dictionary of economics

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 demand–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 interest) 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 savings 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 (Central Bank 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 europeenne pour la reconstruction et la developpe- 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 interest rate) BP balance of payments 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 ´ ´ Commision Economica para America Latina CEPGL ´ ´ Communite economique des Pays des Grands Lacs CES constant elasticity of substitution CET common external tariff CETA Comprehensive Employment and Training Act CEV constant elasticity of variance CFA ´ ` Communaute Financiere 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 Operations 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 planned economy 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 market economy 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 profit 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 currency 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 heteroscedasticity EIB European Investment Bank EMCF European Monetary Co-operation Fund EMS European Monetary System EMU European Monetary Union EMV expected monetary value 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 utility; European Union EUA European Unit of Account 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 preference schemes HA housing association HICP harmonized index of consumer prices © 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 heteroscedasticity 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 industrial organization 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 saving; 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 money 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 money supply; imports M&A merger and acquisition MA moving average MABP monetarist approach to the balance of payments MAP market anti-inflation plan MBO management by objectives; management buyout MCA marginal cost 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; Monetary Policy 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 unemployment 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 Economic Policy (Soviet Union) NEW net economic welfare NIBM non-interest-bearing M1 NIC newly industrialized country NIE new institutional economics 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 purchasing power parity; 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 heteroscedasticity r coefficient of correlation RBC real business cycle RD reserve deposits (of a bank) R&D research and development RDA Regional Development Agency (England) RD and D research, development and demonstration RE rational expectations 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 ´ ´ Societe anonyme (French, Belgian, Luxemburgese or Swiss public company) SACU South African Customs Union SADCC South African Development Co-ordination Committee Sarl ´ ´ ` ´ ´ Societe 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 National Accounts (United Nations) SNB Swiss National Bank (Switzerland’s central bank) SNIG sustained non-inflationary growth SOE state-owned enterprise; small open economy 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 ajoutee (the French value-added tax) TWER trade-weighted exchange rate UBR uniform business rate UDEAC ` Union Douaniere et Economique des Etats de l’Afrique Centrale (Central African Customs and Economic Union) © 2002 Donald Rutherford

UEMOA ´ ´ Union economique et monetaire 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 The top credit rating of the securities benefits and taxation into a single system, issued by corporations and companies, as attempt to ensure that benefits raise net judged by the US rating agency Standard income. & Poor. This rating is based on the view that default is likely to be minimal. above the line (H5, M3) 1 A type of expenditure and revenue of a See also: BB; BBB; C; D; DDD; Prime-1 government. For UK budgets from 1947 to 1963, it referred to spending abatement (Q2) see marginal cost of out of current tax revenue. abatement 2 A firm’s expenditure on direct advertising. 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 See also: below the line suggested as early as the MERCANTILIST period because it appears to be a ‘just’ Abramovitz, Moses, 1912– (B3) approach. John Stuart MILL 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 economist of the War Production different persons’ UTILITIES can be com- Board in 1942 before serving in the US pared. Army; and professor at Columbia Univer- 2 An employer’s stance in wage 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) Inventories and Business Cycles, New York: National Bureau of Economic Research. Abramovitz, M. (ed.) (1958) Capital For- mation and Economic Growth, Princeton, NJ: Princeton University Press. absenteeism (J2) A form of industrial unrest often used instead of a STRIKE. Workers dissatisfied with their conditions take days off work without pay. Some industries have been noted for this practice, e.g. the UK coal- mining industry. It is a form of expressing a grievance available to non-unionized workers. absolute poor (I3) People with income below what is needed See also: exit-voice to maintain a minimum standard of nutri- absolute advantage (F1) tion. An early theory of trade which states that See also: poverty, subsistence one country enters into trade with another because it has a greater productivity than absolute scarcity (Q3) that country in a particular industry or The limited non-renewable nature of some industries, e.g. its cotton industry is more resources, notably metals and fossil fuels. productive than the foreign cotton indus- absolute surplus value (N5) see surplus try. SMITH advanced this as the reason for value trade because a nation, like a household, should specialize. absolute tax incidence (H2) The burden of a particular tax compared See also: comparative advantage with a situation in which there are no taxes or governmental expenditures. absolute concentration (L1) see aggregate concentration See also: tax incidence absolute income hypothesis (E2) absorption approach (F4) A theory of the CONSUMPTION FUNCTION A method of analysing a country’s BALANCE stating that consumption is a function of OF PAYMENTS by comparing its total output current personal disposable income. This with its ‘absorption’, i.e. its domestic ex- was KEYNES’s original view, later refined by penditure on goods and services. There TOBIN and Smithies. The consumption will only be an improvement in a country’s function is non-linear because the MAR- balance of payments if its total output is GINAL PROPENSITY TO CONSUME declines as greater than its absorption of its own national income increases. Keynes asserted output. By the use of PRICE ELASTICITIES that ‘men are disposed, as a rule and on and a MULTIPLIER, it is possible to examine average, to increase their consumption as the effects on output and absorption of their income increases, but not by as much the DEVALUATION of a currency. as the increase in their income’. The early References approach was superseded by the RELATIVE Kyle, J.F. (1976) The Balance of Payments INCOME, PERMANENT INCOME and LIFE-CYCLE in a Monetary Economy, Princeton, NJ: HYPOTHESES. Princeton University Press. © 2002 Donald Rutherford

absorptive capacity (E2) accelerated depreciation (H2) 1 The physical limit to the amount of An initial depreciation allowance greater investment because PRODUCTIVITY de- than the annual wear and tear of a fixed clines as the rate of investment in- capital asset. For an asset with an ex- creases. pected life of ten years, under the straight- 2 The extent to which a country can line method of depreciation the value of increase investment without depressing the asset would be deemed to depreciate returns to that investment. 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) Absorptive Capacity: the per cent in the first year. Governments Concept and its Determinants, Washing- have used this fiscal device to encourage ton, DC: Brookings Institution. private sector investment. abstinence (D3) acceleration clause (G0) A justification for the payment of interest, A clause in many mortgage agreements first advanced by Nassau SENIOR. An making the PRINCIPAL and interest immedi- individual who abstains from current con- ately payable on the occurrence of an sumption is rewarded with interest for event such as failure to make payments adding to the capital stock. Abstinence on time or to keep a covenant. explains the supply of savings: that supply, together with the demand for capital, accelerator principle (E2) forms a theory of the interest rate. 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) An Outline of the coefficient approximating to the amount Science of Political Economy. Reprinted of capital needed to produce another unit New York: Augustus M. Kelly, 1965. of output multiplied by the change in abstract labour (J0) income. An early writer using this princi- Labour which is abstracted from expendi- ple was Aftalion in Les Crises periodiques tures of human labour power. MARX rede surproduction (1913); later Lundberg, garded abstract labour as the creator of HARROD, SAMUELSON, HICKS and Goodwin exchange values. included it in their investment equations. The basic principle, expressed in an equa- See also: concrete labour tion where I is net investment in year t, a abundance (Q2) is the accelerator coefficient and DY is the The opposite of SCARCITY. Abundant goods annual change in income, has been mod- and services 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 aDYtÀ1 scarcity has been discovered. Accelerated Cost Recovery System (H2) where DYtÀ1 is the change in income in US federal tax allowance introduced in the previous year; 1981 and subsequently modified. Most capital goods were assumed to have a life I ¼ aDYt À 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- See also: rolling settlement 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 URBAN ECONOMICS 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

accounting balance of payments (F4) actually paid. This accrual rate can be the A record of all the financial transactions current market rate or the original rate between the residents of one country and when the loan was made. the residents of foreign countries in a accrued expense (M4) given time period (usually a quarter or a An expense incurred in a particular time whole year). period but not yet paid. accounting costs (M4) accrued income (M4) All the costs of producing a good or Income earned in a particular time period service recorded in the accounts of a firm. but not yet received in cash. These include most economic costs but are likely to omit the cost of the owner’s time accumulation (E2) and the OPPORTUNITY COST of the financial The increase in assets which creates CAPI- capital used in the firm. TAL. Individual persons and businesses do this for their own gain; governments accu- accounting cycle (M4) mulate with the future welfare of a coun- The period from the start to finish of an try in view. SMITH and MARX were early operational sequence. Accountants typi- analysts of this process. cally consider periods of a month, three months, six months or a year. acid-test ratio (M2, M4) The ratio of liquid assets such as cash, accounting identity (E0, M4) accounts receivable and short-term mar- A balance with each side of an equation ketable securities to current liabilities. Also equal to the other because of the accounting known as quick assets ratio. definitions used. In economics this identity is usually contrasted with equilibrium con- active fiscal policy (H3, H5) ditions. Thus, in basic macroeconomics, the Frequently used discretionary fiscal policy. accounting equations Y = C + I and Y = C Using this, a government makes many + S entail that I = S, but planned saving changes in its spending and taxation, and investment may diverge (Y is national instead of relying on automatic stabilizers, income, C is aggregate consumption, I is to achieve a desired level of aggregate net investment and S is aggregate saving). demand. accounting profit (M2, M4) activist (E6) The excess of total revenue over the costs An economic policy adviser who believes and expenses of a productive activity in a in the use of discretionary monetary and given time period. Contrast with ECONOMIC fiscal instruments for fine-tuning the econ- PROFIT omy. accretion of a discount (G1) activity analysis (C6) see linear program- The accumulation of capital gains on DIS- ming COUNT BONDS anticipating payment of the bond at par when the bond matures. activity rate (J2) Official UK term for the LABOUR FORCE accrual accounting (M4) PARTICIPATION RATE. If the female population Accounts based on transactions when they is 100 million and the female labour force occur, as opposed to when the cash is is 55 million, the female activity rate will received or paid; not CASH FLOW ACCOUNT- be 55 per cent. ING. activity ratio (M2, M4) accrual interest rate (G0) 1 An accounting measure of the amount The rate at which interest accrues on a of activity of a firm: (standard hours for loan as distinct from the rate at which it is actual output/standard hours for bud- © 2002 Donald Rutherford

geted output) Â 100. adding-up controversy (D3) 2 Net sales divided by total assets or net A dispute concerning ‘solutions’ to the fixed assets. problem of ensuring that the total amount 3 Accounts receivable divided by daily of income going to factors of production credit sales. is equal to the national income. From P.H. Wicksteed’s An Essay in the Coordination actual budget (H6) of the Laws of Distribution (1894) on- The national taxation and expenditure wards, many attempts to solve the pro- accounts of a government. They can be in blem have been limited to the special case balance, in surplus or in deficit; often of a long-run perfectly competitive equili- contrasted with a FULL-EMPLOYMENT BUDGET. brium. actual deficit (H6) see primary deficit See also: Euler’s theorem; perfect competition acyclical (E3) Not subject to fluctuations caused by additional facilities (F3) various types of business cycle. Planned Extra credit arrangements of the INTERNA- economies with little openness to the TIONAL MONETARY FUND to ease the balance international economy, such as the former of payments difficulties of member coun- USSR, hoped to avoid the cyclical in- tries. These include: stability which they claimed to be an . 1963 Compensatory Financing Facility inherent feature of CAPITALISM. to provide compensation for a shortfall Adam Smith Institute (E6) in export earnings; Free market economic policy research . 1969 Buffer Stock Financing Facility; think-tank based in London, UK, and . 1974–5 Oil Facility; founded in 1977 by a group of like-minded . 1974 Extended Fund Facility; graduates of St Andrews University, Scot- . 1974 Supplementary Financing Facility; land. It has published reports on economic . 1986 Structural Adjustment Facility. policies since 1979. additionality (H2) The imposition of an extra obligation. adaptive expectations (E0) This is also a financing principle of the The expected value of an economic vari- EUROPEAN UNION in that some grants it able at a future date measured by the makes have to be matched by a grant from weighted average of all previous values of a member state set as a fixed proportion the variable. The concept was first ap- of the EU grant. plied to the study of investment behaviour and the CONSUMPTION FUNCTION and additional-worker hypothesis (J2) then later to inflation. This approach to The assertion that unemployment will expectations, first advanced by Cagan, encourage more labour force participation although easy for economic model- amongst SECONDARY WORKERS thus increas- builders, ignores the fact that forecasters ing the size of the labour force. This often often take into account more information occurs when there is a shift from heavy to than the past behaviour of the variable light industry. If those made redundant in being studied. 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) ‘The monetary dynamics unemployment will coincide with women of hyperinflation’, in M. Friedman (ed.) joining the labour force. Studies in the Quantity Theory of Money, Chicago: University of Chicago See also: discouraged worker hypothesis; Press. labour force participation rate © 2002 Donald Rutherford

References 1980s, the ratio for the EUROPEAN COMMU- Cann, G.G. (1967) ‘Unemployment and NITY was about one-third. the labor force participation of secondary workers’, Industrial and Labor Rela- adjustment speed (D0) tions Review 20: 275–97. The time it takes a price to adjust to EXCESS DEMAND or EXCESS SUPPLY in a parti- adjustable peg (F3) cular market. This is crucial to the study A FIXED EXCHANGE RATE which can occa- of money wage rates, product prices, sionally be altered according to certain interest rates and nominal exchange rates. rules. The best example is the BRETTON administered inflation (E3) WOODS AGREEMENT which permitted revalua- INFLATION brought about by firms increas- tions and devaluations of up to 10 per cent ing the profit mark-up on their products; a without the permission of the INTERNATIONAL form of COST-PUSH INFLATION. MONETARY FUND. An adjustable peg has the disadvantage of requiring the costly accu- See also: mark-up pricing mulation of foreign exchange reserves and can be unstable as every rumour about a administered pricing (D4, M2) currency change may provoke speculation The practice of setting prices according to necessitating an adjustment. A currency a formula, irrespective of the short-run can be pegged to another single currency forces of demand and supply. This is (often the US dollar) or to a basket of possible because of the market power of currencies such as a SPECIAL DRAWING RIGHT monopolistic and oligopolistic firms. As it or a basket chosen to reflect the trade is expensive to change prices (e.g. new structure of the country. catalogues have to be printed) and as there is always the possibility of adverse con- See also: Bretton Woods Agreement sumer reaction, there is a tendency for prices to be more rigid when administered. adjustable rate mortgage (G3) As part of an anti-inflation programme, A MORTGAGE bearing an interest rate that especially in wartime, governments will fluctuates according to market interest administer major prices, the prices of rates. These are popular with savings goods and services prominent in most institutions as they have less INTEREST RISK, consumers’ budgets; in these circum- and with individuals and households be- stances the rules for increasing prices are cause they offer lower initial interest rates. strictly laid down. Most administered prices are calculated by adding a profit adjusted claim (G0) see note issuance margin to AVERAGE COST. facility See also: mark-up pricing adjustment cost (D0) The cost to an economic agent, e.g. a firm References or a household, of a change in the value of Means, G.C. (1935) ‘Industrial prices and a variable crucial to its decisions. If, for their relative inflexibility’, Senate Docu- example, a firm were to change its capital ment No. 13, Washington, DC: US stock by embarking on an investment Government Printing Office. programme, it would incur the adjustment administration lag (H0) see costs of research, planning, installation of implementation lag equipment and training of workers. administrative cost (H2, M2) adjustment gap (Q1) 1 The personnel and equipment costs of The ratio of international to domestic collecting taxes (public finance). food prices. The greater the amount of 2 Costs incurred to manage an enterprise farm support, the greater the gap. In the (managerial economics). © 2002 Donald Rutherford

See also: transaction cost 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 See also: asymmetric information production is the basis. This tax reduces the amount of revenue that a firm obtains adverse supply shock (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 See also: unit tax at each price level. 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 monopoly situations as it can be advance corporation tax (H2) a BARRIER TO ENTRY. The theory of MONOPO- LISTIC COMPETITION was the first major eco- An interim settlement of UK corporation tax. If a company makes a qualifying nomic theory to incorporate considerations distribution 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

increase consumer demand for products African–American economists (B2) new to the market or in EXCESS SUPPLY. The earliest black economists in the USA include William Edward Burghardt Du Bois References (1868–1963), Sadie Tanner Mossell Alex- Carter, M., Casson, M. and Suneja, V. ander (1898–1989), George Edmund Haynes (1998) The economics of marketing, (1880–1960) and William Henry Dean Jr Cheltenham, UK, and Northampton, MA: Edward Elgar. (1910–52). Their work has included the Reekie, W.D. (1981) The Economics of study of MIGRATION, DISCRIMINATION and LO- Advertising, London: Macmillan. CATION THEORY . Schinalensee, R. (1972) The Economics of Advertising, Amsterdam: North-Holland. African Development Bank (G2) A bank operating from 1966: it finances Advisory, Conciliation and Arbitration investment projects in Africa and raises Service (J5) capital throughout the world. By 1985, it The central UK body, set up in 1974 had fifty African and twenty-five non- under the TRADE UNION AND LABOUR RELA- African countries as members, including TIONS ACT, to promote an improvement in the UK, the USA, Germany and Japan. industrial relations, to encourage an exten- See also: development bank sion of collective bargaining and its reform through advice, conciliation, enquiries and after-hours dealings (G2) arbitration, and to run the CENTRAL ARBI- Dealings in stocks and shares after the TRATION COMMITTEE. An important aspect of London STOCK EXCHANGE closes for the day. its activities has been the publication of Such BARGAINS are recorded as the next codes of practice in industrial relations. day’s business. In the past these dealings were at less attractive prices to both buyer affinity card (G2) and seller because of the greater risk of A CREDIT CARD linked with a charity that trading when market opinion was un- receives donations in proportion to the known; now, long hours of electronic amount spent by the user of that card. dealing have removed this price differen- affirmative action (J7) tial. A series of actions taken by an employer See also: twenty-four-hour trading or public authority to advance the opportunities of disadvantaged groups, espe- aftermarket (G2) cially ethnic minorities, to increase their The trading in securities immediately after representation, particularly in employment they have been issued. and other activities. age–earnings profile (J3) See also: reverse discrimination A graph plotting earnings against age. Such profiles are frequently used in HUMAN AFL–CIO (J5) CAPITAL analysis to show the financially American Federation of Labor and Con- beneficial effects of education. More edu- gress of Industrial Organizations: a merger cation usually raises the profile to a new of two rival labour federations of the USA plateau; rules for salary structures and in 1955 which brought back the breakaway seniority can also affect the profile’s shape. industrial unions that had separated from The frequently used method of construct- their colleagues in craft unions. Some US ing a profile from cross-section data pro- labour unions are not affiliated to the vides a poor estimate if age differentials in AFL–CIO. earnings change. LONGITUDINAL DATA pro- See also: craft union; general union; vide a more accurate picture of life-time industrial union earnings. © 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 particular 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 shortages of young workers in developed countries in the late twentieth century have diminished some of this discrimination. Also, firms which have waived age rules have ageing population (J1) discovered that many older workers have 1 population with an increasing propor- lower ABSENTEEISM, and higher numeracy tion of its population in older age and literacy than younger workers. groups, often because a large group born in a period of high birth rate is agency broker (G2) maturing. A stockbroker who buys and sells shares 2 A population with a rising MEDIAN age. of companies from MARKET-MAKERS. It is In developed countries, a decline in the argued that agency brokers have the ad- birth rate since the 1960s has added to vantage of being able to find better prices this demographic effect. A slower than an individual market-maker can offer growth in GROSS NATIONAL PRODUCT of a and of providing more confidentiality. nation can encourage emigration of the agency cost (D0) young, with the consequence that the A cost arising from a contractual relation- remaining population ‘ages’. A typical ship between a principal and an agent. pattern of consumption and saving is These costs include the expenses of draw- associated with each age group and ing up and enforcing a contract, as well as hence, when a population ‘ages’, it TRANSACTION COSTS, MORAL HAZARD costs and changes its demand for particular goods INFORMATION COSTS. Agency costs are major and services in the private and public determinants of how firms are organized sectors; also, innovation may be af- and how their staff are remunerated. fected and the size of the MULTIPLIER for the whole economy may change. agency pass-through (G2) A MORTGAGE PASS-THROUGH SECURITY guaran- See also: grey society; life-cycle hypothesis 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: agency relationship (D0) see agency theory 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 bargaining agent. It is used to evade the ban on aggregate concentration (L1) CLOSED SHOPS in RIGHT-TO-WORK STATES. The CONCENTRATION of the economic activity of a nation or an industry in the hands agency theory (L2) of a few giant firms. Also called absolute A theory of the firm which explores the concentration. relationships between PROPERTY RIGHTS and financial structures. The central concept See also: concentration ratio; 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 behavior, agency costs and ownership structure’, Journal of Financial Economics 3: 305–60. agent bank (G2) A bank which arranges with a consortium of banks a credit facility for a borrower. agent de change (G2) see specialist 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

of Governors to limit its activities to those permissible under the EDGE ACT. agribusiness (Q1) A large organization which processes or distributes agricultural products. It benefits from ECONOMIES OF SCALE and is managed as an industrial firm, separating personnel, marketing, finance and production functions. References Davis, J.H. and Goldberg, R.A. (1957) A Concept of Agribusiness, Cambridge, MA: Harvard University Press; Lon- don: Barley & Swinfen. Agricultural Adjustment Act 1933 (Q1) The basis of US federal support to farmers which has provided price support to maintain farm incomes. It created the COMMOD- aggregation problem (C3) ITY CREDIT CORPORATION to execute its policy. The choice of a suitable procedure for reducing numerous and detailed data to agricultural household (N0) aggregate variables for use in an econo- A farm with a labour force provided by metric equation. In particular, microeco- residents of a household. This economic nomic parameters have to be expressed in institution, analysed as both a firm and a macroeconomic parameters. The difficult household, was the basic economic unit of task is to eliminate bias so that stable Ancient Greece and is extensive today in macroparameters are produced for use in less developed countries. forecasting models. Sometimes aggregation See also: Ancient Greeks; villa economy is based on weighted averages of the microparameters. agricultural policy (Q1) Price and income support schemes de- References signed mainly to stabilize or increase Fisher, W. D. (1969) Clustering and Aggre- farmers’ incomes. Although consumers of gation in Economics, Baltimore, MD: food suffer through having to pay higher Johns Hopkins University Press. prices under most agricultural policies, it Gupta, K.L. (1969) Aggregation in Eco- is unlikely that developed countries with nomics, Rotterdam: Rotterdam Univer- sity Press. highly productive agricultural sectors will allow a market in unsubsidized agricul- agio theory of interest (E4) tural products as governments seek the An explanation for interest being paid. votes of farmers to be re-elected. As the Interest is paid to allow money or goods to GENERAL AGREEMENT ON TARIFFS AND TRADE be obtained now because they are desired has become increasingly concerned with more in the present than in the future. world trade in agricultural products, na- ‘Agio’ literally means ease or convenience. tional agricultural policies may be harmonized more in the future. agreement corporation (G2) A state chartered US banking corporation See also: Agricultural Adjustment Act engaged in international banking under an 1933, Common Agricultural Policy, Uru- agreement with the FEDERAL RESERVE Board guay Round © 2002 Donald Rutherford

References nomics, the study of unemployment and Moyer, H.W. and Josling, T.E. (1990) wages 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 notion 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’, inaugurated 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. Adam SMITH 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 Allais, Maurice, 1911– (B3) the labour force: this was done by redu- Educated at the Ecole Polytechnique and cing the implicit tax rate on earnings from ´ the Ecole Superieure 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- ´ Superieure 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

tional studies of real income. Awarded the alternative economic strategy (E6) see NOBEL PRIZE FOR ECONOMICS in 1988. New Cambridge Economics alleviation (O2) altruism (D0, L3, P0) A DEVELOPMENT strategy of softening POV- Seeking the good of others. This alterna- ERTY not eliminating it; for example, by , tive to SELF-INTEREST can be a major motive giving every child primary education and for economic activity. Many schemes of every mother health care. idealistic socialism rest on this principle. Adam SMITH used the concept of the INVI- allocative efficiency (M2) SIBLE HAND to show that unconscious altru- The selection of factor inputs which mini- ism can occur in an economy based on the mises the cost of producing goods and principle of self-interest. services to satisfy given wants, subject to See also: non-profit enterprise; utopia resource and technological constraints. This allocation includes efficiency of both References production and distribution. Setting out Collard, D.A. (1978) Altruism and Econ- the conditions for efficiency, including the omy, Oxford: Martin Robertson; New appropriate set of prices, has been the York: Oxford University Press. concern of WELFARE ECONOMICS. Recognition ambient standard (Q2) of the existence of INDIVISIBILITIES and EX- A standard for air quality set in the USA TERNALITIES has necessitated departures by the ENVIRONMENTAL PROTECTION AGENCY. from the approach of NEOCLASSICAL ECO- NOMICS. See also: primary standard; secondary standard See also: Pareto optimality American Depository Receipt (G2) allotment letter (G2) A share certificate or bearer security A letter confirming the purchase of newly entitling the holder to shares of a non-US issued shares. company which have been deposited in a bank located outside the USA. This US all-pay auction (D0) financial instrument, originally devised in A public sale which takes the form of RENT 1927, is now traded on both US and UK SEEKING. The prize is always awarded to stock exchanges. the competitor exerting the highest effort. American Economic Association (A1) This means that in an auction setting, The leading US professional association of each bidder has an incentive to bid just academic and other economists, founded in above the highest bidder, providing there is 1885 and based at Evanston, Illinois (now at a positive pay-off. Nashville,Tennessee).Fromitsearliestyearsit has sought to promote economic research, alpha stock (G2) particularly by publishing its prestigious One of the most actively traded stocks of American Economic Review, a core journal the London STOCK EXCHANGE which is al- of economics, from 1911 and Journal of ways quoted on the STOCK EXCHANGE AUTO- Economic Literature from 1963. The AEA MATED QUOTATION SYSTEM. There are usually currently has over 25,000 members. ten or more market-makers for each of such shares. In 1990, the ISE had about References 110 such stocks. Coats, A.W. (1985) ‘The American Eco- nomic Association and the economics See also: beta stock; delta stock; gamma profession’, Journal of Economic Litera- stock ture 23: 1697–1727. © 2002 Donald Rutherford

American Federation of Labor (J5) see subject to any governmental control. The AFL–CIO leading early exponents of this view were Pierre Proudhon (1809–65) and Mikhail American option (G1) Bakunin (1815–76). In practice, anarchism An OPTION that can be activated before its has been applied to industrial organization expiry date. in the form of workers’ syndicates, but American Stock Exchange (G2) experiments of this nature in France and Previously the New York Curb Market Spain in the early twentieth century were and then the New York Curb Exchange, short lived. Although anarchists share tracing its ancestry back to trading con- with socialists a dislike of capitalism, with ducted in the streets of lower Manhattan LAISSEZ-FAIRE economists a mistrust of the in 1793. It acquired its current name in state and with members of the co-opera- 1953 and was incorporated in 1971; by tive movement a belief that firms should 1987 it had 661 regular members with 60 be managed by labour, they are more per cent of its business with private clients extreme, especially in wanting the aboli- and 40 per cent with institutional inves- tion of private property and being pre- tors. It ended fixed commissions on deal- pared to risk the abandonment of systems ings in 1975 and from 1985 has been of law and order. linked to the Toronto Stock Exchange. References See also: New York Stock Exchange Ritter, A. (1980) Anarchism: A Theoretical Analysis, Cambridge: Cambridge Uni- America Works (I3) versity Press. US private company founded in 1984. It seeks to get people off welfare into em- anchor tenant (R0) ployment. This privatization of welfare to The leading commercial tenant of an work programmes is based upon contracts office block which influences its design between the company and a state or city. and has its logo on the facade in return ¸ A bounty is paid to the company for each for leasing a large portion of the building, person placed in a job for at least seven thereby making the return on the property months. Job search and interview skills are developer’s investment more secure. Some- taught and the worker’s performance is times the anchor tenant is given a market- monitored for four months. able share in the equity of the building. amortization (G0) Ancient Greeks (B1) Gradually extinguishing a liability or debt One of the earliest groups of writers on by allocating the cost of it to a number of economic problems who, despite living in time periods. Major examples are the DE- an underdeveloped economy mainly agrar- PRECIATION of an asset and the repayment ian in character, discussed value, money, of a loan by regular instalments to cover comparative property systems, the division the amount advanced and the interest. of labour, exchange controls and public finance. analysis of variance (C1) The decomposition of the variance in a See also: Aristotle; Plato; villa economy; dependent variable into the variance ex- Xenophon plained by the regression and the residual References variance. Finley, M.I. (1985) The Ancient Economy, See also: linear regression 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 Greek economic 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- SON. Scottish farmer and agricultural economist 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) A Study in Public Finance, (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 fiscal policy. 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 See also: differential theory of rent 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’ investors in the theatre. annual percentage rate (of interest) (E4, G0) Anglo-Saxon capitalism (P1) Actual annual cost of borrowing. The An economic system 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. licensing agreements, special 1 + total charge for credit> APR = 100> : ;1=t selling conditions and other measures less amount of credit serious than monopolization or carteliza- tion. where t is the number of years of the loan. See also: antitrust; competition policy annuity (G0) An amount of money paid annually or at other regular intervals. Major examples Anti-injunction Act (J5) see Norris–La include life assurance premiums, pensions, Guardia Act rent payments and instalment payments. antitrust (L4) An annuity certain has a fixed term, unlike US policy to prevent monopolistic prac- a perpetuity whose payments continue tices in interstate commerce. It started indefinitely (e.g. an unredeemable govern- with the Sherman Act 1890; the states ment stock). An annuity contingent de- have similar legislation applicable to pro- pends on an uncertain event, e.g. the death duction industries. Although national of a person. The purchase price, or present competition policies are common in value V, of an annuity depends on the rate OECD countries, few are as tough, with of interest used in the calculation criminal sanctions, as the US antitrust legislation administered by the Depart- 1 À ð1 þ iÞÀn V=A ment of Justice and the Federal Trade i Commission. The chief federal antitrust statutes are: SHERMAN ACT 1890; CLAYTON ACT where i is the rate of interest (expressed as 1914; FEDERAL TRADE COMMISSION ACT 1914; RO- a decimal) and n is the number of periods BINSON PATMAN ACT 1936 and CELLER KEFAUVER that the annuity is paid. ANTIMERGER ACT 1950. antagonistic growth (O4) References 1 Tensions, often of a social nature, in the Blair, R.D. and Kaserman, D.L. (1985) growth process because of the trade-offs Antitrust Economics, Homewood, IL: between growth, stability and equity. Richard D. Irwin. 2 The deliberate creation of disequilibria Kwoka, J.E. and White, L.J. (eds) (1999) to bring about new economic activities, The antitrust revolution. Economics, e.g. an infrastructure deficiency which competition and policy, 3rd edn, New stimulates the growth of a transport York and Oxford: Oxford University industry. Press. Neale, A.D. and Goyder, D.G. (1980) The anthropogenic climate impact (Q0) Antitrust Laws of the USA, 3rd edn, A climate change brought about by hu- Cambridge: Cambridge University mans, rather than by Nature. Press. Shepherd, W.G. (2000) ‘In perspective: the anticipatory pricing (D4, L1) role of economics at the Antitrust Divi- The practice of including expected cost sion since 1974’, Review of Industrial increases in the make-up of prices. Firms Organization 16: 107–11. adopting this policy hope that it will Viscusi, W.K., Vernon, J.M. and Harring- stabilize their prices as prices will not have ton, J.E. (1995) Economics of regulation to fluctuate with every change in costs. and antitrust, 2nd edn, Cambridge, MA, This type of pricing reduces the MENU COSTS and London: MIT Press. OF INFLATION. apprenticeship (J2) anti-competitive practices (L4) A period of training in a firm which Corporate behaviour in a market which enables a trainee to learn a craft under attempts to increase a firm’s market 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 public good 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 Welfare Economics, Notre Dame, IN: technology advocated for Third World University of Notre Dame Press. countries. Arab Common Market (F0) See also: 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 A DISEQUILIBRIUM price, usually manifest in expectation of a positive return. Profits the existence of EXCESS DEMAND. This is close can often be made from small differences to an EQUILIBRIUM PRICE. in price. This is common in currency and 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

In the case of a currency market, arbitrage Aristotle, 384–22 BC (B3) continues until the cross exchange rates One of the earliest writers on economics are consistent. For example, if initially who anticipated many later debates on US$1 = DM4, DM1 = 2 guilders and value, money and economic systems. In US$1 = 6 guilders, the correct cross-rate the Nichomachean Ethics, Book V, he should be DM1 = 1.5 guilders. The discussed the nature of value in the con- arbitrageurs sell spot and buy forward if text of a discussion of justice; in Topica, he they believe that the value of a currency is anticipated subsequent ideas of value falling: they benefit from the difference based on utility. He supported the idea of between two prices, with the forward private property on the grounds that it contract protecting them from a fall in leads to increased production and clearly the exchange rate. saw that money has the important functions of serving as a unit of account, a arbitration (J5) medium of exchange and a store of value. Settlement of a dispute by referral to a third party, used in industrial relations and References in many commercial disagreements. The Gordon, B. (1975) Economic Analysis be- arbitrator may be a court of law, an fore Adam Smith, London: Macmillan. independent arbitrator chosen by the par- Soudek, J. (1952) ‘Aristotle’s theory of ex- ties in dispute or a permanent government change: an inquiry into the origin of eco- body, e.g. the ADVISORY, CONCILIATION AND nomic analysis’, Proceedings of the Amer- ARBITRATION SERVICE (UK). As arbitration ican Philosophical Society 96: 45–75. is either voluntary or imposed, it can be arithmetic mean (C1) binding, compulsory, mandatory or uni- The sum of a set of values divided by the lateral. Landlord and tenant, shipping and number of values in that set. building contracts often use this method of resolving conflicts. Private arbitration, See also: geometric mean; harmonic mean which may be instituted in advance by a arithmetic progression (C6) contractual term, is cheaper and quicker A series of numbers increasing by a con- than resort to litigation. stant increment called a common differ- See also: pendulum arbitration ence, e.g. 2, 4, 6, 8. MALTHUS asserted that the means of subsistence increases arith- arc elasticity (C1, D0, D1) metically. The elasticity of demand over a portion of a demand curve or the elasticity of supply See also: geometric progression over a section of a supply curve. It is ARMA (C5) calculated from the midpoint between old Autoregressive moving-average model. and new prices and quantities on the This model of a stationary random pro- curve, using the ratio of the percentage cess, i.e. a process whose mean is constant change in quantity to the percentage over time, recognizes that a combination change in price, i.e. of moving-average and autoregressive models is necessary. DQ=ðQ1 þ Q2 Þ elasticity = References DP=ðP1 þ P2 Þ Box, G.E.P. and Jenkins, G.M. (1970) Time Series Analysis: Forecasting and Control, where P1 and Q1 are the price and quan- San Francisco: Holden-Day. tity originally and P2 and Q2 are the price and quantity after the change. It provides Armington assumption (F1) an average of POINT ELASTICITIES. The supposition that internationally traded © 2002 Donald Rutherford

products are differentiated according to In 1972, he shared the NOBEL PRIZE FOR country of origin. ECONOMICS with HICKS. The range of his contribution to economic theory and his References interest in the functioning of a GENERAL Armington, Paul S. (1969) ‘A theory of EQUILIBRIUM system are evident in his demand for products distinguished by Collected Papers. He shows how he devel- place of production’, IMF Staff Papers oped the ideas in Hicks’s Value and Capital 16(March): 159–78. to explain what it means to be better off. Arrow–Debreu model (D5) His analysis of VOTING PROCEDURES ad- An economic theory concerned with vanced the study of social choice. Also, he establishing the existence of an equili- has written much on the economics of brium for an integrated model of pro- information. duction, exchange and consumption. The two theorems produced by the authors See also: social choice theory were that (1) a competitive equilibrium References exists if every individual has initially Leading works include the following: some positive quantity of every commod- Arrow, K.J. (1966) Social Choice and ity available for sale and (2) there are Individual Values, New York: Wiley. individuals capable of supplying a posi- —— (1984–5) Collected Papers of Kenneth tive amount of at least one type of J. Arrow, Vols I–V, Oxford: Basil Black- labour with positive usefulness in the well. production of desired commodities. Arrow, K.J. and Hahm, F. (1971) General Competitive Analysis, San Francisco: See also: general equilibrium Holden-Day; Edinburgh: Oliver & Boyd. References Feiwel, G.R. (ed.) (1987) Arrow and the Ascent of Modern Economic Theory, Arrow, K.J. and Debreu, G. (1954) ‘The Basingstoke and London: Macmillan. existence of an equilibrium for a competitive economy’, Econometrica 22: 265–90. artificial barrier to entry (L1) Arrow–Debreu security (G1) A BARRIER TO ENTRY of firms into a market A financial instrument, or combination or industry erected by a government or the of securities, with a fixed payment of existing firms and not by natural market one unit only according to a specified forces. Governments may insist on licen- contingency. sing new entrants; firms may refuse to provide access to existing technology. Arrow, Kenneth Joseph, 1921– (B3) US economist, educated at City College, artificial currency (F3) New York, and Columbia University; A currency unit used either as a professor at Stanford University from common unit of account for interna- 1953 to 1968, and from 1979, with an tional transactions or as an interna- interlude at Harvard from 1968 to 1979. tional reserve asset. Principal examples His study of social choice led him to of these are SPECIAL DRAWING RIGHTS, EUR- formulate the IMPOSSIBILITY THEOREM, his OPEAN CURRENCY UNITS, EUROPEAN UNITS OF most famous contribution to economics. ACCOUNT and, in general, baskets of cur- Also, he and DEBREU proved in an Econo- rencies. Such currencies are very useful for metrica article of 1954 that a multimarket international accounting in times of vola- equilibrium under perfect competition re- tile exchange rates. quired the existence of forward markets See also: gold franc for all goods and services. His work on risk aversion and on growth theory (parti- A share (G1, G2) cularly LEARNING-BY-DOING) is also notable. 1 A Chinese stock market share payable © 2002 Donald Rutherford

in the Chinese currency, the renminbi. tion and the formation of classes in 2 Usually a non-voting share of the primitive communities. equity capital of a UK company. These References shares have been created to enable the founders of a company to retain con- Krader, L. (1975) The Asiatic Mode of Production, Assen, The Netherlands: trol. A shares trade at lower prices than Van Gorcum. B shares as they are useless to other Marx, K. (1964) Pre-capitalist Economic companies attempting to gain control of Formations, ed. E. Hobsbawm, London: the company. Gradually these shares Lawrence & Wishart. have been accorded voting rights as the O’Leary, B. (1989) The Asiatic Mode of London Stock Exchange regards them Production: Oriental Despotism, Histor- as unfair. ical Materialism and Indian History, Oxford: Basil Blackwell. Asian Development Bank (G2) ask price (G0) Bank founded in 1966 with capital The selling price of a SECURITY set by a provided by Asian countries, the USA, financial institution. Canada, the UK and West Germany on the recommendation of the United See also: bid price Nations Economic Commission for asset (D0, G0) Asia and the Far East. It covers half 1 A resource with a market value. of the world’s population. It is based 2 A unit of wealth capable of earning an in Manilla, the Philippines, and is income. dominated by the Japanese, the largest 3 A large enough estate to discharge the contributor of its capital. Its conserva- burden on an heir or executor. tive lending policy has chiefly favoured loans for specific projects, e.g. to build Real (or tangible) assets include land and ports, roads and bridges, rather than machinery; intangible assets include good- sectoral lending to restructure troubled will and patents; financial assets include economies. It has increased its lending cash and stock market securities. to the private sector and has a joint venture with commercial banks, the See also: national wealth; wealth Asian Finance and Investment Cor- poration (AFIC). asset card (G1) A DEBIT CARD. Asian option (G1) asset motive (E4) A DERIVATIVE settled in cash whose pay-off A motive for holding money. To avoid is related to the average price of the risky investments, people are prepared to underlying asset in a certain time period. sacrifice high returns by keeping their Also known as an average option. portfolios in a liquid or near-liquid form. Asiatic mode of production (P0) See also: speculative demand for money The most primitive form of production, asset specificity (G0) according to MARX, in which self-sufficient The unique character of a durable asset, agricultural communities are despotically e.g. a machine, a skilled worker or a governed. The state, through taxation, production site, which means that it has a appropriates the economic surplus of the low return in other uses. For many specific agricultural sector to finance the building assets the cost of employing them is in the of the country’s infrastructure. The con- nature of a SUNK COST. cept was developed in the 1950s and 1960s to examine more aspects of state forma- See also: economic rent; transfer earnings © 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 negotiations. 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 See also: lemons market able to deal with reporting dealers. Every atomistic competition (L1) evening there is electronic reporting of Similar to PERFECT COMPETITION 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 trades. 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 principal 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 ˆ tatonnement, 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- See also: Dutch auction; English auction; ments and for public utilities. first price auction; second price auction; Austrian School (B1, B2) hybrid auction A prominent school of economics which has References provided an opposing view to much of Engelbrecht-Wiggans, R., Shubik, M. and mainstream economics 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 economic growth. 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 See also: measure of economic welfare; inspire both MISES and HAYEK; his concept public good of entrepreneurial leadership was followed © 2002 Donald Rutherford

by SCHUMPETER in the latter’s theory of autocorrelation (C1) development. Both Mises and Schumpeter The state of an econometric relation such were members of Boehm-Bawerk’s cele- that some or all of the explanatory vari- brated seminar. ables are highly correlated with each other. After the collapse of the Austro-Hun- Poor specification of the relationship be- garian Empire at the end of the First tween variables in the regression equation World War, the members of the school is often the cause. dispersed to the UK, USA and Germany. auto-economy (G0) Prominent new members of it included That part of an economy, according to HABERLER and MACHLUP In the late twenti- . HICKS, which finances itself from its own eth century HAYEK and Ludwig LACHMANN stock of liquid assets. were leaders. Later Austrians have attempted to use the basic concepts of References radical subjectivism, human purpose and Hicks, J. (1974) The Crisis in Keynesian a spontaneous market order to contribute Economics, ch. 2, Oxford: Basil Blackwell. to modern debates about expectations, competition and economic welfare. Their autogestion (J5) policy concerns have included the relation- A French approach to WORKERS’ PARTICIPA- ship between MONETARY POLICY and the TION in the running of enterprises, pro- TRADE CYCLE, FREE BANKING and criticism of posed after the 1968 uprisings in France. socialism. This philosophy of management holds that enterprises should be less hierarchical, References with all employees participating directly Grassl, W. and Smith, B. (1986) Austrian in decision making, especially about work Economics, London: Croom Helm. organization, promotion and other em- Hicks, J.R. and Weber, W. (eds) (1973) ployment rules, technology and methods Carl Menger and the Austrian School of of production. This democratization Economics, Oxford: Oxford University would include a new framework for dis- Press. cussions between enterprises. Lachmann, L. (1976) ‘From Mises to Shackle: an essay on Austrian econom- See also: syndicalism ics and the Kaleidic Society’, Journal of Economic Literature 14: 54–62. References Littlechild, S. (1990) Austrian Economics, 3 Chauvey, D. (1970) Autogestion, Paris: vols, Aldershot: Edward Elgar. Editions du Seuil. autarky (P0) automated clearing house (G2) 1 Self-sufficiency. An organization for the electronic matching of cheques drawn on different banks so 2 A completely closed economy which that interbank indebtedness can be settled. does not engage in international trade. Although many economies have wanted See also: CHAPS; CHIPS such independence from the rest of the world to increase employment, their Automated Real-time Investment Ex- enthusiasm has been tempered by an change (G1) examination of the other effects of A computerized arrangement for dealing protection. in shares set up by MERCHANT BANKS in the City of London in 1974 to bypass the See also: utopia INTERNATIONAL STOCK EXCHANGE and thus save brokers’ commission. It never at- authoritative contracting (J2, J3) see tracted a high proportion of the London employment contract 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 machine 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 econometrics. 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 include 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 consequently 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 combined with discretionary changes in taxation and public expenditure. See also: fine-tuning autonomous consumption (E2) Consumption unrelated to the level of income. At zero income, in the short run, there can be autonomous consumption to maintain physical existence. It is © 2002 Donald Rutherford

