesis on vintage effect (E2) progressive taxation and taught for fifty The effect on PRODUCTIVITY of a capital years. During the Second World War he stock being old. was a conscientious objector working in the US Treasury designing a new inheri- visible hand (D0) tance tax for Puerto Rico. He pioneered A non-market method of allocation, e.g. as PEAK-LOAD PRICING and was a prominent happens in the US economy through the POST-KEYNESIAN. In 1996 he was awarded activities of dominant large corporations.

© 2002 Donald Rutherford References and became a professor at Princeton Uni- Chandler, A. D., Jr (1977) The Visible versity in 1933. His famous collaboration Hand: The Managerial Revolution in with the economist Oskar MORGENSTERN American Business, Cambridge, MA: resulted in Theory of Games and Economic Belknap Press. Behavior (1944). vital revolution (J1) see demographic References transition Morgenstern, O. (1958) ‘Obituary. John voice (H0, J0) see exit voice von Neumann, 1903–57’, Economic Journal 68: 170–4. volatility (D0, E4) Taub, A. H. (1961) Collected Works of Fluctuations in the value of a variable, , New York and especially a price. It can be historic, Oxford: Pergamon. implied (based on a model) or forecast. It von Neumann–Morgenstern stable set can be cyclical, persistent or reverting to (C7) the mean. It is measured by the average A set of outcomes of a game not domi- range (high low) of a price for a given nated by one of its outcomes. This concept time period. has been applied to the analysis of parlia- ‘volatility industry’ (G2) ments and cartels. The part of the financial services sector References which derives its income from fluctuations von Neumann, J. and Morgenstern, O. in interest rates and financial instability. (1944) Theory of Games and Economic volume ratio (J2) Behavior, Princeton, NJ: Princeton Uni- versity Press. Actual hours worked divided by budgeted hours for that productive activity all multi- voting procedures (H0) plied by 100. A democratic method of choosing between different persons or policies in an election. voluntary export restraint (F1) The simplest method is the majority prin- A non-TARIFF form of PROTECTIONISM.A ciple of choosing whoever or whatever country whose domestic industry is suffer- gains 50 per cent of the votes plus one. ing from high levels of imports negotiates Other systems include the plurality rule in with the principal supplying country/coun- which a candidate is chosen for receiving tries the maximum amount traded. Wes- the largest number of votes of all the other tern countries have entered into such candidates. More complicated systems in- agreements with Japan, particularly to clude using the CONDORCET CRITERION. limit car imports. References See also: Multi-Fibre Arrangement Mueller, D.C. (1989) Public Choice II, chs voluntary unemployment (J6) 4–11, Cambridge and New York: Cam- UNEMPLOYMENT, at a given wage rate, bridge University Press. caused by members of the labour force voucher privatization (L0) refusing to take jobs offered. A method of transferring assets from See also: involuntary unemployment public to private ownership. Russia used this approach to privatization from 1992 von Neumann, John, 1903–57 (B3) to transfer 75 per cent of state assets. This A leading mathematical economist who allowed the state to give away its assets to pioneered GAMES THEORY and made major a public unable to pay for shares. contributions to . After an edu- cation at Budapest, Zurich and Berlin voucher system (H0) Universities, he emigrated to the USA A method for consumers of government-

© 2002 Donald Rutherford provided goods and services to choose activities of the company concerned, ex- between alternatives. Instead of a govern- cept for secret and confidential matters. At ment agency deciding who gets what, least annually a report would be given to individuals are given vouchers entitling workers’ representatives about the struc- them to purchase up to a particular cash ture of the company and plans for employ- amount. This has been used in the USA ment and investment. Workers in under the food stamp scheme. In both the subsidiary companies would be informed USA and the UK vouchers have been about changes in activities, output and suggested as a means of parental choice working methods with thirty days to between schools, tenants’ choice between express an opinion before a change was various forms of rented accommodation made. Trade unions welcomed the direc- and adults’ choice in health care. As these tive but there was much opposition from schemes can be expensive to administer, employers’ organizations, including the they have not flourished as much as CONFEDERATION OF BRITISH INDUSTRY. expected. Seealso:industrialdemocracy;workers’ Seealso:Lindahlprice participation vulgar economists (B0) Vredeling directive (J2) Marxian term for economists who are The ‘Draft Directive on Procedures for concerned with appearances and not real Informing and Consulting Employees’ relationships as were the PHYSIOCRATS and proposed by the Dutch Commissioner classical economists such as SMITH. Vredeling of the EUROPEAN COMMUNITY in 1980. It proposed that companies with vulture fund (G1) more than 1,000 employees should keep A MUTUAL FUND practising GREENMAIL.It their workers fully informed about all the targets underperforming companies.

© 2002 Donald Rutherford W

wage (J3) see wages wage differentials (J3) Differences in employment income reflect- wage contour (J3) ing the segmented nature of the LABOUR The connected wage rates offered by firms MARKET. The labour force has several with INTERNAL LABOUR MARKETS to persons structures – geographical, industrial, occu- in the EXTERNAL LABOUR MARKET. These are pational, sexual and racial – which create the ‘key rates’ for the few jobs at which a corresponding wage differentials. Regional person can enter a firm; they are con- wage differentials exist because of the nected into a contour because competing relative prosperity of capital regions and firms in the external labour market cannot peripheral areas as well as a traditional get out of line with other employers’ wage ranking of regions in terms of pay. In the offers. USA, the most famous regional difference References is between northern and southern states. Industrial differentials reflect the degree of Dunlop, J. J. (1957) ‘The task of contem- porary wage theory’, in G.M. Taylor concentration and productivity of particu- and F.C. Pierson (eds) New Concepts in lar industries. Occupational differentials Wage Determination, pp. 117–39, New arise from differences in bargaining ability York: McGraw-Hill. and the amounts of education necessary to enter each occupation. Many differentials wage curve (J3) have been stable for long periods of time The relationship between the level of because of the forces of custom. The skill wages and unemployment. Wages in many differential (the ratio of the pay of skilled countries are lower in the presence of to unskilled workers in the same trade), higher unemployment. This negative cor- which was constant for many centuries relation is noticeable in LOCAL LABOUR MAR- prior to 1914 in many capitalist countries, KETS. has subsequently shrunk because of an increasing amount of publicly financed Seealso:Phillip’scurve education and a declining supply of un- References skilled labour. Sexual and racial differen- Blanchflower, D.G. and Oswald, A.J. tials reflect different levels of investment in (1994) The Wage Curve, Cambridge, HUMAN CAPITAL and DISCRIMINATION. MA, and London: MIT Press. Card, D. (1995) ‘The wage curve; a review’, References Journal of Economic Literature 33: Phelps Brown, E. H. (1977) The Inequality 785–799.