Autumn Statement (H5) average option (G1) see Asian option 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- life cycle (see LIFE-CYCLE HYPOTHESIS). If a 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 Political Economy 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. See also: mean; median; mode average deviation (C1) see mean deviation average incremental cost (D0) Change in total cost divided by change in output; an approximation to MARGINAL COST necessary because marginal cost refers 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 finance basic consumption; at higher income 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. See also: savings; savings ratio 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 SOCIAL COST: 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 ECONOMIES OF SCALE and rise if there are and continuity (there is a boundary in the DISECONOMIES. In the short run, such curves form of an INDIFFERENCE CURVE 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 development economics. 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

backward linkage (L0) see linkage role of the Bank of England and the importance of confidence as the basis of backward shifting (H2) see shifting of taxes credit. backwash effect (R5) References The unfavourable effect of economic growth in a region on other regions in the Bagehot, W. (1965–78) The Collected same national economy. The growing re- Works of Walter Bagehot, ed. N. St gion attracts capital and labour from other John-Stevas, London: The Economist. regions, bringing about a concentration in Bailey, Samuel, 1791–1870 (B3) economic activity and regional economic A major opponent of the Ricardian theory differentials. This effect has been noted in of value, mainly known for his A Critical the context of the study of the CORE and Dissertation on the Nature, Measures and PERIPHERY of a country. Causes of Value: Chiefly in Reference to the See also: spread effect 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 See also: economic welfare; externality; parliament in 1832 and 1835. good; illth; measure of economic welfare 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 debut 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 WORLD BANK 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–Hollings Act once the debtor countries put together balanced budget multiplier (E2, E6) ‘supply-side packages’ (trade liberalization 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 See also: world debt problem 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 frequently 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-eastern Europe’, Economic Jour- mous capital flows + nal 53: 202–11. balancing item Balance for Official Financing (F4) = total currency flow + allocation of special The current balance of the BALANCE OF PAY- drawing rights – gold MENTS + capital transfers + investment subscription to the transactions + BALANCING ITEM. IMF + total official balance of payments (F4) financing 1 Credits and debits in international =0 transactions. 2 The record of the transactions between After 1980, it has been the residents of one country and the rest of the world in a given time period. The visible + invisible balance of payments is divided into a balance = current balance + current account which records trade in total investment and goods and services and a capital ac- other capital transac- count. In accounting terms the balance tions + balancing of payments always ‘balances’, as a item + allocation of surplus or deficit has to be offset by special drawing rights loans granted or received, but the bal- – gold subscription to ance does not indicate whether there is the IMF an equilibrium between a domestic = total official finan- economy and rest of the world demand. cing + methods of A balance of payments may be in deficit financing in the ‘STOCK’ sense of a country switch- =0 ing from cash balances into stocks of The US balance of payments consists of: commodities, or in the ‘FLOW’ sense of a country spending more than its income, a more serious type of deficit. There exports of goods and services + transfer of have been changes in the presentation goods and services under US military of the UK balance of payments ac- grants net À counts. Before 1970, the equation used imports of goods and services À was US military grants of goods and services net À visible + invisible unilateral transfers (excluding military balance = current balance + grants) net À balance of long-term US assets abroad net (increase/capital capital outflow) + = basic balance + foreign assets in the USA net (increase/ balancing item + capital inflow) + balance of monetary allocations of special drawing rights + movements balances of the above subaccounts. =0 See also: accounting balance of payments; balance of payments equilibrium; funda- From 1970 to 1980, it was mental equilibrium; market balance of visible + invisible payments balance = current balance + References balance of private Central Statistical Office (annual) UK and other autono- Balance of Payments, London: HMSO. © 2002 Donald Rutherford

Stern, R.M. (1973) The Balance of Pay- bancor (F3) ments, London: Macmillan. An international currency proposed by Thirlwall, A.P. (1986) Balance of Payments KEYNES at BRETTON WOODS as part of his Theory and the United Kingdom Experi- INTERNATIONAL CLEARING UNION scheme. It ence, London: Macmillan. was hoped that this new currency would balance of payments equilibrium (F4) be the medium for settling intercountry A balance within the overall ACCOUNTING indebtedness. As Keynes’s recommenda- BALANCE OF PAYMENTS. The equilibria most tion was not accepted, the US dollar frequently examined are in the current assumed the role designed for bancor. account, in the visible trade account or in bandit problem (C9) the current and long-term capital accounts A learning problem. Repeatedly a choice is combined. The balance chosen for exam- made from a fixed number of options in ination depends on the purpose of the order to maximize the total reward over a analysis. If the performance of industry is particular time period. The one-armed being considered, then the balance of bandit is a familiar slot machine game. trade will be examined, but the capital accounts merit attention if a foreign ex- References change market is under scrutiny. Berry, D.A. and Fristedt, B. (1985) Bandit Problems: Sequential Allocation of Ex- balance of trade (F4) see trade balance periments, London: Chapman and Hall. balance sheet (M4) bank advance (G2) see advance A statement of the assets and liabilities of bank capital (G2) a firm or other organization which pos- Assets of a bank which constitute its sesses property. The assets show what the ultimate means of meeting the demands firm owns, and what the firm owes is of its creditors. It consists of both the indicated by its liabilities. For a bank, the stockholders’ equity in a bank and funds management of its balance sheet from day obtained by selling bonds and notes with a to day is a central part of its business maturity of more than seven years on tasks. average. This capital is necessary to reduce balancing item (F4) the demands made on DEPOSIT INSURANCE Part of the BALANCE FOR OFFICIAL FINANCING organizations, e.g. the FEDERAL DEPOSIT IN- SURANCE CORPORATION, and on uninsured which takes into account statistical discrepancies. deposit holders. As definitions of this capital (e.g. whether to include both stock Baldwin envelope (F1) and equity) vary from country to country, As defined by Baldwin: ‘The consumption in January 1987 the Bank of England and possibility frontier for a large country the US banking authorities created a constructed as the envelope formed by common system for measuring the capital moving the foreign offer curve along the strength of UK and US banks. The system country’s transformation curve.’ introduced the concept of PRIMARY CAPITAL and assigned a weight to each asset or off- References balance-sheet item so that a risk–asset Baldwin, R.E. (1948) ‘Equilibrium in inter- ratio could be calculated. national trade: a diagrammatic analysis’, Quarterly Journal of Economics 67: See also: risk–asset system 748–62. bank charges (G2) balloon payment (G0) The charges that retail banks make to An additional and large charge levied at their customers for bank advances or for the end of a lease or loan. various transactions, including the transfer © 2002 Donald Rutherford

of funds, the purchase of foreign currency See also: current account; demand deposit; and accounting facilities. These tend to be NOW account; sight deposit greatest in countries with high inflation bank efficiency (G2) and consequently high and variable nom- A measure of a bank’s effectiveness in inal interest rates, and also where there are using the money available to it. This can many regulations restricting the types of be assessed by the ‘mark-up’ between financial mediation. As both the UK and interest rates, i.e. either the ninety-day the US economies have had these charac- bank time deposit day rate minus the teristics, there has been great scope in their PRIME RATE OF INTEREST, or the bank demand banking sectors for a reduction in charges. deposit rate minus the bank prime rate. See also: Islamic banking Mark-ups are similar within one country but differ between countries. Bank Charter Act 1844 (E5, N2) UK statute which was the last major banker’s turn (G2) nineteenth-century attempt to regulate the The margin between the rate of interest a UK banking system by the creation of bank pays to depositors and the rate it new rules for the operation of the Bank of receives for money lent out. England, particularly through control of See also: endowment effect the note issue. The Bank was divided into an Issue Department responsible for the Bank for International Settlements (F3) note issue and a Banking Department Founded in Basle, Switzerland, in 1930 by engaged in other bank activities. The Belgium, Germany, Italy, Japan and the Bank’s note issue was limited to a ‘fidu- UK. Since 1945 it has continued to ciary issue’ of £14 million (backed by arrange currency swaps between European government securities) and the remainder central banks. It is also the agent for the EUROPEAN MONETARY CO-OPERATION FUND and was backed by gold which rose and fell in amount according to international trans- other European institutions. actions. The Act also regulated the se- bank holding company (G2) venty-two country banks which had rights A company which owns one or more banks of note issue: not until 1921 did the Bank and, often, firms engaged in non-banking have a monopoly of note issue in England activities. The development of such com- and Wales (Scotland retained its separate panies in the USA in the twentieth century banking system with a number of banks made the expansion of banking possible, having the power to issue banknotes after despite the existence of UNIT BANKING. the Act of Union in 1707). The rigidity of the Act necessitated its suspension during Bank Holding Company Act 1956 several trade depressions. However, it did (E5, G2) represent a triumph for the thinking of the US federal statute which defined a bank CURRENCY SCHOOL. holding company as one which directly or indirectly owns or holds power to vote 25 bank deposits (G2) per cent or more of the shares of two or The liabilities of banks which constitute more major banks. Previously, bank hold- the major part of the money supply of ing companies were only mildly controlled modern national economies. They are li- by the BANKING ACT 1933 if they were abilities because a bank can transfer its member banks of the Federal Reserve deposits by cheque to other banks who System. In 1966, the Act was amended to then have a claim on it. Such deposits are apply ANTITRUST law to the chartering and created by an individual or firm giving an acquisitions of these companies. The 1956 asset to a bank, e.g. coin and banknotes, or Act prohibited the companies from parti- a promise to repay a loan at a future date. cipation in non-banking activities; amend- © 2002 Donald Rutherford

ments to the Act in 1970 permitted the capital or interest received by way of Board of Governors of the Federal Re- deposit. The Act also set up a Deposit serve System to authorize many non-bank- Protection Board to manage a deposit ing activities, which have included leasing, protection fund. insurance, mortgage banking, community See also: Financial Services Act development and data processing. Banking Act 1987 (E5, G2) banking (G2) This UK statute extended the amount of Money changing originally; after the regulation of deposit-taking business un- Church permitted the charging of interest, der the BANKING ACT 1979, gave the Bank of primarily money lending. Banks began England exclusive powers to authorize the producing money by issuing banknotes business of deposit taking and to revoke and then expanded credit by creating bank such powers, instructed the Bank of Eng- deposits, which became the major part of land to establish a Board of Banking the broadly defined money supply. The Supervision and regulated financial adver- power to create credit made banks key tisements. institutions in modern economies, influencing the level of economic activity. Banking School (N2) In the twentieth century banks in- A group of UK economists, led by Tho- creased in size through mergers and joint mas Tooke and John Stuart MILL, who operations (e.g. in the UK through mer- argued that there could never be an excess gers in the 1920s and 1960s, and in the note issue as notes were only issued to USA through the growth of bank holding cover real transactions. Also, they wanted companies), through internationalization the Bank of England to have higher of their operations and by an extension of reserves and the growing importance of the range of their services. In a sense, bank deposits to be incorporated into every major commercial bank of today monetary theory. aims to be a financial conglomerate sup- See also: Bank Charter Act 1844; Currency plying every form of credit, financial School; Free Banking School; real bills advice and service. doctrine See also: branch banking; domestic ban- bank margin (G2) king system; fractional reserve banking; The operating margin of a bank. free banking; investment banking; Islamic banking; laser banking; merchant bank; banknote (G2) offshore banking; unit banking; usury Paper CURRENCY issued by a bank. Although the first known notes were References issued by Chinese banks in the eleventh Lewis, M.K. and Davis, K.T. (1987) Do- century, it was not until the eighteenth and mestic and International Banking, Ded- nineteenth centuries that they substantially dington: Philip Allan. replaced coinage and BILLS OF EXCHANGE. In Banking Act 1933 (E5, G2) see Glass– London, banknotes originally took the Steagall Act form of receipts for bullion stored with goldsmiths and then became a form of Banking Act 1979 (E5, G2) bank advance when banks discovered their The aims of this UK statute were to power to create money. When countries regulate deposit-taking business under the were on the GOLD STANDARD, it was possible control of the Bank of England. It defined to convert banknotes into bullion; since ‘deposit-taking business’ as the receiving 1931 notes have been FIAT MONEY. In most of deposits of money and then lending to countries the only note issue today is that others, or as being financed out of the of the CENTRAL BANK (the limited power of © 2002 Donald Rutherford

Scottish banks to issue notes is excep- banks. It was granted its independence tional). from the Italian government in 1993. See also: Bradbury Bank of Japan (BOJ) (E5) The central bank of Japan controlled by Bank of Canada (E5) the Policy Board whose members are The central bank of Canada founded in chosen by the Cabinet and approved by 1934 and taken into government owner- the Diet. ship in 1938. It has the task of formulating and executing monetary policy. bank rate (E5) The lowest rate charged by the Bank of Bank of England (E5) England prior to September 1971 for The UK’s CENTRAL BANK which received its discounting high-quality short-term BILLS first charter in 1694. Although originally a presented by financial institutions to pre- privately owned bank, it administered the serve their liquidity. It was replaced by the national debt from 1752. In a series of MINIMUM LENDING RATE. statutes culminating in the BANK CHARTER bank run (G2) see run on a bank ACT 1844, it was increasingly subjected to government regulation, particularly in its bankruptcy (K2) note-issuing powers. After the collapse of A legal action which leads to the control the GOLD STANDARD in 1931, it operated of the property of an insolvent debtor for EXCHANGE CONTROLS from 1939 to 1979 and the benefit of creditors. After the court has from 1945 was more and more involved in appointed a receiver, the debtor can make supervising the UK banking sector. It was an offer to his or her creditors. nationalized in 1946. It conducts MONETARY bank settlement system (G2) POLICY through OPEN MARKET OPERATIONS An electronic means of transferring de- and by influencing market interest rates. posits between banks to settle their The note issue is now entirely FIDUCIARY, mutual indebtedness. In the USA, Fed but the monetary assets backing the note Wire is the Federal Reserve’s system, issue are used for the bank’s daily inter- Bank Wire is a system for domestic ventions in government security and payments and CHIPS is a system for pay- money markets. Also, the bank holds ments between New York banks. Japan accounts for about 130 overseas central has the Zenyin system for interbank trans- banks, the INTERNATIONAL MONETARY FUND fers. The UK has CHAPS for the clearing and some private and public sector clients. banks, as well as BACS. It acts, too, as the registrar of government stocks of the UK, several Commonwealth bank underwriting (G2) countries and UK local authorities. The underwriting by banks, especially the subsidiaries of US bank holding compa- See also: bank rate; Competition and Cre- nies, of the DEBT SECURITIES of low-credit- dit Control; corset; minimum lending rate rated firms. This practice has enhanced the References credit of many small firms. Geddes, P. (1987) Inside the Bank of Banque de France (E5) England, London: Boxtree. The central bank of France founded in Sayers, R.S. (1976) The Bank of England, 1800 by Napoleon I and nationalized in 1891–1944, Cambridge: Cambridge 1946. It was granted independence to University Press. formulate monetary policy in 1994. Bank of Italy (BOI) (E5) Baran, Paul, 1910–64 (B3) The central bank of Italy founded in 1883 Leading US Marxist economist of Russian through the merger of four note-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, New York: 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. See also: arbitration; game theory; 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 trade union 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

wage rate knowing little of the employer’s to happen when UK clearing banks chan- position; the employer will gradually in- ged their bank charges. crease his or her offer to avoid a costly strike. barrier option (G1) An OPTION with a pay-off depending on the References underlying asset reaching or exceeding a Hicks, J.R. (1963) The Theory of Wages, predetermined price. A double barrier ch. 7, London: Macmillan; New York: option has two trigger prices. St Martin’s Press. barrier to entry (L1) bargaining unit (J5) A principal method of creating or preser- The group of US workers represented by a ving a monopoly position. Such barriers labour union. The rules for the boundaries can be legal (governments only permit of the unit have been devised by the NA- certain qualified persons to enter the TIONAL LABOR RELATIONS BOARD under the market), technological (only large-scale provision of the WAGNER and TAFT–HARTLEY production is possible, as is the case with ACTS with a view to making them homo- steel mills and the mass production of geneous units which reflect local needs and consumer durables), financial (a large further COLLECTIVE BARGAINING. amount of capital is required to set up a business) or based on customers’ loyalty Barings Bank collapse (G2) (through PRODUCT DIFFERENTIATION). In the The failure of the long-established UK labour market, trade unions and profes- MERCHANT BANK in February 1995 caused sional associations (e.g. medical associa- by overtrading in Singapore by Nick tions) limit the number of entrants to an Leeson, its senior Singapore trader. This occupation to preserve the income and gambling in FUTURES and OPTIONS of the employment of their members. Nikkei 225 index of the Japanese stock market resulted in a loss of $1.3 billion See also: artificial barrier to entry; barrier when the stock market began to fall and to exit MARGIN CALLS could not be covered. The References losses absorbed all the EQUITY of the bank. The ING Group acquired the bank. In a Bain, J.S. (1956) Barriers to New Competi- tion, Cambridge, MA: Harvard Univer- previous Barings crisis in 1890 the BANK OF sity Press. ENGLAND rescued the bank by raising £17 million. barrier to exit (L1) Barnett formula (H7) The costs or forgone profits of a firm which will occur if it leaves an industry. A method of calculating UK public ex- Barriers to exit are less common than penditure for the component countries of barriers to entry, excepting where a gov- the UK introduced by Joel Barnett, Chief ernment, to prevent increased unemploy- Secretary to the Treasury, in 1978. It was ment, keeps in existence a large intended to bring about convergence in organization threatened with financial col- per capita spending but when it failed to lapse; specialized assets may also deter a do so was criticized for being too generous firm from leaving an industry. to Scotland. See also: barrier to entry barometric firm leadership (L1) The leadership of an oligopolistic firm References which first makes price changes to act as Caves, R.E. and Porter, M.E. (1977) ‘From a ‘barometer’ to test the market. Often a entry barriers to mobility barriers: con- small firm is chosen for this role, as used jectural decisions and contrived deter- © 2002 Donald Rutherford

rence to new competition’, Quarterly close to the base rate. Base rates came into Journal of Economics 91: 241–62. force in 1971. Despite the abolition of barter (D4, F1) their interest rate cartel, few clearing The most primitive form of exchange in banks have base rates out of line with which commodities are directly exchanged their competitors. for each other. An exchange is possible basic commodity (D0) when two persons mutually desire each A good which directly or indirectly enters other’s production. Barter is more cumber- into the production of all commodities. A some than using money as a medium of concept introduced by SRAFFA. exchange because the bartering parties usually have to search for each other References without the advantage of an intermediary. Sraffa, P. (1960) Production of Commod- Nevertheless, in modern times countries ities by Means of Commodities: Prelude short of foreign exchange, e.g. the former to a Critique of Economic Theory, Cam- bridge: Cambridge University Press. USSR, have used this form of trade. If trade bartering is used, there can be a basic income (I3) balance at a point of time or over a few An unconditional income sufficient for years, e.g. in this way Finland and the basic needs. Earnings beyond this allow- former USSR balanced their bilateral ance would be progressively taxed even- trade over a five-year period. tually reaching the income level at which the person would be a net contributor to See also: countertrade the scheme. The disabled and the elderly barter economy (P0) would get more than the basic income. A One of the earliest forms of an economy in government using this approach would which goods are directly changed for other ensure that all citizens received a share of goods without using money as a medium the NATIONAL INCOME. of exchange. Prices are expressed in rela- See also: negative income tax tive terms, e.g. X amount of A = Y amount of B. Transactions can be expen- basic industry (L0) sive as high search costs can be incurred in An industry which exports its products to the pursuit of trading partners. However, other regions, thus being a major determi- to avoid taxation and create employment, nant of its own regional prosperity. in some areas of, for example, Canada and the UK, the exchange of services has See also: non-basic industry replaced the usual market. References base capital (G2) Alexander, J. (1954) ‘The basic-non-basic concept of urban economic functions’, The capital of a securities house required Economic Geography 30: 246–61. to protect it against a fall in its profitability. basic needs budget (I3) A method of calculating POVERTY rates base currency (F3) which assumes that families with limited The CURRENCY used to quantify a RISK. incomes survive by consuming inferior base rate (E5, G2) goods. The cost of this bundle of goods The rate of interest that a UK clearing can rise at a different rate from the basket bank uses as the basis of its structure of used to calculate a price index. interest rates for lending and receiving See also: subsistence deposits. Lending rates are above, and rates on deposits below, base rate. Only basic relief (H2) large and creditworthy institutions borrow Income tax relief for all taxpayers © 2002 Donald Rutherford

irrespective of their marital and other and that there was less concern for the personal characteristics. meaning of capital than for its measurement. In particular, she was angry that basic wage (J3) modern theorists had distorted Keynes by The common and fundamental element in stating that, given a level of savings, the all Australian wages to which MARGINS are government ensures that there is enough added to produce a differentiated wage investment, a view little different from the structure. The basic wage is not merely a classical assertion that savings determine national wage but a general component of investment, ignoring the effect of DISTRIBU- all wages which can in itself be altered. An TION on consumption and investment. increase in the basic wage will be awarded HICKS with his IS–LM analysis, PATINKIN and only if the economy has the economic her US opponents in the CAMBRIDGE CON- capacity to pay for it. TROVERSIES were included in the ranks of See also: over-award payment the illegitimate. basing point pricing (L2) References A system of uniform pricing which in- Robinson, J. (1979) ‘What has become of cludes a transport charge for delivery from the Keynesian revolution?’, in Collected an arbitrarily chosen geographical base. In Economic Papers, Vol. V, pp. 168–77, the USA, it was first used to sell steel at Oxford: Basil Blackwell. Pittsburgh prices plus freight charges from batch production (L6) Pittsburgh to consumers (hence the name The production of a limited quantity of a ‘Pittsburgh-Plus’ for the system). The sys- particular product, rather than continuous tem has also been used in Europe, includ- mass production. ing the UK cement industry. ANTITRUST and COMPETITION POLICIES have long condemned Bauer, Peter Thomas, 1915– (B3) this departure from price competition. A prominent development economist born This practice distorts the location choices in Budapest, Hungary, and professor at of firms as they are charged less than the London School of Economics 1960– actual freight charges in some places but 83. He was created a life peer on retire- in others have to pay for phantom jour- ment. After early field work in Malaysia neys. and West Africa, he progressed to a general study of economic development, See also: Robinson–Patman Act 1936 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 economic planning 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 EFFECTIVE DEMAND 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 See also: AAA; BBB; C; D; DDD © 2002 Donald Rutherford

BBB (G2) sis of racial and sexual DISCRIMINATION in STANDARD & POORcredit rating of securities labour markets using the utility functions which states that they are of medium of employers and employees to demon- grade. strate a ‘taste for discrimination’; the formalisation of the study of HUMAN CAPI- See also: AAA; BB; QD; DDD TAL by an examination of the investment- BDI (J5) like nature of schooling and on-the-job Bundesverrand der deutchen Industrie. training; the analysis of crime as an A major employers’ association in Ger- occupation with expected benefits and many founded in 1949 by an amalgama- expected costs (if caught); and a new tion of thirty-nine national industrial economics of the family as a multi-person federations. BDI now has separate sections production unit practising division of la- for the sectors of the economy. bour amongst its members. His work has extended economic study into areas pre- bear (G1) viously the preserve of sociologists, psy- A market speculator who, believing that chologists and anthropologists. He was prices will fall, sells securities (for exam- awarded the Nobel Prize for Economics ple) now and purchases them later to in 1992. effect delivery of them. A profit is made by the difference between the selling and References buying prices. This reversal of the normal Becker, G.S. (1968) ‘Crime and punish- sequence of transactions is possible on ment: an economic approach’, Journal stock exchanges as securities do not have of Political Economy 76: 169–217. to be immediately delivered. Also, there is —— (1971) Economies of Discrimination, speculation of this nature in currency and 2nd edn, Chicago: University of Chi- commodity markets where there is a cago Press. choice between spot and future transac- —— (1975) Human Capital: A Theoretical and Empirical Analysis, with Special tions. If the bear already possesses what is Reference to Education, New York: Co- being sold, he or she is ‘protected’ or lumbia University Press. ‘covered’; if not, he or she is selling short. —— (1977) The Economic Approach to See also: bull; stag Human Behaviour, Chicago and Lon- don: University of Chicago Press. bearer bond (G1) —— (1981) Treatise on the Family, Cam- A bond owned by the person currently bridge, MA: Harvard University Press. holding it. As no endorsement is needed to Shackleton, J.R. (1981) ‘Gary S. Becker: transfer such bonds, there is no central the economist as empire-builder’, in J.R. register of the owners of any particular Shackleton and G. Locksley (eds) Twelve Contemporary Economists, Lon- bearer bond issue. The EUROBOND is a don and Basingstoke: Macmillan. major example of bearer bonds. bed and breakfast (G1, L8) bearer security (G1) see bearer bond; 1 A sale and purchase of securities within bearer share 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

MERCANTILIST thinking and was later prac- LIMITED ARBITRAGE. Research of this kind tised in the 1930s by many countries. First examines irrationality in markets. predominantly agricultural economies References adopted it; later it was adopted by the UK, USA, France, the Netherlands and Shleifer, A. (2000) Inefficient markets, Oxford: Oxford University Press. Switzerland. After 1945, currency devaluations have embodied this principle. A behaviour line (D0) policy of this type has always been criti- An INDIFFERENCE CURVE. cized because of its self-defeating character: domestic industries can ignore foreign Beige Book (E6) competition so become more inefficient A report of US regional economic condi- and export industries facing retaliation tions published by the FEDERAL RESERVE have a reduced output and consequentially eight times a year. It is based on anecdotal higher unit costs which make them even evidence collected by each of the twelve more uncompetitive in world markets. Federal District Banks. The economic state of different industries and of the See also: General Agreement on Tariffs labour market is described. and Trade; Smoot–Hawley Tariff Act 1930 Bellman’s equation (C8) behavioural economics (D1, L2) This asserts that the value of a state in a The varied approaches to the study of probability distribution equals the ex- economic behaviour, including decision pected value of successor states. This making in firms and other organizations, a equation is used in dynamic programming psychological approach to the study of to establish the greatest return over the consumers and a multidisciplinary ‘techno- long run. logical economics’ with some of the assumptions of the POST-KEYNESIANS. This school of bell-wether of the economy (E3) economics, mainly concerned with micro- A sector that indicates the future of a economic issues, also considers macroeco- whole national ECONOMY. The advertising nomic matters such as inflation and industry is often in this role as changes in unemployment. The specialist journals of advertising expenditure precede an upturn this branch of economics are the Journal or downturn in the economy. of Behavioral Economics and the Journal of bell-wether stock (G1) Economic Behavior and Economics. A stock exchange security regarded as See also: economics and psychology; evo- representative of the state of the stock lutionary theory of the firm market as a whole. It is usually the stock of one of the largest companies. References Earl, P.E. (ed.) (1988) Behavioral Econom- below the line (F4, H6, M3) ics, 2 vols, Aldershot: Edward Elgar. 1 In the UK budgets of 1947–63 receipts Gilad, B. and Kaish, S. (eds) (1986) Hand- and expenditure relating to borrowed book of Behavioral Economics, Vols A funds or the servicing of the national and B, Greenwich, CT: JAI Press. debt. Loasby, B. (1976) Choice, Complexity and 2 For a firm, expenditure on sales promo- Ignorance: An Inquiry into Economic tion other than on direct advertising. Theory and the Practice of Decision- 3 In the UK balance of payments, official Making, Cambridge: Cambridge Uni- financing. versity Press. See also: above the line behavioural finance (G1) The study of financial markets making use benefit approach to taxation (H2) of the ideas of INVESTOR SENTIMENT and 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 interest 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 See also: ability to pay; user charge 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 MERCANTILISM, 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) Jeremy Bentham’s Economic 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 MARKET SOCIALISM 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

securities of a particular stock market. Williams, K. and Williams, J. (eds) (1987) Beta is unity if the changes in the indivi- A Beveridge Reader, London: Unwin dual share and in the whole of the market Hyman. are the same. Betas are positive if the bid (D0) individual and market returns move in the An offer of a price as in an AUCTION or in a same direction, and negative if they move TENDER. in opposite directions. See also: designated competitive bidding; See also: alpha; Sharpe general competitive bidding; limited gen- beta stock (G1) eral competitive bidding Five hundred or so stocks and shares bidding technique (C8) which are the most actively traded on the Estimation of consumers’ valuation of STOCK EXCHANGE AUTOMATED QUOTATION benefits using questionnaires. system after alpha stocks. See also: contingent valuation See also: alpha stock; delta stock; gamma stock bid price (G1) The selling price for UNIT TRUST units or Beveridge, William Henry, 1879–1963 shares of companies. (B3) In many senses, the founder of the UK bid rent (Q2) WELFARE STATE. After an education at Bal- The amount of money a household will liol College, Oxford, he was a law Fellow offer a landowner for space to provide a at University College, Oxford from 1902 particular level of UTILITY. to 1909, as well as Sub-warden of Toynbee References Hall, London, from 1903 to 1905, where he investigated casual labour and unem- Wheaton, W. (1977) ‘A bid rent approach to housing demand’, Journal of Urban ployment in the London docks. As Direc- Economics 4: 200–17. tor of Labour Exchanges at the UK Board of Trade in 1909–15 he created a national bid vehicle (Q2) system of employment exchanges. In 1919 A proposed means of payment based on as Permanent Secretary of the Ministry of surveys to make a CONTINGENT VALUATION, Food he devised a national food rationing e.g. the amount of cash charged to obtain scheme. From 1919 to 1937 as Director of a permit to hunt wildlife. the London School of Economics he Big Bang (G1) expanded the range of its activities, attracting scholars such as HAYEK and HICKS, The DEREGULATION of the London Stock as well as encouraging empirical studies. Exchange on 27 October 1986 which Subsequently he was master of University involved the ending of minimum dealing College, Oxford, from 1937 to 1944, and commissions and the distinction between chairman of the committee which drew up dealers and jobbers. Under the fierce gale the Beveridge Report on social security in of competition, smaller firms found it 1942, which was expanded into the cele- difficult to survive and even the larger brated Full Employment in a Free Society firms withdrew from market-making by (1944), a report which laid the intellectual 1990. Firms anxious to be ahead of their foundations for many post-war UK wel- rivals offered grossly inflated salaries to fare policies. prospective staff and the best of existing staff, making the volume of consequent References redundancies greater. Harris, J. (1977) William Beveridge: a The seeds of the recent changes were Biography, Oxford: Clarendon Press. sown in the early 1970s when UK COMPETI- © 2002 Donald Rutherford

TION POLICY was extended to cover the cent of world trading and 85 per cent of provision of services as well as goods. The US trades. present changes were forced on the Lon- BigMac index (F3) don Stock Exchange when, to avoid in- A measure of the purchasing power of vestigation under the restrictive trade different currencies using the prices of practices legislation, it agreed in 1983 to hamburgers sold by the international food abolish minimum commissions within three chain McDonald’s. This was devised by years. The abolition of UK EXCHANGE CON- The Economist of London and has been TROLS in 1979 made internationalization of calculated since 1986. This index, based on the London market inevitable. The first the theory of PURCHASING POWER PARITY, is stage of these changes was on 1 March calculated by dividing the price of a 1986 when financial institutions such as hamburger in the local currency by its banks and insurance companies were al- price in US dollars. This ratio, the implied lowed to acquire holdings in firms of PPP, is compared with the actual exchange stockbrokers and stockjobbers. In the rate to determine the extent of a currency’s USA the equivalent set of changes took over- or undervaluation relative to the US place on 1 May 1975 and the conse- dollar. The BigMac was chosen for com- quences of those were the formation of parative purposes as it is a popular fast many new financial conglomerates. food item produced everywhere to the Three years of preparation enabled same recipe. London to adjust quickly to the new regime. The high volume of trading in the big push (O4) early months made it easier for firms to A theory of simultaneous economic devel- adjust to lower commissions and to cope opment in several sectors. Rosenstein- with the huge costs of setting up new Rodan asserted that for economic devel- dealing systems. Instead of the old practice opment to succeed there should be, as a of charging clients on the basis of price minimum, several large investment pro- plus commission, the majority of deals are jects in different industries in order to quoted at prices net of commission. The secure INCREASING RETURNS TO SCALE from next step will be to use the London system INDIVISIBILITIES in production. It was hoped to enable brokers throughout the world to that the scale of such development would quote prices to each other. In the period reduce divergences between private and 1986–9, the volume of stocks traded in social products. However, the lack of London fell by a third and the number of resources of many Third World countries jobs fell by 35,000, but much of this made it unlikely that so ambitious a decline was the consequence of the BLACK scheme would be implemented. MONDAY stock market crash. References See also: Mayday Rosenstein-Rodan, P. (1943) ‘Problems of industrialization in Eastern and south- References eastern Europe’, Economic Journal 53: Thomas, W.A. (1986) The Big Bang, Ded- 202–11. dington: Philip Allan. —— (1989) The Securities Market, Lon- bilateral aid (F4, O1) don: Philip Allan. Aid flowing between a particular donor country and a particular recipient; often ‘Big Board’ (G1) TIED AID. The nickname for the New York Stock See also: foreign aid; multilateral aid Exchange situated at 11 Wall Street and established in 1792. It dominates world bilateral monopoly (L1) securities markets by conducting 60 per A 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. See also: bill of exchange; commercial bill; trade bill; treasury bill 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 recession, 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, See also: price discrimination 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, first suggested by BECKER in Companies participating in this sector 1979. It is argued that competitiveness falsify their accounts by omissions or and self-interest, not selfishness and inaccurate entries. Rich and poor, capital- collectivism, when built into human ist and socialist, economies all have black genes produce an effective economic sectors. These sectors are prominent in system of the capitalist type. India, Portugal, Italy, as well as the USA 2 A study of economic behaviour in its and the UK. The large black economy in natural environment. Herbert Spencer, Italy could amount to 25 per cent of GROSS 1820–1903, an inspiration for Charles DOMESTIC PRODUCT. Methods of measuring Darwin, 1809–82, produced an evolu- the black economy include a comparison tionary account of society. MARSHALL of national income with national expendi- stated that in the early stages of tack- ture (a method flawed through errors in ling an economic problem a mechanical both of these aggregates) and the use of approach should be used but later a household expenditure surveys to calculate biological form of analysis. This branch undisclosed incomes through discrepancies of economics has flourished because of between household income and spending. an increased awareness of environmen- Also, changes in the ratio of cash transac- tal economics. tions to total transactions indicate that 3 The economics of renewable natural many prefer the less detectable form of resources. trading central to the black economy. If tax authorities succeeded in discovering See also: altruism; economic man; homo these activities, they would risk stopping economicus; homo sovieticus 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

black market (D4) See also: Thatcherism An unauthorized market with transactions contrary to governmental regulations. Blaug, Mark, 1927– (B3) Markets of this kind are often found when Leading historian of economic thought, there are price or EXCHANGE CONTROLS or education economist and biographer of the restriction of trading to a list of the economics profession. Born in the authorized dealers. Soviet-type economies Netherlands and educated at Columbia were characterized by these markets. University. After working as a statistician at the US Department of Labor, he was Black Monday (G1) assistant professor of economics at Yale Stock market crash in New York and University (1954–62) before becoming London of 19 October 1987. In London Professor of the Economics of Education the FTSE index dropped by 500 points. at the University of London Institute of See also: Brady Commission Education; since 1984 he has held chairs in England at Buckingham and Exeter and in References the Netherlands at Rotterdam. He has 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 Ricardian economics 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, See also: Ricardian theory of value 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 Tony Blair 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 actions 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 New Labour and the Third Way. contour. © 2002 Donald Rutherford

block trade (G1) see put-through Blue Book (C8, E6, J5) 1 The annually published national income and expenditure accounts of the UK. 2 The document setting out the terms and conditions of a firm agreed through COLLECTIVE BARGAINING or unilaterally imposed by an employer, e.g. the Ford Agreement. blue chip (G1) A stock issue by a company or corporation with a high standing because of its earnings record. Such shares are chosen as a basis for the Financial Times, Dow Jones and other share indices. The term is taken from the game of poker as the highest References value chips used are blue. Bator, F.M. (1957) ‘The simple analysis of blue-collar worker (J2) welfare maximization’, American Eco- nomic Review 47: 22–59. US expression for a person engaged in manual employment; usually contrasted bloc grant (H7) with a WHITE-COLLAR worker. DE-INDUSTRIALI- The revenue transferred by the US federal ZATION and the increasing education of the government to a state or local government labour force has reduced the number of so that the lower level government has these workers and, also, labour union sufficient revenues to provide a service, e.g. membership. education, at the standard desired by central government. blue economy (P0) The official economy, known to and re- blocked development (O1) corded by government. The term is derived Economic DEVELOPMENT deliberately im- in the UK from the term BLUE BOOK, the peded by other more developed countries. annual summary of the national income It has been asserted that dominant coun- accounts. tries of the world have blocked the development of Third World countries, per- See also: black economy; informal econ- mitting them only ‘PERIPHERAL CAPITALISM’. omy; unofficial economy References blue return (H2) Amin, S. (1976) Unequal Development: An A self-assessment business income tax Essay on the Social Formations of Per- system, recommended by the SHOUP MISSION ipheral Capitalism, Hassocks: Harvester to Japan of 1949, for collecting taxes from Press; New York: Monthly Review small and medium-sized firms. This system Press. was intended to encourage smaller businesses to maintain minimal accounting block of shares (G1) systems. Any block of more than 10,000 shares, according to the New York Stock Ex- blue-sky laws (G1, K2) change Rule 390. With few exceptions, this US Securities Act 1933 and other US rule requires that listed stocks must be statutes which regulate and supervise the traded on the floor of the exchange, even US securities industry so that financiers if sold in ‘blocks’. do not attempt to sell something which © 2002 Donald Rutherford