© 2002 Donald Rutherford of Pay, Oxford and New York: Oxford References University Press. Mincer, J. (1983) ‘Union effects: wages, wage diffusion (J3) turnover, and job training’, in I. D. Reid, Jr (ed.) New Approaches to Labor The transmission of wage increases in the Economics: A Research, Annual Supple- leading sector of a national labour market, ment 2, Greenwich, CT: JAI Press. or major bargaining group, to other work- ers in a national economy. This can occur wage insurance (J3) because of the established wage leadership The nature of a labour contract which of an industrial or occupational group, or pays a worker more than productivity at because of traditional wage DIFFERENTIALS the beginning of employment and less later in a national wage structure. when the worker’s productivity declines. Seealso:patternsettlement;shunto;wage wage mobility (J3) round The movement of workers from one part of the wage distribution to another. A wage drift (J3) matrix showing transition from one decile The difference between the percentage to another measures it. increase in earnings and the percentage increase in basic wage rates agreed under a wage–price spiral (E3) COLLECTIVE BARGAINING procedure. An ex- A self-sustaining inflationary process: ample would be an annual growth of higher wages lead to increased product earnings by 10 per cent and basic wage prices which lead to more wage claims rates by 6 per cent creating wage drift of 4 and higher wages. Wage INDEXATION is a per cent. This major labour market phe- major cause of such spirals. nomenon of the UK in the 1950s and wage-push inflation (E3) 1960s was largely attributed to a two-tier Price inflation initiated by increases in COLLECTIVE BARGAINING system with the wages brought about by powerful trade national level determining basic wages unions and not by an EXCESS DEMAND for and the local level responsible for supple- labour. This is a type of COST-PUSH INFLA- ments to basic pay. Wage drift often TION. occurs under piecework systems. wage-rental ratio (D0) Seealso:DonovanCommission The ratio of the wage cost to the rental wage flexibility (J3) cost of using a particular technique of A policy advocated by classical and new production, which is dependent on the classical economists to restore an economy capital–labour ratio chosen, which is in to FULL EMPLOYMENT. KEYNES challenged turn dependent on the relationship be- wage flexibility as a feasible policy as he tween wages and rental costs. believed that money wages are inflexible wage rigidity (J3) downwards. Later economists argue in The phenomenon of wages remaining at favour of flexibility because workers have the same level absolutely or relative to ‘priced themselves out of a job’; oppo- other rates of pay in the same wage nents of flexibility assert that the free structure. At the national level wage rigid- movement of wages contributes to the ity occurs if LABOUR’S SHARE OF THE NATIONAL problem of low pay. INCOME is constant, as it has been in some wage gap (J3) countries for long periods of time. The relative wage differential between Seealso:labourmarketrigidities UNIONIZED and non-unionized labour brought about by a trade union exercising wage round (J3) its bargaining rights. An annual set of pay negotiations by the

© 2002 Donald Rutherford major bargaining groups, usually with one mum wage rates set were too high, espe- industry (often engineering) making a cially for young workers, thus contributing settlement which becomes a pace-setter to unemployment. for other groups. Particularly true of the UK in the 1950s and 1960s and, even wages fund theory (B1) more so, in Japan under SHUNTO. The classical theory of the demand for labour. Each employer needs a fund of Seealso:patternsettlement;wagediffu- CIRCULATING CAPITAL to finance the period sion until products are sold; an economy will have a wages fund which is the aggregate wages (J3) of each firm’s fund and will be the max- Payment to workers for supplying their imum amount which can be paid out services for a particular amount of time, nationally in wages. The average wage rate or for producing a defined amount of of the economy is simply the wages fund output. To avoid the abuse known as the divided by the employed labour force. The TRUCK system, UK wages by law were paid rigid adherents of this theory used it as a in cash unless workers consent to direct justification for resisting union demands payment into a banking account. The for higher remuneration, pointing out that Wages Act 1986 has removed the right to a higher average wage rate would cause payment in cash unless that is already the unemployment. The idea of the wage fund method of payment. ignores other methods of financing pro- Seealso:wagedifferentials;wagetheory duction, exaggerates the degree to which the total fund is fixed and does not Wages Act 1986 (J3) consider how a capitalist will allocate UK statute repealing the Truck Acts of income between different types of invest- 1831–1940, abolishing the requirement for ment and consumption. wages to be paid in the coin of the realm. The Act also limited the powers of re- References maining wages councils. Taussig, F.W. (1896) Wages and Capital: An Examination of Wages Fund Doc- wages council (J5) trine, London: Macmillan. A tripartite council with union, employer and independent representatives (ap- wage subsidy (H2, J3) pointed by government) given the task of A payment to a firm of a grant equal to a recommending (in the case of the UK, to proportion of its wage bill or of its wage the Employment Secretary) minimum rates to encourage higher levels of employ- wage rates and hours for the low-paid ment in a particular sector, e.g. manufac- workers covered by a particular council. turing, or throughout the economy. In the This innovation of the state of Victoria, 1960s in the UK, the labour cost of Australia, was introduced into the UK in employing workers in manufacturing was 1909; wages councils still deal with about a subsidized and service sector employers tenth of the UK labour force, particularly more heavily taxed under the SELECTIVE in agriculture and catering. Their popular- EMPLOYMENT TAX. Wage subsidies are often ity with TRADE UNIONS arises from the paid only for employing additional staff as difficulty unions experience in organizing the aim of wage subsidization is usually to workers in sectors with many small firms increase employment. and from their approval of the inspecto- Seealso:regionalemploymentpremium rate set up to monitor the wages actually paid by employers. In the 1980s, the UK wage–tax spiral (E3) government opposed the existence of these An explanation of INFLATION in terms of the councils as it was believed that the mini- effects of government taxation and social

© 2002 Donald Rutherford security charges on the labour market. It is the Wagner–Connery Act) which sought argued that a widening gap between pre- to establish collective bargaining in inter- tax and post-tax employment incomes (i.e. state commerce through dealing with the an increase in AVERAGE TAX RATES) en- problems of union recognition, of employ- courages TRADE UNIONS to ask for higher ers who refuse to bargain and of COMPANY money wages which in turn leads to UNIONISM. The NATIONAL LABOR RELATIONS general inflation. Also known as ‘taxflation’. BOARD was established as an independent administrative agency to enforce the provi- References sions of the Act. It succeeded the National Jackson, D., Turner, H.A. and Wilkinson, Labor Board set up in 1933 to hear F. (1972) Do Trade Unions Cause Infla- complaints against employers who refused tion?, Cambridge: Cambridge University Press. to bargain. Unfair labour practices which could be wage–tenure profile (J3) committed by management were listed in A description of a wage distribution show- section 8 of the Wagner Act. These were ing the relationship between pay and (1) interfering with the rights of employees length of service. to organize themselves; (2) interfering in the affairs of a labor union; (3) discrimi- wage theory (J3) nating in the hiring of workers to affect Explanations of the determination of union membership; (4) discriminating wages at the macro and micro levels. The against or discharging workers who had earliest theories, of the JUST WAGE, were complained under the Act; and (5) refus- normative in character. In the eighteenth ing to bargain with chosen representatives century, CANTILLON and SMITH discussed the of employees. determinants of WAGE DIFFERENTIALS, and The Act was criticized for being too the idea of a WAGES FUND was used to pro-union. It was a major cause of the explain the average level of wages in an great expansion in US labor union mem- economy. In NEOCLASSICAL ECONOMICS, the bership from 3.7 million members in 1935 concept of MARGINAL PRODUCTIVITY was used to 14.8 million in 1945. to explain wage rates. With the growth of COLLECTIVE BARGAINING, wage theory paid Seealso:Taft–HartleyAct more attention to institutional influences Wagner’s law (H5) on wages, especially UNION WAGE EFFECTS: Adolph Wagner’s assertion in 1883 that HICKS, PIGOU and DUNLOP all made early public expenditures would expand as in- contributions to bargaining theories. The dustrial society developed. He prophesied exploration of the distinction between IN- that pressures for social progress would TERNAL and EXTERNAL LABOUR MARKETS con- entail a continuous growth of the public stituted a further attempt to make wage sector and an expanding share of public theory more realistic, as has the discussion expenditure in the national income. The of INSIDER and OUTSIDE WAGE SETTING. assertion of this law reflected the founda- wage unit (J3) tion of a WELFARE STATE in the Germany of The money wage of a unit of labour, i.e. his day. the wages and salaries bill divided by the References quantity of employment. KEYNES relied Musgrave, R.A. and Peacock, A. (eds) greatly on this method of measurement in (1958) Classics in the Theory of Public his GENERAL THEORY, by measuring NATIONAL Finance, pp. 1–16, London and New INCOME in wage units. York: Macmillan.

Wagner Act 1935 (J5) waiting period (G1) US federal labour statute (also known as The twenty-day period required by the US

© 2002 Donald Rutherford Securities and Exchange Commission be- APureTheoryofCapitalandMoney,Cam- tween the registration and offering of new bridge: Cambridge University Press. securities. Walker, D.A. (ed.) (1983) William Jaffe’s Essays on Walras, Cambridge: Cam- wallpaper (G1) bridge University Press. The worthless stock market security of a Walras, L. (1954) Elements of Pure Eco- failed company. nomics or The Theory of Social Wealth, trans. W. Jaffe, London: Allen & Unwin. Walras exchange economy (D5, P0) Walras’s law (D5) A market ECONOMY with a finite number of A GENERAL EQUILIBRIUM law that if the first traders and commodities. n 1 markets are in equilibrium then the Walrasian stability (D5) last market is also in equilibrium. This is The dynamic stability of a market or the so because the AGGREGATE DEMAND for economy as a whole: this is possible because goods, including money, must equal their prices respond with infinite velocity to DIS- AGGREGATE SUPPLY. EQUILIBRIUM situations. Positive excess DE- Walsh–Healy Act 1936 (K2) MAND (demand greater than supply) causes US federal statute insisting on the obser- price rises; negative excess demand (de- vance of MINIMUM WAGE standards in all mand less than supply) causes price falls. government contracts worth over $10,000. Walras, Marie Esprit Le´on, 1834–1910 Seealso:FairWagesResolution (B3) French-born economist who, with MENGER war babies/brides (G1) and JEVONS, was a founder of the MARGIN- Popular names for the US common stock ALIST School and the first to use GENERAL of defence contractors. EQUILIBRIUM analysis. His father, Auguste war dividend (O4) Walras, had already made use of the con- The favourable economic consequences of cept of marginal utility (or rare´te´,ashe a nation engaging in war usually taking termed it) to explain the basis of value. His the form of increased output and technical son, with the mathematical help of a advance. professor of mechanics, was to extend its application powerfully. From 1870 to 1892, Seealso:peacedividend Le´on Walras was professor of economics at the University of Lausanne, Switzerland warehouse economy (F1, P4) An ECONOMY importing most of the manu- (to be succeeded by PARETO). In an ambi- tious writing career he sought to expound factured goods it consumes, rather than political economy in a threefold manner – making them itself. A description applied as pure, applied and social. The first to the UK economy during the 1980s. branch of his theory was published as Seealso:autarky Ele´ments d’Economie Politique Pure (1874–7; English translation, 1953): it is warehouse receipt (G2) his chief claim to be regarded as one of the The receipt issued to the depositor of world’s greatest economic theoreticians. In inventories with a warehouse company. the Ele´ments he uses GENERAL EQUILIBRIUM This receipt can be a negotiable security analysis to present an integrated theory of and act as collateral for a loan. This exchange, production, capital and money. arrangement is a popular method of finance in the US agricultural sector. References Hicks, J.R. (1934) ‘Le´on Walras’, Econo- warrant (G1) metrica 2: 338–48. A document authorizing the payment of a Morishima, M. (1977) Walras’ Economics. DIVIDEND or SHARE.

© 2002 Donald Rutherford warranted rate of growth (O4) wave train (O3) The rate of growth of national income The long wave in the growth of average that maintains the equality of planned labour productivity that oscillates be- saving and planned investment. In the tween bunches of innovations. It was HARROD–DOMAR growth model it is mea- inspired by SCHUMPETER’s notions of tech- sured as Gw = s/v, where Gw is the nological diffusion and innovation. Wave warranted rate of growth, s is the MAR- trains are linked to the life cycles of GINAL PROPENSITY TO SAVE and v is the INCRE- techniques. MENTAL CAPITAL–OUTPUT RATIO. HARROD called References it a fruitful tautology. Iwai, K. (1984) ‘Schumpeterian dynamics. Seealso:naturalrateofgrowth Part II. Technological progress, firm growth and ‘‘economic selection’’’, Jour- warranty (K0) nal of Economic Behavior and Organiza- The right of a buyer to get a seller to tion 5: 321–51. rectify or compensate for the failure of a product to meet its stated level of perfor- weak efficiency (G1) mance. The US Magnuson–Moss War- The pricing of a security to take into ranty – Federal Trade Commission account its past price and trading history. Improvement Act 1975 requires explicit Seealso:strongefficiency warranties for all products selling for more than $15. A warranty is different from a wealth (E0, E0) service contract (which is not related to The stock of assets held by a person, a the product’s performance). Products car- firm or a country. Wealth is measured at rying warranties are more attractive to a particular date, e.g. 31 December, and consumers as the risk to buyers of non- not over a period as is the case with performance is eliminated. INCOME. Wealth statistics are subject to Warsaw Convention (L9) much error because of valuation problems The Air Warsaw Convention of 1929 and owners’ concealment, especially if standardizing passenger tickets, luggage wealth and inheritance taxes are in force. tickets and carrier liability. All members Many forms of income, e.g. rent and profits, are a return to the wealth a person of the INTERNATIONAL AIR TRAVEL ASSOCIATION are bound by it. holds. Seealso:humancapital;nationalwealth waste (D0) 1 The undesired costs resulting from a wealth creation (E2) particular economic activity; a major The process of increasing the net worth EXTERNALITY. of a person or a firm. Often this 2 Transactions which do not create requires innovation, a high rate of saving WEALTH, e.g. RENT-SEEKING behaviour. and a framework of economic incentives. 3 Costs arising from the inherent ineffi- Critics of accumulating wealth emphasize ciency of some types of economic orga- the importance of income distribution nization. For example, BARTER economies rather than increasing individual prosper- waste time through the need of buyers ity. and sellers to search for each other; competitive economies are wasteful in Seealso:economicgrowth needing advertising and other selling expenditures. wealth distribution (D3) The interpersonal distribution of asset water and diamonds paradox (D0) see holdings, often stated as the proportion paradoxofvalue of national wealth held by the top 5 per

© 2002 Donald Rutherford cent, or some other portion, of the popu- land, could set out many of the issues for lation. the subsequent classical debate on mone- tary theory. References Atkinson, A.B. and Harrison, A.J. (1978) Seealso:absoluteadvantage;canonsof The Distribution of Personal Wealth in taxation;economicgrowth Britain, Cambridge: Cambridge Univer- sity Press. wealth tax (H2) Wolff, E.N. (ed.) (1987) International Com- A tax levied on the amount of CAPITAL a parisons of the Distribution of Household person owns. Although there are different Wealth, Oxford: Clarendon Press. schemes from country to country, the tax is usually levied on the net value of assets. wealth effect (E2) It should be distinguished from a tax on The effect of a change in interest rates and capital income. the price level on aggregate demand, particularly consumption. Seealso:capitalgainstax;capitaltax Seealso:Pigoueffect weight (C1) An amount by which the values of an Wealth of Nations (B1) economic variable are multiplied so that Adam SMITH’s masterly treatise on eco- the relative significance of each variable in nomics first published in 1776. Although an index, particularly a price index, is CANTILLON had previously produced a gen- taken into account. eral work on economics as a whole, it was Smith’s which was to provide a compre- Seealso:Laspeyresindex;Paascheindex hensive statement of the subject and to weightless economy (P0) found the school of CLASSICAL ECONOMICS. A national economy heavily reliant on The unity of this work, divided into five service industries and often conducting parts, is provided by his central concern – much of its business electronically. A FOO- an enquiry of the causes of wealth, i.e. TLOOSE economy. ECONOMIC GROWTH. The two important de- terminants of growth were declared to be welfare economics (D6) the DIVISION OF LABOUR and the ratio The branch of economics setting out the between PRODUCTIVE and unproductive la- rules for maximizing the welfare of society bour (a less important cause of the growth by considering both the size of SOCIAL WEL- process). As a leader of the Scottish FARE and its distribution. As normative Enlightenment, he saw the growth process issues are its concern this is one of the as being founded on the desire for better- most abstract and theoretical branches of ment leading to saving, which is then economic science. The subject has ad- invested making possible the division of vanced much from PIGOU’s Economics of labour. As the specialization of economic Welfare (1919) that defined economic wel- activity inherent in the division of labour fare as ‘that part of social welfare that can principle requires large markets, he fer- be brought directly or indirectly into rela- vently supported FREE TRADE. Like the PHY- tion with the measuring-rod of money’ SIOCRATS before him, the government was and then examined the relationship be- to be limited to a few basic functions and tween private and social products, dis- taxation was to be levied according to cussed PARETO OPTIMALITY and considered strict principles. Just as Cantillon had in detail welfare problems raised by mono- given a perceptive account of international poly and wages. As so many attempts are finance because of his experience as a made to increase social welfare through banker, Smith, acutely aware of the great income redistribution, it was inevitable advances in banking in his native Scot- that the principles for compensation were