they do not possess, e.g. part of the sky, to studied law at Paris and later became a another person, or to devise other fraudu- lieutenant of police. He is credited with lent investment schemes. introducing the principle of LAISSEZ-FAIRE. His main work was Dissertation de la See also: bubble; Securities and Exchange nature des richesses, de l’argent et des Commission ` ´ ´ tributes, ou l’on decouvre la fausse idee qui bogey (G1) ´ ` ´ regne dans le monde a l’egard de ces trois The return to or income from an invest- articles (1707). ment which is used as the benchmark to bond (G1, M2) judge the performance of a fund manager. 1 A promise under seal to pay money. Movements in a stock market index are 2 A fixed interest security issued by a often used as a bogey. government, corporation or company. ¨ Bohm–Bawerk, Eugen von, 1851–1914 (B3) See also: deep discount bond; govern- Leading economist of the AUSTRIAN SCHOOL ment bond; junk bond; straight bond and disciple of Carl MENGER. He read law bond fund (G1) at Vienna University and then economics A fund established to receive the proceeds at Heidelberg, Leipzig and Jena Universi- of a bond issue and to make subsequent ties; his student contemporary was WIESER. disbursements. Such funds are often set up From 1889 to 1893 he was a civil servant by local authorities. working on income tax and currency reform. On three occasions (1893, 1896–7 bonding cost (M2) and 1900–4) he was the Minister of The cost to an agent of putting up a BOND Finance of Austria; in 1902 University of as a guarantee to meet losses. Bonding is Vienna appointed him to a chair. In his common amongst travel agents and insur- economic writings, he began with a theory ance underwriters. of value based on MARGINAL UTILITY and bond market (G1) then proceeded to a theory of interest and A market which raises long-term capital capital. His lengthy exposition of the for governments and firms through bonds ROUNDABOUT METHOD OF PRODUCTION, possible bearing a fixed rate of interest, as well as through the use of capital, is central to his arranging the trading of issued bonds. work. Production more capitalistic in nature has on average a longer period of bond rating agency (G1) production. He refused to relate the pay- A financial markets specialist which rates ment of interest to either productivity or the creditworthiness of the principal is- exploitation, asserting that interest is paid suers of bonds – governments, municipa- because present goods have a higher sub- lities and corporations. Standard & Poor jective value than future goods. and Moody’s are the leading US agencies of this kind. References Bohm-Bawerk, E. von (1959) Capital and ¨ See also: AAA; BB; BBB; D; DDD; Interest, 3 vols, trans. G.D. Huncke and Prime-1 H.F. Sennholz, South Holland, IL: Lib- ertarian Press. bonus issue (G1) Kuenne, R.E. (1971) Eugen von Bohm- ¨ An issue to present shareholders of extra Bawerk, New York and London: Co- shares in proportion to existing holdings. lumbia University Press. If issued without charge, known as a SCRIP ISSUE. Boisguilbert, Pierre Le Pesant de, 1646–1714 (B3) book value (M4) Born at Sainte-Croix Saint Ouen de Rouen, The value of an asset as recorded in the © 2002 Donald Rutherford

books or accounts of a firm or other border is long, the products exported over organization. Often this valuation is made one part of a border will also be imported at the time that assets are originally over another. This happens, for example, purchased with the consequence that with building materials over the USA– changes in value caused by inflation are Canada border. ignored. borrower’s curse (G0) See also: inflation accounting Having excessive optimism about a project boom (E3) that is loan financed. A peak in economic activity, the upper borrower’s risk (G1) turning point in the business cycle. Booms The hazard of not knowing whether the are characterized by high output, low expected returns to a project will materi- unemployment, speculative investment alize. and many short strikes. See also: recession bottleneck (D2) A shortage in the supply of a FACTOR OF boom and bust (E3) PRODUCTION which, if not remedied, can The characteristic of a cyclical economy. add to inflationary pressures; hence an Despite the overall stability of the UK economy with full employment suffers economy, for example, in the late 1990s many bottlenecks. Also, lack of an appro- there were fluctuations in some sectors, priate INFRASTRUCTURE has often been a especially agriculture and manufacturing. major bottleneck impeding the develop- See also: 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. See also: bull bootblack economy (P0) A derogatory term for a national ECONOMY bottom-line accounting (M2) dominated by LABOUR-INTENSIVE service in- Accounting which is especially concerned 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 See also: 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

bought deal (G1) Kernan, C.E. (1974) Creative Tension: The The purchase of a stock issue or a Life and Thought of Kenneth Boulding, portfolio of investments by one or more New York: Basic Books. financial institutions for resale in whole or Boulwareism (J5) part. Offloading parts of an acquired A substitute for collective BARGAINING, portfolio has become easier as there are named after Lemuel Boulware, the Vice- now so many types of financial instru- President for Industrial Relations at Gen- ment. As these deals cut dealing costs, eral Electric. It consisted of a company they provide a popular method for INVEST- making a unilateral offer based on re- MENT TRUSTS to acquire securities. search into a union’s demands. It was held Boulding, Kenneth Ewart, 1910–92 (B3) by the US Supreme Court in 1969 that A polymath economist born in the UK this was not US collective bargaining who made diverse contributions to many in ‘good faith’ as intended by the TAFT– HARTLEY ACT. areas of US economics. He was educated at Oxford, Chicago and Harvard Univer- boundary constraint (C1) sities. His career, which began as an The limit to the value of a variable, e.g. assistant lecturer at Edinburgh University, zero or positive. was spent chiefly at Michigan from 1949 to 1977 and subsequently at Colorado. His See also: Tobit model writing began with an article in the Eco- bounded rationality (D0) nomic Journal in 1932 on displacement A theory of decision making taking into cost and resulted in the production of over account the capacities of the human mind, 300 articles and twelve books. His major which has become a central theme of BE- textbook, Economic Analysis, blended to- HAVIOURAL ECONOMICS. It asserts that the gether KEYNESIANISM and NEOCLASSICAL ECO- rational choice of a decision-maker is NOMICS. In 1950, in A Reconstruction of subject to cognitive limits because human Economics, he urged a theoretical switch beings lack knowledge and have only a from flows to stocks, from incomes to limited ability to forecast the future. assets, and from the prices of labour and capital to their national income shares. His See also: cognitive dissonance; economics close examination of equilibrium linked and psychology; Simon price and ecological equilibria. His study References of social organization contrasted the exchange system and its threat system of war Cyert, R.M. and March, J.G. (1975) A with the integrative system of a grants Behavioral Theory of the Firm, 2nd edn, Englewood Cliffs, NJ: Prentice Hall. economy. Simon, H.A. (1982) Models of Bounded See also: grants economics Rationality, 2 vols, Cambridge, MA: MIT Press. References Boulding, K.E. (1945) Economics of Peace, bourgeoisie (D6, N3) New York: Prentice Hall. The capitalist middle class created by the —— (1950) A Reconstruction of Econom- Industrial Revolution at the beginning of ics, New York: Wiley. the nineteenth century and regarded as —— (1966) Economic Analysis, 4th edn, exploitative by MARX. The bourgeoisie was New York: Wiley. accused of wrongly appropriating surplus —— (1978) Ecodynamics, Beverly Hills, value from the product of the PROLETARIAT. CA, and London: Sage. —— (1981) A Preface to Grant Economics: bourse (G1) The Economy of Love and Fear, New Stock market of a European country. The York: Praeger. term is derived from the Bruges commod- © 2002 Donald Rutherford

ity exchange founded in 1360 in front of John Bradbury, Permanent Secretary to the home of Chevalier van de Buerse. the Treasury, and were also known as Treasury notes or UK currency notes. Box–Jenkins (C1) The Bank of England’s dislike of small A methodological approach to the study denomination notes necessitated issue by of TIME SERIES which has improved short- the Treasury. The smallest Bank of Eng- term economic forecasting by following land note until 1928 was a £5 note; in that the method of identification of economic year, £1 and 10 shilling notes were in- relationships and then estimation of them cluded in the Bank of England issue. and diagnostic checking. See also: banknote References Box, G.E.P. and Jenkins, G.M. (1970) Brady Commission (G1, K2) Time Series Analysis: Forecasting and US presidential commission which re- Control, San Francisco: Holden-Day. ported in 1988 on the Wall Street stock market crash of October 1987. Its princi- boycott (J5) pal recommendations were that one insti- 1 Stopping trade by refusing to deal with tution, preferably the FEDERAL RESERVE a particular country or supplier. This SYSTEM, should have the task of co-ordinat- form of protest, first used against Ire- ing financial regulation; that clearing sys- land’s landlords in the nineteenth cen- tems should be unified as a means of tury, was employed against South reducing financial risk; that there should Africa when apartheid was in force, be better information, including the trade, and in many trade disputes. time of trade and ultimate customer in 2 An action by a TRADE (LABOR) UNION each major market; that there should be a which prevents a firm from distributing harmonization of rules on margins; and its goods in an attempt to force it to that ‘circuit breakers’ should be co-ordi- concede the union’s demands. However, nated across markets. industrial relations legislation and ANTI- TRUST law in the USA have increasingly See also: circuit breaker mechanism made this illegal. brain drain (F2) See also: economic sanctions International migration of highly qualified persons, especially surgeons, physicians, bracket creep (H2) scientists, information technology specia- The movement of income tax payers into lists and engineers, from low-income coun- higher tax brackets as the inevitable con- tries to more prosperous economies, sequence of the growth of money incomes especially the USA. Differences in salaries with the income bands for each rate of and research facilities, as well as an over- income tax remaining the same. The re- supply of specialized graduates in less sults of this are higher marginal and developed countries, have occasioned this, average tax rates. The TAX REFORM ACT 1986 resulting in an increase in the HUMAN CAPI- (USA) attempted to eliminate this creep TAL stock of advanced countries. Some by indexing tax brackets and reducing the countries have proposed the repayment of number of tax brackets. state financed education as a deterrent to See also: indexation; emigration. Rooker–Wise Amendment See also: immigration; migration Bradbury (E5) branch banking (G2) UK Treasury note of £1 or 10 shillings A system of banking which permits a issued in 1914 to 1928 after the withdrawal banking institution to operate at many of gold coins. These were named after locations. This eighteenth-century Scottish © 2002 Donald Rutherford

invention was slow to be copied by other brand to other products. This is exten- countries: the USA only began to adopt it sively practised by tobacco companies. in 1933. Branch banking reduces the risk Brandt Commission (F3, O0) arising from an overcommitment to the The Independent Commission on Interna- financial needs to a single area. Major UK tional Development chaired first by Willy clearing banks expanded in the past Brandt, previous Chancellor of West Ger- through establishing large branch net- many, and then by Julius Nyerere, ex- works. In the USA in the late twentieth President of Tanzania. Its first report, century, branches sprang up in response to North-South: a Programme for Survival the liberalization of state banking laws, the (1980), failed to produce any action; its growth of suburbs, the movement of in- second report, Common Crisis: North- dustry to peripheral locations and the South Cooperation for World Recovery difficulty of reaching banks situated in (1983), responded to the THIRD WORLD debt congested city centres. The Interstate problem by recommending the AMORTIZA- Banking and Branch Efficiency Act 1994 TION of old debts. permitted branch banking across US state boundaries. breakeven analysis (C1, D4) A graphical representation of the relation- branch economy (F4, P0) ship between total costs and total revenue A national or regional economy substan- with breakeven taking place where total tially controlled elsewhere because many of cost is equal to total revenue (i.e. average its businesses are foreign-owned subsidi- cost is equal to average revenue). aries. The Scottish economy has acquired a branch status through the use of regional policies which encourage inward investment; in many less developed countries MULTINATIONAL CORPORATIONS have substantially transferred economic power abroad. branding (L1, M3) PRODUCT DIFFERENTIATION that establishes individuality for a particular product. A producer hopes thereby to gain a measure of MONOPOLY POWER through reducing the amount of substitution between its products and those of its competitors. See also: monopolistic competition brand loyalty (D1, M3) A consumer’s continued purchasing of the same differentiated good for a considerable period of time. As firms benefit from a stable regular demand, they will make it an objective of their advertising to achieve this goal. Brand loyalty lowers the ELASTI- breakeven level of income (M2) CITY OF DEMAND for a good and gives firms The level of income at which all income is a measure of MONOPOLY POWER. consumed and no debts are incurred. See also: monopolistic competition breakeven pricing (C1, D4) brand stretching (M3) A firm’s policy of setting prices equal to Applying the name of an established 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 married. 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 See also: 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 See also: American depository receipt for changing inappropriate national exchange 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

regarded as an indicator of future changes See also: A share in the PRIME RATE OF INTEREST. bubble (D4, G1) Brookings Institution (E6) 1 An unsustainable rise in an asset price. An independent centre founded in 1927 in 2 A speculative venture. Famous bubbles Washington, DC, for research into eco- include the Dutch tulip mania of 1625– nomics, government, foreign policy and 37 and the South Sea Bubble in Eng- other social sciences. It is famous for its land of 1720. Unless there are an forecasting model of the US economy and infinite number of traders, a bubble is for its influential studies of major econo- irrational in nature. mies, including those of Japan and the References UK. Taxation, international economics, growth and stabilization have been major Blanchard, O. I. and Watson, M.W. (1982) research concerns. ‘Bubbles, rational expectations and financial markets’, in P. Wachtel (ed.) References Crises in the Economic and Financial Fromm, G. and Klein, I. R. (1975) The Structure, Lexington, MA: Lexington Brookings Model: Perspectives and Re- Books. cent Developments, 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; Land previously used for industrial pur- London: Macmillan. poses which requires reclamation before bubble economy (P1) new building can be undertaken. 1 An economy engaged mainly in market- See also: blackfield site; 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 Public Choice, 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 Buddhist economics (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. bureaucrats. Schumacher, E.F. (1973) Small is Beauti- 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- See also: fiscal policy © 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 See also: tax incidence 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 agricultural 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 prominent feature of recent SUPPLY-SIDE ECO- Laidler, D. (1984) ‘The buffer stock notion in monetary economics’, Economic Jour- NOMICS and has taken the form of attempts nal (Supplement) 94: 17–34. to reduce federal outlays for civil purposes. 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

holders offer mortgage loans for the pur- banks or insurance companies. The 1986 chase or building of houses. Act freed them from many restrictions, changing their character from organiza- See also: building society; savings and tions with social aims to competitive firms loan association with a commercial orientation. Building Societies Act 1986 (G2, K2) See also: thrift UK statute which liberalized the operating rules for building societies and aligned built-in stabilizer (E6) see automatic them with other financial institutions. The stabilizer societies were allowed to lend to non- bulge-bracket firm (G2) members, hold and develop land as a A top investment bank of the USA, one of commercial asset and invest in companies the leading oligopolists of the US securi- and other corporate bodies. Also diversifi- ties industry. The separation of commer- cation into banking, insurance, invest- cial from investment banking under the ment, trusteeship and executorship, and GLASS–STEAGALL ACT protects their privileged land management services was allowed. position. Liquid assets were limited to a third of a society’s assets. Instead of being required bull (F3, G1) to have 90 per cent of their loans secured A speculator who, expecting prices of by property, building societies were per- shares, commodities or currencies to rise, mitted to reduce that proportion to 75 per will buy now and sell after prices have cent by 1992, enabling them to have risen, thereby making a capital gain. The broader investment portfolios. A new opposite is a BEAR. Building Societies Commission regulates bulldog bond (G1) the building societies. A bond denominated in sterling by a Building Societies Association (G2) company whose accounts are in another UK association of building societies which currency. jointly represents their interests. When it bulldog issue (G1) fixed common mortgage interest rates, it A long-term sterling bond issue, mostly was a powerful CARTEL. purchased by UK INSTITUTIONAL INVESTORS. building society (G2) bullet strategy (G1) A UK financial institution primarily con- An investment rule to concentrate the cerned with raising, through members’ securities in a portfolio at one point of deposits, a stock or fund for making the YIELD CURVE. advances to them secured on land and buildings for residential use, according to bullion (E4) the BUILDING SOCIETIES ACT 1986. As they Gold or silver ingots or bars used as bank stand between those who save and those reserves and as private stores of wealth. who ultimately borrow money, they act as See also: gold bullion standard financial intermediaries. All of them were founded as local non-profit-making insti- Bullionist controversy (N2) tutions, the earliest dating from the 1840s. A major debate in classical monetary Through mergers some societies acquired theory from 1797 to 1825 which was a power rivalling that of the major banks occasioned by the suspension of cash and, like the latter, offering a wide range payments, i.e. the inconvertibility of the of financial services. In 1900, there were pound sterling, during the Napoleonic 2,286 building societies; in 1990, 105; in Wars. The Bullionists, named after the 2000, 67. The recent decline in their supporters of the Bullion Committee’s numbers occurred through mergers with report of 1810 to the House of Com- © 2002 Donald Rutherford

mons, included RICARDO: they recommended 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. See also: Currency School Bullock Committee (J5, L2) UK governmental committee on workers’ participation in the management of companies which reported in 1977. The committee, 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, New York: 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 bundled deal (D0) see interlinked MULTICOLLINEARITIES in data. transaction © 2002 Donald Rutherford

bundling (D0) the US FEDERAL RESERVE SYSTEM from 1970 The sale of two or more goods or services to 1978, where he practised his conserva- in a package deal. A seller is able to tive monetary beliefs. As US Ambassador increase sales of less popular items by to West Germany in 1981–5 he negotiated combining them with those in great de- the German Treaty of 1982 to obtain more mand. German logistic support for US troops. His final years were spent in research at See also: mixed bundling; pure bundling the American Enterprise Institute. In his References important exposition of business cycle Adams, W.J. and Yellen, J.L. (1976) ‘Com- theory (with Wesley Mitchell) he compiled modity bundling and the burden of mono- a list of economic indicators which became poly’, Quarterly Journal of Economics the basis of business cycle forecasting in 90: 475–98. the USA after 1945. He calculated ‘reference cycles’ as the single indicator of bunny bond (G1) turning points in cycles. A noted anti- A fixed interest security entitling the Keynesian in economic policy matters. holder to an interest payment in cash or to more units of the asset. References Burns, A.F. (1946) Economic Research and buoyant tax (H2) the Keynesian Thinking of Our Times, A tax with a rising yield because of Washington, DC: National Bureau of increases in the extent of the TAX BASE, e.g. Economic Research. through rises in income or property values. —— (1954) Frontiers of Economic Knowl- edge, Princeton, NJ: Princeton Univer- Bureau of Economic Analysis (H1) sity Press. The branch of the US Department of —— (1969) The Business Cycles in a Commerce responsible for assembling and Changing World, New York: National publishing US national income accounts. Bureau of Economic Research. Burns, A.F. and Mitchell, W.C. (1946) See also: National Income and Product Measuring Business Cycles, Washington, Accounts DC: National Bureau of Economic Re- search. Bureau of the Budget (H1) Mullineux, A. (1990) Business Cycles and A US federal bureau created within the US Financial Crises, Hemel Hempstead: Treasury by the Accounting Act 1921 to Harvester Wheatsheaf. provide operational control over expenditure programmes. In 1939 it was trans- business cycle (E3) ferred to the President’s Office, at which ‘A type of fluctuation found in the aggre- time it changed its function increasingly to gate economic activity of nations that ensuring managerial efficiency. organize their work mainly in business See also: Office of Management and Bud- 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 recessions, 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

cycles since 1920. HABERLER, in an exten- Movements, 3rd edn, London: Allen & sive survey of business cycle research, Unwin. noted the many possible causes of cycles, Mitchell, W.C. (1927) Business Cycles: The including credit changes, overinvestment, Problem and its Setting, New York: National Bureau of Economic Research; costs of production, underconsumption, London: Pitman. mass psychology, variations in harvests – the interaction of the MULTIPLIER and the Business Expansion Scheme (G2) ACCELERATOR and international influences. UK investment scheme introduced in 1981 More recently, the cycle of elections in to encourage small businesses, especially democratic countries has been associated by giving them access to the finance with fluctuations in national economies. provided by the UNLISTED SECURITIES MAR- (See figure.) KET. Tax incentives are available to investors in these businesses. See also: accelerator principle; Juglar cycle; Kitchin cycle; Kondratieff cycle; Kuz- business organization (M1) nets cycle; political business cycle A particular legal arrangement for owning a firm. The principal types of business are References the sole trader, the partnership and the Bowers, D.A. (1985) An Introduction to company/corporation. These forms have Business Cycles and Forecasting, Read- different liabilities for debt and varying ing, MA, and Wokingham: Addison- numbers of owners. There is limited liabi- Wesley. lity for the shareholders of companies and Burns, A.F. and Mitchell, W.C. (1946) corporations have limited liability, but sole Measuring Business Cycles, New York: traders and members of partnerships are National Bureau of Economic Research. unlimited. Haberier, G. (1958) Prosperity and Depres- sion. A Theoretical Analysis of Cyclical See also: limited partnership © 2002 Donald Rutherford

business studies (M0) The techniques of DEMAND MANAGEMENT The multidisciplinary analysis of the that they employed were based on a problems of business, using economic, mixture of planning and market freedom. accounting, psychological, legal and sta- This form of macroeconomic policy was tistical methods. It blossomed as a sub- criticised for entailing too many monetary ject as a consequence of the and fiscal changes. establishment of business schools, espe- See also: mixed economy cially the Wharton School of Finance and Commerce in Philadelphia in 1881 butterfly effect (C0, E0, F0) and the Henley Administrative Staff The large differences in the values of College (UK) in 1947. These postgradu- dependent economic variables as a conse- ate schools, the chief practitioners of quence of minuscule differences in in- business studies, have reduced many putted economic variables. This type of managerial inefficiencies which used to effect makes it difficult for policy-makers be regarded as the principal cause of to be sure of the effects of their decisions. DISECONOMIES OF SCALE. The distinctive dis- Foreign exchange markets often display cipline developed by the subject has been butterfly effects. ORGANIZATION THEORY . See also: chaos theory Butskellism (E6) buyers’ market (D4) The similar economic policies pursued by A market in which buyers have a domi- Hugh Gaitskell and R.A. Butler as Chan- nant influence on price because of excess cellors of the Exchequer in the early 1950s. 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- Cairn’s Group (F0) rities have no interest paid on them. The group of major agricultural exporting See also: 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

ploying in total about 400,000 workers. A Controversies in the Theory of Capital, centre with fewer than twenty staff is Cambridge: Cambridge University Press. called a ‘pocket centre’. Cambridge Economic Policy Group call money (E4, G2) (B2, H3) Money lent within the City of London by A group of Cambridge economists led by CLEARING BANKS to DISCOUNT HOUSES for Wynne Godley who recommended an ex- short periods, sometimes only overnight, pansionary fiscal policy and import con- and immediately payable on demand. This trols in order to alleviate UK unemployment is ranked after cash and deposits with the after 1974. They opposed the use of DEMAND Bank of England as the most liquid asset MANAGEMENT and INCOMES POLICIES as cen- of the UK clearing banks as it can be tral instruments for determining the level recalled at any time. of AGGREGATE DEMAND. call option (G1) See also: New Cambridge economics The right to buy a stock exchange security Cambridge School (B1, B2) at the current price within a specified Successive generations of economists at period, normally three months. Cambridge University, particularly after Cambridge Circus (B2) the establishment of the separate Econom- Several young economists who debated ics Tripos in 1903. The school was with KEYNES in the early 1930s the devel- founded by MARSHALL and was made fa- opment of his ideas in A Treatise of mous in the 1930s by KEYNES, its intellec- Money (1930) into the theories central to tual leader. After 1945 its prominent The General Theory of Employment, Inter- leaders included KALDOR, Joan ROBINSON, est and Money. The group included Joan SRAFFA and Wynne Godley. A succession ROBINSON, Roy HARROD, Richard KAHN, of ideas has occupied the school in the James MEADE and Piero SRAFFA. 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) Collected Works, Vols and, more recently, an examination of the XIII and XXIX, London: Macmillan. nature of markets to show that MARKET CLEARING is so poor that DISEQUILIBRIUM is Cambridge controversies (D3, E0) Disputes between economists in Cam- a major economic problem. bridge, England (ROBINSON and KALDOR), See also: New Cambridge economics and Cambridge, Massachusetts (SOLOW and SAMUELSON), about the nature of CAPI- Canal Age (N7) TAL. In particular, the English contestants The period 1757–1830 in UK history when attacked the neoclassical assumptions of a network of 4,250 miles (6,800 km) of their transatlantic opponents by question- navigable rivers and canals was created to ing the existence of the aggregate PRODUC- transport agricultural produce and the TION FUNCTION. Also, they debated the manufactures of the Industrial Revolution. theory of profits and capital, the determi- It was succeeded by a railway age. nation of savings and the interest rate, canons of taxation (H2) aggregate capital and the re-switching of 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) The Cambridge Revolu- of payment and quantity to be paid tion: Success or Failure?, rev. edn, Lon- should be clear), convenience (payable at don: Institute of Economic Affairs. the time the taxpayer is in receipt of Harcourt, G.C. (1972) Some Cambridge income) and economy in collection. © 2002 Donald Rutherford

References seller gives funds to cover interest pay- Smith, A. (1776) The Wealth of Nations, ments over a specified rate. Also applies to ed. R.H. Campbell and A.S. Skinner, an adjustable rate mortgage. Book V, ch. II, Part II, Oxford: Clar- endon Press, 1976. See also: collar; floor capacity (D2, E4) Cantillon effect (E4) 1 The maximum output that a firm or a The differential impact of an increase in the national economy can produce from its money supply. As different recipients of existing supply of factors of production. extra cash have different uses for it, there A firm can increase its capacity by en- will be a change in the relative demand for, larging its labour force or its capital stock. and relative prices of, goods and services. 2 The maximum amount of money which The rate of interest will fall if the recipients a financial institution can lend. of the extra money save and invest. See also: capital utilization Cantillon, Richard, c.1680–c.1734 (B3) Irish-born banker and economist who capacity charge (D4, M2) spent much of his life in France where he A component of the price of the goods or made a large personal fortune after the services of public enterprises which is collapse of John LAW’s Mississippi Com- expected to cover the costs of fixed capital. pany. His writings on economics, other capacity ratio (J2) see volume ratio than the Essai sur la Nature du Commerce ´ ´ en General, appear to have perished with capacity utilization (D0, E0) him when his house in Albemarle Street, The ratio of the actual output of a firm, London, was burnt down. His remarkable industry or national economy to its max- Essai showed his keen reading of several imum output at a point in time. This ratio economists, including PETTY, and his im- will fluctuate cyclically. A high degree of mense practical knowledge of banking. In utilization will be a signal for more net many senses he anticipated QUESNAY and investment. other PHYSIOCRATS by setting out a model See also: accelerator principle; trade cycle of the economy with villages, market towns and cities engaged in mutual ex- capital (D0, E0) changes. Also, he powerfully explained the 1 Durable goods capable of producing a role of the ENTREPRENEUR in economic stream of goods or services over a activity, with a more plausible explanation period of time. than Smith’s INVISIBLE HAND postulate. His 2 A factor of production distinct from analysis of exchange rates, open market land, the entrepreneur and the labour operations and the bank credit multiplier currently being used. gives his work a modern focus. 3 A sum of money which is invested in a business enterprise. References 4 Accumulated expenditures giving rise to Cantillon, R. (1755) Essai sur la Nature du higher subsequent incomes, as in HUMAN ´ ´ Commerce en General, English trans. CAPITAL. H. Higgs, London: Macmillan, for the 5 Wealth. Royal Economic Society, 1931. 6 Stored-up labour; exchange value which Murphy, A.E. (1986) Richard Cantillon: is becoming wealth, according to Marx. Entrepreneur and Economist, Oxford: Clarendon Press. See also: Cambridge controversies; capital theory cap (E4, G1) The maximum interest rate paid on a capital account (F4) floating rate security by its issuer. 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 undertaking 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

European Union controls have been pro- 4 Production motivated by the profit gressively abandoned. motive. capital deepening (E2, O4) Investment which produces an increase in The PHYSIOCRATS and classical economists a CAPITAL–LABOUR RATIO because the capital such as SMITH regarded capitalism as the stock grows at a faster rate than the natural form of economic organization labour force. based upon man’s propensity to truck and See also: capital widening barter and likely to be the most successful in increasing ECONOMIC WELFARE. MARX cri- capital flight (F2) ticized many definitions of capitalism for A capital outflow from a particular coun- being timeless, ignoring the different his- try. This is broadly defined as all pur- torical forms it takes, and for the institu- chases of foreign assets (other than to tion of private property, which prevents increase official reserves), together with the reconciliation of individual and gen- the errors and omissions item of a BAL- eral interests, causing the alienation of ANCE OF PAYMENTS; narrowly, it can be workers. Marxists have classified capital- regarded as short-term capital outflows ism into different stages, namely agricul- (hot money) plus errors and omissions. tural capitalism, merchant capitalism, capital gains tax (H2) industrial capitalism and state capitalism. A tax based on the increase in capital See also: creative destruction; fundamen- value of an asset between its purchase and al contradiction of capitalism; industrial its sale. This tax discourages investors capitalism; late capitalism; lemonade-- from adjusting their portfolios and reduces stand capitalism; merchant capitalism; business for stockbrokers. The country monopoly capitalism; peripheral capital- with the highest rate of tax is Australia ism; personal capitalism; popular capital- (48.5 per cent) followed by the UK and ism; socialism; state capitalism; state the USA. monopoly capitalism capital income tax (H2) References A tax levied on the returns from invest- Dobb, M. (1946) Studies in the Develop- ments or capital. Often such a tax is levied ment of Capitalism, London: Routledge. at a higher rate than taxes on employment Graham, D. and Clarke, P. (1986) The incomes. New Enlightenment: The New Birth of Liberalism, London: Macmillan. capital intensive (D2) Hirschman, A. O. (1982) ‘Rival interpreta- A form of production using much physical tions of market society: civilizing, de- capital per unit of labour input. The structive, or feeble’, Journal of Economic degree of factor intensity is usually mea- Literature 20 (December): 1463–84. sured by the slope of an ISOQUANT. Tribe, K. (1981) Genealogies of Capitalism, See also: capital deepening; labour inten- London: Macmillan. Wallerstein, I. (1979) The Capitalist World- sive Economy, Cambridge: Cambridge Uni- capitalism (P1) versity Press. 1 A socioeconomic system of production capitalist class (J5) see bourgeoisie using ROUNDABOUT METHODS OF PRODUC- TION. capitalist imperialism (L2, O0) 2 An ECONOMY based on private enter- The exercise of power by major capitalist prise. countries over less developed countries, 3 The use of markets not planning to often through the medium of MULTINA- allocate economic resources. TIONAL CORPORATIONS. Marxists have argued © 2002 Donald Rutherford

that the declining rate of profit on home capital–output ratio (D2) production forced capitalists to expand The amount of capital divided by the overseas. amount of output produced by it. This measure of CAPITAL INTENSITY underlies the References ACCELERATOR PRINCIPLE. Owen, R. and Sutcliffe, B. (eds) (1972) Studies in the Theory of Imperialism, capital re-switching (D2) London: Longman. A return to more CAPITAL-INTENSIVE methods of production because a technique has capitalization (G1) become more profitable through an in- The conversion of an interest payment or crease in the marginal product of capital a liquid asset into permanent capital. or a fall in the rate of interest. A company can capitalize its cash reserves by the issue of shares (a free, BONUS or See also: Cambridge controversies SCRIP ISSUE). A debtor, even a nation, can capitalize interest payments by adding capital reversing (E2) them to the original sum borrowed. A challenge to the NEOCLASSICAL view that input substitution responds to the relative See also: securitization scarcity of factors of production. Instead of relative prices, changes in the quantity capitalization effect of a tax (H2) of capital lead to capital reversing. Also The reduced value of an asset resulting known as reverse capital deepening be- from the imposition of a tax on the income cause a lower rate of profit can be from the asset; for example, a tax on the associated with a lower capital–labour imputed income from owner-occupied ratio. housing depresses the value of houses. capital tax (H2) capital–labour ratio (D2) A tax based on the value of assets. Such The amount of physical capital employed taxes, which are very costly to collect by each worker usually measured by divid- because of valuation problems, rarely con- ing the value of the capital stock by the stitute a large proportion of a country’s size of the labour force. These ratios are total tax revenue but are imposed for the central to theories of growth and of COM- distributional reason of increasing the PARATIVE ADVANTAGE. relative tax burden of the rich. In practice, See also: capital deepening; capital inten- governments often reduce the effective rate sive; capital widening of capital taxes by a variety of allowances, e.g. to allow for depreciation, life insur- capital market (G1) ance and pensions. A market which issues securities to raise long-term capital. See also: wealth tax See also: primary market; secondary mar- capital theory (D2, E2) ket A theory which links the theories of production, growth, value and distribution capital mobility (F2) to explain why capital produces a return The flow of financial capital between one which keeps capital intact but yields inter- employment and another. It was assumed est (or profit) which is permanent. Over by RICARDO and other practitioners of CLAS- the past 200 years the notion of capital SICAL ECONOMICS that capital would flow has varied greatly: to many of the CLASSI- between places and industries until rates CAL ECONOMISTS it was to a large extent the of profit were equalized. raw materials and the WAGES FUND; later it See also: mobility of labour; multi- was viewed as a physical INTERMEDIATE national corporation good. To MARX capital was a social mode © 2002 Donald Rutherford

of production; to the AUSTRIAN SCHOOL time income expected from the asset or by was crucial to the concept; to FISHER capitalizing the expected income. capital was a stock which produced a See also: discounting; net present value stream of income with its value determined by relative preference for future capital widening (E2) rather than present goods. Important de- An increase in the real capital stock bates include the relationship between the leaving the CAPITAL–LABOUR RATIO un- RATE OF INTEREST and the value of capital, changed as the capital stock and the as well as discussion of the notion of labour force grow at the same rate. aggregate capital. As there are many See also: capital deepening important sub-species of capital, including HUMAN CAPITAL and EQUITY capital, specia- capitation tax (H2) see poll tax list theories of capital are also pro- capping an interest rate (G1) pounded. Capital theory expanded its Separating the part of interest payments in concerns in the 1960s within the context excess of real interest payments and then of growth theory. A major issue discussed capitalizing it by adding it to the long- then was the method of measuring aggre- term debt. gate or social capital to achieve a value independent of distribution and prices. captive insurance (G2) Joan ROBINSON suggested using labour time An insurance company whose business is as a measure; Champernowne introduced mainly supplied and controlled by its a CHAIN INDEX METHOD. owners. The principal beneficiaries are those originally insured. See also: Cambridge controversies capture theory (K2, L4) see regulatory References capture Harcourt, G.C. (1972) SomeCambridge Con- troversies in the Theory of Capital, Cam- carbon sequestration (Q2) bridge: Cambridge University Press. Storing carbon dioxide by planting trees Kregel, J.A. (1976) Theory of Capital, or pumping into underground reservoirs: London: Macmillan. an approach to reducing global warming. capital transfer tax (H2) carbon sink (Q2) UK tax introduced in 1975 on transfers of An area with trees and plants which has wealth payable by the donor or recipient been created to absorb carbon dioxide. during life or at death. Estate duty, in This has been proposed to reduce global force from 1894 to 1975, was the prede- warming. cessor of this tax. carbon tax (H2, Q2) capital utilization (D2, E2) A tax related to the carbon content of 1 The proportion of fixed capital (build- coal, natural gas or oil, which is imposed ings and machinery) in use. If machin- to improve the natural environment. The ery is worked for only half of a time tax can take the form of a fixed amount period, the capital utilization rate is 50 per ton of carbon embodied in each fuel per cent. or be an AD VALOREM TAX. The level of the 2 Actual output as a percentage of poten- tax is related to the emission reduction tial output at a reference date. target chosen. See also: capacity utilization See also: effluent fee; environmental tax; marketable discharge permit capital value (E2, M2) A valuation of an asset broadly measured cardinal utility (D0) either by discounting the total future The satisfaction obtained from consump- © 2002 Donald Rutherford

tion, or engaging in an economic activity, carry-back, carry-forward system (H2) which is directly measurable in monetary A tax system which permits businesses to or other units. The cardinalist argues that carry net operating losses back or forward it is possible to compare, e.g. in UTILS, the against past or future gains in income or relative amount of satisfaction from con- capital appreciation. suming different quantities of the same or other goods. Thus, the law of DIMINISHING carrying capacity (J1) MARGINAL UTILITY could be described as The ability of a particular area to sustain a follows: a woman obtains 10 utils from population at a specified level of subsis- the first glass of champagne, 8 utils from tence, usually specified as the number of the second, 6 utils from the third . . . . persons per unit of land. Proxy measures of utility, e.g. the amount cartalist (E4) of money which a person is prepared to A person believing that the value of a give up to obtain x amount of a good, currency depends on the power of the have all been considered too indirect. issuing authority and not on its intrinsic See also: ordinal utility; revealed prefer- value or its convertibility into gold. ences; utility See also: Banking School; fiat money; References metallist Majumdar, T. (1961) The Measurement of Utility, London and New York: Mac- ` ´ carte a memoire (G2) millan. French for SMART CARD. carer (I3) cartel (L1) An unpaid family worker who provides An association of producers who agree to nursing and domestic care to young, in- fix common prices and output quotas in firm or elderly relatives. Moral obligation an oligopolistic market. As the aim of a is the basis for undertaking this work. cartel is to prevent competition, there is a tendency for the producers to strive to Caribbean Basin Initiative (F0) maintain existing market shares, with the An arrangement agreed in 1984 to give consequence that a firm can only increase exports of countries of the Caribbean its output if total market demand rises. region tariff-free access to the USA. The device of a cartel has long been used Caribbean Community (F0) as a method of restricting competition: A common market with agricultural and Adam SMITH acknowledged the existence industrial integration founded in 1973 in of cartels in the eighteenth century: ‘Peo- succession to the Caribbean Free Trade ple of the same trade seldom meet to- Area (1968–73). The members are Angu- 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 St Kitts-Nevis, St Lucia, St Vincent, Trini- to raise prices.’ Firms afraid of the effects dad and Tobago. of recession are eager to join such associations, e.g. in the 1880s in the USA and in Caribbean Development Bank (G2) Germany in the interwar period. Increas- DEVELOPMENT BANK founded in 1970 con- ingly tough legislation in the USA and sisting of seventeen member countries Western Europe has outlawed many car- from the Caribbean region as well as tels. The ORGANIZATION OF PETROLEUM EXPORT- Canada and the UK. INGCOUNTRIES has some of the characteristics of a cartel. caring society (D6, P0) see altruism; welfare state See also: competition policy © 2002 Donald Rutherford

cash (E4) 6,886 in the UK and 7,172 in France but The most LIQUID of ASSETS, consisting of only 2,000 in West Germany. coin and banknotes; often defined as a See also: automated teller machine; debit zero-interest asset, although Goodhart card; smart card and others have suggested that interest could be paid by running a national cash economy (G2, P0) lottery on the serial numbers of the notes. Part of a national ECONOMY using cash to Commercial banks also regard deposits at make all payments. This occurs either the ‘central’ bank as cash. because of a shortage of banking facilities References or because of a desire to evade tax. In modern economies, much of the BLACK or Goodhart, C.A.X. (1986) ‘How can non- INFORMAL ECONOMY is of this nature. interest bearing assets co-exist with safe interest-bearing assets?’, British Review cash flow (M2) of Economic Issues 8: 1–12. 1 The net amount of money received by a cash accounting (M4) firm over a given period. The recording of income and expenses 2 Retained profits and funds set aside for when cash is actually received or spent. depreciation. This flow permits a firm This method is often used to calculate to finance its own investment. income tax. cash flow accounting (M4) See also: accrual accounting Accounting based on the transactions which are recorded when payment is actu- cash budgeting (M2) ally made. Contrast with ACCRUAL ACCOUNT- Predicting the cash flows of a business. ING. See also: cash flow; cash flow accounting cash-in-advance constraint (E4) A good has the status of money through cash crop (Q1) being involved in most types of exchange, Agricultural produce marketed for cash, so purchases within a period are con- rather than retained for the use of the strained by the amount of money available farmer’s household. at the beginning of that period. Also See also: agricultural household known as the finance or effective demand constraint. cash–deposits ratio (G2) The ratio of a bank’s holdings of cash to its References total deposits, sometimes used as a measure Kohn, M. (1981) ‘In defense of the of control over the banking system to finance constraint’, Economic Inquiry guarantee its liquidity. In the second half 19: 177–95. of the twentieth century, LIQUID ASSET ratios cashless society (G2, P0) came to be the preferred method of con- A modern economy which uses CREDIT trolling the total volume of bank deposits. CARDS and direct debiting of bank ac- cash dispenser (G2) counts to make payments, instead of notes A machine provided by a bank or other and coins. deposit-taking institution, often at its pre- See also: debit card mises, to dispense cash through the inser- tion of a card to account-holders of that cash limit (H5) bank or a bank in association with it. A method of controlling government Usage of dispensers varies from country to spending in the UK which replaced a country. In the UK and France they are constant-prices system. From 1974 to particularly popular: by 1985, there were 1976, cash limits were used for several © 2002 Donald Rutherford

public sector building programmes and person or firm in the private sector, e.g. a from 1976 for about 60 per cent of central pension, an educational bursary, a training government expenditures. Originally, the grant, which is made to implement a government calculated the real value of government’s redistribution policy. Unlike current programmes and then added an the alternative, IN-KIND TRANSFER, the reci- amount to compensate for some or all of pient has more freedom to determine inflationary increases. From 1981, the consumption. system was simplified by expressing public expenditure targets entirely in cash terms. Cassel, Karl Gustav, 1866–1945 (B3) After studying mathematics at Uppsala cash management account (G2) University, Sweden, he became a professor A bank deposit of US commercial banks, of economics at Stockholm University in a CHECKING ACCOUNT that pays a return lin- 1902. He was a founder of modern Swed- ked to investments. Originally designed by ish economics, especially noted for Theory Merrill Lynch (with the processing done of Social Economy (originally published in by Bank One, Columbus, Ohio) in 1977 to 1918) and monetary writings. He rejected evade the strictures of REGULATION Q. both labour and MARGINAL UTILITY theories of value in favour of a price theory which See also: NOW account he also applied to his study of the RATE OF Cash Management Bill (E5, G1) INTEREST. He relied on the QUANTITY THEORY US treasury bill with very short maturity OF MONEY in his monetary economics and that is sold occasionally by the US Treas- was anti-Keynesian. His pupils included ury to boost the Treasury’s cash balance. OHLIN and MYRDAL. cash nexus (E4, P0) References Human relationships based on monetary Mitchell, W.C. (1969) Types of Economic transactions. Thomas Carlyle in Chartism Theory, Vol. 2, ch. 16, New York: wrote: ‘Cash payment had not then grown Augustus M. Kelley. to be the universal sole nexus of man to casualization (J2) man’. The process of changing employment from See also: dismal science regular and permanent to occasional and part-time forms. This is done to increase cash positive (M3) the flexibility of a labour force. A surplus in cash but not necessarily profits; a positive CASH FLOW. catallactics (D4) The study of all market phenomena, i.e. of cash price–earnings ratio (G1) actions conducted on the basis of mone- A modified version of a PRICE–EARNINGS tary calculation. RATIO, with earnings measured as post-tax earnings + non-cash provisions (e.g. de- References preciation). This ratio removes some of von Mises, L. (1949) Human Action, 3rd the effects of conservative accounting, edn, New Haven, CT: Yale University making international comparisons more Press. meaningful. But as depreciation reflects catalytic policy mix (E6) the CAPITAL INTENSITY of an industry, the A mixture of major and subsidiary poli- cash price–earnings ratio will undervalue cies: the latter are used as a catalyst to service industry shares. avert the undesired effects of a major cash ratio (G2) see cash–deposits ratio 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

tinuities which states how many stable CAT standard (L5) equilibria exist given a choice of control The standard a product has to meet in variables but does not indicate which of Charges, Access and Terms. This approach them will be in a particular system. A to quality management was introduced in ‘catastrophe’ occurs when transition from the UK in the 1990s. one equilibrium to another produces in- ceiling (E3) stability in the system. A peak in economic activity; the max- References imum level of production in a BUSINESS CYCLE or TRADE CYCLE after which there is Poston, T. and Stewart, I. (1978) Cata- strophe Theory and its Applications, a downturn in output, employment and London and San Francisco: Pitman. prices. The peak is often associated with Saunders, P.T. (1980) An Introduction to FULL EMPLOYMENT of the factors of produc- Catastrophe Theory, Cambridge: Cam- tion: shortages of skilled labour and BOT- bridge University Press. TLENECKS in production bring about a decline from peak activity. catching-up hypothesis (N1, O4) 1 The view that in the post-1945 period See also: crisis; floor the countries which had lost a great deal ceiling price (D4, L5) of their capital stock in the Second Maximum price set under a system of World War, and had to renew it, experi- price control. If, as is often the case, this enced higher growth and productivity price (OC in the figure) is less than the through having modern plant and ma- market equilibrium price OE, there will be chinery. excess demand MN and some need for 2 More generally, the way the national rationing to allocate goods. income of any low-productivity country is raised. Thus, gross investment (including replacement investment) has been regarded as a more important determinant of economic growth than net investment. References Abramovitz, M. (1986) ‘Catching up, for- ging ahead, and falling behind’, Journal of Economic History 46: 385–406. categorical grant (H2) A grant from a central or federal government to a lower level of government to be spent on only a particular category of expenditure. Such grants can be based on a formula (e.g. reflecting the size and age distribution of the population) or on a project (e.g. introducing a new educa- Celler–Kefauver Antimerger Act 1950 tional curriculum). They usually require (L4) matching funds by state or local government. This US federal statute, amending the SHERMAN and CLAYTON Acts, limited the cats and dogs (G1) expansion of firms by merger by making it Speculative stocks and shares with a poor illegal for major firms to acquire their history of sales and earnings. competitors’ assets or stock if the effect is © 2002 Donald Rutherford

a substantial reduction in competition or a banks). By setting interest rates for dis- contribution to the creation of a monopoly. counting the short-term BILLS of the banking system and by OPEN MARKET OPERATIONS, Celtic tiger (P0) a central bank is able to exert a powerful Ireland, because of its exceptional eco- influence over the size of the money nomic and employment growth among supply. Other methods of control over the OECD countries. GDP growth averaged banking and financial systems include the over 9 per cent annually in the 1994–8 prescribing of RESERVE ASSETS ratios, the period and unemployment fell by nine issuing of directives and the examination percentage points. There was labour force of the accounts of banks and other finan- and labour productivity growth. Merchan- cial institutions. dise trade grew to 25 per cent of GDP and Although the oldest central bank is the fiscal surplus to 1.75 per cent of GDP. Sweden’s Riksbank (founded in 1668), the Although European Union funds and Bank of England was the first central foreign inward investment contributed to bank to specialize as a central bank, i.e. economic growth, there was no overriding largely to abandon its private functions policy plan which drove the economy and to concentrate on issuing banknotes, forward. acting as the government’s bank in mana- Census of Manufactures (L6) ging the national debt and controlling the A regularly published statistical account of money supply and the exchange value of the economic activities of the firms of the the pound sterling. In the nineteenth manufacturing sector of a national ECON- century, England’s example influenced OMY In the USA, this census was first . France, the Netherlands, Austria, Norway, conducted in 1809 and has been published Denmark, Belgium, Spain, Germany and every five years since 1967. Japan to set up their own national banks. The USA’s Federal Reserve System of Census of Retail Trade (L8) twelve district banks was set up in 1913. A survey of the economic activities of retailing ESTABLISHMENTS and FIRMS. In the See also: Bank of England; Bundesbank; USA, it was first published in 1929; since Federal Reserve System 1967 there has been a census every five References years. Blinder, A.S. (1998) Central banking in Center for International Studies (F0) theory and practice, Cambridge, MA, Founded in 1951 at the Massachusetts and London: MIT Press. Institute of Technology. Goodhart, C.A.E. (1987) ‘Why do banks need a central bank?’, Oxford Economic Central Arbitration Committee (J5) Papers 39: 75–89. UK body established in 1975 with the central bank independence (E5) concerns of SEXUAL DISCRIMINATION, COLLEC- The conduct of MONETARY POLICY by a CEN- TIVE BARGAINING agreements and pay struc- TRAL BANK, independent of governmental tures, as well as making awards if control through its Treasury. This has long employers refuse to disclose information been true of the USA with its FEDERAL for collective bargaining purposes. RESERVE SYSTEM, and of the UK since 1997. central bank (E5) See also: Monetary Policy Committee The bank of any country which ultimately guarantees the LIQUIDITY of the banking central limit theorem (C1) system as a whole. It is usually owned by An attempt to explain why so many the government (in the USA, the Federal distributions of independent variables are Reserve System is owned by the member close to the NORMAL DISTRIBUTION. © 2002 Donald Rutherford

centrally planned economy (P2) phical periphery because of factors such as 1 An ECONOMY whose investment and marketing and traffic production is co-ordinated by a central References governmental body. Christaller, W. (1966) The Central Places 2 A COMMAND ECONOMY. Inspired by the of Southern Germany, Englewood Cliffs, celebrated Soviet five-year plans of the NJ: Prentice Hall. 1930s, many countries in Eastern Eur- Losch, A. (1954) The Economics of Loca- ope and in the Third World used this tion, New Haven, CT: Yale University alternative to the MARKET ECONOMY but Press. found it impossibly inefficient, with the Centre for Policy Studies (E6) result that in the late 1980s it was An independent London-based economics largely abandoned. In this type of research institute founded in 1975 with the economy information is regularly col- aims of research and education in eco- lected to form the basis of a forecast of nomic and social affairs. It is noted for economic activity and to construct pro- applying market solutions to economic posals for the future development of problems. production. There is an annual issue of targets for subordinate state enterprises. centre–periphery system (F0, P0) Some economies of this type tried to A system of international economic rela- reform their planning procedures, e.g. tions consisting of active world industrial Hungary with its major economic re- centres and a passive periphery. The perform of 1 January 1968. iphery produces and exports raw materials to the centre; the centre receives a dispro- See also: indicative planning; market so- 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) The Logic of the Planned Economy: The Seeds of the certainty equivalent (D0) Collapse, trans. K. Cook, Oxford: Clar- The amount of money definitely available endon Press. that will give a decision-maker the same utility as that from a more risky course of central occupation (J2) action. The main occupation which characterizes an industry and is essential to its working, certificate of deposit (G2) e.g. doctors and nurses in medical services, A marketable bank deposit receipt which farmworkers in agriculture. has the advantage of allowing the holder to gain the higher rate of interest asso- central place theory (B1) ciated with fixed or long-term deposits. An account of the way a continuous Certificates of deposit (CDs) were intro- hierarchy of economic activities determines duced in the USA in 1961 and grew in the optimal locations of cities. It takes into volume after 1973 when REGULATION Q no account THRESHOLD POPULATION size and the longer insisted that there had to be a IDEAL LIMIT of consumers’ travel to trading ceiling to the rate of interest. Dollar CDs enterprises. The central place is the settle- have had to be registered securities from ment in a region complementing it, offer- 1983 onwards. The Eurodollar CD was ing goods and producing services for introduced in London in 1966 and the consumers at dispersed points. This key sterling CD in 1968. Companies, and even settlement is often located at the geogra- banks, depositing surplus funds short term © 2002 Donald Rutherford

and obtaining CDs both increase their a comment’, Review of Economic Studies investment income and maintain their 21: 112–35. liquidity. chain migration (F2, J1) Certification Officer (J5) A sequential process of migration with UK official whose post was established in one phase of migration linked to subse- 1975 with the particular remit of certifying quent phases of migration. A major ex- that trade unions are independent; also ample is when the first cohort of migrants concerned with the political funds of trade induces subsequent flows of migrants con- unions. sisting of their relatives and friends who have been persuaded to move because of ceteris paribus (D0) the information sent back by the ‘pio- Latin expression meaning ‘other things neers’. being equal’. A term popular from the mid-nineteenth century, especially in PAR- Chamberlin, Edward Hastings, 1899– TIAL EQUILIBRIUM ANALYSIS when the relation- 1967 (B3) ship between two variables is investigated, Educated at the Universities of Iowa, all other variables which might be influen- Michigan and Harvard where his PhD, tial being assumed to have unchanging supervised by Allyn YOUNG, formulated the values. This is a useful concept in MICRO- theory of MONOPOLISTIC COMPETITION, his ECONOMICS as a DEMAND CURVE shows the principal achievement. Although Joan RO- relationship between price and quantity BINSON produced a theory of IMPERFECT demanded with income, tastes and the COMPETITION in the same period, Chamber- prices of other goods held constant. lin was always keen to differentiate his theory from hers. chaebol (L0, M1) Korean group of giant companies con- References trolled by a family-owned holding com- Chamberlin, E.H. (1933) Theory of Mono- pany. polistic Competition, Cambridge, MA: Harvard University Press. See also: zaibatsu Kuenne, R.E. (ed.) (1967) Monopolistic Competition Theory: Studies in Impact: chain bank (G2) Essays in Honor of Edward H. Chamber- A bank linked to others through common lin, New York: Wiley. stockholding. Banks of this kind were Robinson, R. (1971) Edward H. Chamber- present in Chicago as early as 1893. lin, New York: Columbia University Press. chain index method (D2) A measure proposed by Champernowne to Chancellor of the Exchequer (H1) enable a conventional production function UK finance minister who is the ministerial to be built which is compatible with MAR- head of the Treasury. The Chancellor is GINAL PRODUCTIVITY THEORY All alternative . responsible for proposing changes in pub- production techniques are arranged in a lic expenditure and taxation, the conduct ‘chain’ for some predetermined rates 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) ‘The production function and the theory of capital: See also: Monetary Policy Committee © 2002 Donald Rutherford

change in demand or supply (D0) detected by cumulative sum charts and by calculating the number of BOOTSTRAPS. A 90 An increase or decrease (e.g. of income) per cent or 95 per cent confidence is which causes a shift in the demand or needed to establish a change. SUPPLY CURVE. A shift in the DEMAND CURVE from DD to D0 D0 raises prices for each chaos theory (D0, G1) quantity, e.g. from OP to OP0 at OQ. An An analysis of random movements applied increase in supply from SS to S0 S0 leads to to the price data of stock and currency more being supplied at each price level, markets, as well as to meteorology. Chaotic e.g. from OQ to OQ0 at OP. This is not behaviour appears random in that changes caused by a price change, which would in prices or other economic variables show result in a movement along the particular no regular periodicity and are not part of a curve, but by a change in the CETERIS PAR- structure detectable by statistical tests. IBUS conditions. However, more sophisticated tests offer a chance of identifying underlying non-linear mathematical structures. See also: butterfly effect 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 exchange 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 provide temporary liquidity to financial markets using the funds deposited with it. characteristics theory of consumer demand (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 traditional utility-based consumer theory. change point analysis (C5) An attempt to determine whether and References when a change has occurred. Changes are Lancaster, K. (1971) Consumer Demand. A © 2002 Donald Rutherford

New Approach, New York: Columbia nical Analysis of Stock Trends, 5th edn, University Press. Boston: John Magee. charge (D0, G2) chart point (F3, G1) 1 The price of a service. A significant point on a graph of price 2 A right over property given to a cred- movements, especially of a currency, which itor in return for a loan. usually prompts intervention in that market. See also: bank charges; binomial charge; capacity charge; emission charge; user cheap money (E4) charge A policy of keeping interest rates low to encourage capital accumulation and eco- charge card (G2) nomic development. In the UK, this pol- A plastic card issued by a financial institu- icy was launched by the War Loan tion, such as a bank or a retailer, which Conversion of June 1932 and continued allows the holder to charge the sum due until 1951: under it the bank rate was only for the purchase of goods or services to an 2 per cent. In the USA, this policy was account. This reduces the need to hold used to ease the cost of servicing the cash for transactions purposes and pro- national debt during the Second World vides the holder with credit until the War and in the immediate post-war years. account is payable. Major examples of Also some Latin American countries fol- such cards include those issued by Amer- lowed it. A policy of this kind has its ican Express and the Diners’ Club. problems. Real interest rates can become negative, generating an excess demand for See also: credit card; debit card credit, with the consequence that finance has to be rationed rather than allocated by chartered company (M1) interest rates. A UK company established by a Royal Charter. Several, in particular the East check (G2) see cheque India Company and the Hudson’s Bay Company, were set up in Elizabethan checking account (G2) England in the early seventeenth century. A US commercial bank deposit available for immediate use by the writing of a chartism (G2, N0) check (cheque). These deposits are part of 1 A technique of market analysis which the M1 money supply: until 1980 they did predicts prices by extrapolating future not bear interest. In the UK, they are price movements from a chart of pre- known as CURRENT ACCOUNTS. vious price fluctuations. This has been See also: Depository Institutions Deregu- applied to the study of stock and lation and Monetary Control Act 1980; foreign exchange markets. It is argued NOW account that prices represent all influences on demand and supply, including informa- check-off provision (J3) tion. Recurrent patterns, e.g. a ‘head A clause in an employment contract re- and shoulders’ shape, are used to pre- quiring an employer to deduct TRADE UNION dict changes in trends. subscriptions from workers’ pay. This ar- 2 A political movement in England and rangement lowers the cost of trade union Scotland of the 1830s and 1840s for the administration and stabilizes trade union reform of the franchise, named after a membership as many persons will remain charter presented to parliament. in the union through inertia. References Chenery, Hollis Burnley, 1918– (B3) Edwards, R.D. and Magee, J. (1966) Tech- A prominent US development economist. © 2002 Donald Rutherford

A graduate in mathematics, engineering Chicago Board Options Exchange (G1) and economics from Arizona, Oklahoma, The world’s largest options market, trad- Virginia and Harvard Universities. Profes- ing over half of the US options contracts. sor at Harvard from 1965 to 1970 and It was created by the Chicago Board of from 1983; economic adviser to the pre- Trade in 1973 and is subject to SECURITIES sident of the WORLD BANK in 1970–2 and AND EXCHANGE COMMISSION regulations. Ori- the bank’s vice-president in charge of ginally it dealt in call options; put options development policies in 1972–82. His were introduced in 1977. The majority of quantitative approach to DEVELOPMENT ECO- options traded are based on the Standard NOMICS views self-sustaining economic & Poor 100 stock index. growth as a function of industrialization, which is itself associated with a switch Chicago School (B2) from agricultural to industrial products in A group of liberal US economists which the commodity structure of a country’s first acquired its identity in the 1930s exports. In 1959, he published a widely under the leadership of Frank KNIGHT, used INPUT–OUTPUT text. He collaborated Jacob VINER and Henry C. SIMONS. Promi- with ARROW and others in 1961 to produce nent in this group since 1950 have been the CONSTANT ELASTICITY OF SUBSTITUTION PRO- Milton FRIEDMAN, George STIGLER, Ronald COASE, James BUCHANAN and Gary BECKER: DUCTION FUNCTION which substantially replaced the popular COBB–DOUGLAS they share an all-embracing belief in the PRODUCTION FUNCTION. power of MARKET FORCES 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- and Solow, R.M. (1961) ‘Capital-labour stantly attempting to maximise his advan- substitution and economic efficiency’, tages. Recent crusades of the school have Review of Economics and Statistics 43: included its advocacy of a monetary policy 225–50. based on rules, not discretion, and of Chenery, H.B. and Clark, P. (1959) Inter- industry Economics, New York: Wiley. unrestricted capitalism. cheque (G2) References A written instruction for transferring a Friedman, M. and Friedman, R.D. (1962) bank deposit from one person to another. Capitalism and Freedom, Chicago: Uni- In the nineteenth century, the cheque versity of Chicago Press. gradually replaced banknotes and BILLS OF Patinkin, D. (1981) Essay on and in the EXCHANGE as a means of settling claims. Chicago Tradition, Durham, NC: Duke University Press. Today, cheque cards have made the cheque Reder, M.W. (1982) ‘Chicago economics: even more acceptable. The usage of the permanence and change’, Journal of cheque for monetary transactions varies Economic Literature 20: 1–38. from country to country, being especially Simon, H.C. (1948) Economic Policy for a popular for non-cash transactions in Free Society, Chicago: Chicago Univer- France. sity Press. Stigler, G.J. (ed.) (1988) Chicago Studies in See also: debit card; eftpos Political Economy, Chicago: University cheque card (G2) of Chicago Press. A plastic card issued by a bank to an chief executive officer (M1) account-holder to guarantee a cheque up The person appointed by the board of to a specified amount. directors of a company, corporation or See also: credit card; debit card; 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: this Japanese national federation of comes throughout an economy, describing trade unions was merged with Domei in the relationship between households, 1987 to form Rengo. firms, the government, the capital market and the rest of the world. (See the figure.) churning (G1) 1 Cancelling an existing insurance policy circular migration (J1) and purchasing a new one as a replace- Temporary or repetitive population movement. ment. This can be COMMUTING or repeated 2 Frequent changes in a portfolio of movements from one’s residence to a securities. Commission-hungry life in- distant place within one year. surance agents and stockbrokers often propose a rapid turnover of this kind. circulating capital (D0, M2) WORKING CAPITAL which is used to finance circuit breaker mechanism (G1) the current expenditure of a business, A price limit or trading halt used in major especially its wage bill and purchase of US stock markets. If the market drives the raw materials and energy, together with Standard & Poor 500 index twenty points stocks of goods. SMITH distinguished this in either direction, the trading session will form of capital from fixed capital, i.e. be terminated. This intervention in price buildings, machinery, land improvements determination prevents fluctuations from and HUMAN CAPITAL. creating excessively high prices or a price collapse such as happened in the market Civil Rights Act 1964 (J7) crash of October 1987. US federal statute which outlawed many forms of racial and sexual discrimination. See also: Brady Commission 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

erally assisted programmes was proscribed; one of the founders of modern capital Title VII made sexual and racial discrimi- theory. nation in employment illegal. References See also: discrimination Clark, A.H. and Clark, J.M. (1938) John Bates Clark: A Memorial, New York: Clark, Colin Grant, 1905–89 (B3) Columbia University Press. UK-born pioneer of NATIONAL INCOME ac- classical classical fallacy (J3) counting, educated at Oxford University. The view that CIRCULATING CAPITAL by He was a lecturer at Cambridge University creating a wage fund improves wages and in 1931–7 before emigrating to Queens- increases the demand for labour but FIXED land, Australia, where in 1938–52 he was a CAPITAL does not. SAMUELSON asserted that financial adviser and Under-Secretary of this view makes the mistake of identifying State for Labour and Industry; subse- the wage fund with the whole of circulat- quently Director of the Institute for Re- ing capital and ignores the contribution of search in Agricultural Economics of fixed capital to the growth of REAL WAGES. Oxford University from 1953 to 1969. His foundational work on national income References accounting included the major advance of Samuelson, P.A. (1994) ‘The Classical making one of the first calculations of the Classical Fallacy’, Journal of Economic MULTIPLIER. In 1940, he broadened his Literature, 32: 620–39. interests to consider the nature of eco- classical dichotomy (B1, E4) nomic development; also well known for The view attributed to classical economists his writings on population and land use. that real variables are determined by other References real variables alone and monetary vari- Clark, C. (1932) The National Income, ables by only other monetary variables. 1924–31, London: Macmillan. Output and employment thus are deter- —— (1940) Conditions of Economic Pro- mined by the real wage but the money gress, London: Macmillan. supply can change the general price level —— (1962) Growthmanship: a Study in the without affecting relative prices. PATINKIN Methodology of Investment, 2nd edn, used this term to describe this theoretical London: Institute of Economic Affairs. stance. KEYNES was much concerned when —— (1977) Population, Growth and Land advancing from his Treatise on Money to Use, rev. edn, London: Macmillan. his General Theory to demolish this dual- ism. But with the advent of the New Clark, John Bates, 1847–1938 (B3) Classical School there has been revival of US economist famous for the theory of this view. MARGINAL PRODUCTIVITY He was educated at . Brown University, Amherst College and classical econometrics (C1) the University of Heidelberg. For most of ECONOMETRICS that seeks to formulate eco- his academic career, from 1895 to 1923, he nomic models to test hypotheses about was a professor at Columbia University. appropriate data. His major achievement, in Distribution of See also: Bayesian econometrics Wealth (1899), was to expand MARGINALISM into the concept of marginal productivity classical economics (B1) in order to tackle problems of production The dominant school of UK economics and distribution. In Philosophy of Wealth from 1752 to 1870. David HUME in his (1885) he used CLASSICAL ECONOMICS as the attack on MERCANTILISM anticipated a new foundation of his own economic theory; in approach to economics but it was Adam Capital and its Earnings (1888) he became 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 See also: Celler–Kefauver Antimerger Act; Coats, A.W. (ed.) (1971) The Classical Robinson–Patman Act 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 macroeconomic model 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 See also: dirty float; fixed exchange rate; classical economists, including James MILL, floating exchange rate 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) climate levy (Q4) 1 The matching of demand and supply in A UK indirect tax levied as a percentage a particular market. of the energy bills of firms with the hope 2 The exchange between banks of the of reducing their contribution to global cheques drawn upon them. warming. clearing bank (G2) cliometrics (N0) A UK COMMERCIAL BANK which accepts The quantitative study of history originally deposits from the public and gets its name carried out in the USA in studies of the from being a member of the clearing house profitability of slavery and the role of which ‘clears’ cheques by settling inter- railroads. This elaborate econometric ana- bank indebtedness. There are separate sets lysis has been applied to the study of of clearing banks for England and Wales, economic growth. Scotland and Northern Ireland. The Scot- See also: Fogel; North tish and Northern Irish banks also have the right to issue banknotes. A bank of References this kind is distinguished from other McCloskey, D.N. (1978) ‘The achievement financial intermediaries in that its reserves of the cliometric school’, Journal of are the monetary liabilities of the govern- Economic History 38: 13–28. ment sector, i. e. bills, bonds and deposits clipping (E5) with the central bank. Debasing a coinage made of precious clearing house (G2) metals by cutting off part of the edge of The financial institution which settles the coins. This problem for monetary autho- mutual indebtedness of commercial banks rities was solved first by milling the edges by clearing cheques. A bank with a net and later by the introduction of TOKEN debt after the clearing to another bank MONEY AND BANKNOTES which had no intrin- will settle by drawing a cheque on its sic value to be removed. deposits with the central bank See also: Gresham’s law Clearing House Interbank Payments closed economy (F1, P0) System (G2) An ECONOMY which does not engage in New York automated clearing facility for international trade. There are no econo- transferring dollars between major US mies of this type in the world today but banks, branches of foreign banks and countries such as Japan were closed to some subsidiaries of out-of-state banks. foreigners for centuries. The concept is CHIPS, for short. important theoretically to construct simple macroeconomic models uncomplicated by clearing market (D0) international trade. A free market with flexible prices which quickly establishes an equilibrium between See also: autarky; open economy demand and supply, eliminating any excess demand or supply. Financial markets pro- closed-end credit (G2) vide excellent examples. A form of CREDIT granted on condition that the PRINCIPAL and charges for the loan See also: disequilibrium economics; equi- are repaid over a specified time period. librium closed-end fund (G1) climacteric (N0) A MUTUAL FUND bought at a discount. Sales A critical period in the history of a and purchases can only be made between country of a national economy, e.g. the investors thus maintaining a stable pool of UK in the late nineteenth century. 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 bargaining, 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 maximize the value of production. His many applied studies include an examination of broadcasting, monopoly pricing and antitrust 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 composition of the national income is unaf- fected by the precise pattern of liability for pollution which the perpetrators and victims have determined. Thus EXTERNALITIES 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 Law and Economics 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 ply, there will be a movement to the f½YðestimatedÞ À YðmeanÞ2 g P original equilibrium price and output; if f½YðactualÞ À YðmeanÞ2 g elasticity of supply is greater then there will be continuing DISEQUILIBRIUM until the This ratio can range from 0 to 1, being 0 if elasticities change (see the figures). all the variation is unexplained and 1 if all References the variation is explained. Nerlove, M. (1958) ‘Adaptive expectations and cobweb phenomena’, Quarterly See also: linear correlation Journal of Economics 72: 227–40. coefficient of multiple correlation (C1) coconut model (E1) A statistic which measures the extent to A model of a tropical island in which there which changes in a dependent variable are is a taboo against eating the coconuts one explained by the joint variation in the has picked so there has to be a trade of independent variables chosen to explain nuts for nuts before consumption can it. It is the square root of the COEFFICIENT occur. The ability to trade depends on the OF MULTIPLE DETERMINATION. number of potential trading partners. There is no mechanism to ensure forecasts coefficient of multiple determination of the time to complete a trade. This model (C1) reflects the modern reality of producers For two independent variables this coeffi- consuming little of what they produce. cient, R1.23 is equal to 1 À s1.232/ s12, where s1.23 is the standard error of an estimate of See also: Robinson Crusoe economy variable X, on independent variables X2, References and X3, and s is the standard deviation of Diamond, P.A. (1982) ‘Aggregate demand X1. in search equilibrium’, Journal of Poli- tical Economy 90: 881–94. coefficient of variation (C1) The ratio of a STANDARD DEVIATION to an coefficient of correlation (C1) ARITHMETIC MEAN of a set of values, usually Referred to as r by statisticians and used expressed as a percentage. This is a better as a measure of the interrelatedness of two measure of the dispersion of a set of variables. This coefficient is measured by values than the standard deviation as it the formula can be used for different measures with different magnitudes and can cope with P (x y) two measures expressed in different units, p P 2P 2 ð x y Þ e.g. monetary and physical. cognitive consonance (D0) The state of a cognitive system when ideas A perfect negative relationship has the and beliefs are in harmony. value À1; a perfect positive relationship +1. Values in between these extremes will cognitive dissonance (D0) depend on how strong the relationship The coexistence of discordant cognitions. between x and y is. As a consequence of this dissonance, peo- coefficient of determination (C1) ple will avoid situations and information A ratio of the explained variation to the likely to increase such discomfort. This total variation of values from a regression theory of Festinger’s, about an unpleasant line, usually referred to as r0. It is mea- state of tension, has been applied by econ- sured by the formula omists to the explanation of work behaviour, home ownership and discrimination. © 2002 Donald Rutherford

See also: economics and psychology production and manufacturing and trade sales. References Akerlof, G. and Dickens, W.T. (1982) ‘The See also: economic indicators economic consequences of cognitive dis- Colbertism (H2, L5, N4, N6) sonance’, American Economic Review 72: 307–19. Government intervention in industry, Festinger, L. (1957) A Theory of Cognitive named after the French MERCANTILIST Jean Dissonance, Evanston, IL: Row, Peter- Baptiste Colbert (1619–83) who success- son. fully reformed the French economy after 1649. In France, the home of Colbertism, Cohesion Fund (O0) the government’s ability to subsidize in- EUROPEAN UNION fund created in 1993 by dustry and follow protectionist policies the MAASTRICHT TREATY to provide money has been limited since entry to the Eur- for environmental and trans-European opean Economic Community in 1958. network projects in member states whose gross domestic product is less than 90 per See also: dirigisme cent of the EU average. The fund can collaborative production (L2) contribute up to 85 per cent of the public A form of workplace organization which expenditure on a project. decentralizes production. This reaction to TAYLORISM can take many forms, including coinage (E4) TEAM WORK and QUALITY CIRCLES. Pieces of metal of a standard size and weight stamped by a sovereign power to collar (E4, G2) give them the status of money. Coins were A combination of a CAP and a FLOOR to first used as money by the Lydians (Greek give an interest rate a fixed range. inhabitants of what is now West Turkey) in the seventh century BC. The first coins collateralized mortgage obligation (G1) were made of electrum, a natural alloy of A bond based on a portfolio of mortgages gold and silver. Silver, bronze and copper with interest and capital repayments paid were later used in Ancient Greece and the by the original mortgagors. Roman Empire. Copper coins, used for collecting bank (G2) small transactions, were issued with a Any bank, other than the payer bank, monetary value in excess of the value of handling a bank item, e.g. a cheque, for metal used, establishing the principle of collection. token money, which is the nature of coinage today. The first problems of coinage, collective bargaining (J5) clipping and forgery, were solved by a Negotiations between a TRADE (LABOR) UN- ION and a single employer or EMPLOYERS’ change in production method from ham- ASSOCIATION over pay, working conditions mering to milling to ensure a standard size. The second problem, the inconveni- and other employment matters. It can only ence of transporting it to carry out large be genuine if the parties are free to initiate financial transactions, was remedied by discussions and reach a settlement: under INCOMES POLICIES, and in countries where the use of banknotes. trade unions have little independence from coincident indicators (E3) the state, this is not possible. It is usually Measures of economic activity used by bilateral, but sometimes other interested economic forecasters to track cyclical parties are at the bargaining table, e.g. in movements in the ECONOMY. The main ones some US teachers’ negotiations where used are employment in non-agricultural parents are represented. It can take place enterprises, personal income less transfer at different levels – national, industrial, payments. and indices of total industrial 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 See also: 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 UNION membership and activities amount- IL: Irwin. —— (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- COMET (E1) sions, not by the market. 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, the UK, Ireland and Denmark. It is of INTERMEDIATE GOODS, these industries dynamic, giving predictions over time if controlled would contribute substan- paths of five to ten years. It models the tially to the control of the ECONOMY as a real sector of these economies: monetary whole. and financial elements, represented by 2 Education and training which are basic interest rates, are exogenous. The interde- to the performance and growth of pendence of the economies are chiefly industry. described by trade flows. One of the See also: nationalized industry applications of the model has been to develop the methodology of EUROPEAN UN- commercial bank (G2) ION economic policy. A bank providing a wide range of banking See also: linkage model services, including receiving deposits from the public and the making of loans. As a References consequence of more competition in the Barten, A.P., d’Alcantara, G. and Carrin, financial sector, these banks have diversi- G.J. (1976) ‘COMET: a medium-term fied into insurance, mortgage finance and macroeconomic model for the European a wide range of business finance, pre- Economic Community’, European Eco- viously the concern of investment/mer- nomic Review 7: 63–115. chant banks alone. command and control regulation (Q2) See also: clearing bank; retail bank; Administrative and statutory rules con- wholesale bank cerning pollution control. Sources of pollution are narrowly defined, specific References control devices prescribed and emissions Ballarin, E. (1987) Commercial Banks standards applied. Critics of this approach amid the Financial Revolution: Develop- to POLLUTION CONTROL assert that it ignores ing a Competitive Strategy, London: both the extent of pollution damage and Harper & Row; Cambridge, MA: Bal- the costs of regulation. linger. command economy (P3) commercial bill (G1) An ECONOMY in which the orders of a A short-term BILL OF EXCHANGE by which central planning authority to lower level the person who draws it promises to pay economic organizations have the force of the drawee the sum specified on a parti- law. Lower level organizations are in- cular future date, one, two, three or six structed to follow particular practices and months hence. This method of finance was to use stated prices, inputs and output extensively used in the UK in the early targets. The first modern economy of this nineteenth century before banks were pre- type was devised by Lenin who was pared to make short-term advances in the inspired by the German military organiza- form of overdrafts to their customers. It is tion of the First World War. Until the still a popular form of short-term finance. mid-1980s, the planning mechanism of the When a bill of this kind is accepted by an Soviet-type economy had command char- ACCEPTING HOUSE, becoming a bank bill, it is acteristics. possible for the drawee to obtain immediate payment at a discount (fixed according See also: perestroika to the ruling short-term money market commanding heights (I2, L0) interest rate). 1 The basic industries of an economy, See also: treasury bill especially energy, transport and telecommunications. It is argued that as a commercial paper (G1, M2) high proportion of their output consists A form of short-term company borrowing, © 2002 Donald Rutherford

usually for thirty days. These unsecured GENERAL EQUILIBRIUM analysis since IOUs permit companies to borrow directly HICKS. MARX argued that through the from investors, bypassing banks and bond exchange process goods lose their use markets. Banks, however, are used as value, becoming ‘citizens of the world’ agents to place the paper; sometimes and merely the vehicle for merchants to investment banks underwrite the IOUs earn SURPLUS VALUE. SRAFFA regarded a investing themselves. This type of finan- commodity as a good or service pro- cing, long used in the USA, was introduced by a unique combination of duced into the UK in 1986; also used in factor inputs. many other countries, including France, 2 A raw material or primary product. Australia, Hong Kong and Singapore. commodity agreement (F1) See also: IOU money An international agreement between producing and consuming countries to stabi- commercial policy (F1) lize prices and organize quotas for major The international trading policy of a metals and foodstuffs. national government with respect to im- The UNITED NATIONS CONFERENCE ON TRADE port duties/quotas and export subsidies. AND DEVELOPMENT recommended eighteen These policies have been a central issue in agreements in 1977 but only achieved economics since the MERCANTILISTS first them for sugar, cocoa, tin, rubber and debated the merits of TARIFFS. coffee. See also: General Agreement on Tariffs Commodity Credit Corporation (Q1) and Trade 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 commodity 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 MARXIAN ECONOMICS and eleven US futures exchanges, its members © 2002 Donald Rutherford

and brokerage houses. It covers a wide the stage of economic development of the range of futures trading, including trading country, e.g. Third World countries tend in agricultural commodities, currencies, to have a preponderance of PRIMARY PRO- metals and securities. It aims to ensure DUCTS amongst their exports. The com- fair trading and financial integrity, e.g. by modity structure is examined to test requiring customer funds to be kept in hypotheses about international trade, e.g. separate bank accounts. the HECKSCHER–OHLIN TRADE THEOREM. commodity reserve currency (F3) common access resources (Q0) A currency with a value based on a Jointly owned natural resources, e.g. a ‘basket’ of commodities representative of piece of agricultural land open to all average consumption. This currency tends adjoining a town. The major departure to be stable over time, as happened under from the principle of common access the GOLD STANDARD, and can take a variety occurred in Great Britain from the thir- of forms reflecting the technical character- teenth century onwards when common istics of commodities at a particular time land was enclosed into private holdings. and the desired level of stability. However, it has been argued that few commodities Common Agricultural Policy (Q1) are suitable for inclusion in the ‘basket’, The major economic policy of the EUR- OPEAN COMMUNITY costing over 40 per cent e.g. on account of storage difficulties, but using commodity futures could eliminate of the community’s budget. The principles many of these problems. 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) Essays in Positive has been more protectionist than several Economics, pp. 204–50, Chicago: Uni- of the national agricultural policies that it versity of Chicago Press. replaced. The policy, started in the first commodity stabilization schemes (F1) Mansholt Plan of 1960, intended to con- International agreements designed to in- trol the ‘agriculture’ of the member coun- troduce order into international primary tries in the widest sense of farming and all commodity markets, usually with the aim related industries, including fertilizer proof helping less developed countries. A ducers, machinery and food processing. typical scheme would draw up a price Implementation of the policy was slow, stabilization plan to prevent the agricul- e.g. the target price for cereals, the central tural incomes of these countries falling agricultural commodity of the European below their present levels. Community, was not agreed until Decem- ber 1964. The European Agricultural Gui- See also: buffer stock; commodity agree- dance and Guarantee Fund was set up to ment; price stabilization; primary com- finance refunds on exports to third coun- modity prices tries, intervention measures to stabilize markets and common measures, including commodity tax (H2) structural modifications. A tax on a good, usually taking the form The policy has used a ‘single price of a SALES TAX or an EXCISE DUTY. system’ of target prices throughout the European Community for fixing interven- commodity terms of trade (F1) see net tion prices and frontier crossing point c.i.f. barter terms of trade prices. These prices are expressed in council commodity trade structure (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

been very costly as overproduction has led the EUROPEAN COMMUNITY. Some countries to at least 60 per cent of the agricultural outside the area may be permitted to have budget being spent on disposing of sur- privileged access, e.g. those Third World pluses. Temporary bans on production and countries allowed by the LOME CONVENTION ´ the giving of surpluses to charities are used to export to European Community coun- from time to time. Mansholt in Agriculture tries preferentially. 1980 (published 1968) set out a ten-year See also: customs union plan for restructuring European agriculture, including the retiring of farmers and common market (F0) the concentration of agricultural produc- A CUSTOMS UNION within which there is free tion into larger and more efficient units. movement of labour and capital, no tariffs The plan achieved little as it met with between its member countries and a COM- national resistance, especially for threaten- MON EXTERNAL TARIFF to exclude other ing the existence of small family farms. countries’ produce. A common market in This policy has reduced European Com- many respects behaves like a national munity imports from the rest of the world ECONOMY as all firms of the same industry and insulated community domestic prices are in competition across national bound- for agricultural produce from world price aries and can draw upon the same pool of fluctuations, destabilizing the prices and labour and financial capital. The absence incomes of the farmers of other countries. of tariffs within this market enables pro- Within the European Community, the duction to be allocated according to the policy has redistributed income from con- principle of COMPARATIVE ADVANTAGE. The sumers and taxpayers to producers and EUROPEAN UNION is a major modern exam- discriminated against industry. In coun- ple. tries such as the UK, higher food costs have met with much criticism; in develop- See also: single market ing countries, many farmers have gone out common ownership (P0) of business through being excluded by so 1 Property rights conferred upon a group, large a market as the European Commu- e.g. the use of land by residents of a nity. The URUGUAY ROUND of the GENERAL village. AGREEMENT ON TARIFFS AND TRADE negotia- 2 Ownership by the state or one of its tions attempted to reduce the protection- agencies, e.g. a NATIONALIZED INDUSTRY. ism of the CAP. common pool resources (Q0) common cost (D0) Natural or human-made resources which The cost of an input simultaneously used provide social and economic benefits for a in the production of several goods and community or communities. These include services of a firm. forests, wetlands and water accumulations. See also: joint cost It is difficult to exclude individual users from these common resources but it is common currency (F3) easy for an individual to exploit the A currency available for transactions by resource to the detriment of the commu- several countries which still retain their nity. Use has to be co-ordinated to prevent own currencies; not a SINGLE CURRENCY. It over- exploitation. was suggested that the ECU could take on this role. See also: public good See also: hard ecu common property resources (Q0) Land or other natural resources which are common external tariff (F1) not owned by an individual because no The tariff protecting a free-trade area, e.g. property rights have been defined or a © 2002 Donald Rutherford

corporate body has made them freely institutional economics’, Journal of Eco- available to all. nomic Issues 17: 721–44. common stock (G1) common resource problem (Q0) The EQUITY capital of a US corporation. The difficulty of assigning to a particular The owner of common stock is entitled to user the cost of using a resource available vote in general meetings, to receive de- to several users. clared dividends and to obtain a share in the net assets of the corporation on its Commons, John Rogers, 1862–1945 dissolution. This stock does not usually (B3) have a PAR VALUE. US economist who was born in Hollands- burg, Ohio, and a founder of INSTITUTIONAL Commonwealth Grants Commission economics. Although educated as a gradu- (H7) ate student at Johns Hopkins University, An independent Australian statutory body he was never able to finish a college or founded in 1933 with the original aim of university degree course. He held academic dealing with states in need of special posts at Wesleyan University and Syracuse assistance. Now it makes special grants to University. Much of his life was spent in the states to enable services to conform to empirical work in Wisconsin, constructing minimum standards. Most of these grants an index of wholesale prices, investigating are unconditional, i.e. not EARMARKED. labour unions and investigating the eco- See also: federal finance; unconditional nomic concepts present in legal reasoning. grant He took as the foundation of economics volitional theories of value and cost, communal economy (P0) rather than those based on UTILITY or a An ECONOMY consisting of communes as COMMODITY He used US Supreme Court . basic units of production. Usually, income cases to establish the working rules which is equally distributed among commune guide and restrain individuals in transac- members and there is no outside owner- tions, the key units of economics. ‘Value’ ship of capital. As communes tend to be and ‘economy’ were treated as the transac- self-sufficient, production is primarily for tions of millions of people engaged in members’ consumption. Modern technol- valuing and economizing. His legal re- ogy is often deplored and strict rules searches also led him to analyse the nature govern the conduct of the commune mem- of bargaining power. bers. Many examples of these idealistic See also: Ayres; Galbraith; Veblen communities exist, including Robert OWEN’s experiment at New Lanark, Scot- References land, in the nineteenth century, the Israeli Commons, J.R. (1893) The Distribution of kibbutz and, in the USA, the Shakers and Wealth, New York: Macmillan. the Hutterites. —— (1905) Trade Unions and Labor Pro- blems, Boston: Ginn. See also: autarky —— (1924) The Legal Foundations of Capitalism, New York: Macmillan. ´ Communaute Economique de L’Afri- —— (1934) Institutional Economics: Its que de l’Ouest (F0) Place in Political Economy, New York: A CUSTOMS UNION with joint sectoral poli- Macmillan. cies created in 1974 and consisting of the —— (1934) Myself, New York: Macmillan. Ivory Coast, Mali, Mauritania, Niger, Harter, L.G. (1962) John R. Commons: His Senegal and Upper Volta as members. Assault on Laissez-Faire, Corvallis, OR: Oregon State University Press. commune (P0) Rutherford, M.H. (1983) ‘J.R. Commons’ An association of persons jointly owning a © 2002 Donald Rutherford

productive enterprise and managing it Wales gradually from 1990. It replaced themselves. The most famous examples the existing RATES system and was com- are the Paris Commune of 1871, the Israeli bined with a UNIFORM BUSINESS RATE. A kibbutz and Robert OWEN’s communities in principal aim of this charge was to en- the early nineteenth century in England courage the adult population to bring and the USA. pressure upon their local governments to moderate their expenditure: by increasing See also: common ownership the number paying local taxation it was communism (P2) hoped there would be more opposition to A society with common ownership of local government overspending. Critics capital and income distribution according opposed its high collection cost and re- to need. Under Marxist-Leninism it is gressive nature (only giving rebates to the strictly defined as the final stage of social- very poor). Also it was argued that a ism when the state has withered away, community charge should only be used to everyone is equal as members of a uni- finance PUBLIC GOODS. In 1991, it was versal proletariat, and there is no DIVISION decided to replace it with a modified OF LABOUR. MARX’s vision was exceedingly property tax, the COUNCIL TAX. vague because his concern was to analyse References contemporary capitalism rather than future socialism. The nearest to communism HMSO (1986) Paying for Local Govern- ment, Cmnd 9714. has been in small idealistic communities; Mason, D. (1985) Revising the Rating larger societies are unlikely to consent to System, London: Adam Smith Institute. such levelling. The term was often applied loosely to the centrally planned state community programme (J2) capitalist countries of the COMECON and UK employment measure to help the long- China. term unemployed by providing them with jobs of benefit to the community, e.g. See also: command economy; socialism rehabilitating wasteland. These are offered References on a temporary basis and are often dis- Daniels, R.V. (ed.) (1965) Marxism and liked for being low paid. Communism: Essential Readings, Syra- See also: workfare cuse, NY: Singer. commuting (R4) communitarianism (P4) Daily journeys of workers between their An economic philosophy sometimes called homes and places of work. When a trans- the THIRD WAY that is opposed to the port network makes places distant from a doctrine of INDIVIDUALISM and the praise centre of production more accessible, of ECONOMIC MAN. A collectivist successor house building occurs in outlying areas, to socialism that opposes libertarianism. causing land and property prices to rise. community (P0) Other effects of commuting include in- A collectivity: a household, a neighbour- creased traffic congestion and the diffi- hood, village, city, state, transnational culty of financing city services used by, but interest group, in ascending order of size. not paid for, commuting workers. See also: communitarianism See also: circular migration; fiscal mobility community charge (H2, H7) A form of UK local taxation often called company (M1) the ‘poll tax’ and levied on most adults A legal entity or corporate body brought over 18 years old. It was introduced in into existence by registration under the UK Scotland in 1989 and in England and Companies Acts (1844 and subsequently). © 2002 Donald Rutherford