© 2002 Donald Rutherford rigorously discussed – particularly in the References KALDOR–HICKS compensation principle, the Barr, N. (1987) The Economics of the SCITOVSKY reversal test and in Rawls’s MAX- Welfare State, London: Weidenfeld & IMIN principle. Other approaches include Nicolson. the attempt to devise a SOCIAL WELFARE Barry, N. (1990) Welfare, Milton Keynes: FUNCTION, seemingly sunk by ARROW’s IM- Open University Press. Hills, J. (ed.) (1990) The State of Welfare. POSSIBILITY THEOREM and the general theory The Welfare State in Britain since 1974, of the SECOND BEST. Despite so many false Oxford: Oxford University Press. theoretical starts, welfare economics has Marsh, D. (1970) The Welfare State, inspired a great number of empirical stu- London: Longman. dies, some using cost–benefit analysis, in Ringen, S. (1988) The Possibility of Poli- matters as diverse as health, transport and tics. A Study in the Political Economy of energy economics. the Welfare State, Oxford: Clarendon Press. Seealso:normativeeconomics References welfaretrap(I3)seepovertytrap Just, R.E., Hueth, D.L. and Schmitz, A. (D6) (1982) Applied Welfare Economics and well-being Public Policy, Englewood Cliffs, NJ, and Having a high income, much education, London: Prentice Hall. good health mentally and physically and Little, I.M.D. (1957) A Critique of Welfare many opportunities for personal advance- Economics, 2nd edn, Oxford: Oxford ment. University Press. Sugden, R. (1981) The Political Economy Werner Report (E5) of Public Choice: An Introduction to EUROPEAN COMMUNITY report of 1970 setting Welfare Economics, Oxford: Martin Ro- out the conditions for monetary union as bertson. (1) total and irreversible convertibility of currencies, (2) complete liberalization of welfare state (I3) capital transactions and a complete inte- A nation that provides for basic needs by gration of banking and other financial using taxation to finance benefits for low- markets, and (3) the irrevocable locking income groups and to deliver free personal of exchange rate parities to end margins of services, especially health care. Germany fluctuation. provides one of the earliest examples of a welfare state; Sweden, one of the most Seealso:DelorsPlan comprehensive amongst MIXED ECONOMIES. Since 1945 it was thought that a mixed Wharton model (E6) economy with a welfare state was the A quarterly model of the US economy natural way for Western industrialized that has been used for forecasting pur- economies to evolve but the problems of poses since 1963. Originally it was based controlling inflation in the 1970s brought on KEYNESIAN principles of income deter- many to criticize the extent of state welfare mination, but increasingly in the 1980s it provision. Welfare states are becoming had a monetary content. increasingly expensive because of the age- References ing of the populations of advanced coun- Klein, L.P., Friedman, E. and Able, S. tries and rising expectations of increased (1983) ‘Money in the Wharton quarterly welfare benefits and improved health care. model’, Journal of Money, Credit and Inevitably, there are vigorous debates on Banking 15: 237–59. means testing and alternative methods of finance and a crusade in favour of greater whistleblower (M1) ECONOMIC EFFICIENCY. A person in an organization who reveals a

© 2002 Donald Rutherford bad state of affairs, e.g. incompetence, fight against a predatory company partici- deceit and fraud. pating in a TAKEOVER battle. white-collar worker (J2) whole life insurance (G2) A non-manual worker employed in an Insurance which both promises to pay a office, laboratory or shop; a manager, stated amount on the death of the insured professional worker, clerk, technician or and has an accumulated cash value avail- sales assistant. There have been proportio- able as collateral for a loan. nately more of these workers in the labour (G2) force because of technological change, the wholesale bank A bank acquiring its deposits from cor- growth of the public sector and the in- porations and the interbank market. creasing bureaucratization of firms in oli- gopolistic industries. It was feared in the Seealso:retailbank 1950s that this shift in the occupational structure would lead to the demise of wholesale money market (G1) TRADE UNIONS but instead new trade unions An interbank market in which banks offer specializing in the organization of white- or obtain large deposits from each other. collar workers have emerged, especially in This is an important way for MERCHANT, the public sector. This upgrading of the INVESTMENT and other SECONDARY BANKS to labour force has contributed to rising obtain deposits as they do not receive labour costs. deposits directly from the public. white good (D0, L6) wholesale price index (E3) 1 A consumer durable, such as a washing UK index of the group of commodities machine, cooker or refrigerator, which bought and sold by wholesalers. Changes is usually painted white. in this index precede and indicate likely 2 Household linen (the original meaning changes in the RETAIL PRICE INDEX. of the term). Seealso:coincidentindicators

Seealso:browngood;consumerdurable Wicksell, Knut, 1861–1926 (B3) white knight (G3) Leading Swedish economist whose ideas A friendly bidder for a company already were to inspire the STOCKHOLM SCHOOL and facing a hostile takeover bid. form a basis for a macroeconomic theory alternative to KEYNESIANISM. Educated at white market (D4) Uppsala University in mathematics, Wick- A legal market not in contravention of any sell soon showed himself to be a coura- governmental regulation; the opposite of a geous liberal, especially in propagating BLACK MARKET. NEO-MALTHUSIAN views – like John Stuart MILL he was arrested for doing so. Income white noise (C1) from journalism and various grants en- A completely random time series, all abled him to undertake independent study lagged correlations being zero; its spec- in 1885–1900; he came under the influence trum density is constant. of Bo¨HM-BAWERK and acquired a great ad- white revolution (Q1) miration for his theory of capital. This An agricultural revolution, particularly influence was clear in his celebrated Value, promoted in India, which encouraged the Capital and Rent (1893, original German growth of herds of dairy cattle. edition) and Interest and Prices (1898, original German edition). A major theme white squire (G3) of his work was the relationship between A company or several companies acting NATURAL RATES and MARKET RATES OF INTER- jointly in support of a WHITE KNIGHT in the EST which, he believed, are at the heart of

© 2002 Donald Rutherford cumulative processes of expansion and Williamson, Oliver Eaton, 1932– (B3) contraction in the economy. His work, as Educated at MIT, Stanford and Carnegie indicated by his lectures at Lund Univer- Mellon Universities. Apart from a time as sity (where he was a professor from 1901), assistant professor at Berkeley, University shows that he was eager to synthesize the of California, in 1963–5, he has been a capital theory of the AUSTRIAN SCHOOL with professor at the University of Pennsylva- Walrasian GENERAL EQUILIBRIUM notions nia from 1965. His work on TRANSACTION and other NEOCLASSICAL insights. COSTS, organizational hierarchies and ANTI- TRUST policy have made him a leader of the Seealso:purecrediteconomy revived school of INSTITUTIONAL ECONOMICS. References References Gardlund, T. (1958) The Life of Knut Williamson, O.E. (1970) Corporate Control Wicksell,Stockholm:Almqvist&Wiksell. and Business Behavior, Englewood Cliffs, Uhr, G.C. (1960) The Economic Doctrines NJ: Prentice Hall. of Knut Wicksell, Berkeley, CA: Califor- —— (1975) Markets and Hierarchies,New nia University Press. York: Free Press. wide monetary base (E4) —— (1986) Economic Organization: Firms, Notes and coins in circulation with the Markets and Policy Control, Brighton: public plus banks’ till money plus bankers’ Harvester Wheatsheaf. balances with the Bank of England (UK). windfall gain or loss (E0) wider share ownership (G0) An unexpected increase or decrease in ex Widespread ownership of the shares of post income; if it had been expected, it public companies throughout the popula- would have been included in ex ante tion. It is argued that encouragement of this, income. These windfalls are part of TRAN- as in the UK, makes private capitalism more SITORY INCOME but not of PERMANENT IN- acceptable throughout the country and that COME. companies are less vulnerable to TAKEOVER windfall profit (D0, E0) as private shareholders retain their shares An unexpected PROFIT arising from a cir- longer than INSTITUTIONAL INVESTORS do. In cumstance not controlled by a firm or an PRIVATIZATION the UK, has increased the individual. These profits constitute TRANSI- number of persons holding shares. TORY INCOME and can give rise to unusual widget (D0) consumer behaviour. A convenient term for a non-specified window dressing (G2) product or service used in discussions of Interbank borrowing to improve the ap- the principles of costing or industrial pearance of a bank’s balance sheet. This processes. was abandoned by UK CLEARING BANKS in widow’s cruse (E0) 1946 but is still practised in some banking 1 The Cambridge expression, used by systems, e.g. in France. KAHN and Joan ROBINSON, to refer to an winner’s curse (C7) economy which continues at the same Paying more for an item than its value. level of output, neither expanding nor This is measured by the difference between contracting as any spending of entre- a winner’s bid and the next lower bid in a preneurs’ profits leads to an equal single unit auction. creation of other profits elsewhere in the economy. withdrawal (E0) 2 The money-creating process of continu- Not spending income on domestically ally increasing money through bank produced goods and services but using it lending. to buy imports, pay taxes or make savings

© 2002 Donald Rutherford with the consequence that the value of the from membership of many committees MULTIPLIER is reduced. The CIRCULAR FLOW and commissions on leading public issues OF INCOME distinguishes withdrawals from covering topics ranging from criminal INJECTIONS. Also known as a leakage. statistics, hallucinogens and broadcasting to taxation, shop hours and the Civil withholding tax (H2) Service. She married John Wesley Wootton A tax on earnings, interest or dividend when she was 20; he was killed five weeks payments deducted at source. This tax is later in the First World War. She was designed to simplify the collection of tax married a second time in 1934 to a and to ensure that tax is not evaded. By student, George Wright. taxing dividends due for repatriation, it is hoped that foreign-owned companies will References be encouraged to invest in the country Bean, P. and Whynes, D. (eds) (1986) where their subsidiaries are located. Barbara Wootton. Social Science and Public Policy. Essays in her Honour, womeneconomists(B3)seefemale London and New York: Tavistock. economists Wootton, B. (1934) Plan or No Plan, London: Gollancz. Wootton, Barbara, 1897–1988 (B3) —— (1938) Lament for Economics, Lon- Economist and social scientist noted for her don: Allen & Unwin. works on INCOMES POLICY, PLANNING and —— (1945) Freedom under Planning, Lon- criminology. She was educated at Girton don: Allen & Unwin. —— (1959) Social Science and Social College, Cambridge, where she originally Pathology, London: Allen & Unwin. read classics before a reading of MAR- —— (1964) The Social Foundations of SHALL’s Principles of Economics caused her Wage Policy: A Study of Contemporary to specialize in economics. Although being British Wage and Salary Structure, 2nd awarded first-class honours with distinc- edn, London: Allen & Unwin. tion, university regulations prevented her, —— (1967) In a World I Never Made: as a woman, from taking her degree. Soon Autobiographical Reflections, London: she was made a fellow of Girton and Allen & Unwin. Director of Studies in Economics. In workable competition (D4, L1) 1922, she became a research officer of the Competition meeting only some of the Trades Union Congress. From 1926 to conditions for PERFECT COMPETITION;an 1928 she was Principal of Morley College absence of ANTI-COMPETITIVE PRACTICES.Itis for Working Men and Women, then Di- a SECOND-BEST situation. The criteria for an rector of Studies for Tutorial Classes in the industry being in a state of workable University of London (1928–45), Professor competition are its level of profits relative of Social Studies (1945–52) and at the end to normal profits, its costs relative to those of her career a Nuffield research fellow. of the most efficient scale, the extent of its Her achievements were recognized by product variation and selling costs and its the award of many honorary degrees, a life rate of technical progress relative to what peerage and being made a Companion of is considered satisfactory. These condi- Honour. Throughout her works there is a tions indicate how NORMATIVE the concept practical utilitarian concern to relate pro- is. The notion is central to the implemen- blems to reality. Her attack on Lionel tation of US ANTITRUST policy and increas- ROBBINS’s definition of economics in her ingly used in UK COMPETITION POLICY. Lament for Economics and her approach to planning and wage policy all indicated References her desire to influence policy-makers by Clark, J.M. (1961) Competition as a Dy- using an empirical approach. Much of her namic Process, Washington, DC: Brook- knowledge of economy and society came ings Institution.

© 2002 Donald Rutherford Sosnick, S.H. (1958) ‘A critique of con- ing) vote and the representation of senior cepts of workable competition’, Quar- staff on the supervisory board has, it is terly Journal of Economics 72: 380–423. argued, weighted the composition in fa- Utton, M.A. (1986) The Economics of vour of the management. Regulating Industry, Oxford: Basil Blackwell. Seealso:industrialdemocracy work classification (J2) workfare (J2, J6) A method of classifying work require- US schemes of community work qualify- ments which is an alternative to job ing the unemployed for social security description. The elements in the classifica- benefits. The idea was first used by the tion are the work range, the work struc- Roosevelt Administration in the 1930s. ture (how changeable work goals are), The US Federal Act of 1981, the Omnibus work control (how much discretion is Budget Reconciliation Act, forced all re- involved) and the cognitive effort required. cipients of federal or state aid to register This classification has been applied to for work or job training and gave the knowledge-intensive WHITE-COLLAR work. states the powers to require such persons to participate in work incentive, job search worker compensation insurance (I3) or work experience programmes. These Sickness and accident benefits financed by schemes have been criticized for creating employers’ premiums. In the USA the slave labour, for displacing existing work- amount of such insurance varies from ers, for adding to administrative costs and state to state and according to the accident for reducing the chance of the unemployed record of the firm. seeking good jobs. The most enthusiastic workers’ participation (L2) implementation of the scheme has been in The participation of employees in the West Virginia. Other countries, e.g. Swe- management of their firms. In Europe, a den, have versions of such schemes to keep major example since 1950 has been Ger- down the level of unemployment. many. There, two basic laws govern such References schemes: the works constitution law (Be- Ravallion, M. (1999) ‘Appraising Work- triebsverfassungsgesetz) and co-determina- fare’, World Bank Research Observer 14: tion law (Mitbestimmungsgesetz). Under 31–48. the former, works councils, which can determine several matters including work- working capital (M2) ing hours and vacations, can be formed if Current assets minus current liabilities; more than five workers are regularly em- capital available to provide short-term ployed. Co-determination law deals with financing for a firm. CLASSICAL ECONOMISTS the structure of the supervisory board that regarded this as mainly the raw materials exists in addition to an executive board and the WAGES FUND. Today it is often and has worker representatives. The law, regarded as a measure of the LIQUIDITY of originally applied only to the iron, steel a firm. and coal industries, stipulated an equal workingcapitalratio(M4)seecurrent number of employee and shareholder re- ratio presentatives on supervisory boards. Gra- dually, this type of workers’ participation working hours (J2) has spread to private sector firms. In 1976, The total number of hours a person works the law was extended to all companies per day or per week. The view that with over 2,000 employees, an extension to reduced hours increases workers’ welfare smaller companies being strongly resisted and chances of employment is based on by employers. The chairman, a share- too simplistic an analysis: a reduction in holders’ representative, has a second (cast- hours often raises unit labour costs which,