A company is owned by shareholders ities which they perform relatively better. whose legal personalities are distinct from From its first enunciation in 1815 by TOR- the corporate body, and it has a range of RENS, this principle has stated that a activities defined under its Articles of country’s pattern of production and inter- Association. For the past hundred years national trade and specialization are de- this has been a dominant form of business termined by its relative efficiency in organization in capitalist economies. The producing goods. This approach advances existence of companies is compatible with Smith’s doctrine of ABSOLUTE ADVANTAGE, SOCIALISM, provided that the state sets the which was a simple extension of his DIVI- economic and social aims of each com- SION OF LABOUR principle. Torrens and RI- pany. CARDO argued that even if country A were See also: corporation; firm more productive in every agricultural and industrial activity than country B, trade company town (R1) would still take place if internal produc- A town run by one firm, e.g. a place run tion cost ratios were different from coun- by a mining company which provides all try to country. Although this advanced jobs, services and housing. These towns international trade theory, it was later have been criticized for permitting unscru- criticized for assuming constant costs, pulous firms to perpetrate many forms of ignoring transport costs and for not deter- exploitation, including the monopoly sale mining the ratio at which exchange would of poor-quality goods at inflated prices. take place. John Stuart MILL, with his LAW company union (J5) OF RECIPROCAL DEMAND, completed the the- A TRADE (LABOR) UNION dependent on the ory by establishing the actual exchange company which approves it. Only the rate resulting from trade. employees of that company are permitted Ricardo’s example of trade in cloth and to be members. In the nineteenth and wine between England and Portugal states twentieth centuries, especially in the USA, that to produce a given amount of each organized labour objected to these fake commodity the following amounts of la- unions. bour are required in each country: See also: enterprise union; sweetheart contract; truck England Portugal comparable worth (J3) Cloth 100 men 90 men The relative value of a worker’s labour based on productivity rather than personal Wine 120 men 80 men characteristics. A principle adopted in Australia in 1972 and introduced in three uniform steps by June 1975 to counter Thus, England can produce cloth rela- SEXUAL DISCRIMINATION. tively more cheaply than wine and Portu- gal can produce wine more cheaply than See also: Equal Pay Acts 1963 and 1970 cloth. The countries will both gain by References increased specialization in the production McGavin, P.A. (1983) ‘Equal pay for of the good for which they have a com- women: a reassessment of the Austra- parative advantage, even though Portugal lian experience’, Australian Economic has an absolute advantage in the produc- Papers 22: 48– 59. tion of both commodities. comparative advantage (F1) See also: Heckscher–Ohlin trade theorem; The principle justifying individuals or na- Leontief paradox; Rybczynski theorem; tions specializing in those economic activ- terms of trade © 2002 Donald Rutherford

comparative costs (F1) see comparative the INCOME EFFECT of price changes so that advantage only the SUBSTITUTION EFFECT is in force. comparative statics (E1) compensating common tariff (F1) A technique of economic analysis compar- A TARIFF which keeps the rest of the world ing one equilibrium position with a later as well off after the formation of a CUS- TOMS UNION as it was previously. one which is the product of changes in the values of PARAMETERS and EXOGENOUS VARI- compensating wage differential (J3) ABLES. KEYNES used this method; ROBERTSON A differential in wages or salaries created and HARROD preferred dynamic methods to compensate for a poor job attribute, e.g. which, unlike comparative statics, have the a health hazard or variability of earnings. advantage of showing how an earlier Firms grant these differentials to enable equilibrium is transformed into a later them to retain staff in undesirable jobs one. and to recruit new workers. compassionate conservatism (I3) compensation principle (D6) A political creed advocating the shrinking The rule that redistribution leads to an of the WELFARE STATE by using faith-based improvement in economic welfare if those organizations to provide welfare services. who gain an increase in real income and This in the USA entailed the dismantling welfare are able to compensate the losers of the GREAT SOCIETY project of President and still be better off. This major principle Lyndon B. Johnson. President George W. of modern WELFARE ECONOMICS was devised Bush in his election campaign of 1999– by KALDOR and HICKS to deal with the 2000 often referred to this philosophy of problem of making interpersonal compar- conservatism. isons of UTILITY; it has often been applied in COST–BENEFIT ANALYSIS. References References Olasky, M.N. (2000) Compassionate Con- servatism, New York: Simon & Schuster. Mishan, E.J. (1981) Introduction to Nor- mative Economics, New York: Oxford compensated demand curve (D1) University Press. A demand curve constructed so that a compensatory finance (H5) consumer’s initial level of UTILITY is con- Expenditures by a government to offset stant because of an adjustment to his or LEAKAGES from the CIRCULAR FLOW of in- her money income. This curve eliminates come. Thus, the impact of taxes, savings and imports which reduce the value of the MULTIPLIER for a national economy can be reduced by a government increasing its public expenditure and boosting exports through subsidizing export industries. compensatory financial facility (F3) An INTERNATIONAL MONETARY FUND arrangement in force since 1963 to help with the fluctuations in commodity prices which cause a shortfall in the value of exports. Repayments are made to the International Monetary Fund over a three- to five-year period. See also: additional facilities © 2002 Donald Rutherford

competition (L1) attempt to control dominant monopolies, 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 supplying 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) The EUROPEAN ECONOMIC COMMUNITY from A process consisting of two opposing 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 TREATY OF ROME in Articles 3, 7, 37 and 85– efficient firms to the more efficient and the INNOVATION mechanism which enables firms 94 deals with many aspects of the promotion 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. compulsory competitive tendering 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 See also: 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 See also: substitute © 2002 Donald Rutherford

complexity theory (D0) sum becomes immense compared with the A study of agents interacting simulta- original sum. Not surprisingly, Keynes neously in a multiple cause and effect asserted that ‘there is no more powerful feedback. It looks at the emergence of a force than compound interest’. new phase of a system and a large range of potentials instead of forecasting on the Comprehensive Employment and basis of a simple cause and effect chain. Training Act 1973 (J2) The Santa Fe Institute of New Mexico, US federal statute consolidating previous, founded in 1984, pioneered this form of 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. and Lane, tion, including ON-THE-JOB TRAINING. The D.A. (1997) ‘The economy as an evolving Job Corps set up under Title IV was a complex system’, Proceedings of the residential programme to provide remedial Evolutionary Path of the Global Econ- work and skills training for severely dis- omy Workshop, Santa Fa, New Mexico, advantaged youths. September, Boulder, CO: Westview Press. Comptroller of the Currency (G2, H1) compliance cost (D0) US office set up under the NATIONAL BANK- ING ACT 1863 originally to deal with currency The cost of complying with a government regulation, including taxation. Such costs and monetary matters, but the task of are incurred by the private sector and by chartering and monitoring national banks governmental organizations below the le- also given to it has become its principal vel of central/federal government. The concern. costs of compliance include accountants’ compulsory competitive tendering fees and the OPPORTUNITY COST of the time (H7, M1) spent filling in forms. The rule that UK local authorities put out composite commodity (D0) major services, e.g. street cleaning, to TEN- A collection of goods representing pur- DER instead of providing them by their chasing power in general, or money as it is own departments. In many cases, the a medium of exchange. This composite is contract is awarded to the original local only possible if the prices of other goods authority service. remain constant. HICKS introduced the compulsory savings (E2) see forced concept. savings See also: ceteris paribus Computer-assisted Trading System (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 See also: Stock Exchange Automated range of life and non-life insurance busi- Quotation System 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- total accumulation period is long, the total ment attributable to the largest firm or © 2002 Donald Rutherford

firms. MONOPOLY, DUOPOLY and OLIGOPOLY are there is less risk of default in servicing the the most concentrated of market forms; loan. It is argued that the INTERNATIONAL PERFECT COMPETITION is the least. UK in- MONETARY FUND and WORLD BANK in making dustry is more concentrated than that of this stipulation make ‘conditionality’ a the USA or other West European coun- PUBLIC GOOD. tries, partly because of its smaller domestic Condorcet criterion (D0) market, which necessitates few firms per A voting procedure by which the candidate industry if ECONOMIES OF SCALE are to be is chosen on the basis of defeating all the achieved, and partly because of the weak- others by obtaining the majority of the ness of the UK policy on mergers. votes in pairwise elections. See also: aggregate concentration; concen- Confederation of British Industry (L0) tration ratio; Gini coefficient; Herfindahl– The major representative body for private Hirschman index; Lerner index; Lorenz and public sector firms of UK industry. curve; relative concentration The CBI was created in 1965 as a result of concentration economy (D0) the merging together of the Federation of An ECONOMY OF SCALE arising from the British Industries (founded in 1916), the concentration of industry in a particular British Employers’ Federation and the area. National Association of British Manufac- turers. See also: agglomeration economy confidence interval (C1) concentration ratio (L1) The range within which, to a certain 1 An absolute ratio (sometimes called a percentage, one is confident that a sample leading firms ratio) which shows the statistic lies. Thus, with a 95 per cent percentage of sales, output, assets, value confidence interval, if we sample 1,000 added or employment which can be voters to ascertain their current opinion ascribed to the largest firms of the of the government we can be confident industry, usually the top four or five. that only fifty are unrepresentative of the These ratios are more accurate if they population as a whole. Confidence inter- are adjusted for imports and exports. vals are stated for MEANS, STANDARD DEVIA- 2 A relative ratio based on a size distribu- TIONS, proportions and differences. tion of firms showing, for example, what proportion of firms has what See also: confidence level proportion of output; LORENZ CURVES confidence level (C1) and GINI COEFFICIENTS are used for this A confidence limit, or CRITICAL VALUE, purpose. expressed as a percentage. See also: aggregate concentration; Herfin- conflicting claims approach to inflation dahl–Hirschman index; Lerner index; N- (E3) firm concentration ratio Attributing INFLATION to the total wage concrete labour (D2, J0) claims of workers exceeding the total The labour required to produce a particu- income available. lar product, e.g. a piece of furniture. References Labour in this qualitative sense creates use values. Rowthorn, R.E. (1977) ‘Conflict, inflation and money’, Cambridge Journal of Eco- See also: abstract labour nomics 1: 215–39. conditionality (F3) confluence analysis (C1) Lending to a debtor on condition that the A general statistical method used in loan is used for a specific purpose so that econometrics created by FRISCH and others © 2002 Donald Rutherford

from the 1930s onwards. It attempts to voted to particular programmes: pre- discover the different linear relationships viously the president could refuse to spend between several observable variables, tak- moneys for purposes which had been the ing into account measurement errors. subject of appropriation bills despite Con- gressional approval. References Frisch, R. (1934) Statistical Confluence See also: Gramm–Rudman–Hollings Act Analysis by Means of Complete Regres- sion Systems, Oslo: Universitetets øko- consideration (G1, K0) nomiske institutt. 1 The value of a stock exchange transaction expressed in a particular currency. conglomerate (M1) 2 The advantage or detriment which es- A large firm, particularly in the USA, with tablishes a particular contract under many subsidiary firms producing unre- common law jurisdictions such as Eng- lated goods and services so as to reduce land and Wales, the USA and some risk. Famous US conglomerates include Commonwealth countries. ITT, LTV, Litton, Textro and Gulf and Western. Their past growth was based on consol (G1) a simple mathematical truth that if a A consolidated fund stock (‘Consolidated company with a high PRICE–EARNINGS RATIO Annuity’) of the UK government issued as takes over one with a lower price–earnings an unredeemable fixed interest security. ratio, the acquiring company’s earnings They were introduced in 1751 as a means per share will automatically rise, helping of replacing a variety of government bonds to finance further acquisitions. Their re- of different MATURITIES and interest rates cent growth has been hampered by the with a single government stock. The yield opposition of the US Department of on consols has often been used as a Justice and periods of falling stock market measure of the long-term rate of interest. prices. The consols currently traded in the UK conglomerate merger (L1) have nominal interest rates of 2½ per cent A MERGER between two firms with different and 4 per cent. products or activities. These mergers are Consolidated Fund (H1) motivated by the desire to use underuti- The fund of the UK central government lized resources, particularly management into which all direct and indirect tax and marketing. Although it is hoped that revenues and other receipts are paid. Prior the merger will create a financially strong to its establishment in 1787, separate firm, rather than a firm with an increased funds existed for each type of government market share, experience has shown that revenue. many mergers of this kind have not been financially successful. See also: funding Congressional Budget and Impound- Consolidated Fund standing services ment Control Act 1974 (H6) (H6) Major US federal statute which reformed An item of the UK budget covering the US budget process by changing the expenditures which do not require annual fiscal year from 1 July to 1 October to give approval by parliament, e.g. interest on Congress more time to consider the bud- the NATIONAL DEBT and the salaries of get, created new budget committees, intro- judges. duced a first budget resolution to establish ceilings on expenditure, revenue and debt Consolidated Metropolitan Statistical and made anti-impoundment provisions to Area (J1, R1) stop the president from seizing money A large metropolitan complex of the USA © 2002 Donald Rutherford

including PRIMARY METROPOLITAN STATISTICAL prices would show national income for a AREAS. number of years at the prices of one year. consolidation loan (G2) constant returns to scale (D0) see A loan offered by a financial institution to returns to scale replace several outstanding loans of a constrained market pricing (D4, L5) debtor. The replacement loan will be less Prices in little need of regulation because costly to service each month and will be they are constrained by competition. This over a longer period. Persons with burden- concept is used by US regulatory agencies, some credit card debts can use loans of this such as the INTERSTATE COMMERCE COMMIS- kind, often secured on residential property. SION, in its pricing policies. Prices not consortium bank (G2) constrained by competition have to be A bank jointly owned by a number of between a floor price equal to marginal other banks for the purposes of giving cost and a ceiling price equal to the STAND- small banks representation in a financial ALONE COST. centre. These consortia deal with specific Consumer Advisory Council (L4) types of financing, especially massive loans A subordinate organization of the US FED- for infrastructure investment. ERAL RESERVE Board of Governors estab- conspicuous consumption (E2) lished in 1976 to advise the board on the Expenditure on expensive goods to impress discharge of its duties under the Consumer others with one’s wealth and status rather Credit Protection Act. It has thirty mem- than to satisfy basic needs. VEBLEN was the bers. first to analyse ostentation of this nature. consumer credit (G2) constant capital (D2, E2) Credit granted by banks, finance houses The MARXIAN term for raw materials and and other financial institutions usually to machinery. This form of capital transfers purchase CONSUMER DURABLES. The volume only its own value, originally created by of this credit can be controlled by altering labour, to the finished product. its price, i.e. by changing interest rates or the minimum size of initial deposits. See also: organic composition of capital; variable capital 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

ership and allowance for their depreciation the interests of consumers, even at the in NATIONAL INCOME accounts. Despite con- cost of shareholders’ incomes. Action sumer durables resembling the fixed capi- can take the form of lobbying parlia- tal used by firms, they are classified as ments for legislation, protest marches part of consumption. However, as their and legal suits. In response to these purchase often requires CONSUMER CREDIT, campaigns, many Western countries like fixed capital, they are subject to a since the 1960s have introduced elabo- fluctuating demand sensitive to monetary rate consumer protection legislation to policy. ensure that consumers get a fair deal before, during and after buying a good See also: brown good; white good or service. In the USA, for example, the FEDERAL TRADE COMMISSION supervises ad- consumer equilibrium (D1) vertising, the Fair Packaging and Label- That choice of expenditures, using a given ing Act 1965 prevents inadequate income, which will maximize a consumer’s product information on packages and UTILITY Formally it is expressed in the . labels, the Consumer Credit Protecting statement that each ratio of marginal Act 1968 requires a simple statement of utility from a particular good relative to the details of loans, the Fair Credit its price is equal to every other such ratio Reporting Act 1970 allows consumers throughout the consumer’s purchases (if it access to their credit reports, and a is not, it will be possible to redistribute variety of safety acts protect the users one’s expenditures to increase total utility). of cars, toys and other products. In the This equilibrium is based on the LAW OF UK, the CONSUMER CREDIT ACT 1974 pro- DIMINISHING MARGINAL UTILITY: vides protection for consumers. How- ever, there are still opponents of consumer protection who argue that marginal utility of marginal utility of regulation is an expensive and bureau- good A good B cratic procedure unduly restricting the price of A = price of B behaviour of firms. Also, some consu- ... mers may be prepared to endure lower marginal utility quality to make some purchases fall = within their budgets. good n 2 Advocacy of materialism, of purchasing = price of n more and more goods and services rather than being frugal. See also: consumer sovereignty Consumer Expenditure Survey (C8) References US survey of the current expenditure of US Evans, J. (1980) Consumerism in the United residents which began in 1979. It is used to States, New York: Praeger. revise the CONSUMER PRICE INDEX and is Swagler, R. (1994) ‘Evolution and Appli- conducted by the Bureau of the Census cations of the Term Consumerism: Theme and Variations’, Journal of Con- for the Bureau of Labor Statistics. Infor- sumer Affairs 28: 347–60. mation is collected from a panel which is Swann, D. (1979) Competition and Con- interviewed five times every three months, sumer Protection, Harmondsworth: Pen- and from records kept by participating guin. households over a specified fortnight. consumer price index (E3) consumerism (D1) US price index which shows the average 1 Concerted action to make firms pursue change in the prices of a representative © 2002 Donald Rutherford

basket of goods and services purchased for large corporations with huge advertising daily living by US households. Data are budgets, GALBRAITH and others have chal- collected on the prices of food, clothing, lenged this view of the influence of con- housing, fuels and services, etc., from sumers. Also, the increase in the role of eighty-five areas. Market prices, including government and the importance of MERIT indirect taxes, are used and each item is GOODS have reduced the power of indivi- weighted according to its importance in dual consumers in modern economies. consumers’ budgets. The US Bureau of See also: countervailing power Labor Statistics began the compilation of this index in 1919. Two versions of it are consumer’s surplus (D1) published: the CPI-U and the CPI-W. The area, shaded in the figure, under an individual consumer’s demand curve See also: Consumer Expenditure Survey; which shows the difference between what retail price index a consumer is willing to pay and what consumer protection legislation (D1, actually is paid. It will be greater for richer K2) consumers as they have a higher demand; Measures to enforce minimum standards hence, when the price structure is designed in the provision of goods and services, to to reflect consumer incomes, higher in- provide advisory services for consumers come groups pay more for a good service, and, in the case of public corporations e.g. employed persons are charged more (UK), to establish users’ councils to han- than unemployed. This major concept, dle complaints. The principal measures introduced into economics by DUPUIT and protecting the UK consumer are the Sale refined by MARSHALL and HICKS, has be- of Goods Act 1979, the Trade Descrip- come a major tool of COST–BENEFIT ANALYSIS. tions Acts 1968 and 1972 and the Con- sumer Credit Act 1974. In the USA, the Food and Drug Administration and the Consumer Product Safety Council energe- tically protect the consumer. See also: consumerism consumer society (D1, P0) A society which devotes a high proportion of its income to luxury goods and undertakes little saving. Only MARKET ECONOMIES have been prosperous enough to choose this lifestyle. See also: conspicuous consumption consumer sovereignty (D1, M3) The decisive power of consumers to deter- See also: producer’s surplus mine the amount and pattern of production by freely choosing goods and services References in accordance with their preferences. Bergson, A. (1975) ‘A note on consumer’s Adam SMITH in his rejection of MERCANTI- surplus’, Journal of Economic Literature LISM turned the goal of economic activity 13: 38–44. to satisfying the consumer rather than Deaton, A. and Muellbauer, J. (1980) producers. NEOCLASSICAL ECONOMICS built Economics and Consumer Behavior, many of its theories on the notion of CON- New York and Cambridge: Cambridge SUMER EQUILIBRIUM. Given the growth of University Press. © 2002 Donald Rutherford

consumption externality (D6) contestable markets thesis (L1) The effect of one person’s consumption on BAUMOL’s view that competition can be the production and consumption of others. maintained by the state ensuring that an A modern example is the effect of cigar- industry’s barriers to entry are kept low. ette smoking on the health of non-smokers Under such circumstances, free entry and who are forced to be ‘passive smokers’ and exit will maintain the market in a compe- are compelled to pay for the consequences titive state. This thesis is compatible with of smoking on the health of smokers recent UK COMPETITION POLICY. through higher medical insurance pre- References miums or higher taxes. Baumol, W.J., Panzar, L.C. and Willig, See also: externality R.D. (1982) Contestable Markets and the Theory of Industry Structure, New consumption function (E2) York: Harcourt Brace Jovanovich. The relationship which shows aggregate consumption as a function of income contingency claims contracting (J3) see (measured absolutely, relatively or perma- employment contract nently at current or constant prices) and contingency table (C1) possibly wealth or the rate of interest. As A table whose columns and rows are consumption is the major part of na- observed frequencies so that the expected tional expenditure, the consumption func- frequency of a particular hypothesis can tion is central to models of income be investigated. These tables can be ex- determination. KEYNES in his General The- tended to more than two dimensions. ory inspired much of later work, which has included the ABSOLUTE INCOME, RELATIVE IN- contingent commodity (D0) COME, PERMANENT INCOME and LIFE-CYCLE A new commodity resulting from the approaches. occurrence of a particular event. consumption tax (H2) contingent fee (D4) A tax levied on actual expenditures with A fee paid only on the successful outcome the hope that it will encourage saving. In of an activity, e.g. a fee for a lawyer’s wartime when it has been necessary to services which is a percentage of the curb consumption, taxes of this kind have damages awarded to a plaintiff. In the been levied as an alternative to rationing. USA this fee system is alleged to encourage vexatious litigation. See also: expenditure tax contingent market (D4, G1) contango (G1) A market, particularly an insurance mar- 1 A charge a stockbroker used to make ket, which transfers risk from those facing for carrying over a sale or purchase of a it to those who are prepared to undertake security to the next accounting period. it. An example of this is when a ship 2 In commodity markets it refers to spot owner faced with the risk of the loss of a prices being lower than futures prices. ship can transfer the risk to LLOYD’S See also: backwardation insurers. If the insurance market is in equilibrium, the insurance premium contemporaneous externality (D6, Q0) should settle at the rate which equates the An economic activity affecting another marginal cost of insurance to the marginal type of production in the same time benefit of losing an undesired risk. period, e.g. bee-keeping helps fruit farm- contingent valuation (D0, Q0) ing. Valuation of commodities not traded in See also: sequential externality markets, e.g. clean air, landscapes and © 2002 Donald Rutherford

wildlife. The valuation is based upon the used, especially in the USA, as a means of responses of individuals to questions advancing employment policies, e.g. the about what their actions would be if a employment of women, blacks and dis- particular hypothetical situation were to abled persons. occur. When the average of responses has See also: Fair Wages Resolution been calculated with weighting if necessary, people’s valuation of a PUBLIC GOOD is contract curve (D0) ascertained. A proxy measure already used 1 A curve connecting the points of tan- is the travel cost a person will incur to gency of two individuals’ respective IN- benefit from that environment. DIFFERENCE CURVES such that the MARGINAL RATE OF SUBSTITUTION for them References is the same. Brookshire, D., Ives, B. and Schulze, W. 2 AN ISOQUANT showing where the marginal (1976) ‘The valuation of aesthetic pre- rate of technical substitution is the same ferences’, Journal of Environmental Eco- nomics and Management 3: 325–46. for the production of two different goods. continuity thesis (B1) The view that there is a continuum See also: Edgeworth box between the allocation theory of classical contracting (D0, K0) and neoclassical economists with the con- Forming an agreement to supply a factor sequence that there was no marginal of production or a product. revolution in the 1870s. Thus it is asserted that MARSHALL was not overturning CLASSI- See also: employment contract; tendering CAL ECONOMICS but using the sharper tools contracting out (L2, L3) of mathematics to clarify Ricardian eco- Partial PRIVATIZATION of a public service nomics as stated by John Stuart MILL. often through employing subcontractors See also: marginalists to undertake a specific function such as cleaning, laundering or accounting. References contractionary national income gap Shove, G.F. (1942) ‘The place of Mar- (E1) see deflationary gap shall’s Principles in the development of economic theory’, Economic Journal 52: contractual savings (E2, G2) 294–329. Savings made under a contract that speci- continuous double auction (D4) fies regular payments into a fund over a Bids are submitted by both buyers and minimum time period. The advantage to sellers, then ranked from highest to lowest pension funds and life assurance compa- and a trade is effected when there is a nies of savings of this type is that they match. A DUTCH AUCTION is a continuous make possible long-term institutional in- descending auction. vestments, e.g. in real estate. continuous variable (C6) contracyclical policy (E3) see A variable, expressed in symbolic form, countercyclical policy e.g. x or y, which can assume any value contrarian investment strategy (G1) between two given values. A stock market practice of buying stocks and shares that have been losing value and See also: discrete variable selling stocks short which have been im- contract compliance (H0, J7) proving. This approach is based on the Obeying the terms and conditions of view that a stock market overreacts to the governmental contracts awarded to private information it receives. Price–earnings and sector firms. This approach has often been 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 ECONOMIES modified their planning meth- A principle of income distribution that 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, PRIVATIZATION has caused market economies to revert more to their See also: equality standard 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 organizations 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. See also: black market; prices policy See also: Bullionist controversy 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 See also: Swedish budget 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; many producer co-operatives were under PERFECT COMPETITION, i.e. GENERAL founded in the USA and the UK in the EQUILIBRIUM. last quarter of the nineteenth century. core economy (P0) Unfair business competition, especially A major economy, usually a MARKET ECON- the withholding of supplies, destroyed OMY which plays a leading role in world , many of the US co-operatives, but some trade. of the UK co-operatives founded then still survive in printing, clothing and footwear core firm (L1) manufacture. Self-management of Yugo- A giant corporation that dominates a slav enterprises and the large workers’ co- market. operatives at Mondragon (in the Basque core inflation rate (E3) region of Spain) attracted much attention. The underlying trend in INFLATION which All these enterprises have had to face the depends solely on past labour and capital problems of underinvestment (as producer costs and firms’ EXPECTATIONS of changes in members often prefer present wages to these costs. This rate changes only if future profits), low PRODUCTIVITY and a lack expectations based on extrapolating from of managerial experience. But poor perfor- past costs change. To bring the core mance has not been universal, as Mondra- inflation rate of a major economy, such as gon shows. the USA’s, down to zero could require a See also: industrial democracy; workers’ steady fall in national output for several participation years. This rate is usually estimated by excluding volatile food and energy prices References from the CONSUMER PRICE INDEX. Ireland, N.J. and Law, P.J. (1982) The See also: headline rate Economics of Labour-Managed Enter- prises, London: Croom Helm. References Vanek, J. (1970) The General Theory of Eckstein, O. (1981) Core Inflation, Engle- Labour-Managed Market Economies, wood Cliffs, NJ, and London: Prentice Ithaca, NY: Cornell University Press. Hall. co-operative federalism (H7) core region (R1) A federal state with much intergovernmen- A dominant or leading region of a country tal co-operation between federal and state which often includes the capital city. The governments. In particular, the different accumulation of physical and HUMAN CAPI- TAL is encouraged there by the AGGLOMERA- layers of government jointly participate in TION and CONCENTRATION ECONOMIES possible many programmes. in such a large population. See also: dual federalism; fiscal federalism corner solution (C1) core (D0) An answer to an OPTIMIZATION PROBLEM in which one of the variables in a TRADE-OFF A set of possible equilibrium prices. As is zero at an optimum. originally devised by EDGEWORTH in Math- ematical Psychics (1881), it corresponds to Corn Laws (N4, N5) all PARETO-EFFICIENT positions in a two- The series of English laws dating from the person, two-good economy which show reign of Edward IV which protected Eng- improvement after trade. This concept has lish agriculture by imposing tariffs on the been applied to the study of co-operative import of corn to maintain its price; also games and is shown by the CONTRACT CURVE export bounties (subsidies) were granted in the EDGEWORTH BOX diagram. The core to farmers. CLASSICAL ECONOMISTS such as coincides with a set of price equilibria SMITH objected to this interference with © 2002 Donald Rutherford

FREE TRADE; RICARDO viewed it as an en- factor income, pure corporate profits, it couragement to production which would does not affect output in the short or long expand agriculture, a form of production run. subject to the LAW OF DIMINISHING RETURNS, and bring about a decline in the rate of corporate morality (M0) profit and a STATIONARY STATE in the econ- The maintenance of high ethical standards omy. The growing manufacturing interest by businesses. This requires honesty in the also opposed these laws as PROTECTION kept accounting and other statements of corpo- up food prices and wages. The laws were rate activity, high-quality safe products, repealed by the government led by Sir participation in community programmes, Robert Peel in 1846. care for the environment, an awareness of the long-term interests of the economy in References its investment policy and prompt payment Kadish, A. (ed.) (1996) The Corn Laws: of taxation in order to contribute suffi- The formation of popular economics in ciently to public expenditure. Britain, London: Pickering. corporate state (P0) corn model (E2) A state considerably influenced by rela- RICARDO’s simple model of an economy tively few large firms and trade unions with one commodity, corn, which is both which jointly, with the collaboration of the the single input and single output of that government, make the major economic country. Corn provides subsistence for decisions on which the running of an workers who produce an annual output of economy is based. Italian fascism of the corn. Thus a single commodity is both the interwar period took this form; UK gov- intermediate and final product. ernments of the 1960s and 1970s, accord- See also: Sraffa ing to their critics, adopted such a political philosophy. As the proportion of output cornucopia (D1, P0) produced by a few major companies in- An abundance of consumer goods possible creases in the USA and other Western only in a high-income capitalist country, countries, CORPORATISM becomes a more e.g. the USA. important issue. corporate finance (G3) See also: minimal state; state monopoly Specialist financial services to corpora- capitalism tions and other large organizations. Ad- vice is given on raising new capital and on corporate veil (L2) acquisitions. The disguises of firms to prevent government and shareholders knowing all of corporate governance (G3) their activities, including the extent of The set of rules which are used to control their income. Shareholders’ ignorance of and run a firm or other organization. The a company’s actual behaviour leads them powers of different managers, the formu- to underestimate the true value of a lae for calculating remuneration and grie- company, e.g. they ignore the effect of vance procedures are part of governance. current corporate saving on prospective See also: Cadbury code; Greenbury code; PRICE–EARNINGS RATIOS and hence the stock Myners Committee market valuation of the company. Govern- ments collect less in corporate taxation corporate income tax (H2) because of their ignorance of firms’ total A separate tax on firms which has the earnings. advantage of being easier to collect than an income tax applied to both persons and corporation (M1) firms. As it is a tax on a special kind of A privately or publicly owned firm whose © 2002 Donald Rutherford

powers and activities are defined in the ment to cover the social costs borne by a statute or articles which set it up. It is the firm. major way of organizing a large firm in many countries and hence is responsible See also: Pigovian subsidy for most industrial and commercial output corrective tax (H2) of several national economies. As most An INDIRECT TAX used to counter EXTERNAL- large corporations, whether in the public ITIES thereby bringing about a PARETO or private sectors, are to a large extent equilibrium. controlled by their managers, many have asked to whom they are ultimately respon- See also: effluent fee sible. correlation (C1) See also: managerial models of the firm; The extent of interdependence between multinational corporation; public enter- two variables. Unlike regression, this cal- prise; transnational corporation culation is not used to predict the value of one variable from the other. corporation income tax (H2) A major tax used by the US federal See also: autocorrelation; coefficient of government for raising revenue. To avoid correlation; Durbin–Watson statistic; mul- its constitutionality being challenged in the tiple correlation; non-linear correlation; courts, it was levied as an excise on the rank correlation; Spearman’s rank correla- privilege of doing business as a corporation formula tion. Until 1941, it raised more revenue than the INDIVIDUAL INCOME TAX. The tax is correspondent bank (G2) paid in two instalments in the first six A bank accepting deposits from another months of the year following the tax year bank located in another area to provide in which a corporation’s income arises. local services for it. Many banks internationally have this arrangement to be able corporation tax (H2) to make payments in different currencies. A direct tax on the profits, after interest In the USA, the UNIT BANKING system and depreciation, of companies. Separate necessitated correspondent banking as a income taxation for individuals and com- means of transferring funds between dif- panies enables different rates to be ferent localities. charged. The yield from the corporation tax varies from country to country as a corridor (E0) consequence of different tax rates and A range above and below the equilibrium differences in corporate profitability. path of an economy. Within the corridor, normal market forces bring the economy corporatism (L2, P0) back to the equilibrium path. Control of an economy by giving major economic decision making to corpora- corruption (K4) tions, industrial ministries and, in some The use of public office for private gain by economies, leading TRADE (LABOR) UNIONS. the political establishment, bureaucrats or This was said to be the character of the legislators. Its different forms include ac- UK economy in the 1960s and 1970s and cepting bribes to change decisions, fraud, has long been true of France. LAUNDERING MONEY and BLACK MARKET operations. Corruption increases TRANSACTION See also: corporate state; indicative plan- COSTS and the final cost of many goods ning and services, especially where a govern- corrective subsidy (D6, H2) ment licence is needed. Although it can A SUBSIDY given to a firm as an incentive discourage foreign investors, it does make for internalizing an EXTERNALITY; a pay- some economic systems work faster. © 2002 Donald Rutherford

References criterion for selecting a project. The bene- Elliott, K.A. (ed.) (1997) Corruption and fits and costs can be real (tangible or the Global Economy, Washington, DC: intangible) or pecuniary. Tangible benefits Institute for International Economics. can often be equated with increased out- Treisman, D. (2000) ‘The causes of cor- put; intangible benefits with prestige and ruption: a cross-national study’, Journal the creation of something beautiful; and of Public Economics 76: 399–457. pecuniary benefits with a change in the ‘corset’ (E5) relative remuneration of an industry or an The method of Bank of England control occupation. over commercial banks’ liabilities in force See also: compensation principle from December 1973 to June 1980. A limit was placed on the amount of banks’ References sterling deposits and foreign currency Hicks, J.R. (1943) ‘The four consumers’ deposits lent in sterling: if the limit was surpluses’, Review of Economic Studies exceeded, a special deposit, bearing no II: 31–41. interest, had to be lodged at the Bank of Pearce, D.W. (1983) Cost-Benefit Analysis, England. Banks objected to the way in 2nd edn, London: Macmillan. which it encouraged companies to lend cost-effectiveness analysis (H5) directly to each other rather than using An analysis of the costs of alternative banks as intermediaries. The removal of programmes designed to meet a single the corset led to an upsurge in the money objective. The programme which costs supply. least will be the most cost effective. This See also: disintermediation form of analysis was first developed when Robert McNamara was US Secretary of cost–benefit analysis (C1, D6, R1) Defense in the 1960s. The evaluation of an investment project with a long-term perspective from the See also: planning programming; budget- viewpoint of the economy as a whole ing (although it is sometimes used in the private sector) by comparing the effects of cost gradient (M2) undertaking the project with not doing so. The increase in costs resulting from an This form of analysis was designed to enterprise being less than optimum size. provide a means for evaluating public works and development projects in cases costing margin (D4, M2) where the value of them could be mea- An addition to average direct costs to sured empirically. It can be traced back to cover indirect costs and provide a normal DUPUIT’s De la mesure de l’utilite des ´ level of net profit under FULL-COST PRICING. travaux publics (1844), but it was first This rule is most likely to be used in a applied as a technique for assessing pro- mature oligopolistic industry not faced jects under the US Flood Control Act with potential competition. 1936. The theoretical justification for References many cost–benefit procedures was slight Andrews, P.W.S. (1949) Manufacturing until HICKS published an article in 1943 on Business, London: Macmillan. CONSUMERS’ SURPLUSES. A calculation of the NET PRESENT VALUE of expected costs and cost, insurance and freight (F3) expected benefits makes it possible to use The full-cost valuation of imports paid by the decision rule that a project will only be purchasers. International trade statistics undertaken if the benefits exceed the costs. usually measure imports ‘c.i.f.’ so that all The maximization of net social benefits the charges of international trade are came to be regarded as the appropriate included in balance of payments accounts. © 2002 Donald Rutherford

cost leader (L1) in workers’ homes. Handloom weaving The lowest cost producer of an industry. before the INDUSTRIAL REVOLUTION was orga- This leadership is usually established by nized in this way; now, NETWORKING and ECONOMIES OF SCALE, exclusive rights over TELECOMMUTING are home based. new technology or preferential access to See also: domestic system; home produc- raw materials. A cost advantage has often tion; homework; networking economy; been the basis of monopoly power. proto-industrialization cost of living adjustment (J3) Council for Mutual Economic Aid (F0) A provision in a US labour contract The intergovernmental council ‘Comecon’ providing for automatic wage increases in of the USSR, Bulgaria, Czechoslovakia, line with rises in the CONSUMER PRICE INDEX. Hungary, Poland and Romania established Usually abbreviated to COLA. in 1949, which promoted mutual interna- cost of living index (J3) tional trade and the co-ordination of Now termed in the UK the RETAIL PRICE national economic plans. (Albania joined INDEX. It shows changes in the cost of in 1949, East Germany in 1950, Mongolia purchasing a bundle of goods and services in 1962 and Vietnam in 1978; Romania representative of the average consumer. weakened its ties in 1973 by making The Ministry of Labour and now its separate agreements with the European successor, the Department for Education Community; Yugoslavia became an associ- and Employment, had to maintain this ate member in 1964; China and North index as it is of crucial importance to wage Korea enjoyed observer status from 1964.) bargaining. It was established by Stalin to provide a socialist ‘market’ to oppose the world-wide See also: consumer price index capitalist market – hence Comecon was cost-push inflation (E3) called ‘the Russian MARSHALL PLAN’. To Inflation caused by an autonomous in- Comecon were added the INTERNATIONAL crease in costs in the absence of an BANK FOR ECONOMIC CO-OPERATION and the increase in demand. The principal cost INTERNATIONAL INVESTMENT BANK as alterna- increases are wage increases forced by tives to the INTERNATIONAL MONETARY FUND. powerful trade unions, imported raw ma- Initially, Comecon agreed on general goals terial costs pushed up by international for trade and technical assistance which producers’ cartels and the profit MARK-UPS led to the joint organization of scientific of oligopolistic firms. research, technical assistance in the building of industrial plants and the develop- cost ratio (M2) ment of mineral resources. In 1954, a step The ratio to sales of factory costs, admin- was made towards economic integration istrative costs, research and development by the co-ordination of five-year plans and costs, capital expenditure, selling costs or in 1955 production priorities for member distribution costs. states were established. Multilateral trade cost-utility analysis (I1) agreements were recommended, as was the A method of evaluating health pro- co-ordination of energy policies. Although in 1961 ‘Basic Principles’ for the long-term grammes by calculating the cost per effect produced of a medical procedure or treat- plans of member countries were drawn up, ment. Effects are converted into prefer- Soviet proposals the following year for a ences or utilities. It makes use of QUALITY- single plan and a single planning authority were rejected as being an encroachment on ADJUSTED LIFE YEARS. national sovereignty. The International cottage industry (L0) Bank for Economic Co-operation was An industry whose production takes place 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 See also: investment reserve system; Swe- the Congress, a report formulating broad dish budget 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 ECONOMICS. His important work, which was Hammond, G.T. (1990) Countertrade: Off- 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 Mathematiques de la Theorie 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 Mathematical Economics, 2nd See also: consumer sovereignty 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 ðD1 þ D2 Þ þ D1 f 0 ðD1 þ D2 Þ ¼ 0 An economy, like the US economy, which behaves as if natural resources are infinite f ðD1 þ D2 Þ þ D2 f 0 ðD1 þ D2 Þ ¼ 0 in supply and that Nature can absorb any amount of refuse. BOULDING coined this term to describe the ‘Wild West’ philosophy still prevalent in modern USA. See also: spaceman economy 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. See also: econometrics References See also: duopoly Haavelmo, T. (1944) ‘The probability approach 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. See also: general union; industrial union 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- See also: co-operative federalism; dual luation as it does not encourage specula- federalism; fiscal federalism 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 macroeconomics) 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 allocating 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- See also: affinity card; charge card; debit est rates. In the UK this was traditionally card; smart card 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- See also: ‘corset’; special deposit 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 payment 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 MEDIUM OF EXCHANGE has gradually displaced coinage credit spread (G1) made of precious metals. That part of the yield to maturity attributable to credit risk. Treasury bonds have credit multiplier (E4) see money 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 rate of profit 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, See also: 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: cross-subsidization (L1, L3) D. Dobson. 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

rule of attributing costs properly to each ELASTICITY of IS-LM CURVES. In the figure, division to make each part of that enter- although an increase in government ex- prise individually financially accountable, penditure raises the IS curve from IS1 to could allow the profitable divisions to IS2, because of the INELASTICITY of the LM finance loss-making divisions. In the pri- curve the rate of interest rises from r1 to vate sector, cross-subsidization occurs r2, without an increase in national income. within firms if some of their products are Crowding out may also occur because sold at less than incremental cost. To increased government spending changes ensure maximum efficiency, firms should private sector expectations about the fu- avoid this practice as far as possible. ture of the economy, thereby reducing the amount of investment carried out. cross-trading (D4) A method of disposing of all the goods a seller offers in a market by selling the same good at different prices throughout a trading day, with prices falling towards the end of the day. crowding hypothesis (J2, J7) The view that DISCRIMINATION occurs because some workers are crowded into the few occupations lacking barriers to entry. Women’s wages, for example, have been depressed by an excess supply to the few jobs traditionally available for women. Both John Stuart MILL and EDGEWORTH used this model of discrimination. See also: occupational segregation crowding in (E2) Public expenditure which stimulates pri- References vate sector investment. Carlson, K.M. and Spencer, R.M. (1975) ‘Crowding out and its critics’, Federal Re- See also: crowding out 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

C share (G1) York and London: Monthly Review A Chinese stock market share owned only Press. by state-owned enterprises. It is denomi- cum dividend (G2) nated and payable in either Chinese or A stock exchange security with the entitle- foreign currency. ment to receive an imminent dividend. cultivated capital (E0, Q0) A hybrid form of CAPITAL combining hu- cumulative multistage cascade system man-made and NATURAL CAPITAL, e.g. food, (H2) wood and natural fibres. A sales tax on the gross value of a commodity at each stage of production. It cultural economics (Z1) does not allow a rebate of taxes paid at The analysis of the demand for and earlier stages of production. This tax was production of literature, music, opera, in force in West Germany until the end of drama, painting and sculpture. The pecu- 1967, in Luxemburg until the end of 1969 liarities of the labour market for these and in the Netherlands until the end of performers and producers are analysed 1968. and the role of public subsidies considered. cumulative preference share (G1) see References preference share Baumol, W.J. and Bowen, W.G. (1966) The Economic Dilemma, New York: The cumulative security (G1) Twentieth Century Fund. A stock exchange security which accumu- Peacock, A. and Rizzo, I. (1994) Cultural lates unpaid interest or preference divi- Economics and Cultural Policies, Dor- dends so that the holder does not suffer drecht: Kluwer Academic. from a year of poor profitability. In return Ruskin, J. (1857) The Political Economy of for this greater security of income, many Art, London: Smith, Elder. cumulative PREFERENCE SHARES are without Cultural Revolution (N0) voting rights. A change in the organization of the Chinese society and economy in the late currencies of the world (F3) see 1960s and 1970s. This revolution chal- Appendix A lenged the DIVISION OF LABOUR previously currency (F3) practised, especially by breaking down the The official money currently circulating in division between the town and country- a country and available for immediate use side. Revolutionary factory committees as a medium of exchange. It can take the were set up to implement changes. These form of coins, BANKNOTES and, in a broader included using five-year plans only as sense, BANK DEPOSITS. Currencies are called general guidelines, requiring administra- by various names, the most popular being tors to work two or three days per week dollar, franc and kroner. The value of a in manual work and setting up of work currency is regarded as an overall indica- teams involved in matters as diverse as tor of world opinion about that country’s production planning, assigning production economy. Apart from the use of prudent tasks, establishing safety regulations and fiscal and monetary policies to boost managing welfare funds. Mass action was confidence in a currency, there are other used to unify the working class. ways of making a currency attractive. A References central bank can produce beautiful bank- Bettelheim, C. (1974) Cultural Revolution notes, offer CONVERTIBILITY into another and Industrial Organization in China. currency or raise its interest rates to Changes in Management and the Divi- encourage foreign holdings of that cur- sion of Labour, trans. A. Ehrenfeld, New rency. A few small countries – Luxemburg, © 2002 Donald Rutherford

Panama and Liechtenstein – do not have See also: J-curve; Marshall–Lerner condi- their own currencies. tion See also: coinage currency market (F3) see foreign exchange market currency appreciation (F3) A rise in the international value of a currency reform (F3) currency. If, for example, more French Replacing an existing currency which has francs are exchanged than previously for lost its value with a new currency. Ger- the same amount of US dollars, the dollar many after the First and Second World has appreciated. Wars provides good examples of this. On an appointed day, holdings of the old currency basket (F3) currency are replaced by the new at a A combination of currencies to produce a particular exchange rate. The intention of common unit, e.g. the ECU. The values of such reform is to restore confidence in these currencies are weighted, e.g. by the money used by a state. In some shares in world trade or the gross national extreme cases where a currency has been products of the countries participating. severely devalued, it has changed its name, e.g. in Peru the sol de oro became currency cocktail (F3) the inti. A mixture of contributing currencies, e.g. currency revaluation (F3) the ECU or SDR. A deliberate increase in the price of a currency depreciation (F3) currency with a fixed exchange rate. This A fall in the international value of a is undertaken to reduce a balance of currency as less of another currency is payments surplus. Revaluation is often exchanged for one unit of one’s own. urged by countries in deficit to enable Residents of one country using the cur- them to compete more easily in interna- rency in other countries will have their tional markets. As a consequence of a purchasing power per unit of the currency revaluation, a CENTRAL BANK suffers losses reduced. Depreciation can occur very ra- from the fall in value of its foreign pidly in foreign exchange markets in reac- exchange holdings: taxpayers ultimately tion to bad news about the state of the bear these losses as central banks are economy issuing the currency. usually owned by governments. currency risk (F3) currency devaluation (F3) The possibility of suffering a financial loss A fall in a FIXED EXCHANGE RATE which through holding a currency which falls in reduces the value of a currency in terms value. Supporters of the EURO argue that of other currencies. The pound, for exam- one of the principal arguments for mone- ple, was devalued in 1949 from US$4.03 to tary union is the reduction in this type of US$2.80 and in 1967 from US$2.80 to risk. US$2.40. The aim of devaluation is to improve the balance of payments CURRENT currency run (G2) ACCOUNT. The change in the exchange rate A great increase in the public’s demand for by raising import prices and lowering cash because of the belief that other forms export prices will reduce imports and of finance, including CREDIT CARDS, will be increase exports, if there is a price-elastic ineffective. At the time of the beginning of demand for both and the possibility of the new millennium, 1 January 2000, many diverting production to exports and sub- believed that only coins and banknotes stitutes for imports by reducing domestic were reliable at a time when widespread expenditure. computer failures were possible. © 2002 Donald Rutherford

Currency School (B1, N2) consist of stock in trade, work in progress, A group of UK economists who, following debts owed to the firm, readily realizable RICARDO, believed that the note issue investments, bills receivable, prepayments, should be convertible and strictly deter- cash at the bank and in hand. mined by the amount of gold possessed by See also: current liabilities the Bank of England. The leaders of the school, Robert TORRENS and Samuel LOYD current cost accounting (M4) (later Lord Overstone), convinced Prime A form of accounting which includes Minister Sir Robert Peel of their theory – adjustments for the effects of inflation. hence the BANK CHARTER ACT 1844 which was The UK’s Statement of Standard Account- to provide the framework for many of the ing Practice 1980 required several adjust- operations of UK banking until 1980. ments to be made: to DEPRECIATION for fixed assets which had risen in price, to sales References figures for the higher cost of replacing Felter, F.W. (1965) Development of British stocks and to monetary working capital. Monetary Orthodoxy, 1719–1875, Cam- bridge, MA: Harvard University Press. See also: inflation accounting; Sandilands Report currency stabilization scheme (F3) An international arrangement by which a current deposit (G2) group of states agrees to link the exchange A bank deposit of a UK bank which is rate values of their currencies to gold, a payable on demand, now termed a SIGHT leading currency (e.g. the US dollar) or an DEPOSIT. artificial currency. The first scheme in the See also: demand deposit; time deposit post-1945 period was BRETTON WOODS; the major one in force at the beginning of the current liabilities (M2) twenty-first century is the EUROPEAN MONE- The debts of a firm payable within the TARY SYSTEM. current accounting period, usually twelve months, which include sums owed by currency swap (F3) creditors and bills payable. These are A capital market exchange of a loan in liquid if payable within a month; other- one currency for a loan in another, e.g. a wise, ‘deferred’. fixed interest dollar loan for a floating interest loan in Swiss francs. See also: current assets current account (F4, G2) current operating profit (M2) 1 A bank account of a UK CLEARING BANK The current value of output sold over a immediately available for making pay- period, less the current cost of related ments. In the past, bank accounts of inputs. this type never earned interest; some current population survey (J2) now do. In the USA they are known as A survey of US households undertaken by CHECKING ACCOUNTS or SIGHT DEPOSITS. the US Census Bureau. Its monthly sur- 2 A sub-account of a nation’s BALANCE OF veys are used to provide data on employ- PAYMENTS accounts consisting of visible ment, unemployment, wages and hours and invisible trade plus private and statistics. Also it provides annual figures official current transfers; capital flows on school enrolments, living arrangements, are in the separate capital account. annual incomes, poverty status and other See also: NOW account important socioeconomic variables. current assets (M2) current prices (C1) The assets of a firm convertible into cash A measurement of an income variable at within a period of twelve months. They the prices of the period for which data © 2002 Donald Rutherford

were collected; for example, consumption toms union, e.g. the movement of capital at current prices would show for years X, and population towards GROWTH POLES Y and Z the actual cost of purchasing such creating a dynamic effect of a union. goods and services at the prices ruling in years X, Y and Z respectively. cycles (E4) Regular fluctuations in a national econ- current purchasing power (M2, M4) omy from a peak through a downswing to The historic value of an asset adjusted by a trough and then an upswing back to the changes in a retail price index. peak. Few national economies are without See also: inflation accounting this instability. current ratio (M2) See also: boom and bust; business cycle; The ratio of CURRENT ASSETS to CURRENT Juglar cycle; Kitchin cycle; Kondratieff LIABILITIES of a firm. Also known as a cycle; Kuznets cycle; stop–go working capital ratio or 2:1 ratio following cyclical trade (F1) the rule of thumb that assets should be A type of INTRA-INDUSTRY TRADE, particu- twice liabilities, unless the seasonal or larly in agricultural products which are speculative nature of the firm requires traded north to south between the two more working capital. This is the principal hemispheres in one harvest and south to measure of the LIQUIDITY of a firm. north in the other part of the year. customize (L2) To modify the standard design of a CON- cyclical unemployment (J6) SUMER DURABLE by minor changes in its Recurrent unemployment occurring at appearance or functions to allow its owner particular phases of the business cycle, to express his or her personality, e.g. starting with the downturn from a boom. replacing small car/automobile wheels by This unemployment is caused by a defi- larger ones. ciency of AGGREGATE DEMAND and is associated with a fall in the number of job customs union (F0) vacancies. A group of countries with a COMMON EXTERNAL TARIFF but with free trade cyclical variations (C1) amongst themselves and free movement Movements in a TIME SERIES brought about of labour and capital. The EUROPEAN COM- by the BUSINESS or TRADE CYCLE. These MUNITY is a major example of such an components of changes in the values of a arrangement. Many theories about cus- variable can be removed from raw data by toms unions are based not only on how first removing seasonal variations by mak- free trade based on COMPARATIVE ADVANTAGE ing a SEASONAL ADJUSTMENT and then divid- is beneficial but also on LOCATION THEORY to ing the adjusted data by corresponding understand the changes within the cus- trend values. © 2002 Donald Rutherford

D D (G1) prominence to insignificant economic re- A SECURITY of questionable value according lationships. to the rating agency Standard & Poor. David Hume Institute (H0) See also: AAA; BBB; BB; Q DDR 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

Economic Forum is held annually in 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 dawn raid (G1) tariffs. The size of the deadweight loss A method of acquiring the shares of a depends on the ELASTICITY of demand or company popular in London in the early supply. 1980s. A company was taken over by rapid purchase of shares at the beginning of the Deane, Phyllis Mary, 1918– (B3) working day. Since shares were acquired at Educated at Glasgow University. Research different prices, the International Stock officer at the National Institute for Eco- Exchange Council has now regulated this nomic and Social Research from 1941 to technique. 1945, at the Colonial Office from 1946 to 1949 and at the Department of Applied days of grace (G0) Economics, Cambridge University, from The extra days after a debt, e.g. an 1950 to 1951. Fellow of Newnham Col- insurance premium, is due in which the lege, Cambridge, from 1961 to 1983 and debtor is allowed to pay. professor of economic history from 1981 day trade (G1) to 1982. She has produced several works The purchase and sale of a stock market on colonial national income accounting security in a margin account within the and the celebrated The First Industry same day. Also known as daylight trade. Revolution (Cambridge University Press, 1965) and The Evolution of Economic Ideas See also: bed and breakfast (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 See also: 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 immediate debiting of a bank account at the time of purchasing goods or services; an ‘electronic 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) Whatever the financial success or failure ´ ´ A French emigre to the USA in 1948, of an enterprise the commitment to servi- educated in mathematics in Paris and cing the debt remains. It is contrasted with subsequently professor at Chicago, Yale EQUITY finance. and Berkeley (since 1960) Universities. With Arrow in 1954, he used topological debt illusion (H0) methods to prove the existence of GENERAL Voters’ lack of awareness of the cost of EQUILIBRIUM. His Theory of Value: an Axio- public sector expenditure being financed matic Analysis (1959, 1971) produced a by borrowing rather than taxation. They more sophisticated exposition of competi- cannot perceive correctly the present value tive price theory, using set theory and of future benefits in the public sector topology. In 1983 he was awarded the because of imperfect information, with NOBEL PRIZE FOR ECONOMICS. His work is the consequence that a larger amount of theoretical rather than empirical in nature. public expenditure is approved. References See also: fiscal illusion; renter illusion Debreu, G. (1983) Mathematical Economics: debt-led growth (O4) Twenty Papers of Gerard Debreu, Cam- Economic development financed by bor- bridge: Cambridge University Press. rowing, usually from foreign countries. debt (G0, M2) This turned out to be a disastrous policy The liabilities of a firm, a government or a in the 1970s leading to the THIRD WORLD DEBT PROBLEM. household. A company’s debt often takes the form of fixed interest DEBENTURES, debt neutrality (G0) cumulative non-voting preference shares Non-responsiveness of a portfolio of in- and short-term bank loans. A government vestments to changes in the mixture of has BILLS as short-term debt and long-term taxes and borrowing used by a government debt issued as BONDS. A household’s debts to finance the public sector’s real spending include bank loans and liabilities incurred programme on goods and services. to purchase property and consumer durables. debt policy (H7) The course of action taken to manage a debt contract (G0) country’s NATIONALDEBT. The official approa- An agreement to lend money. ch often adopted is to maintain market debt–equity swap (F3, G2) conditions so as to maximize the present The exchange of a fixed interest debt for and future demand for government debt, an equity shareholding. Countries with but such a policy stance may be in conflict large debts to Western banks have been with credit/interest rate policy. offered this solution to their indebtedness. Previously, swaps took the form of banks debt ratio (G0) see gearing giving loans to companies wanting to debt restructuring (G0) make an investment in a debtor country. Changing the MATURITIES of the debts of a Fixed interest debt has also grown in government or a firm so that it is easier to Third World countries because of their service them. Restructuring often takes the lack of developed stock markets. form of lengthening the maturity of debt. See also: securitization It is allowed by creditors who would otherwise have little prospect of receiving debt finance (G2) interest and repayment of the PRINCIPAL. Short- or long-term fixed interest finance that does not involve the transfer of own- debt security (G0) ership but usually requires collateral. A loan made by an investor to an issuer © 2002 Donald Rutherford

who agrees to repay the debt at a specified arranged in order of magnitude by divid- date and to pay interest. These securities ing it into ten equal parts. The first, or are issued by both governments and cor- lowest, decile is sometimes used as a porations and can be linked to an EQUITY benchmark for calculating LOW PAY. issued by a financial intermediary. See also: lower quartile; median; percen- debt service indicator (G0) tile; upper quartile A measure of the ability of a borrower to meet capital and interest payments on a decimalization (E5) debt. Indicators used include the debt A change in the currency of a country so service ratio (interest and capital repay- that the basic unit is divisible into ten ments due divided by export earnings), the parts. The French franc and US dollar cash flow ratio (current account surplus have been divided into a hundred cents minus interest payments divided by export since the eighteenth century and the Aus- earnings), and the solvency ratio (the tralian dollar since 1966. In the UK in percentage of a country’s export earnings 1971 the pound, previously divisible into which it would have to devote to debt twenty shillings or 240 pence, was made servicing to keep its total debt–export equivalent to 100 new pence. It is feared ratio on a declining trend). that this type of currency change leads to consumers losing their PRICE PERCEPTION debt sustainability (F4) and unwittingly accepting price increases. The calculation of the projected earnings However, the quotation of prices in old from exports relative to the cost of servi- and new forms reduces this disguised cing the external debt of a country. inflation. See also: debt trap decision cycle (D0, E6) debt trap (G0) The recurrent round of economic decisions The consequence for a government, or an made by national governments and other individual, of borrowing at a rate of economic agents. Exchange rate decisions interest greater than the rate of growth of have to be made several times a day; many its income causing its current expenditure commodity prices and interest rates are on items other than debt servicing to be changed weekly; tax changes, wages and increasingly reduced. product prices mainly annually. Major investment decisions are made infre- decelerator (H3) quently. A fiscal change, e.g. a cut in public expenditure or an increase in taxation, decision variable (C6) see choice variable which counteracts the expansionary effects deconcentration (L1, L4) of the investment ACCELERATOR. 1 Dispersal of an industry over a wider decentralized market economy (P0) area. An ECONOMY in which economic agents 2 The break-up of an industry dominated below the level of central government take by a few firms. This has occurred under major investment, production and pricing ANTITRUST legislation. decisions. Allocation is according to mar- decreasing returns (D2) see returns to ket conditions rather than planning tar- scale gets. dedicated budget (H6) See also: centrally planned economy; eco- A budget which permits the use of funds nomic devolution for specified types of public expenditure decile (C1) only because of strict legislation. Much The value obtained from a set of data US federal budgeting has this inflexibility © 2002 Donald Rutherford

so further Congressional approval is This type of financing, also known as needed to make some public spending ‘pump priming’, has often taken the changes. form of PUBLIC WORKS. KEYNES recommended that the government’s current See also: earmarking; ringfencing expenditure budget should be in bal- deemed tax (H2) ance but that its capital budget could go US corporate tax concession equal to the into deficit in times when aggregate amount of total income already paid to a demand needed to be stimulated. foreign government. If a US corporation 2 The financing of a BALANCE OF PAYMENTS has paid $10 million tax abroad on a pre- deficit. tax income of $20 million when it remits See also: functional financing $5 million in dividends to the USA its deemed tax will be $10 million Â 0.5. deflation (E3, E6) 1 A reduction in AGGREGATE DEMAND. A deep discount bond (G1) deflationary policy of extra taxation A bond paying little or no interest which and lower public expenditure is chosen is sold below its redemption value. Inves- by governments to correct balance of tors make a capital gain by holding it to payments deficits and to lower the price the date of redemption and, in many cases, level. reduce their total tax burden as income 2 A fall in the average price level. taxation is often more punitive than capi- 3 The elimination of price increases from tal gains taxation. an index of production or consumption. deep integration (F1) Economic statisticians are frequently An association of national economies engaged in ‘deflating’ time series to going beyond FREE TRADE to a harmonizing separate real from nominal changes. of national economic regulations. Increas- deflationary gap (E6) ingly the EUROPEAN UNION has pursued this The excess of AGGREGATE SUPPLY over AGGRE- course to realize its original objectives. GATE DEMAND of a national economy. This de facto population (J1) overall situation of an economy at less A population count based on where peo- than FULL EMPLOYMENT has often encour- ple were on census night. This is a popular aged KEYNESIAN policies of deficit spend- form of census, especially in developing ing. countries. degrees of freedom (C1) See also: de jure population The number of observations in a sample minus the number of population PARA- deficiency payment (H2, Q1) METERS to be estimated by the sample. A form of governmental subsidy to farmers equal to the difference between the de-industrialization (L6) market price of an agricultural commodity The decline of a country’s manufacturing and the price set under an agricultural industry absolutely or relatively. This fall in policy. The purpose of the payment is to manufacturing activity is most noticeable achieve a desired level of farmers’ incomes. in employment, but a slower rate of growth, See also: intervention price 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

are especially concerned with this because be the greater convergence of economic of their view that what is productive is the performance through co-ordination of creation of goods, not of services. budgetary and monetary policies, possibly with a European Reserve Fund with re- References serves drawn from each participating cen- Blackaby, F. (1979) De-Industrialisation, tral bank. The second stage would provide London: Heinemann Educational. a medium-term framework for key eco- Bluestone, B. and Harrison, B. (1982) The Deindustrialization of America: Plant nomic objectives so that stable economic Closings, Community Abandonment, and growth could be achieved. Finally precise the Dismantling of Basic Industry, New rules of a non-binding nature would be York: Basic Books. created for annual budgets and the finance Rodwin, L. and Sazanami, H. (eds) (1989) of government activity, and a European Deindustrialization and Regional Eco- System of Central Banks for the formula- nomic Transformation: The Experience tion of a common monetary policy would of the United States, Boston and Lon- be set up. It was later agreed to let the don: Unwin Hyman. EURO replace national currencies in 2002. Saeger, S.S. (1997) ‘Globalization and the Deindustrialization: Myth and Reality See also: Eurofed; European Monetary in the OECD’, Weltwirtschaftliches Ar- System; European Monetary Union; Wer- chiv 133: 579–608. ner Report de jure population (J1) References The population permanently resident in a Committee for the Study of Economic and particular area. Monetary Union (1989) Report on Eco- See also: de facto population nomic and Monetary Union in the Eur- opean Community, Luxemburg: Office delinking (F1) for Official Publications of the Eur- The breaking off of trading and other opean Communities. relationships between Third World countries and Western countries. It is argued Delphi method (M2) that the benefits of such a course of action A method of business forecasting used by include an increased freedom to shape the many large US corporations consisting of development of that country, as well as panels of experts expressing their views of less chance of economic exploitation by the future and then revising them in the foreign investors. light of their colleagues’ views so that bias and extreme opinions can be eliminated See also: dependency theory See also: alpha stock; beta stock; gamma Delors Plan (F0) stock The plan of the European Community Committee for the Study of Economic and delta stock (G1) Monetary Union of 1989 chaired by Jac- The least traded stocks and shares which ques Delors, the President of the EUROPEAN are not quoted on the STOCK EXCHANGE COMMUNITY The European Community set . AUTOMATED QUOTATION SYSTEM. up the committee to propose a progression from the SINGLE EUROPEAN ACT 1986 to a demand (D0) SINGLE CURRENCY and a common MONETARY 1 The amount of factors of production, POLICY throughout the European Commu- or of their products, desired at a parti- nity. It was proposed that there should be cular price. This is shown graphically in three stages in the movement to the a DEMAND CURVE. committee’s goals. The first stage would 2 Total expenditure on a good or service. © 2002 Donald Rutherford

demandable debt instruments (G0) for cash, withheld taxes, withheld insur- Banknotes, current/checking bank ac- ance and TIME DEPOSITS whose notice of counts. withdrawal has expired. See also: NOW account demand curve (D0) A graph relating the quantity demanded demand for money (E4) of a good, service or factor of production The demand for cash or a bank deposit, to different prices of it. Although John not for an asset such as a stock certificate STUART MILL first had the idea of such or bond. KEYNES, by distinguishing the schedules, it was COURNOT and the MARGIN- TRANSACTIONS, PRECAUTIONARY and SPECULA- ALISTS who introduced them to economics. TIVE DEMANDS FOR MONEY revolutionized As the curve shows the relationship be- monetary theory. It is a broader theory tween only two variables, the CETERIS PAR- about the motivation for holding money IBUS assumption has to be made. Much than the QUANTITY THEORY OF MONEY that controversy has arisen about the nature of money is held solely for transactions the MARSHALLIAN DEMAND CURVE, particu- purposes. The demand for money by a larly the circumstances under which there representative individual can be consid- can be a movement along the demand ered in terms of MARGINAL UTILITY as being curve without affecting the assumption the result of balancing the imputed yield that real income is constant. The normal from holding it (the convenience and demand curve is assumed to be downward security of a cash holding) against the cost sloping because of the psychological belief in terms of interest income forgone. Dis- underlying the LAW OF DIMINISHING MARGINAL cussions of MONETARISTS’ views have led to UTILITY. many econometric studies of demand for money functions which have shown them to be less stable than originally asserted. References Fisher, D. (1989) Money Demand and Monetary Policy, Hemel Hempstead: Harvester Wheatsheaf. demand management (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 demand management have asserted that frequent changes destabilized the economy. See also: Giffen paradox; price–consumption curve See also: fine-tuning demand-pull inflation (E3) demand deposit (G2) INFLATION originating in EXCESS DEMAND. Funds held at a bank with a notice period KEYNES introduced this approach to infla- of less than seven days. They can take tion in his How to Pay for the War (1940). many forms, including CHECKING ACCOUNTS, The notion of an ‘INFLATIONARY GAP’, i.e. an certified cashier’s and officer’s cheques, excess of AGGREGATE DEMAND over AGGRE- travellers’ cheques, LETTERS OF CREDIT sold GATE SUPPLY at FULL EMPLOYMENT, was used © 2002 Donald Rutherford

to explain this phenomenon instead of the lowered productivity and increased labour view inherent in the QUANTITY THEORY OF costs. MONEY that inflation was caused by an See also: job control unionism increase in the money supply. The fullest form of demand-pull inflation is when dematerialization (G1) excess demand occurs in both factor and Paperless settlement of stock exchange product markets. transactions. See also: demand-shift inflation See also: paperless entry; Taurus demand-shift inflation (E3) demerger (L1) see unbundling INFLATION brought about by a structural change in an economy which permanently demerit good (H0) see merit bad raises demand. This is a consequence of demographic accounting (J1) increases in wages and in the prices of The tabulation of the population accord- capital goods in expanding sectors being ing to its characteristics and its states (at communicated to other sectors. It is a birth, death and place) at various dates. mixed form of inflation as changes in both demand and cost bring about the ultimate References increase in product prices. Stone, R. (1971) Demographic Accounting and Model-building, Paris: OECD. demarcation (J2, J5) Reserving work activities for a particular demographic transition (J1) occupation. Thus, for example, in an A model showing a society’s population engineering plant where there is demarca- changes through four stages (see the fig- tion, tasks will be assigned separately to ure). Stage 1 is the traditional society with mechanical, electrical and electronics en- little population growth, a stable popula- gineers. CRAFT UNIONS, anxious to protect tion with a high birth rate counteracted by the work available for their members, have an equally high death rate. Stage 2 shows been keen to follow this practice, especially rapid population growth because im- in the UK. The inflexibility in the use of proved health care has pushed down the labour brought about by this practice has death rate but the birth rate is still high. © 2002 Donald Rutherford

Stage 3 has a population decline caused by References couples desiring fewer children. Stage 4 is a Hayek, F.A. (1990) Denationalisation of mature society with a stable population Money - the Argument Refined, 3rd brought about by higher incomes and edn, London: Institute of Economic better education, where couples have about Affair. two children each. Many Third World Denison residual (O4) countries are still in the second stage; most Advances in knowledge and associated of the OECD countries are in stage 4. causes of economic growth. Denison dis- References covered this important growth determinant Caldwell, J.C. (1976) ‘Toward a restate- in his study of the USA and eight West ment of demographic transition theory’, European countries for the period 1950–62. Population and Development Review 2: References 321–66. Denison, E.F. (1967) Why Growth Rates Notestein, E.W. (1945) ‘Population: the Differ, ch. 20, Washington, DC: Brook- long view’, in T.W. Schultz (ed.) Food ings Institution. for the World, Chicago: University of Chicago Press. Denison’s law (E2) This states that the private sector saving of demography (J1) companies and households is a constant The study of the size and composition of proportion of national income. This rela- human populations, particularly their tionship held for twenty-five years but it is births, deaths and migration. Both histor- now being disputed. ical recording and projections of future References populations are calculated to provide the basis for economic and social planning. Denison, E. F. (1958) ‘A Note on Private Saving’, Review of Economics and Sta- See also: population census; Malthus; tistics, 40: 261–7. Petty department (M1, P1) References 1 Part of an economy or economic orga- Pressat, R. (1972) Demographic Analysis. nization. Methods, Results, Applications, London: 2 A branch of capitalist production, ac- Edward Arnold; Chicago: Aldine Ather- 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 The measurement of the relationship be- materials and buildings; Department II, tween socioeconomic variables and demo- consumer goods which reconstitute both graphic variables, e.g. between income the labour force and capitalists, contri- levels and interregional migration. buting to their well-being; Department III, luxury goods, weapons, which renew denationalized money (E4) neither constant nor variable capital. Money issued by a variety of private and foreign banks and not by a national dependency culture (D6, H2) government. This money is less likely to A society, or major part of it, permanently be debased. This diminution of the role of dependent on TRANSFER INCOMES because the state enables banks to benefit from the extensive provision of welfare benefits has inhibited work and individual effort. SEIGNORAGE. Several governments, including those of See also: debasing a currency; free bank- the USA and the UK, fear that benefits ing fix the poor in a perpetual state of relative © 2002 Donald Rutherford

deprivation. It is also argued that excessive dependency theory’, in S. Haggard (ed.) international AID can have the same effect The International Political Economy and on whole countries. the Developing Countries, Vol. 1, pp. 300–41, Aldershot: Edward Elgar. dependency ratio (I3, J1) The proportion of a population which has dependent economy (F0, P0) to be supported by recipients of FACTOR An economy closely linked with another, INCOMES. It is commonly measured as either through economic treaties (see CO- MECON) or through dependence on a nar- children under the age of 15 row range of exported goods. Many Third + adults over 64 World countries are dependent on a single Â 100 per cent export, e.g. Mauritius on sugar and Zaire number of adults in the labour force on copper. See also: branch economy The value of this ratio is large when persistently high birth rates have increased depletable externality (D0) the proportion of children in a population, An EXTERNALITY which by affecting one or much international emigration has left person affects others less, e.g. horse man- an old population. ure used in gardening. See also: grey society See also: pollution control dependency theory (O1) deposit account (G2) Exploitation theory applied to small coun- An interest-bearing bank account (UK) tries. A small country exporting agricul- which cannot be withdrawn without due tural commodities finds that the control of notice (in most cases, at least seven days). its economy, especially its trade, shipping, In the USA, such accounts are known as insurance, banking and port facilities, savings accounts or time deposits. passes to foreigners who are often associated with a local wealthy elite. The deposit base (E4, G2) economy suffers from the repatriation of Narrow money. profits and imports, both of which are detrimental to domestic industries. The See also: M0; M1 deterioration in local industry reduces industrial employment and pushes indi- deposit insurance (G2) genous workers into the subsistence sector. Insurance used to protect deposits held in In order to counteract the losses created banks and other financial institutions. In by dependency, these theorists recommend the USA, the major scheme has been the fast independent growth and the granting FEDERAL DEPOSIT INSURANCE CORPORATION of priority to basic needs. Critics argue which from 1933 insured the deposits of that the theory at best is applicable only to the member banks of the FEDERAL RESERVE some tropical colonies in the 1900–50 era, SYSTEM and of non-member banks choos- that it exaggerates the extent of profit ing to join. Instability in the banking repatriation and that it fails to establish a system of the USA in the 1990s put single optimal set of prices. deposit insurance under a great strain. Critics argued that insurance made banks References more reckless in their lending policies, Frank, A.G. (1978) Dependent Accumula- causing the financial difficulties which tion and Underdevelopment, London: insurance sought to avoid. Macmillan. Smith, T. (1995) ‘The underdevelopment See also: Banking Act 1979; Resolution of development literature: the case of Trust Corporation © 2002 Donald Rutherford

Depository Institutions Deregulation few years. Over the past 200 years, there and Monetary Control Act 1980 (G2, have been several depressions, especially in K2) the nineteenth century, in the economies US federal statute which increased fair of Western countries. The term is often competition in US banking by imposing used loosely to refer to a period of universal reserve requirements of 3 per extensive unemployment and business fail- cent for the first $25 million of deposits ures. The start of the 1930s is usually cited and 12 per cent of further deposits on as the major recent example of a depres- COMMERCIAL BANKS, mutual savings banks, sion in the strict sense. SAVINGS BANKS, SAVINGS AND LOAN ASSOCIA- See also: Great Depression; recession TIONS and CREDIT UNIONS. The FEDERAL RE- SERVE SYSTEM was empowered to demand References supplementary reserves of 4 per cent of Bernanke, B.S. (2000) Essays on the Great deposits for a maximum of ninety days Depression, Princeton, NJ: Princeton and allowed to charge for its services. NOW University Press. ACCOUNTS were legalized and many interest Hall, T.E. and Ferguson, J.D. (1998) The rate ceilings phased out. Great Depression: An international disaster of perverse economic policies, Ann See also: Hunt Commission Arbor: University of Michigan Press. deposit-taking business (G2) deprival value (M4) A COMMERCIAL BANK, or other financial A measure of the value of an asset to its institution, licensed to conduct financial owner; the lower of the replacement cost business according to the rules of a CEN- or ECONOMIC VALUE. TRAL BANK, e.g. the Bank of England. See also: Sandilands Report See also: Banking Act 1979 deregulation (K2, L5) depreciation (F3, M4) Abolition of governmental regulations, 1 The decline in value of an asset mea- especially for prices and the operations of sured by various accounting rules of publicly owned organizations, with the thumb. Under the straight-line method, aims of lowering prices through more the annual amount of depreciation is competition, and of stimulating the equal to a fraction of the capital ex- growth of small businesses. Examples of penditure (the value of an asset divided deregulation include the securities markets by its life). Other methods include the of New York and London, US airlines and ‘declining balance’ approach which UK buses. Deregulation of stock markets makes depreciation equal to a fraction occurred in the USA in 1975, in the UK in of the written-down value of the asset, 1986 and in Japan gradually in the mid- and the ‘sum of digits’ approach under 1980s. In banking the USA amended its which a fraction of the capital expendi- regulatory bank legislation in the DEPOSI- ture declines linearly over time. True TORY INSTITUTIONS DEREGULATION AND MONE- economic depreciation, the replacement TARY CONTROL ACT OF 1980 and the GARN–ST cost of physical wear and tear, is diffi- GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982, cult to calculate as capital markets are to remove ceilings on interest rates and to often imperfect. allow THRIFTS to diversify their financial 2 The fall in value of a currency under a activities, e.g. credit cards and commercial FLOATING EXCHANGE RATE regime. and industrial loans. Critics of deregulation argue that safety See also: currency appreciation suffers, industries are destabilized and depression (E3) there is less provision for underused ser- A fall in national output continuing for a 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. See also: economic devolution 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 See also: creative destruction 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 through a fall in the price of inter- SWAP, WARRANT, OPTION or FUTURE available 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) see currency devaluation 2 A function f(x) of x 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 See also: industrialization used to deprive the latter of welfare References benefits. Kitching, G. (1989) Development and Un- See also: Poor Laws; 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, domestic 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 development 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) Introduction to Differ- decrease, 50 per cent if there is no change ence Equations, New York: Wiley. in the overall number rising or falling, or 100 per cent if there is an increase over a differential tax incidence (H2) given time period. In the USA, Business The burden of one tax compared with Cycle Indicators, published from 1961, has another. measured diffusion for twenty-one eco- See also: tax incidence nomic indicators. differential theory of rent (D3) diffusion rate (O3) The theory of ANDERSON, RICARDO and The proportion of output of an industry others which asserted that the rent on land using a particular technique by a stated subject to DIMINISHING RETURNS arose from date, e.g. the percentage of the steel differences in fertility or location with no industry using technique X by 2000. This rent being paid on the least fertile or most is a major measure of technical progress distant land. As the margin of cultivation and of INNOVATION. High rates of diffusion is extended, the total amount of rent paid are encouraged by the possibility of cost increases. reduction and by energetic advisory and differentiated good (D0, M3) information services. A good appearing different from its mar- Dillon Round (F1) ket rivals by being sold under a brand The fifth round of tariff reductions, orga- name and packaged differently. Recogni- nized under the GENERAL AGREEMENT ON TAR- tion of this marketing device made a great IFFS AND TRADE, of 1960–1. Under it, the contribution to the formation of the the- USA agreed to a 20 per cent reduction in ory of MONOPOLISTIC COMPETITION. tariffs on 20 per cent of its dutiable See also: branding; brand loyalty; pro- imports. As the concessions were concen- duct differentiation trated on manufactures, the round had little effect on the exports of less devel- differentiated marketing (M3) oped countries whose industrialization was A marketing strategy with separate mar- at a low level. It was of far more impor- keting programmes for each product of a tance for bilateral deals between the USA firm. and industrialized countries. differentiated product (D0, L1) see diminishing marginal rate of substitu- product differentiation tion (D1) differentiation (C6, L1) This rule of consumer behaviour states 1 A major business strategy to acquire that at the same level of utility a consumer some MONOPOLY POWER by the differentia- will sacrifice decreasing amounts of good tion of products, or of their marketing Y to obtain extra units of good X. This is and distribution to the consumer. usually expressed as an INDIFFERENCE 2 A mathematical method of calculating CURVE. the derivative of a function; this is much References used in NEOCLASSICAL ECONOMICS. Hicks, J.R. (1939) Value and Capital, ch. 1, See also: branding; monopolistic compe- Oxford: Clarendon Press. tition; product differentiation diminishing marginal utility law (D1) diffusion index (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-sloping nature of the normal stances of a taxpayer and can have its DEMAND CURVE, to resolve the so-called incidence shifted to the producer. Direct WATER AND DIAMONDS PARADOX and to justify taxation is regarded as more equitable but redistribution from the rich to the poor. it is more difficult and expensive to collect. Although BENTHAM, SENIOR and JEVONS are See also: tax incidence noted for their clear exposition of this law, hints of it appeared in earlier economic direct cost (D0) writings. 1 A production cost directly attributable to the cost of producing one unit of a diminishing returns law (D2) particular output. The decline in output which occurs as 2 Variable cost. successive units of a variable factor of production are applied to a fixed factor. See also: indirect cost The most familiar example was the appli- direct factor content (M0) cation of increasing amounts of labour to The amounts of FACTORS OF PRODUCTION a fixed amount of land with the conse- used only in the last stage of production. quence that the MARGINAL PRODUCT of labour declined. This view of agricultural direct foreign investment (F2) production was central to much of CLASSI- 1 Investment in productive facilities by a CAL ECONOMICS, including RICARDO’s model foreign company, e.g. the purchase or of the economy. The US economist Henry building of factories. Charles Carey (1793–1879) was one of the 2 The purchase of stocks and shares few economic writers of the nineteenth which give a foreign company control century to argue that in a developing over existing real assets. economy cultivation can proceed from the least to the most fertile land bringing See also: multinational corporation; port- about increasing returns. folio investment See also: returns to scale direct–indirect taxes ratio (H2) A measure of the TAX STRUCTURE which References compares the yields from the various types Carey, H.C. (1848) The Past, The Present of tax to see their relative importance as and The Future, Philadelphia: Carey & sources of revenue. Hart. direct labour organization (L3) Dinks (J1) A department of a UK local authority Double income, no kids: US professional carrying out building, street cleansing or couple with a high joint income and no other activities itself rather than contract- dependants. ing them out to private sector firms. They were severely criticised for their low pro- direct and indirect taxation (H2) ductivity. In the 1980s, the UK govern- Two broad categories of taxation differen- ment began the replacement of direct tiated according to administrative arrange- labour organizations by private firms ments, incidence, or the characteristics of through COMPETITIVE TENDERING in an at- taxpayers. Income taxes, for example, are tempt to reduce the cost of local govern- paid directly to revenue authorities, can ment services. directly reduce taxpayers’ real incomes and be directly related to taxpayers’ character- directly unproductive profit-seeking istics. But an indirect tax, such as a sales activities (L3) tax, is indirectly paid by an individual Activities yielding pecuniary returns but through purchasing goods and services, is not producing goods or services. A major not directly related to the personal circum- 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 deducted. 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 commission. 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 direct tax (H2) see direct and indirect 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 See also: indirect utility function 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 See also: 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 See also: floating exchange rate 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