© 2002 Donald Rutherford in turn, reduces international competitive- which was conceived at BRETTON WOODS in ness and profit margins on traded goods 1944 and started business in 1947; it was leading to lower economic growth and intended that it should be linked to the employment. If reduced working hours INTERNATIONAL MONETARY FUND by member raise PRODUCTIVITY, no extra demand for countries belonging to both. It aims to labour results. In France, working hours encourage the provision of private, rather were reduced from forty to thirty-nine per than public, investment. Of its initial week, with full compensation, in January authorized capital of $10 million, one- 1982; in West Germany, the Metalworkers tenth was paid in dollars and gold. Fed- Union demanded in 1984 a reduction from eral and state bonds of the bank issued in forty to thirty-five hours with partial the USA raised a substantial amount of compensation. the original capital. At different phases of MARX made the length of the working its life, it has been a bank of reconstruc- day a key issue: he argued that working tion, a development bank and a policy hours longer than those spent in produ- reformer. cing subsistence for workers created SUR- Current aims suggested for the bank PLUS VALUE. Paradoxically, working hours include the major provision of funds and have been longer in socialist countries, technical advice to Third World borrowers, being forty-two to forty-five hours per the co-ordination of aid to less developed week. But in the developing countries of countries and theoretical leadership in de- Africa and Asia weekly working hours are velopment policy. Some people in the USA often as much as fifty or fifty-five. Japan, regard the World Bank as a means of which has industrialized only recently, still spreading US political philosophy and has long average working hours, about monetarism, but the financial rise of Japan forty-eight per week (three-quarters of the as the world’s major lender increasingly labour force works a six-day week). diminished US influence. In recent years, the bank has lent about 90 per cent of its workingpopulation(J2)seelabourforce advances for infrastructure projects, e.g. working-time regime (J2) education, health, irrigation and telecom- The rules set down in the EUROPEAN SOCIAL munications. Currently, recipient countries CHAPTER stating the maximum length of the are being asked to adopt price reforms and working week and working day and the market-related trading reforms. dispersion of hours. Full-time and part- time work are both covered. world debt problem (F3) The consequences of the large debts of less Seealso:annualized-hourssystem;flex- developed countries accumulated since ibleworking-timeschemes 1970. The magnitude of this indebtedness work sharing (J6) has given rise to problems of debt servi- A method of reducing unemployment by cing and the stability of the banking splitting a full-time job into two part-time system. The significance of the debts has jobs. Parents sometimes do this in order to often been measured by the ratios of debt share in domestic duties and child rearing. to gross national product or of debt to Occupations introducing this form of shar- service, but it has been asserted that a ing include school teaching and social better measure is the comparison of the work. rate of growth of export earnings with the rate of interest. Several approaches have Seealso:jobsharing been suggested to reduce this indebted- World Bank (F3, G2) ness, e.g. in 1986 the World Bank sug- Popular name for the International Bank gested SECTOR ADJUSTMENT LENDING as a for Reconstruction and Development means of reducing the indebtedness of

© 2002 Donald Rutherford certain THIRD WORLD countries. Some coun- References tries have reduced their indebtedness by a Brown, A.L. (1985) World Inflation since policy of exchanging debt for equity but 1950, Cambridge: Cambridge University there are limits to such conversions as Press. many national governments are alarmed Horsman, G. (1988) Inflation in the Twen- to see more foreign ownership of domestic tieth Century, Brighton: Harvester Wheatsheaf. companies. Major Western banks have gradually written off these loans as bad World Intellectual Property Organiza- debts. tion (O3) Seealso:debtserviceindicators;Jubilee A Geneva-based body concerned with 2000 upholding international conventions on protected ideas and with harmonizing na- References tional laws concerning such property. Griffith-Jones, S. (ed.) (1988) Managing World Debt, Brighton: Harvester Seealso:intellectualproperty Wheatsheaf. world monetary reserve assets (F3) Holley, H.A. (1987) Developing Country The total of the assets of all the countries Debt: The Role of the Commercial Banks, London: Routledge. of the world, in the form of special drawing rights, gold and reserve curren- World Economic Forum (F0) cies. An annual meeting of leading politicians Seealso:reserveassets and bankers at Davos, Switzerland, to discuss strategies to keep the world econ- world monetary system (F3) omy on an even course. In 1970 Professor The institutional mechanism for settling Klaus Schwab convened an informal gath- intercountry indebtedness and for provid- ering of Europe’s chief executives at Davos ing loans to increase the liquidity of under the patronage of the Commission of countries in need. After the GOLD STAN- European Communities and the following DARD, there was a world institutional gap year created a non-profit-making founda- until the BRETTON WOODS system was de- tion, the European Management Forum, vised. Although the arrangements for peg- subsequently renamed the World Eco- ging exchange rates ended in 1971, the nomic Forum in 1987. It has expanded its INTERNATIONAL MONETARY FUND and the activities to organize meetings for all WORLD BANK remain as pillars of a world major world regions and brought together system. heads of states and governments too. Seealso:EuropeanMonetarySystem Increasingly it has been lobbied at its meetings by protestors against global ca- world stock market indices (G1) see pitalism. AppendixB world systems perspective (O0) world inflation (E3) A method of analysing economic develop- The rates of inflation country by country ment which uses a structural approach to around the world, measured by annual put FOREIGN AID in the context of being rates of increase of consumer or producer part of the world economy and measures prices. Countries with high post-war infla- that country’s relationship with the rest of tion records include Argentina, Brazil, the world economy. Israel, Mexico and Yugoslavia; countries with low post-war inflation records in- world trade (F1) clude Japan, Switzerland, the USA, and The sum total volume of exports or West Germany before reunification. imports of every national ECONOMY. The

© 2002 Donald Rutherford growth of trading within MULTINATIONAL 140 member countries and covers more CORPORATIONS, much of it measured at ARTI- than 90 per cent of world trade. Decisions FICIAL TRANSFER PRICES, has made it more on trade disputes are settled consensually. difficult to gain a precise idea of the value The WTO also administers trade agree- of exports of particular countries. The ments and reviews national trade policies. volume of world trade fluctuates accord- worst case consequence analysis (Q2) ing to the state of major economies, A form of risk management in which especially the USA, and grows at different controlled experiments provide an aware- rates within particular trading blocs and ness of the consequences of an extreme between them. event. This is used as part of environmen- tal controls. World Trade Organization (F1) The successor to GATT inaugurated in writer (G1) 1995 and based in Geneva, Switzerland. It A CALL seller in an option market who sells administers the global rules of trade of a OPTIONS against shares he or she already multilateral trading system to facilitate owns in order to improve their perfor- and to encourage world trade. It has over mance.