COMMERCIAL BILLS and CERTIFICATES OF DE- cial rate is based on the government’s POSIT.The twelve discount houses, forming view, which can be more long-sighted as the money market, act as a buffer between it attempts, in most cases, to take into the commercial banks and the BANK OF account the welfare of future generations. ENGLAND. Banks short of cash will recall money lent to the money market which discount window (E5) then has to discount bills to balance its US term for lending to depository institu- books. The Bank of England as LENDER OF tions by each of the twelve district FEDERAL LAST RESORT is always prepared to lend to RESERVE BANKS. From 1913 to 1916, this was discount houses, by discounting bills, in the only lending a FEDERAL RESERVE BANK order to preserve the liquidity of the could undertake. It is either adjustment banking system as a whole. credit to meet a temporary need for funds Curiously, many of these discount or extended credit to help banks subject to houses are now owned by clearing banks seasonal fluctuations, or accommodation who could easily abolish them by aban- to cope with special circumstances, e.g. the doning an agreement not to compete in effects of a change in the financial system. the money market which has existed since Other lending is by discounting eligible the 1930s: the banks prefer this unusual paper, e.g. a commercial or agricultural buffer between themselves and the Bank of loan made by the bank to a customer. England. Before 1980, such lending was only made to Federal Reserve member banks; now, discounting (D0, M4) under the DEPOSITORY INSTITUTIONS DE-REGU- A method used to value at the same date LATION AND MONETARY CONTROL ACT 1980, it is economic flows or stocks which have open to all depository institutions except originated at different dates. A typical use bankers’ banks which maintain transac- of discounting is to convert the expected tion accounts or non-personal time depos- future incomes from an asset to present its. Discount window loans are usually values using a DISCOUNT RATE. only a small proportion of bank reserves, See also: discounted cash flow e.g. less than 3 per cent in 1985. This lending can be used in MONETARY POLICY discount market (G1) instead of OPEN MARKET OPERATIONS. The money market specializing in transactions in short-term financial assets. References See also: short-term money market Mengle, D.L. (1986) ‘The discount window’, Federal Reserve Bank of Richmond discount market loans (G1) see Economic Review 72(3): 2–10. overnight money discouraged workers hypothesis (J2, J6) discount rate (D0, E4) The view that workers give up job search 1 The rate of interest charged by a CEN- activity because high unemployment rates TRAL BANK to lower level financial in- and a lack of hiring by businesses make it stitutions (usually COMMERCIAL BANKS) unlikely that they will succeed in gaining for discounting their bills, i.e. lending employment. Lack of search loses them them money, often when acting as the the status of being unemployed and so LENDER OF LAST RESORT. they drop out of the LABOUR FORCE. 2 The rate used for discounting future values to the present. In COST–BENEFIT ANA- See also: additional worker hypothesis LYSIS there is a distinction between a private and a social rate of discount. A discrete variable (C6) private rate of discount reflects the time A variable which can take only some of preference of private consumers; a so- the values between two given values, e.g. © 2002 Donald Rutherford

the number of countries in the world can rial fatigue, increases in the marginal cost be 50, 100 or 200 but not 1.8. of attracting more customers and rising factor prices – how many of these ‘causes’ See also: continuous variable are valid depends on how strictly a dis- discriminating auction (D4) economy is defined. A form of sale with discrimination based See also: economy of scale on price. The bids are ranked from the highest. Each bidder pays what has been disembedded economy (P0) bid until the good or service auctioned is An ECONOMY in which economic relation- sold out. ships dominate the social relationships of kinship and polity. This phenomenon, ob- discriminating monopoly (L1) see price served by the GERMAN HISTORICAL SCHOOL, is discrimination followed today by an emphasis on markets. discrimination (J7) disembodied technical progress (O3) 1 Unfair and unfavourable treatment of a An increase in PRODUCTIVITY which occurs group of workers or other persons. without the installation of new capital 2 Setting different wages for workers with goods. Examples include organizational the same productivity but different per- changes or LEARNING-BY-DOING. sonal characteristics, i.e. sex, age or race, or refusing to hire them. See also: embodied technical progress disequilibrium (D0, E3) Different schools of economics have chosen 1 An economic system in a state of EXCESS different approaches to the issue: NEOCLASSI- DEMAND or EXCESS SUPPLY. CAL economists such as BECKER examined 2 The state of an economic system whose how a taste for discrimination affects the key variables continue to fluctuate demand for each group, while others have around an EQUILIBRIUM or an equili- placed discrimination in the context of brium growth path. Expectations of wider concerns such as class conflict. economic agents or lags in the system See also: ageism; horizontal discrimina- can cause this. tion; racial discrimination; sexual discrimi- disequilibrium economics (D0, E0) nation; vertical discrimination The analysis of non-clearing markets or References national economies with less than FULL Becker, G.S. (1971) The Economics of EMPLOYMENT. In macroeconomics, the DY- Discrimination, Chicago: University of NAMIC MULTIPLIER shows how disequili- Chicago Press. brium occurs in the economy as a whole; Marshall, R. (1974) ‘The economics of in the MULTIPLIER–ACCELERATOR MODEL racial discrimination: a survey’, Journal changes in the national income are stu- of Economic Literature 12: 849–71. died. KEYNESIAN ECONOMICS is believed to be Reich, M. (1981) Racial Inequality, Prince- essentially a theory of disequilibrium ton, NJ: Princeton University Press. rather than a theory of GENERAL EQUILI- diseconomy of scale (D2) BRIUM as NEO-KEYNESIANS would assert. A rise in average costs as a consequence of References an increase in output. This is visible in the Barro, R.J., Howitt, P.W and Grossman, positively sloped part of the AVERAGE COST H.I. (1979) ‘Macroeconomics: an apprai- curve. Early writers on the subject attrib- sal of the non-market clearing paradigm’, uted such diseconomies to the managerial American Economic Review 69: 54–69. problem of co-ordinating the activities of Hey, J.D. (1981) Economics in Disequili- large enterprises. Later writers noted other brium, Oxford: Basil Blackwell. sources of diseconomies, including mate- Muellbauer, J. and Portes, R. (1979) © 2002 Donald Rutherford

‘Macroeconomics when markets do not disguised unemployment (J6) clear’, in W. Branson (ed.) Macroeco- That part of the LABOUR FORCE consisting nomic Theory and Policy, ch. 16, New of employed workers with a low produc- York: Harper & Row. tivity making little contribution to the Samuelson, P. (1939) ‘Interactions between GROSS DOMESTIC PRODUCT. A low level of multiplier analysis and the principle of acceleration’, Review of Economic Sta- investment per worker, or the reluctance tistics 21(May): 75–8. of labour to move to more productive and higher paid work in the more modern disequilibrium growth theory (O4) sectors of an economy, can cause this A dynamic theory with KEYNESIAN founda- unemployment. Countries or regions with tions accounting for the course of change large agricultural sectors, e.g. less devel- of a national economy. This growth pro- oped countries and southern regions of cess can be initiated by disequilibrium in a the EUROPEAN UNION, often have a great deal factor or product market or through the of this sort of unemployment. non-equality of aggregate demand and disincentive effect (H2, H3) aggregate supply. The discouraging effect of a tax on the References supply of effort or the number of persons Ito, I. (1980) ‘Disequilibrium growth the- available for work. The best example is an ory’, Journal of Economic Theory 23: income tax with a high marginal rate. This 380–409. can result in a BACKWARD-BENDING LABOUR SUPPLY CURVE. disequilibrium money (E4) The mismatch between the demand for See also: incentive effect and supply of money brought about by disinflation (E3) lags that prevent SUPPLY-SIDE SHOCKS from The reduction of inflation to a very low affecting the demand for money. These level. A major way of attempting to reach shocks in money and credit markets lead this goal is to lower AGGREGATE DEMAND by to asset prices overshooting their equili- the use of MONETARY and FISCAL POLICIES. brium level. disinflation cost (E3, E5) disequilibrium price (D4) The loss of output resulting from a MONE- A price that fails to equate demand with TARY POLICY seeking to reduce inflation by a supply. In the figure, Pe is the equilibrium reduction in aggregate demand, often price. Above Pe prices will be determined through increasing interest rates. by the demand curve; below it, by the disintermediation (G2, M2) supply curve. 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 argued that as utilitarianism had been me- chanically applied and as humans were © 2002 Donald Rutherford

increasingly connected only by cash pay- tion a major concern. ments, fundamental spiritual values were 2 The distribution of one type of income being neglected. between persons or between groups. 3 The last stage of production in which See also: cash nexus goods or services reach final consumers. References See also: labour’s share of national in- Rutherford, D. (1996–7) ‘Dismal Carlyle come; post-Keynesians andthe‘‘DismalScience’’’,The Carlyle So- ciety Papers New Series, No. 8: 24–36. distributional/social weights (C1) The increased weighting of one social or disposable income (D3, H2) income group in COST–BENEFIT ANALYSIS. This 1 PERSONAL INCOME plus TRANSFER INCOME gives a group more significance: for exam- net of all taxes levied on incomes. ple, if the LOWER QUARTILE of an income 2 The amounts of money a person can distribution is given a weight of 4 but the spend or save in a given time period. UPPER QUARTILE only 1 then costs and See also: final income benefits affecting the lowest income group will be regarded as four times as impor- dissaving (E2) tant as those of the top group. 1 The spending of accumulated savings. 2 A net increase in borrowing. disturbance term (C1) A variable, positive or negative in value, or distortion (D6) ERROR term which indicates the extent to The failure to reach a welfare optimum which the dependent variable of a regres- because the social marginal cost of produ- sion equation falls short of the central cing goods is less or more than the social value of the independent variables. In the marginal benefit of consuming that good. equation I = a(Y À Y1) + u, I is net WELFARE ECONOMICS is much concerned with investment, Y is this year’s income, Y1 is distortions when analysing taxation and last year’s income and u is the disturbance monopoly. term showing the extent to which I is more distortionary tax (H2) or less than the central value of a(Y À Y1). A biased tax causing inefficiencies. Many This term reflects the random element in specific taxes, e.g. those levied on the economic relationships. products of one industry but not on those disutility (D0) of another, can change the post-tax alloca- A negative satisfaction, e.g. pain, tiredness, tion of demand. unhappiness. Study and work supposedly distribution (D3, L8) create disutility, justifying higher earnings 1 The division of the NATIONAL INCOME to better educated and more productive among the FACTORS OF PRODUCTION in the workers. Consumption of a good or ser- form of WAGES, PROFITS, INTEREST and vice, according to the law of DIMINISHING ´ RENT. TURGOT, in his Reflections sur la MARGINAL UTILITY can continue to the point , formation et la distribution des richesses where UTILITY turns into disutility, e.g. a (1766), was probably the first economic few glasses of claret can give a person writer to examine the distribution as a utility, a few litres severe disutility. A BAD separate issue. Despite John Stuart produces disutility. MILL’s attempt to separate the laws of See also: labour disutility theory production from the laws of distribution, there has always been an intimate divergence indicator (F3) relationship between distribution and The margin by which a currency in the other economic theories. Socialist econ- EXCHANGE RATE MECHANISM can diverge from omists have made the study of distribu- its central or PAR VALUE. This is Æ2.25 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 VALUE 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 See also: conglomerate share Âdividend (%) yield (%) = Â 100 diversification cone (F1) market price Â100 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) See also: money supply 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

dividing a task into its component opera- provoking a long-running controversy tions. Although writers as early as XENO- amongst Marxists. He had a deep interest PHON had mentioned the principle, SMITH, in the history of economic thought, colla- with his famous example of pin making, borating with SRAFFA in the editing of RI- made it a central explanation of the CARDO’s works and suggesting that growth process, He noted that such spe- economic theory descended from QUESNAY cialization would save time as there would through RICARDO and MARX to LEONTIEF and not have to be frequent changes from one SRAFFA. Current policy issues also con- activity to another, that workers would cerned him: he was able to make use of a become more dextrous and that the analy- Ricardo–Marx two-sector model to make sis of jobs would make possible the intro- policy recommendations for less developed duction of machinery. However, he was economies. aware that workers would become dull References through repetitive tasks – a Smithian point often misinterpreted by Marxists: division Dobb, M.H. (1946) Studies in the Develop- ment of Capitalism, London: Routledge. of labour in itself can produce ALIENATION —— (1966) Soviet Economic Development amongst workers, whether or not they own since 1917, London: Routledge. the capital they use. —— (1978) ‘Maurice Dobb Memorial Issue’, Cambridge Journal of Economics division of thought (D2) 2: 2. Specialization in the processing of information and acting upon that data. Such dogs of the Dow (G1) specialists will undertake either strategic An approach to investment based on using planning or executive operations. dividend data. At the beginning of the References year, US stocks listed by Dow are ranked Arrow, K.J. (1979) ‘The division of labour by dividend yield from the highest to the in the economy, the polity and society’, lowest and then an equal amount is in G.P. O’Driscoll (ed.) Adam Smith and invested in each of the top ten stocks. The Modern Political Economy: Bicentennial following year the procedure is repeated Essays on The Wealth of Nations, Ames, and the stocks whose rank has fallen IA: Iowa State University Press. below the top ten are sold. do-able (O2) dole bludger (J6) A development strategy emphasizing pro- An Australian unemployed person who jects and methods wanted by local popula- does not seek work but enjoys a life of tions as they are more likely to be leisure financed by social security benefits. maintained in the long term. Abolition of unemployment benefit was Dobb, Maurice Herbert, 1900–76 (B3) intended to force such persons into re- UK Marxist economist, educated at Cam- training or job search. bridge and the London School of Eco- See also: job-seeker’s allowance; New nomics, and a fellow of Trinity College, Deal Cambridge, from 1924 to 1967 and Reader in Economics from 1959. Throughout his dollar (F3) academic career his Communist Party The name of the USA’s currency since ideological stance informed his views and 1785. Other countries, including Hong his writings. As a defender of Soviet-style Kong, Canada and Australia, have fol- economic planning, he participated in lowed the US lead. The term is derived major debates with MISES and HAYEK. His from the Bohemian thaler introduced in analysis of capitalism defended the Marx- 1517. ‘Yen’ (Japanese) and ‘yuan’ (Chi- ian interpretation of economic history, nese) both mean dollar. © 2002 Donald Rutherford

See also: currencies studies of taxation and comparative economic systems. dollarization (F3) 1 The use of the US dollar for domestic References monetary transactions outside the USA Domar, E.V. (1957) Essays in the Theory of because the local currency is depreciat- Economic Growth, New York: Oxford ing rapidly through high inflation. In University Press. 1904 Panama abandoned its own currency for the dollar, as did Ecuador in Domei (J5) 2000 and El Salvador in 2001. Japanese Federation of Labour. This la- 2 The abandonment of a national cur- bour union national federation merged rency in favour of the US dollar. In with Churitsuroren to form Rengo in countries such as Ecuador a rapid 1987. Domei had 2.09 million members decline in the value of its currency, the in 1987. sucre, required this drastic economic domestic absorption (E2) reform. A nation’s total use of its own output of See also: dual exchange rate goods and services in consumption and investment. dollar overhang (F3) US dollars held outside the USA in the See also: absorption approach 1960s in excess of the gold backing for them. domestic banking system (G2) The interconnected banking institutions of See also: monetary overhang a particular country. These receive deposits from the public, lend at home and dollar standard (F3) abroad and effect the transfer of funds. The basis of value for INTERNATIONAL MONE- As the ultimate guarantor of the LIQUIDITY TARY FUND currencies, the US dollar, under of a banking system, a national CENTRAL the BRETTON WOODS system (1968–73), a BANK operates and, to a large extent, successor to the GOLD STANDARD. Unlike attempts to control all WHOLESALE and RE- linking currencies to gold, this standard TAIL BANKS. did not require dollar holdings as a back- The greater sophistication attributed to ing for other currencies, thus making it a the banking systems of Western countries less potent system of international money. is a product of their long period of relative domain (C6) freedom to develop a variety of financial The set of values a variable can take. instruments, unlike the MONO-BANKS of Soviet-type economies whose role was See also: continuous variable; discrete limited through subservience to a system variable of central planning. Domar, Evsey David, 1914– (B3) The Second World War created an A founder of modern economic growth excessive volume of public sector debt theory. Educated at the Universities of which made possible a post-war expansion California (Los Angeles), Michigan and in bank advances to meet the demands of Harvard. Early in his career he was an private sector borrowers. Other changes economist with the FEDERAL RESERVE Board have been a widening of the range and of Governors and then at the COWLES COM- activities of COMMERCIAL BANKS, including MISSION, and professor at the Massachu- new techniques and financial products, setts Institute of Technology from 1958 to particularly in the UK and the USA. In 1972. He is best known for reviving the USA in the 1960s, for example, there economic growth theory in the HARROD– was a switch from asset management to DOMAR MODEL; his other works include 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 See also: banking; derivative organized in this way. References See also: advanced organic economy; Lewis, M.K. and Davis, K.T. (1981) Asiatic mode of production; cottage in- 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 See also: competitive fringe 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 See also: monetarism; money supply unofficial strikes to enforce workers’ demands. 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 OPPORTUNITY COST 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 See also: shop steward 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’ Associations 1965–8 (1968) savings are made and the income from Report, London: HMSO, Cmnd 3623. the savings when they are invested. Many dose–response function (I1, Q0) income tax systems have this feature. The relationship between a dose of pollu- double-taxation relief (H2) tion and the physical consequences, in- A tax credit allowed against the tax pay- cluding mortality, morbidity, crop yields able by a resident of a country on account and material deterioration. of income already having been taxed References abroad, e.g. if a US citizen has already Lave, L. and Seskin, E. (1967) Air Pollu- been taxed in France, then that will be tion and Human Health, Baltimore, MD: taken into account when calculating that Johns Hopkins University Press. person’s liability for paying US taxation. Ridker, R. (1967) Economic Costs of Air This relief is only possible if there is a Pollution, New York: Praeger. tax treaty between the two countries concerned or between states in a country, such dot com company (L2) as the USA, with a federal constitution. In A firm which markets its goods and the USA where the rate of INDIVIDUAL IN- services from its website on the Internet. COME TAX can vary from state to state, a double counting (M4) person who resides in one state and works Recording something twice with the con- in another can gain relief by being given sequence that the total resulting from tax credits by one state. aggregating individual items is incorrectly See also: deemed tax too large. In NATIONAL INCOME accounting, double counting is a crucial problem to be Douglas Amendment 1965 (G2) avoided. It is essential, for example, to An amendment to the BANK HOLDING COM- ensure that TRANSFER INCOMES are not PANY ACT (USA) prohibiting bank holding added to FACTOR INCOMES as transfer in- companies from acquiring banks in other comes are derived from factor incomes. states. double discounting (M4) Douglas, Paul Howard, 1892–1976 (B3) A calculation which twice takes into ac- A US economist who was taught, and count inflation thus producing too small a much influenced, by John Bates CLARK at net present value. Double discounting is Columbia University. For most of his only approved when it is used to correct academic career, i.e. 1920–4 and 1927–48, for both inflation and time preference. he was a professor at Chicago. As US double factorial terms of trade (F1) Senator for Illinois in 1948–66, he fought NET BARTER TERMS OF TRADE multiplied by the for family allowances, old-age pensions ratio of the productivity change index for and pro-union legislation. one country’s export industries and the In 1928, he used MARGINAL PRODUCTIVITY THEORY as the foundations of the COBB–DOU- productivity change index for a foreign GLAS PRODUCTION FUNCTION, the leading ap- country’s export industries. This measure of the TERMS OF TRADE indicates the ex- proach on the subject until 1961. His early change rate between domestic and foreign work on wages included a seminal study of LABOUR FORCE PARTICIPATION relating wages factor services. to participation within major US cities See also: single factorial terms of trade and attempting to vindicate MARGINAL PRO- DUCTIVITY THEORY . double switching (D0) see reswitching References double taxation of savings (H2) Douglas, P.H. (1934) Theory of Wages, Taxing both the income out of which 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 See also: laundering money 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- See also: Standard & Poor 500 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 See also: Big Bang 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 production or retailing. dual economy (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 See also: multiple exchange rate © 2002 Donald Rutherford

dual federalism (H7) or avoiding the costs of storing unsold A loose form of federalism in which the goods. Although in some countries the federal and state levels act separately but practice is encouraged, and made possible in parallel. This traditional view of the US by means of government subsidization, Constitution implies that federal govern- there is much opposition to dumping, e.g. ment is mainly concerned with interstate the GENERAL AGREEMENT ON TARIFFS AND commerce with production being the con- TRADE has an International Dumping Code cern of the states. and the USA passed the Anti-Dumping Act in 1921. In some cases, dumping can See also: co-operative federalism; fiscal only be prevented by retaliatory acts such federalism; new federalism 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 See also: 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) See also: Bertrand duopoly model; Cour- A method of selling which consists of an not duopoly model; spatial duopoly auctioneer inviting a bid much higher than model; Stackelberg duopoly model 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 Â asset turnover. gradually counterclockwise from the higher to the lower prices. ` Dupuit, Arsene Jules Etienne Juvenal, ´ 1804–66 (B3) See also: auction French engineer educated at l’Ecole Poly- Dutch book (D7) ´ technique des Ponts et Chaussees. 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 peages 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 chaussees. 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 pricing’, 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

difficulties for the financing of public tion of formal dynamic models of ECO- expenditure. Many other economies have NOMIC GROWTH and change. The inclusion experienced this phenomenon, e.g. Ja- of time in the study distinguishes this maica with its bauxite industry, Venezuela approach from static models of economic with its petroleum industry. systems. In dynamic models, at least one variable is measured at a different time References from the others; subscripts are attached to Corden, W.M. and Neary, L.P. (1982) ‘Bo- each variable to indicate the date(s) to oming sector and de-industrialization in which they refer. a small open economy’, Economic Jour- nal 92: 825–48. See also: comparative statics; static model Wijnbergen, S. van (1984) ‘The Dutch disease: a disease after all?’, Economic References Journal 94: 41–55. Simonovits, A. (2000) Mathematical methods in dynamic economics, New York: St dynamically inconsistent policy (E6) Martin’s Press; London: Macmillan. A policy based on decisions which later dynamic gains from trade (F1) cease to be optimal. The effects of a trade policy on ECONOMIC GROWTH. Important determinants of these dynamic economics (E1) gains are the accumulation of physical The study of the movement of an economy capital, the transmission of technology from a particular state at a particular date and improvements in the quality of macro- to another state later usually using lagged economic policy. variables. Although classical economists such as Adam SMITH and John Stuart MILL dystopia (P0) were concerned to study the nature of A disagreeable state, the opposite of a economic progress, it was particularly RO- UTOPIA. It is likely to have low incomes, BERTSON, HARROD, HICKS and the STOCKHOLM high crime and other social problems, and SCHOOL in the 1930s who began the crea- few economic prospects. © 2002 Donald Rutherford

E early retirement scheme (J2, J6) ing of basic wages or salaries and all A modern proposal to reduce unemploy- other premium and bonus elements. ment, or make space in a firm for younger 2 The INCOME of a business available for workers, by lowering, or making more distribution to shareholders. flexible, the statutory retiring age. The 3 The share of the proceeds of production principal aim of these schemes, to redis- going to a FACTOR OF PRODUCTION. tribute jobs from older to younger workers, can be frustrated if the rising earnings per share (G2) Pre-tax earnings divided by the number of productivity of the firm’s labour force shares entitled to a variable dividend. This reduces its total demand for labour. ratio, when used as an indicator of the earmarked gold (E5) long-term growth potential of a company, Gold held at US FEDERAL RESERVE BANKS for should be compared with other indicators foreign and international accounts; it is of a firm’s performance, including its not part of the US gold stock. market share and its research and development expenditure. Earnings per share earmarking (H5) are usually larger than dividend per share The allocation of public revenue exclu- as few companies distribute all of their sively to the execution of a particular profits. function of government, e.g. using the proceeds of television licences in the UK earnings ratio (G2) to finance the British Broadcasting Cor- Net profit (excluding preference dividends) poration. Some governments have rejected divided by equity capital. this approach because of the inflexibility it earnings yield (G2) introduces into public finances, arguing Earnings (per cent) Â par value/market that different types of public expenditure price; for example, for a company with a grow at different rates from various tax dividend of 25 per cent earned on a share revenues. Nevertheless, the principle is with a par value of £1 with a market price often followed in social expenditure and is of 125p, the earnings yield is 25 Â 100/125 a method of controlling it. = 20 per cent. See also: dedicated budget; ringfencing; trust fund 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, the Philippines and cies, the physical environment and the Thailand. In 1996 there was a capital weather. inflow into these countries of $73 billion but in 1997 an outflow of $30 billion. ecological footprint (Q0) With financial deregulation came careless The amount of land an individual needs to lending by international banks to these support his or her present consumption. Asian countries. When the extent of in- This concept was anticipated by Richard debtedness was known, the creditors pa- CANTILLON’s land and labour theory of nicked. There was a fall in exchange rates, value. an ineffective rescue effort by the IMF and e-commerce (L8) subsequently a banking crisis and a severe Trade in goods and services effected by e- fall in effective demand. mail (electronic mail). easy money policy (E5) A relaxed monetary policy permitting high econometrics (C1, C2, C3) rates of growth of the money supply to The measurement of economic relation- keep interest rates low. This has been ships using statistical techniques, and the advocated as a means of keeping aggregate testing of economic theories. Econometrics demand high and unemployment low. The has become the basis for economic fore- UK and the USA used the policy in the casting. years immediately following the Second It was inseparable from mathematics World War. and statistics as an academic discipline until the foundation of the Econometrics See also: cheap money Society in 1931. Although a quantitative easy rider (H3, J5) see free rider approach to economics goes back to PETTY, in the twentieth century it owes its origins ecfare (D6) to Henry Moore’s attempt in 1911 to ROBERTSON’sabbreviated expression for ECO- provide statistical evidence for MARGINAL NOMIC WELFARE. PRODUCTIVITY theory. Gradually it changed eclectic Keynesians (B2) see new its emphasis from searching for constant Keynesian economic laws to probabilistic models. The major techniques most frequently eclectic theory (F2) used are MULTIPLE REGRESSION, TWO-STAGE A theory drawn from various sources to LEAST SQUARES and a multitude of tests to explain FOREIGN DIRECT INVESTMENT. Loca- prevent problems such as AUTOCORRELA- tion theory is employed to explain why TION. After 1945, the growth of macroeco- production occurs at several locations; IN- nomics and the more sophisticated study TERNALIZATION THEORY explains why the of consumer behaviour inspired a great internal market is preferred to the exter- volume of econometric work. The data nal; ownership advantages, especially of used are either TIME SERIES provided by product brands and PATENTS explain why a official governmental statistical organiza- firm produces overseas rather than license tions or CROSS-SECTION DATA collated its technology. This theory has been used through surveys. to explain the expansion of multinational banking and of hotel chains. See also: Cowles Commission ecodevelopment valuation (D4, Q0) References Valuation of an environment according to Griliches, Z. (1983) Handbook of Econo- relative scarcity and minimal dislocation. metrics, Amsterdam: North-Holland. Haavelmo, T. (1944) ‘The probability ap- ecological capital (Q0) proach in econometrics’, Econometrica The changing stock of plant, animal spe- (Supplement) 12: 1–115. © 2002 Donald Rutherford

Marchi, N. de and Gilbert, C. (eds) (1989) achieve economic efficiency. MISES argued History and Methodology of Econo- that markets are essential to this process metrics, Oxford: Clarendon Press. and used this concept to attack socialism. Pagan, A. (1987) ‘Three econometric methodologies: a critical appraisal’, References Journal of Economic Surveys 1: 3–24. Horwitz, S. (1998) ‘Monetary calculation Pagan, A.R. and Wickens, M.R. (1989) ‘A and Mises ‘‘Critique of Planning’’’, survey of some recent econometric meth- History of Political Economy 30: 427–50. ods’, Economic Journal 99: 962–1025. Walters, A.A. (1968) An Introduction to economic climate (E6) Econometrics, London: Macmillan. The persisting state of an economy apparent in its general trends over a specified economic agent (D0, M0) time period. A person or firm with the power to make decisions about output, investment, prices, See also: economic weather etc. Economic Community of the countries Economic and Social Council (F0) of the Great Lakes (F0) United Nations council elected by the An economic association of Zaire, General Assembly of the UN to co-ordi- Rwanda and Burundi set up in 1979 to nate its economic and social work. Its establish trade agreements. commission’s remit includes population, Economic Community of West African human rights, the status of women, drugs States (F0) and regional problems. It has fifty-four An economic association with free move- members. ment of labour and a proposed COMMON EX- economic anthropology (A1) TERNAL TARIFF set up in 1975. The member The study of socioeconomic organizations. countries are Benin, Gambia, Ghana, Guin- In succession to the classical political ea, Guinea-Bissau, Ivory Coast, Liberia, economy of QUESNAY, SMITH, RICARDO and Mali, Mauritania, Niger, Nigeria, Senegal, MARX that traced the economic conse- Sierra Leone, Togo and Upper Volta. quences of human nature, it has examined economic cost (D0) see opportunity cost economic behaviour. VEBLEN used an anthropological approach in his distinctive economic crime (K4) INSTITUTIONAL ECONOMICS. Increasingly eco- A crime undertaken for financial gain. Its nomic anthropologists have studied non- specific nature depends on the rules of a market economic institutions. particular economic system. In the former USSR frequent use was made of this References concept. It covers both the theft of state Gregory, C.A. (1982) Gifts and Commod- property and the illicit making of profits; ities, London: Academic Press. in the UK, it refers to fraud and INSIDER North, Douglass C. (1990) Institutions, DEALING. Institutional Change and Economic Per- formance, Cambridge: Cambridge Uni- See also: economics of crime versity Press. economic development (O1) see economic base multiplier (R0) see development regional multiplier economic devolution (D0, P0) economic calculation (D2, P2) 1 The transfer of all economic decision Valuations based on present and expected making to individual households and future conditions used to allocate scarce businesses. capital resources among competing uses. 2 The principal characteristic of a MINI- The purpose of the calculation is to MAL STATE. © 2002 Donald Rutherford

economic efficiency (D0) omy, policy, environment, New York and The simultaneous achievement of both Chichester: Wiley. TECHNICAL and ALLOCATIVE EFFICIENCY Far- . Lloyd, P.E. and Dicken, P. (1977) Location rell also described it as product or global in Space: A Theoretical Approach to Economic Geography, New York: Har- efficiency. per & Row. References economic good (D0) Farrell, M.J. (1957) ‘The measurement of A scarce good, yielding UTILITY, which productive efficiency’, Journal of the must be allocated either by rationing or Royal Statistical Society. Series A 120: 253–81. by the price mechanism; not a FREE GOOD. economic growth (O4) economic forecasting (C5) The growth in the total, or per capita, output Predictions of the values of particular of an economy, often measured by an economic variables, often on the basis of increase in real GROSS NATIONAL PRODUCT, extrapolation of past trends, modified by and caused by an increase in the supply of other information and using the techni- FACTORS OF PRODUCTION or their PRODUCTIVITY . ques of econometrics. National economic This approach was central to Smith’s forecasting is an essential element of DE- Wealth of Nations and to much of CLASSI- MAND MANAGEMENT, as well as a first stage CAL ECONOMICS. HARROD and DOMAR in 1948 in national and corporate PLANNING. The were major founders of modern growth forecasts drawn up by private institutes theory. Growth theorists have wedded and newspapers provide different views of their work to DEVELOPMENT ECONOMICS and the future to the government’s. to a study of ECONOMIC PLANNING. Ecolo- See also: linkage models; Treasury model gists and others concerned about the scarcity of natural resources have advo- References cated zero economic growth rates as ap- Clements, M.P. and Hendry, D.F. (1998) propriate for the twenty-first century. A Forecasting economic time series, Cam- writer as early as John Stuart MILL (in his bridge, New York and Melbourne: Principles of Political Economy, Book IV, Cambridge University Press. ch. 6) extolled the benefits of the STATION- Fildes, R. (ed.) (1995) World Index of ARY STATE. Economic Forecasts, 4th edn, Aldershot: Gower Press. References Kacapyr, E. (1996) Economic forecasting: Mishan, E.J. (1977) The Economic Growth the state of the art, Armonk, NY, and Debate. An Assessment, London: Allen London: Sharpe. & Unwin. Rostow, W.W. (1990) Theorists of Eco- economic geography (R1) nomic Growth from David Hume to the Economic analysis of the location of Present, New York: Oxford University economic activity, together with the study Press. of land use and urban areas. Although economic incidence (H2) see tax von Thimen was, in a sense, the father of incidence LOCATION THEORY it was not until the 1950s , that much detailed work was done in this economic indicators (C8, E3) branch of geography. Statistics used in economic forecasting to analyse the state of an ECONOMY. Overall See also: land economy indicators of economic activity include References indices of industrial production, manufac- Hanink, D.M. (1997) Principles and appli- turing output, engineering orders, retail cations of economic geography: Econ- sales volume, registered unemployment © 2002 Donald Rutherford