© 2002 Donald Rutherford X

X-efficiency (D4) are Ways and Means to Increase the LEIBENSTEIN’s concept of efficiency that re- Revenues of Athens, perhaps the first work jects the technical efficiency notion of profit on PUBLIC FINANCE in which he argued for maximizing and cost minimizing. He argued state intervention to expand silver mining, that individual workers are free to choose Oeconomicus which included a discussion their effort level and interpret their own of the nature of wealth and income jobs. The equilibrium position for a firm will differentials and Cyropaedia which ex- be when every individual is in his or her plains that the DIVISION OF LABOUR is limited ‘inert area’, an effort point which, if moved by the extent of the market. away from, would reduce utility. This level Seealso:AncientGreeks;Aristotle;Plato of ‘efficiency’ and associated cost is com- fortable for a firm’s individuals. Prices are Xetra (G1) fixed using conventional formulae. The electronic cash market trading system for securities of the Frankfurt exchange. References Both auctions and continuous trading are Leibenstein, H. (1976) Beyond Economic used for dealing in over 5,000 equities and Man: A New Foundation for Macroeco- over 10,000 warrants. Safety mechanisms nomics, Cambridge, MA: Harvard Uni- versity Press. such as volatility interruptions are in force. —— (1978) General X-Efficiency Theory The trading platform of the iX interna- and Economic Development,NewYork tional exchanges. and London: Oxford University Press. X-form (L2) —— (1980) Inflation, Income Distribution and X-Efficiency Theory, London: Croom A hybrid type of business enterprise that is Helm; New York: Barnes & Noble. a mixture of the H- and M-FORMS. Seealso:U-form Xenophon, 430–354 BC (B3) A follower of Socrates before embarking References on military campaigns, including the ex- Williamson, O.E. (1986) Economic Organi- pedition of Cyrus. The three works attrib- zation: Firms, Markets and Policy Control, uted to him most relevant to economics ch. 4, Brighton: Harvester Wheatsheaf.

© 2002 Donald Rutherford Y

Yankeebid(D0)seesealedbidauction its maturity. An inverse yield curve is downward sloping, a positive yield curve Yankee bond (G1) upward sloping and a flat yield curve A bond issued in the US securities market horizontal. In most cases the yield, deter- by a non-US concern. mined in a secondary market, is for a yearling (G1) previously issued bond. The yield is also a A UK local government stock maturing in guide to the pricing of new bond issues. a year. The TERM STRUCTURE OF INTEREST RATES Seealso:governmentbond yellow dog contract (J5) An individual employment contract whereby a worker promises not to join a TRADE (LABOR) UNION. This standard practice of many US firms in the 1920s was used to impede the growth of union membership. It was outlawed by the NORRIS–LA GUARDIA ACT. yellow stripe price (G1) A stock market price shown on a screen of the STOCK EXCHANGE AUTOMATED QUOTATION SYSTEM which refers to large BARGAINS of a particular stock. yield (D2, G0) 1 Return to an investment measured by dividend or interest receivable divided by price of that security. 2 The annual produce from cultivating a piece of land. Seealso:redemptionyield yield curve (G0) The relationship between the percentage yield of a bond and the number of years to

© 2002 Donald Rutherford University of Wisconsin. His many aca- demic appointments included professor- ships at Stanford and, from 1913, at Cornell. His wide-ranging articles included demography and many aspects of applied economics, public finance and antitrust policy. He will long be remembered for his immensely influential article on IN- CREASING RETURNS TO SCALE that both ad- vanced the theory of ECONOMIC GROWTH and challenged the Marshallian THEORY OF THE FIRM. Tragically, he died relatively young of influenza in London. determines the curve, e.g. if short-term References rates are higher than long-term, there will Young, A.A. (1928) ‘Increasing returns be an inverse yield curve. and economic progress’, Economic Jour- Seealso:termstructureofinterestrates nal 38: 527–42. yield gap (G0) yuppie, yuppy (J1) A young urban professional. Most of The YIELD on equities minus the yield on bonds. Inflation after 1959 depressed the these aggressive young graduates are em- capital values of bonds, raising their yields ployed in financial centres such as New in both the UK and the USA: this created York and London. These health-con- a reverse yield that has fluctuated between scious workaholics firmly believe in free about 1 per cent and 9 per cent. market economics. Their high salaries have made it possible for them to con- Young, Allyn Abbott, 1876–1929 (B3) tribute to the GENTRIFICATION of inner city Educated at Hiram College, Ohio, and the areas.

© 2002 Donald Rutherford Z

zaibatsu (L2) zero coupon bond (G1) A Japanese group of large companies A bond bearing no interest. As the bond is owned by a family-controlled holding issued at a discount, it has a REDEMPTION company. YIELD. Seealso:chaebol Seealso:junkbond zai teku (G0, M1) zero growth (E0, O4) Financial management (Japanese). The characteristic of an economy in a STATIONARY STATE. CLASSICAL ECONOMISTS zakat (H2) feared the movement of the economy to Under Islamic law, a tax on surplus stationarity, excepting John Stuart MILL wealth, e.g. on buried treasure acquired who was willing to approve of no growth, through little labour, or on a herd above a providing that there was a satisfactory certain size. The tax is levied to help the income distribution. In modern advanced poor and needy. economies this has been suggested as a zero base budgeting (H6) goal on the grounds that growth of the A method of governmental budgeting GROSS NATIONAL PRODUCT generates SOCIAL which begins with an appraisal of all COSTS in the form of pollution, congestion spending projects on their merits and then, and more arduous work, as well as run- by aggregation, produces a budget total. It ning down non-renewable resources too was intended, when it was introduced by rapidly. Zero growth is often expressed as the Carter Administration in the USA in a condemnation of all growth rather than the 1970s, to replace the traditional budget an attack on particular undesirable eco- method of deciding first on an expenditure nomic activities. However, changes to total and then allocating that sum among more environmentally-friendly production different programmes. In practice, it is techniques make economic growth more questionable whether this method can be acceptable. implemented as project analysis is long, Seealso:ClubofRome costly and difficult – and not applicable to all parts of a budget. zero–infinity dilemma (Q2) References A problem in environmental economics Sarant, P.C. (1978) Zero-base Budgeting in when the probability of damage is small the Public Sector: A Pragmatic Ap- but the impact of a pollutant is potentially proach, Reading, MA: Addison-Wesley. large.

© 2002 Donald Rutherford zero population growth (J1) social security system from 1912 to 1930 The goal of many twentieth-century dis- before beginning his academic career. He ciples of MALTHUS usually taking the form developed a theory of COLLECTIVE BARGAIN- of advocating birth control. In many West ING based upon the possible outcomes of European countries the use of contracep- expected conflict, as perceived by manage- tive pills since the 1960s has brought the ment and labour, and developed the the- natural rate of increase below the replace- ory of DUOPOLY by expanding the notion of ment level. PRODUCT DIFFERENTIATION. Seealso:neo-Malthusians References Zeuthen, F.L.B. (1930) Problems of Mono- (D0) zero priced poly and Economic Welfare, London: G. Free. This term enables the prices of Routledge & Sons. everything to be placed on a continuum —— (1959) Economic Theory and Method, from zero to a considerable sum. Many Cambridge, MA: Harvard University goods and services provided by the public Press. sector are given freely to consumers, e.g. most of the health care provided by the Zipf’s law (R1) UK’s National Health Service. Although A linear relationship between the loga- goods can be free to a consumer, they are rithm of the largest cities and the loga- not costless because of the scarcity of rithm of those cities’ populations after factor inputs. ranking the cities by size starting with the largest. It is claimed to be universally true zero profit (D0) and to reflect constant RETURNS TO SCALE in The absence of SUPERNORMAL PROFITS in the cities. long run, under conditions of PERFECT COM- Seealso:Gibrat’slaw PETITION, as firms earn only NORMAL PROFITS which are included in average costs. References zero-rated good (H2) Zipf, G. (1949) Human behaviour and the principle of last effort, Cambridge, MA: A good not subject to VALUE-ADDED TAX. Addison-Wesley. Exemptions from value-added tax vary from country to country but the principal zombie (G3) items excluded in some countries have A company insolvent but continuing to been food, clothing and educational mat- operate. erials. Seealso:overtrading zero real interest (E4) A nominal rate of interest equal to the zonal pricing (D4, Q4) rate of inflation of that country. The aggregation of NODAL PRICES to pro- duce the same prices over part of a system zero-sum game (C7) such as electricity transmission. Economic activities in which gains to the winners equal losses to the losers. There zone of freedom (D0, L9) are many examples of these games, e.g. the A price range of the tariffs set by major attempt of all major trading countries to airlines. The ‘zone’ is the range below and have export surpluses. above a single reference level within which an air tariff must be set. Zeuthen, Frederik Ludvig Baug, 1888– 1959 (B3) zoning (Q3) Danish mathematical economist who A local government method of regulating graduated from Copenhagen University in land use. By the prohibition of certain 1912 and was employed by the Danish types of building in particular areas, land

© 2002 Donald Rutherford values and the nature of economic activity c gearing. In this expression, a is a are affected. constant and b and c are coefficients reflecting the relative importance of each Z-score (G0, M2) ratio. The score for an individual company A measure of the overall performance of a is compared with a test score to judge company which takes the form of a weight- whether the company is a financial failure ed index. The index is a + b profitability or a success.

© 2002 Donald Rutherford Appendix A Currencies of the world (F3)

Afghani: Afghanistan Danish krone: Denmark, Faroe Islands, A/Guilder: Netherlands Antilles Greenland Australian dollar: Australia, Kiribati, Denar: Macedonia Nauru Islands, Tuvalu Deutschmark: Germany Bahama dollar: Bahamas Dinar: Algeria, Bahrain, Sudan Republic, Baht: Thailand Tunisia Balboa: Panama Dirham: Morocco, United Arab Emirates Barbados dollar: Barbados Djibouti franc: Djibouti Belgian franc: Belgium Dobra: Sa˜o Tome´ Belize dollar: Belize Dominican peso: Dominican Republic Bermuda: Bermudian dollar Dong: Vietnam Bolivar: Venezuela Drachma: Greece Boliviana: Bolivia Dram: Armenia Brunei dollar: Brunei East Caribbean dollar: Antigua, Dominica, Burundi franc: Burundi Grenada, Montserrat, St Christopher, Canadian dollar: Canada St Lucia, St Vincent Cedi: Ghana Egyptian pound: Egypt CFA franc: Benin, Burkina Faso, Camer- Escudo: Azores, Madeira, Portugal oon, Central African Republic, Chad, Ethiopian birr: Ethiopia Congo, Coˆte d’Ivoire, Equatorial Gui- Falkland pound: Falkland Islands nea, French Community/Africa, Gabon, Fiji dollar: Fiji Islands Guinea-Bissau, Mali Republic, Niger Florin: Aruba Republic, Senegal, Togo Republic Forint: Hungary CFP franc: French Pacific Islands French franc: Andorra, France, Chilean peso: Chile Guadeloupe, Monaco, Re´union Island, CI dollar: Cayman Islands St Pierre & Miquelon Colombian peso: Colombia Gibraltar pound: Gibraltar Colon: Costa Rica, El Salvador Gold cordoba: Nicaragua Comoros franc: Comoros Gourde: Haiti Congo franc: Congo Democratic Republic Guarani: Paraguay Cuban peso: Cuba Guilder: Netherlands CV escudo: Cape Verde Guinea franc: Guinea Cyprus pound: Cyprus Guyanese dollar: Guyana Dalasi: Gambia Hong Kong dollar: Hong Kong

© 2002 Donald Rutherford Hryvna: Ukraine Norwegian krone: Norway Icelandic krona: Iceland Ouguiya: Mauritania Indian rupee: India Pa’anga: Tongo Islands Iraqi dinar: Iraq Pakistan rupee: Pakistan Jamaican dollar: Jamaica Pataca: Macao Jordanian dinar: Jordan Peso: Argentina, Philippines Kenya shilling: Kenya Peso Uruguayo: Uruguay Kina: Papua New Guinea Pound: St Helena, United Kingdom Koruna: Czech Republic, Slovakia Pound sterling: Pitcairn Islands Krona: Sweden Pula: Botswana Kroon: Estonia Punt: Irish Republic Kuna: Croatia Quetzal: Guatemala Kuwaiti dinar: Kuwait Rand: South Africa Kwacha: Malawi, Zambia Readj kwanza: Angola Kyat: Burma Real: Brazil Lari: Georgia Renminbi: China Lats: Latvia Rial: Iran, Yemen Republic Lebanese pound: Lebanon Rial Omani: Oman Lek: Albania Riel: Cambodia Lempira: Ringgit: Malaysia Leone: Sierra Leone Riyal: Qatar, Saudi Arabia Leu: Moldavia, Romania Rouble: Belarus, Russia Lev: Bulgaria Rufiya: Maldive Islands Liberian dollar: Liberia Rupiah: Indonesia Libyan dinar: Libya Rwanda franc: Rwanda Lilangeni: Swaziland Schilling: Austria Lira: Italy, San Marino, Turkey, Vatican SDR: Special Drawing Right (IMF) Litas: Lithuania Seychelles rupee: Seychelles Local franc: French Guiana, Martinique Shekel: Israel Luxemburg franc: Luxemburg Shilling: Somali Republic, Tanzania Maltese lira: Malta Singapore dollar: Singapore Maluti: Lesotho Solomon Islands dollar: Solomon Islands Manat: Azerbaijan Som: Kyrgyzstan Marka: Bosnia Herzegovina Spanish peseta: Andorra, Balearic Islands, Markka: Finland Canary Islands, Spain, Spanish ports Mauritius rupee: Mauritius in North Africa Metical: Mozambique Sri Lanka rupee: Sri Lanka Mexican peso: Mexico Sum: Uzbekistan MG franc: Madagascar Surinam guilder: Surinam Naira: Nigeria Swiss franc: Liechtenstein, Switzerland Namibian dollar: Namibia Syrian pound: Syria Nepalese rupee: Nepal Taiwanese dollar: Taiwan New dinar: Yugoslavia Taka: Bangladesh New kip: Laos Tala: Western Samoa New shilling: Tenge: Kazakhstan New sol: Peru Tolar: Slovenia New Zealand dollar: New Zealand, Pit- Trinidadian dollar: Trinidad & Tobago cairn Islands Tugrik: Mongolia Ngultrum: Bhutan US dollar: Ecuador, Guam, Puerto Rico,

© 2002 Donald Rutherford Turks and Caicos, United States of Notes: America, Virgin Islands Currency officially replaced by the euro Vatu: Vanuatu on 1 January 2002. Won: North Korea, South Korea Some currencies with the same name have Yen: Japan different values. Zimbabwian dollar: Zimbabwe Zloty: Poland

© 2002 Donald Rutherford