and unfilled vacancies. Indicators of out- in a particular branch of the discipline put show the growth of production of have been founded. Many economists only principal industries; indicators of external publish articles and avoid publishing trade include indices of export and import books because of the great status the volume, the visible and current balances journals have attained in the economics and the terms of trade plus the size of the profession. Recently many of these period- official reserves; financial indicators in- icals have added assessments of computer clude changes in various measures of the software to their book reviews. The lead- MONEY SUPPLY Inflation indicators include . ing academic journals of economics in- those for retail prices, basic materials and clude American Economic Review, Bank of wholesale prices of manufactured pro- England Quarterly Review, Economica, ducts. Economic Journal, Journal of Industrial Economics, Journal of Political Economy, See also: coincident indicators Manchester School of Economic and Social economic institution (P0) Studies, National Institute Economic Re- 1 An organization which is a component view, Oxford Economic Papers, Quarterly of an economy. Journal of Economics, Review of Economic 2 A system of PROPERTY RIGHTS. Studies, Review of Economics and Statis- 3 A norm of economic behaviour. tics. 4 A decision-making unit. See also: financial journalism 5 A type of contract, e.g. a form of insurance to cover a particular sort of economic justice (D6) risk. Distributive justice based on fully in- References formed and voluntary transactions. Since Wiles, P.J.D. (1977) Economic Institutions Aristotle’s Nicomachean Ethics many eco- Compared, Oxford: Basil Blackwell. nomic writings have asserted the importance of ensuring that exchange is fair to economic integration (F0) both parties and that the fruit of produc- The joining together of economic activ- tion should be distributed to factors of ities, especially the trade of several coun- production according to their relative in- tries. This can take different forms, puts. including FREE-TRADE AREAS, CUSTOMS UN- IONS, COMMON MARKETS and federations of See also: Rawlsian justice national economies. Different forms of integration can be distinguished by the economic life (M4) extent to which individual national gov- The period during which an asset is ernments retain independence in decision expected to yield a return. For the pur- making. poses of calculating DEPRECIATION, assets are assumed to have a standard life. See also: European Monetary System Houses are given a notional life of 80 economic journals (A1) years, coal mines 100 years and machines The learned academic periodicals, mostly 8, 16 or 25 years. published quarterly, containing articles and book reviews, which, by presenting economic man (D0) the research findings of the economics A person, motivated by self-interest, who profession, give the clearest indication of attempts in consumption, work and leisure the present state of the subject. Some of to maximize his total utility. Much of them, e.g. the American Economic Review, CLASSICAL and NEOCLASSICAL economics attempt to cover all branches of econom- makes this assumption about human nat- ics, but increasingly journals specializing 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. See also: homo economicus; homo sovieti- Keynes, J.N. (1891) The Scope and Method cus of Political Economy, London: Macmil- lan. economic methodology (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 economic model 1 In a specialized sense, the use of the building when setting out the effects of market or the price mechanism as part protectionism 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. MARGINALISM and NEOCLASSICAL ECONOMICS, for example, have been able to demon- See also: economics as rhetoric 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. See also: economic methodology See also: accounting profit 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 INDICATIVE PLANNING also attracted economic rent (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. See also: centrally planned economy; development 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 VALUE, the nature of MONEY and the DIVISION OF LABOUR. ´ The word ‘economistes’ was first used by the French PHYSIOCRATS in the 1760s and in that century CANTILLON and SMITH produced 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 methodological debates were present in the subject 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 treatment of economic theory. The hints of earlier writers have provided the foundations for present-day economists. Issues of welfare, raised by MARSHALL and his follower PIGOU, led to a See also: council housing; 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- See also: economic methodology 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 See also: bounded rationality; cognitive Anderson, R.W. (1976) The Economics of consonance; cognitive dissonance 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) The economics of organised crime, Such is the importance of this mod- Cambridge, New York and Melbourne: ern branch of economics that several Cambridge University Press. journals specialize in blending economic and legal analysis, notably Journal of economics of information (D8) Law and Economics, Journal of Legal A branch of economics that recognizes the Studies, International Review of Law and imperfection of information, the costs of Economics and Journal of Law, Econom- obtaining it and its asymmetric character ics and Organization. because of the actions of firms and in- See also: economics of crime dividuals. The sources of information, including that which is spontaneously References generated by the market, are considered. Hirsch, W.Z. (1999) Law and economics: Information economics has many implica- An introductory analysis, 3rd edn, San tions for financial markets. Diego and London: Academic Press. Ogus, A.I. and Veljanovski, C.G. (eds) References (1984) Readings in the Economics of Stigler, G.J. (1961) ‘The economics of Law and Regulation, Oxford: Clarendon information’, Journal of Political Econ- Press. omy 69: 213–25. Polinsky, A. (1989) An Introduction to Law Stiglitz, J.E. (2000) ‘The contribution of and Economics, Boston: Little, Brown. the economics of information to twen- Posner, R.A. (1986) Economic Analysis of tieth century economics’, Quarterly Law, 3rd edn, Boston: Little, Brown. Journal of Economics 115 November): ‘Symposium on law and economics’, Co- 1441–78. lumbia Law Review 85: 899–1116, 1985. Veljanovski, C. (1990) The Economics of economics of law (K0) Law. An Introductory Text, London: 1 The economic analysis of legal issues, Institute of Economic Affairs. especially PROPERTY RIGHTS, negligence, economics of religion (L3) contract and crime, as well as the more A study of non-market behaviour within obviously related areas of regulation, communities of believers. Matters covered competition and monopoly. include the influence of religious belief on 2 The application of price theory and economic behaviour, the use of theology to statistical methods to the study of criticize economic policy, and the applica- legislation, legal decisions and courts of tion of microeconomic theory to the study law. COMMONS was one of the first of individual and collective religious beha- economists to use legal materials to viour. further economic analysis. COASE pioneered the rigorous application of eco- References nomics to a legal problem – in his case Azzi, C. and Ehrenber, F.G. (1975) ‘House- the law of nuisance. STIGLER and others hold allocation of time and church brought the illumination of economics attendance’, Journal of Political Econ- into dark areas of REGULATION. Posner omy 83: 27–56. demonstrated that most branches of the Iannaccone, L.R. (1998) ‘Introduction to law can benefit by the use of economic the economics of religion’, Journal of Economic Literature 36: 1465–96. concepts. The valuation of costs and benefits and the application of the economics of the arts (Z1) see cultural notion of OPPORTUNITY COST to many economics legal problems are the principal ways in which economists have shown them- economic specificity (A1, J5) selves to be invaluable colleagues of 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 world economy . 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) produced an aid pack- nation by the imposition of binding rules age for Kosovo and the Balkans and for budgetary policies, especially by stating considered restructuring Russia’s exter- upper limits for budget deficits and by nal debt. defining an overall FISCAL STANCE. A union . Okinawa (2000) considered the elimina- of this kind has been proposed for the tion of poverty in developing countries EUROPEAN UNION. and financial assistance to provide in- See also: Delors Plan formation technology for them. . Genoa (2001) provided a global fund to economic value (D0, M4) see replacement combat AIDS, recommended a New cost Deal for Africa and called for new world trade talks. economic weather (E6) The short-term conditions under which an economic system (P0) economy operates over periods as short as The system of ownership, institutions and a week, a month or a quarter of a year. allocation mechanisms of an ECONOMY. Ownership is the principal criterion for See also: economic climate distinguishing various forms of SOCIALISM economic welfare (D6) from CAPITALISM. Institutions indicate the The total satisfaction residents of a coun- degree of freedom from central control, try receive from the consumption of avail- particularly the nature of trade unions, able goods and services. Increasingly there productive enterprises and banks. Methods have been attempts to move beyond NA- of allocation contrast planned with market TIONAL INCOME measures as a proxy esti- economics. University and college courses mate of economic welfare to the use of a on comparative or alternative systems wider range of social and economic indi- contrast different types of economy. cators so that EXTERNALITIES and the subtle- See also: economic institution; economy ties of human tastes can be taken into account. Total welfare conferred by the economic transition (P0) production of goods and services must be The change from one type of ECONOMIC viewed alongside welfare losses, e.g. more SYSTEM, usually from a centrally planned income is judged within the context of the to a market economy. The principal recent amount of leisure enjoyed by workers. A aspects of this transformation in Eastern high-welfare country usually has a high Europe have included PRIVATIZATION of proportion of the population owning the state industries, liberalization of capital major types of consumer durable, e.g. and labour markets, the founding of stock washing machines and television sets; a exchanges and the strengthening of private low-welfare country has poor housing, property rights. much pollution and long working hours. Dissatisfaction with an economy has economic underpinning (P0) several indirect indicators, including the The economic activities which finance a incidence of alcoholism, the rate of sui- society. Previously this support was mainly cide, infant mortality rates, life expectancy, agricultural and industrial; now it is in- disease and disability rates. creasingly based on information. See also: measure of economic welfare; economic union (F0) social welfare This uniting of national economies consists of four elements. A SINGLE MARKET, economism (D0) COMPETITION POLICY common policies on , A taste for material success. To Marxists, structural change and regional develop- economism amounts to pursuing inter- ment, and macroeconomic policy co-ordi- mediate economic goals instead of ulti- © 2002 Donald Rutherford

mate political goals. In modern economies, arise in many aspects of a firm’s opera- workers with low economism often end up tions – its financing, marketing and pro- in the SECONDARY LABOUR MARKET where duction. An excellent example of a scale there is little training and small chance of economy is the spreading of a fixed cost economic advancement over a larger output, e.g. typesetting costs spread over an increased print run. In the economy (P0) figure, there are economies of scale up to 1 The market order. output OP but diseconomies at higher 2 A set of exchanges. outputs. 3 The entirety of the economic activities of one nation using the same currency. 4 Frugal use of resources in order to minimize costs. See also: advanced organic economy; auto- economy; barter economy; black economy; blue economy; bootblack economy; branch economy; cash economy; centrally planned economy; closed economy; command economy; core economy; communal economy; cowboy economy; decentralized market economy; dependent economy; drug economy; dual economy; enclave economy; estate economy; financial economy; first best economy; formal economy; han- som cab economy; informal economy; market economy; mature economy; mesoe- conomy; mineral-based economy; moon- See also: diseconomy of scale; economy light economy; networking economy; one- of scope; external economy of scale; inter- crop economy; open economy; parallel nal economy of scale market economy; permanent arms economy; pink economy; primitive economy; References protean economy; psychological economy; Gold, B. (1981) ‘Changing perspectives on pure credit economy; revenue economy; size, scale and returns: an interpretive second economy; self-sufficient economy; survey’, Journal of Economic Literature shadow economy; share economy; short- 19(March): 5–33. age economy; socialist economy; Soviet- economy of scope (D2) type economy; spaceman economy; steady A reduction in AVERAGE COST brought about state economy; underground economy; by the joint production of two or more villa economy; warehouse economy goods or services by a single firm, rather than by several firms. The similarities of economy of scale (D2) the products permit the use of the same A reduction in long-run AVERAGE COST as a factor inputs for different products, e.g. result of an expansion in output leading to marketing, basic research. In the transport increasing RETURNS TO SCALE. To measure a industry the use of the same fixed capital purely scale effect, it is necessary to make for both passenger and freight vehicles some strict assumptions: that, as output provides a good example of this economy. changes, there is no change in techniques used, factor prices are constant and the References same degree of vertical integration holds Panzar, L.C. and Willig, R.D. (1981) ‘Eco- as output changes. Scale economies may nomics of scope’, American Economic © 2002 Donald Rutherford

Review Papers and Proceedings 71(May): of international transactions, and that 268–72. their investments can be wider than those of FEDERAL RESERVE member banks, e.g. in economy of size (D2, M2) foreign finance. A reduction in AVERAGE COST resulting from the growth in size of a firm, e.g. the See also: McFadden Branch Banking Act managerial economics arising from the multiplant nature of a large firm or from Edgeworth box (D0, F1) its superior type of marketing organiza- 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 A false economic generalization following each indifference curve of X touches an a wrong paradigm and based on poor, or indifference curve of Y. In the figure, IX1– no, empirical research. IX7 and IY1– IY7 are indifference curves of consumer X and consumer Y respectively. ecu (E4) CC is the contract curve. The MARGINAL The European Currency Unit, a composite RATES OF SUBSTITUTIONS are equalized for basket of currencies consisting of the each consumer. currencies of EUROPEAN COMMUNITY countries. In 1990, the Deutschmark comprised about 30 per cent, the French franc about 19 per cent, sterling about 12 per cent and the Italian lira about 10 per cent of this basket. It is increasingly used in commercial banking transactions because its greater stability makes it more suitable for fixing contractual terms than a national currency. Employees of the European Com- mission are paid in ecus and even Bank of England treasury bills are denominated in them. It was replaced by the EURO in 1999 on a 1:1 basis. See also: hard ecu Edgeworth, Francis Ysidro, 1845–1926 Edge Act Corporation (G2, M1) (B3) A type of US financial corporation in Irish-born economist and statistician who existence since 1919 which can receive received a classical education at Trinity deposits from foreign governments and College, Dublin, and Oxford University. other non-US residents and from US He began his academic employment as a citizens whose deposits are transmitted lecturer in logic in 1880 and afterwards the abroad. It can also hold foreign securities Tooke Chair of Political Economy at and engage in foreign exchange activities. King’s College, London, in 1890; then These corporations can be either banking Drummond Professor of Political Econ- corporations mainly concerned with ac- omy at Oxford from 1891 to 1922. A cepting deposits or corporations princi- natural mathematical ability enabled him pally involved in investing in foreign non- to write the very influential Mathematical banking firms. The advantages of being a Psychics (1881), much admired by MAR- corporation of this kind are that they can SHALL: in it he applied mathematics to operate across state boundaries, in the case UTILITARIANISM, analysed the nature of con- © 2002 Donald Rutherford

tract in a free market 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 commonly used formula is te = t1 À kt2/(l À 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 VALUE 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 À 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. Many firms attempt to base their revenue from it is equal to the marginal wage structure on a productivity principle. costs of pollution. An early example of the use of these fees has been in Germany’s See also: local labour market Ruhr Valley; they have also been charged in References the USA, France and the Netherlands. Marshall, A. (1920) Principle of Econom- See also: pollution control; pollution tax ics, 8th edn, Book V1, ch. 3, London: Macmillan. eftpos (G2) Electronic funds transfer at point of sale, efficient estimator (C1) i.e. automatic debiting of customers’ bank The statistic of two sampling distributions or credit card accounts. This is the major with the same mean but the smaller method of introducing the cashless society variance. but unlikely to replace the present variety efficient job mobility (J6) of payment methods. Movement of workers to different jobs in See also: debit card response to a changing pattern of demand which results in the elimination of labour egalitarianism (D3) shortages. 1 Advocating universal suffrage. 2 EQUALITY OF OPPORTUNITY because there See also: labour mobility are no barriers to entering any occupa- efficient market (D4) tion with or without the financial A market in which prices reflect all avail- means being offered to facilitate entry. able information. In a weak version of this 3 An absence of income differentials. market prices reflect past prices; in a See also: Bentham stronger version, prices reflect fully all publicly available information. Profits in eigenprices (D0) an efficient market cannot be made by The economically rational prices of an studying historical prices as the traders economy derived from the actual state of have that data already. This concept is an economy, as shown in an INPUT–OUTPUT crucial to the macroeconomic theory of the table. Each eigenprice is a full-cost price, RATIONAL EXPECTATIONS School. The efficient reflecting the input–output coefficients for market hypothesis applied to the stock the production of that good. Eigenprices market is the RANDOM WALK hypothesis. 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) ‘Forecasts of future pricing. Actual prices are irrational if they prices, unbiased markets and martingale diverge from eigenprices. Eigenprices are models’, Security Prices: A Supplement ‘ideal’ because factors of production are Journal of Business 39: 242–55. Samuelson, P. (1965) ‘Proof that properly rewarded according to their marginal rev- anticipated prices fluctuate randomly’, enue products. Industrial Management Review 6: 41–9. References effluent fee (Q2) Seton, F. (1985) Cost, Use and Value. The A charge to a polluter giving the right to Evaluation of Performance, Structure discharge into the air or a watercourse a and Prices across Time, Space and Eco- nomic Systems, Oxford: Clarendon noxious emission. Although this approach Press. to pollution control has been criticized as a ‘licence to pollute’, it does encourage firms elasticity (D0) to minimize the discharge of pollutants. The responsiveness of the value of an Ideally, the fee should be fixed such that the economic variable to a change in the value © 2002 Donald Rutherford

of another which is related to it. The most relative shares and the elasticity of common use of the concept is PRICE ELASTI- substitution’, Journal of Political Econ- CITY OF DEMAND. This concept, one of the omy 68: 284–7. most durable tools of the economist, is used extensively in price theory, interna- elasticity of supply (D0) tional economics and industrial econom- The responsiveness of the quantity sup- ics. plied to a change in the price of that factor, good or service. In the short term, See also: cross price elasticity of demand; elasticity of supply; income elasticity of demand elasticity of a factor of production (D0) The proportionate change in output caused by a proportionate increase in the input of one factor of production, holding the other factors constant. elasticity of demand (D0) The responsiveness of quantity demanded of a good or service to a change in its price or in a consumer’s income. elasticity of expectations (D0) HICKS defined this as the ratio of the proportional change in the expected future values of X to the proportional change in its current value. If this is equal to unity, expected values and current values change in the same direction and by the same proportion, e.g. if present prices double then it is expected that future prices will double also. elasticity of substitution (D0) The ease with which one factor of production can be substituted for another. If the elasticity of substitution is greater than unity for a FACTOR OF PRODUCTION, then an increase in its supply will increase its relative share of the national income. HICKS introduced this concept in his The- ory of Wages (1926) to show the effect of a change in the supply of one factor, assuming two factors only and constant returns to scale, on the marginal productivity of the other. The concept has been extensively used in the study of PRODUCTION FUNCTIONS and the analysis of the effects of INVENTIONS. References Bronfenbrenner, M. (1960) ‘A note on © 2002 Donald Rutherford

supply can be increased only by using a source of pollution which reduces its existing factors of production more inten- emissions more than legally required to sively (e.g. by overtime working); in the ‘bank’ the right to pollute more in the long term supply can be increased by future. Thus over a period of time the flow increasing factor supply (e.g. recruiting of emissions is on average at the legal and training more workers, increasing the limit. capital stock). Supply elasticities increase empirics (C8) as the time period lengthens, as demon- Empirical findings acquired through ob- strated (in the figures) by the changing servation and experiment. slope of the supply curves (S). employee ratios (J2) elephant (G1) Measures of the characteristics of a LA- US term for an INSTITUTIONAL INVESTOR. BOUR FORCE which include: eligible liability (E5, G2) 1 capital employed per employee, a CAPITAL– Sterling deposit liabilities (excluding de- LABOUR RATIO; posits with an original maturity of over 2 sales per employee, a measure of the two years) + sterling resources obtained by PRODUCTIVITY of sales staff; switching foreign currencies into sterling. 3 profit per employee, a measure of la- From 1971 to 1981 in the UK, commercial bour utilization; banks had to maintain 12½ per cent of 4 average wage per employee, a measure their eligible liabilities in the form of of labour costs. reserve assets. embargo (F1) Employee Stock Ownership Plan (J3) Prohibition of trade or an activity such as An arrangement for a company to set up an the publication of a book. employee trust to allow employees to acquire the shares of the company. These embodied technical progress (O4) schemes have flourished in the USA and Technical improvements embodied in the the UK. In the USA, the National Center capital stock. Net or replacement invest- for Employee Ownership (NCEO) esti- ment can increase the amount of embodied mated in 1986 that 8,000 US firms had technical progress as in both cases the equip- such schemes by then, covering 10 million ment available and chosen for purchase will to 11 million workers, i.e. 8 per cent of the usually employ the latest technology. total national workforce. The company makes regular tax-deductible contributions See also: disembodied technical progress; 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 See also: industrial democracy; 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 other resources. Under the Act, the COUN- 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 See also: implicit contract theory; invisi- Kahn, R.F. (1931) ‘The relation of home ble handshake 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) See also: activity rate; labour force parti- The desired level of employment as a cipation rate 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 reflation, special measures for the ‘empty nest’. long-term unemployed and infrastructure investment. See also: Third Age 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

an economic activity does not have any endowment (A1) spin-offs in terms of services and pro- 1 An original asset, especially land; in- cessing and so there is an absence of the herent ability. dynamic effects of intersectoral growth. 2 Something of value bestowed upon an- 2 A sub-economy of an advanced econ- other. omy, e.g. in the USA, ethnic groups have endowment effect (G2) formed distinct sub-economies with, for An increase in a bank’s profitability as a example, Cubans or Mexicans compris- result of a rise in interest rates. ing both the owners and workers. endowment insurance (G2) end of geography (F3, G1) A form of insurance which provides for a A way of referring to global financial fixed sum of money to be paid on a integration. specified date, or at death. References endowment mortgage (G3) O’Brien, R. (1992) Global Financial Inte- A mortgage linked to an insurance policy gration. The End of Geography, London: that provides at the end of its term a sum Chatham House. to redeem the mortgage. The mortgagor pays both interest on the amount bor- endogenizing the exogenous (E1) rowed and insurance premiums. In times The inclusion in an economic model of of falling property prices the problem of something previously regarded as given. NEGATIVE EQUITY makes this form of house Classical economists, for example, repurchase unattractive. garded FULL EMPLOYMENT as given, whereas KEYNES included it as a variable in his Engel, Ernst, 1821–96 (B3) model of the national economy. Expecta- German statistician who was educated at tions were often regarded as given but now the Ecole des Mines, Paris. Director of the many economic models include them. statistical bureaux of Saxony from 1850 to 1858 and of Prussia from 1861 to 1862. In See also: endogenous variable; exogenous 1857 he propounded Engel’s law, one of variable the first major empirical findings of lasting endogenous growth theory (O4) importance. An explanation of ECONOMIC GROWTH as the Engel coefficient (D2) product of the structural features of an Expenditure on food, beverages and to- ECONOMY An early theory was HARROD’s . bacco as a proportion of final private warranted rate of growth that made the consumption expenditure. growth rate depend on the savings ratio and output–capital ratio, both structural Engels, Friedrich, 1820–95 (B3) features. Later versions of this theory had The principal intellectual collaborator of foundations in microeconomics and em- MARX from 1844. Although his family phasized the contribution of accumulated owned textile mills in the Rhineland and HUMAN CAPITAL to increased productivity. Manchester, he was a social critic from the age of 18. He never attended university See also: post-neoclassical endogenous but came under the influence of the Young growth theory Hegelians in Berlin; his practical knowledge of business was to temper Marxian endogenous variable (D0, E1) theory. His interest in economics began An economic variable whose values are with an essay Outlines of a Critique of determined by the other variables of an Political Economy (1844). His analysis of economic model. industrialization and his prophecy of a See also: exogenous variable proletarian revolution impressed Marx. © 2002 Donald Rutherford

They jointly wrote Die Heilige Familie the highest bidder, provided that the bid is (The Holy Family) (1845), Die Deutsche not less than the seller’s reserve price. The Ideologie (The German Ideology) (1845–6) earliest auctions in the Roman Empire and Manifest der Kommunistischen Partei were probably like this since ‘auction’ is (The Communist Manifesto) (1848). En- derived from the Latin word auctus mean- gels is also noted for his Umrisse zu einer ing ‘increase’. Kritik der Nationalokonomie (Outlines of a ¨ See also: auction Critique of Political Economy) (1844) and Die Lage der arbeitenden Klasse in England English disease (J5) (The Condition of the Working Class in The consequences of poor industrial rela- England) (1945), as well as his posthu- tions and industrial organization manifest mous editing of the second and third in strikes, low productivity and low growth. volumes of Marx’s Das Kapital. His frequent financial help to the Marx family enterprise culture (P0) maintained his great friend in his chosen An ECONOMY with little REGULATION and career. Living in retirement for twenty-six every encouragement to ENTREPRENEURS. years, he was able to reconstruct the enterpriser (M1) see entrepreneur remainder of Marx’s Das Kapital from mounds of notes. enterprise union (J5) A Japanese TRADE UNION covering all the References workers below supervisor level within an Carver, T. (1983) Marx and Engels: The enterprise or within an establishment of Intellectual Relationship, Brighton: that enterprise. The union has its head- Wheatsheaf. Henderson, W.O. (1976) The Life of Frie- quarters on company premises and is drich Engels, 2 vols, London and Port- often run by company employees on land, OR: Frank Cass. secondment from their usual employment. This is the most important level of union- Engel’s law (E2) ism in Japan as most of workers’ contribu- The assertion that, as income rises, the tions are spent at this level and vital wage proportion spent on food falls. Formally, bargaining is done. Often an enterprise this can be stated as the INCOME ELASTICITY union is given the task of allocating OF DEMAND for food is less than unity. between types of worker the gross addition to the enterprise’s wage bill. Although engine of growth (O4) there were 72,605 unions by 1989, this 1 The mechanism, often said to be inter- does not imply a weak union movement as national trade, which starts an econo- there is joint action through their national my’s expansion. This view has been federations, the major ones having been contrasted with the view that trade is a RENGO, SOHYO, DOMEI, SHINSANBESU. Since ‘handmaiden’. A concept attributed to 1948, statistics on Japanese unions have ROBERTSON. been produced by the Basic Survey on 2 A major economy of the world, e.g. the Trade Unions. USA, which is so large that its expansion generates a demand for imports See also: company union; local union which stimulates many other national economies. enterprise zone (R5) A local UK or US area, often a decaying English auction (D4) inner city, selected for special government A method of selling an item which begins help in the form of exemption from with the first bid being requested by the property taxation and from many govern- auctioneer and ends when the bids reach mental regulations. The purpose of these an uncontested peak. The item is sold to zones is to encourage the location of new © 2002 Donald Rutherford

industries and new jobs by reducing the one point to the envelope. The main use of factor cost of doing so. The creation of envelope curves is in relating long-run to such zones leads to conflict between local short-run cost curves. In the figure authorities and businesses within and SATC1–SATC4 are short-run average total without these areas as the latter can suffer cost curves; LRAC is the long-run average a loss of industry. total cost curve. See also: regional policy ˆ entrepot (F1) A commercial centre or warehouse engaged in the distribution of goods throughout 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 shareholders; in small businesses, usually by the manager–proprietor. The idea of entrepreneurship was introduced into economics by CANTILLON, literally to mean the ‘under- environmental accounting (M4) 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- COME accounting, FINANCIAL ACCOUNTING Subsequently different economists debated 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, solid waste, pesticides and toxic equality of opportunity (D6, J7) substances. 1 Access by minority groups and the disadvantaged to education and every- environmental tax (Q2) thing necessary for full participation in A tax on a polluter related to the external society. costs of private production. 2 An absence of DISCRIMINATION so that See also: effluent fee people are judged only by the personal attributes relevant to a particular task EPA (C5, F0) or activity. Individuals are responsible A world econometric model of the Japa- for outcomes. nese Economic Planning Agency which References includes nine country models (of the seven major OECD countries, Australia and Roemer, J.E. (1998) Equality of opportu- South Korea) and six trading regions. nity, Cambridge, MA: Harvard Univer- sity Press. See also: linkage models equality standard (D6) References An idealistic approach to income distribu- Amano, A., Maruyama, A. and Yoshi- tion giving equal shares to all by equaliz- tomi, M. (eds) (1982) EPA World Eco- ing per capita incomes. Critics of this nomic Model, Vols 1 and 2, Tokyo: approach assert that human nature is not Economic Planning Agency. so altruistic as to tolerate a system of reward which ignores differences in indivi- epidemic model (O3) dual persons’ contributions to output. An explanation of the diffusion of tech- Also a fall in labour productivity is a nology using the analogy of the spread of likely consequence of using this policy. infectious disease. The rate of diffusion is regarded as a function of the product of See also: altruism; contribution standard; (1) the share of the population with a egalitarianism; needs standard particular innovation and (2) the number equalizing wage differential (J3) of the fixed population without it. The A wage differential which compensates a model attempts to explain why a diffusion worker for a non-pecuniary aspect of a rate follows a sigmoid S-shaped time path job, e.g. the degree of risk or the dirtiness with low initial rates, a quickening of of working conditions. These differentials diffusion, then a fall back to low rates as discourage labour mobility to more plea- the potential for diffusion diminishes. sant occupations. CANTILLON and SMITH References were both aware of this reason for wage Romer, P. (1990) ‘Endogenous technologi- differentials. cal change’, Journal of Political Econ- omy (October 1990 Supplement) 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 The achievement of the same amount of job adverts specifying applicants of a ECONOMIC WELFARE per head or the same particular sex; subsequently the issues economic opportunities for each indivi- covered have included a wider range of dual. As the creed of EGALITARIANISM, it grievances. It publishes annual statistics on denies differences in innate abilities and sexual wage differentials. argues that superior abilities are merely Equal Pay Act 1963 (USA) (J3, J7) the product of training. US federal statute which sought to equal- See also: human capital ize male and female pay for workers in © 2002 Donald Rutherford

interstate commerce. Employment discrimination against women and ethnic minorities was dealt with under Title VII of the Civil Rights Act 1964. Equal Pay Act 1970 (UK) (J3, J7) UK legislation that enforced the principle of equal pay for equal work: this was to apply to all collectively bargained agreements and STATUTORY MINIMUM WAGE RATES by 1975. Despite the Act, there is still a divergence between male and female earnings, reflecting OCCUPATIONAL SEGREGATION of women, differences in hours worked and promotion policies of firms. Equal Pay Directive (J3, J7) A directive issued by the EUROPEAN COMMIS- SION in 1975 to counter discrimination in pay, especially on the grounds of sex. equal product curve (D0) see isoquant equilibrium (D0, E0) A state of balance such that a set of selected interrelated variables has no inherent tendency to change. In economics, a major example is the balance of the forces equating demand and supply. SMITH in his discussion of prices used the idea of market prices fluctuating around the NAT- See also: general equilibrium; temporary URAL PRICE which can be considered a equilibrium central price. The SUBSISTENCE THEORY OF References WAGES regarded expansions and contractions of a population as equilibrating Amendola, M. and Gaffard, J.-L. (1998) forces making the subsistence wage rate Out of equilibrium, Oxford and New York: Clarendon Press. the long-run equilibrium wage. An equili- Caravale, G. (ed.) (1997) Equilibrium and brium can exist for an economy as a economic theory, London and New whole, for a sector of it, for a particular York: Routledge. market or for an institution, such as a Fisher, F.M. (1983) Disequilibrium Founda- firm. Although the term is applied princi- tions of Equilibrium Economics, Cam- pally to static models, there can be an bridge: Cambridge University Press. equilibrium in dynamic models when vari- Samuelson, P.A. (1965) Foundations of ables proceed along an equilibrium-type Economic Analysis, 2nd edn, New York: path. Equilibria can be stable or unstable, Athenaeum. temporary or permanent: some of them do not exist. The Marshallian and Keynesian equilibrium GNP (E0) cross-diagrams are the most famous dia- The level of real national income at which grammatical representations of equili- AGGREGATE DEMAND equals AGGREGATE SUP- brium (E, equilibrium). PLY i.e. desired expenditure equals the , © 2002 Donald Rutherford

quantity of goods and services supplied in TRALLY PLANNED ECONOMIES. To the partici- that economy. pating government there is the advantage of not having to pay fixed interest charges. equilibrium price (D0) Many East European countries turned to The price which equates demand and this organizational form after 1989 as a supply in a market in a particular time means of reconstructing their economies. period. See also: European Bank for Reconstruc- equilibrium velocity (E4) tion and Development; joint venture The VELOCITY OF CIRCULATION that maintains interest rates on deposits at their long-run equity-linked mortgage (G2, R2) equilibrium (i.e. average) rates. A method of purchasing commercial or residential property. The lender offers to equipment trust bond (G2) pay, for example, half the current interest A financial arrangement for leasing equip- rate on the mortgage in return for acquir- ment. The holder of the bond owns the ing half the equity in the property (or equipment and then leases it to the firm another proportion). This device makes it which has issued the bond via a trustee. possible for borrowers to obtain finance The trustee pays the interest and principal for large property purchases and for len- to the bondholder, receiving rental pay- ders to benefit from the capital apprecia- ments from the issuer of the bond. tion of properties. equity (G1) 1 ORDINARY SHARES. equity premium (G1) 2 COMMON STOCK. The excess of the average real return to 3 The portion of a company’s capital stock market securities over the interest which does not earn a fixed rate of rate on treasury bills. In the USA this has interest. Equity holders usually receive been about 6 per cent for 100 years. dividends varying with the profitability References of the company/corporation and its Kocherlakota, N.R. (1996) ‘The equity profit distribution policy. The issue of premium: it’s still a puzzle’, Journal of equity shares enables a company to Economic Literature 34: 42–71. expand its capital and to spread busi- Mehra, R. and Prescott, E.C. (1985) ‘The ness risk. equity premium: a puzzle’, Journal of 4 Fairness. Monetary Economics 15: 145–61. See also: horizontal equity; Rawlsian jus- equity release scheme (G2) tice; vertical equity A loan obtained by a house owner equity comovement (G1) through taking out a mortgage on the The extent to which the prices of equities property to buy a high-yield bond in on different stock exchanges change by the order to provide an income. Falling house same amount and in the same direction. prices caused some owners to lose their The removal of exchange controls has homes. increased the possibility of comovement. equity-style management (G2) equity joint venture (M1) The choice by a portfolio manager be- A business jointly owned and run by a tween large or small growth or value of a private firm and a governmental organiza- client’s investments where growth is mea- tion. As it is financed partly by equity sured by earnings growth and value is the capital, the return to the private investor is ratio of price to book value of a share. A a variable dividend. This arrangement was popular strategy is to choose growth at a used by capitalist firms to invest in CEN- reasonable price. © 2002 Donald Rutherford

equity taxation (G2) policy instrument to keep a target variable Taxation based on the fairness principle close to its desired value used as early as that each person should suffer an equal 1954 by PHILLIPS. sacrifice. ‘Sacrifice’, however, is an ambig- References uous term as it can refer to equality in absolute terms or at the margin. Salmon, M. (1982) ‘Error correction mechanisms’, Economic Journal 92: 615–29. See also: ability to pay escalator clause (M2) equity warrant (G2) A clause in a contract designed to revise An option to buy an ORDINARY SHARE or payments due under that contract in line COMMON STOCK at a fixed price in the future. with changes in a specified price index. In It is issued in the form of a bond with a low times of considerable inflation, these COUPON. In the case of EUROBONDS, the war- clauses are popular in labour and building rant is issued attached to a bond denomi- contracts, as well as in tax schedules and nated in a particular currency. However, the social security benefits tables. warrant is often detached and traded sepa- See also: cost of living adjustment rately. The popularity of this cheap method of stock market speculation is reflected in establishment (M1) the rapid increase in warrant prices. A place of business, a factory or a plant which is part or the whole of a firm. equivalent variation (D6) The minimum amount a person who gains estate economy (P4) from a change has to be given to forgo the 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 The scientific study of the physical meth- tea plantations and Argentina with its ods of work with the aim of minimizing cattle ranches had this character. effort and maximizing output. Inspired by Although wages of the estate workers were the study of the practical problems of low by international standards, they were using military equipment in the Second high enough to induce the movement of World War, it became a recognized disci- workers from subsistence agriculture. pline in 1949. Much work has been done These estates were the basis of develop- on the appropriate ways of displaying ment in several ex-colonial countries. information, on the study of machine controls and on the relationship between e-tail company (L8) a worker and the physical environment. A company which retails its goods and services using e-mail. References Singleton, W.T. (ed.) (1982) The Body at ethical unit trust (G2) Work, Cambridge: Cambridge Univer- UK equivalent of a SOCIAL CONSCIENCE FUND. sity Press. Euler’s theorem (D3) error (C1) The rule that if FACTORS OF PRODUCTION are The difference between observed and true paid according to their MARGINAL PRODUCTS, values brought about by chance rather the total product will be distributed com- than systematically. pletely if and only if there are constant RETURNS TO SCALE. The theorem is of See also: probable error; standard error importance when considering the applica- of estimate; Type I error; Type II error tion of the MARGINAL PRODUCTIVITY OF WAGES error-correction model (C5) since if there are DIMINISHING RETURNS and An econometric method of adjusting a 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

the largest market in the industrialized full employment and productivity in its world (USA, 244 million; Japan, 122 mil- area, to trade on the basis of fair competi- lion), but Japanese per capita income was tion and to remove tariffs between mem- then 48 per cent higher and US per capita bers by 1 January 1970. Although it income 40 per cent higher than in the reduced TARIFFS in 1961 and quotas among European Community. The industrial members during 1961–6, it was not origin- strength of the European Community lies ally intended to be a CUSTOMS UNION, i.e. especially in its chemical, transport equip- with a COMMON EXTERNAL TARIFF. After 1973, ment and industrial machinery industries. a series of agreements between EFTA and the European Economic Community re- See also: European Economic Communi- duced tariffs between the member coun- ty; European Union 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 European Currency Unit (E5) see ecu 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

were unsuccessful attempts towards Eur- Amsterdam, Dordrecht and Lancaster: opean monetary union in the Tindemans Nijhoff. Report of 1976 and the Jenkins Initiative de Grauwe, P. and Papadenos, L. (1990) of 1977. The European Monetary System in the 1990s, Harlow: Longman. European Monetary Co-operation European Monetary Union (F3) Funds (F3) The integration of the monetary policies Part of the EUROPEAN MONETARY SYSTEM that and currencies of member states under a finances imbalances in payments between new EUROPEAN CENTRAL BANK using a single the countries participating. currency. This union was envisaged by the European Monetary System (F3) WERNER REPORT and designed by the DELORS The West European system for aligning PLAN which set out three stages towards exchange rates and bringing about a con- integration. The first stage started in 1990 vergence in monetary policies. It came into with the abolition of restrictions on capital being when West Germany, France, Den- movements in the EEC; the second stage mark, the Netherlands, Italy, Belgium and amended the Treaty of Rome under the Ireland decided in 1979 to change their Maastricht Treaty 1992 to create the exchange rates only within a joint consul- European Monetary Institute 1994 to tation procedure. The principal compo- provide for central bank co-operation and nents of the system are the ECU, the monetary policy co-ordination (the Insti- EXCHANGE RATE MECHANISM and credit me- tute was dissolved after the creation of the chanisms. Major currency alignments have European Central Bank 1998) and there taken place in September and November was an irrevocable fixing of exchange rates 1979, March and September 1981, Febru- of the participating currencies by 1 Janu- ary and June 1982, March 1983, July 1985, ary 1999; the third stage from 1999 led to April 1986 and January 1987. The size of the abolition of national currencies of 12 realignments has tended to increase over countries with the euro in circulation from time: by the 1980s they were as great as 10 1 January 2002. per cent per realignment. Under the sys- European option (G1) tem, Ireland and Italy, the highest infla- An OPTION that can only be exercised on its tion countries, have suffered deteriorating expiry date. competitiveness and other countries, particularly Belgium and Denmark, have im- European Recovery Program (O2) see proved. The system is a hybrid of a fixed Marshall Plan rate system and a managed float. European Regional Development Fund Prior to 1992 it created a zone of (R5) exchange rate stability in Europe and A EUROPEAN COMMUNITY fund offering re- contributed to the convergence of the gional assistance, particularly for infra- economic policies of the members. Spec- structure projects, in member countries. ulation forced the pound and the lira out of the EMS in September 1992. Further European Social Charter (I3, J0) speculation in August 1993 required the A treaty of the Council of Europe signed widening of the permitted fluctuation in 1961. It sought to protect social and margin to 15 per cent for six of the economic human rights. Most of its arti- remaining currencies. cles concern employment conditions but it also grants social and medical assistance See also: European monetary co-operation to resourceless people, the right to social References security and the protection of mothers and Coffey, P. (1984) The European Monetary children, and migrant workers. By June System – Past, Present and Future, 2001 the Social Charter had been ratified © 2002 Donald Rutherford

by eighteen countries including Iceland and the central banks of the fifteen mem- and Turkey; the UK agreed to implement ber states. it in 1997. eurozone (F3) European system of accounts (E0) The countries of the EUROPEAN UNION which A classification of household expenditures accepted the euro as their common cur- by categories of use. It is a coherent rency. framework for the presentation of the national income accounts of the member event study (C5, G0) countries of the EUROPEAN COMMUNITY. The The analysis of the statistical significance principal accounts are: of the occurrence of a particular type of 1 Domestic accounts event, e.g. a stock repurchase or financial restructuring, for the market value of a Goods and services accounts company in a financial market. Production account Generation of income account evolutionary game theory (C7) Distribution of income account An application of evolutionary methods to Use of income account game theory. Through learning and evolu- Capital account tion it is possible to reach an equilibrium Financial account. lacking in rationality. A trial and error process establishes which strategy works 2 Rest of the world accounts best. A search for new microfoundations Current transactions account to evolutionary dynamics has been under- Capital account taken to enable the theory to be applicable Financial account. to human society. References References European System of Integrated Economic Samuelson, L. (1997) Evolutionary Games Accounts ESA, 2nd edn, Luxemburg: and Equilibrium Selection, London and Statistical Office of the European Com- Cambridge, MA: MIT Press. munities, 1980. Weibull, J.W. (1995) Evolutionary Game Theory, London and Cambridge, MA: European Union (F0) MIT Press. A combination of the EUROPEAN COMMUNITY, co-ordination of foreign and security po- evolutionary theory of the firm (L1, L5) licies, and co-ordination of justice and A study of the determinants of the ‘des- interior affairs established by the Maas- tiny’ of firms which rejects the view that tricht Treaty and effective from 1 Novem- firms are maximizers and asserts that ber 1993. The Council of the EU consists firms’ actions have evolved from their of the appropriate ministers from each own traditions. Innovatory change is only member state for the matter under discus- accepted in a crisis; it is not part of a long- sion. term growth plan. MARSHALL, with his biological analogies for the growth of the European Unit of Account (E4) firm, was a founder of this theoretical A basket of the currencies of the member approach. The viable firm, according to countries of the EUROPEAN ECONOMIC COMMU- ALCHIAN, has profits greater than are NITY Each currency is weighted according . needed to maintain current activities; to its standing and amount in circulation. therefore under conditions of UNCERTAINTY, See also: ecu managers cannot predict the outcome of their decisions, so luck is quite important. Eurosystem (E5) This consists of the EUROPEAN CENTRAL BANK See also: Penrose © 2002 Donald Rutherford

References 2 More generally, any output level less Alchian, A. (1950) ‘Uncertainty, evolution than the maximum amount technically and economic theory’, Journal of Politi- possible. cal Economy 58: 211–21. Nelson, R.R. and Winter, S.G. (1982) An See also: X-efficiency Evolutionary Theory of Economic excess capacity theorem (L1) Change, Cambridge, MA: Belknap Press The theoretical outcome of MONOPOLISTIC of Harvard University Press. COMPETITION which holds that profit-max- ex ante, ex post (E0) imizing firms choose a level of production A widely used distinction in macroeco- that is lower and with higher average costs nomics, coined by MYRDAL, to distinguish than under PERFECT COMPETITION. In the what is planned (i.e. ex ante) from what figure, ATC is AVERAGE TOTAL COST, MC is actually happens (i.e. ex post). These alter- MARGINAL COST, D is demand, AR is AVER- native concepts are often used in discus- AGE REVENUE, MR is MARGINAL REVENUE, OP sions of investment and welfare. If, for is the profit-maximizing price, OQ2 is the example, ex post investment is less than profit-maximizing output and Q1Q2 is the what was planned, then the expectations excess capacity. of the investor have not been realized. References Myrdal, G. (1939) Monetary Equilibrium, London: William Hodge. ex ante variables (E0) Measures of what is planned or intended, e.g. intended investment. These have been used since the STOCKHOLM SCHOOL and Key- nesians started modern macroeconomics; increasingly ex ante measures have been used to estimate EXPECTATIONS. In practice, surveys of business enterprises are used to ascertain intended levels of production, investment and employment. See also: ex post variables excess burden of a tax (H2) The DEADWEIGHT LOSS from a tax. This has See also: profit maximization two meanings: excess demand (D0) 1 The deadweight loss suffered by tax- The amount by which demand exceeds payers in excess of what the government supply at a given price. As excess demand collects. can be positive or negative, it is a useful 2 The amount a taxpayer would sacrifice way of stating the relationship between in excess of the taxes being collected in demand and supply. When a market is in exchange or the removal of all taxes. equilibrium, excess demand is zero. The See also: tax incidence rate of excess demand can be measured as (demand À supply)/supply. Markets sub- excess capacity (D0) ject to maximum price control are usually 1 In competitive theory, a level of output characterized by long-term positive excess below that level of output which mini- demand which necessitates rationing and mizes average total cost. 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. See also: dual exchange rate 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 See also: trade to stabilize or improve the sterling exchange 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

a country’s balance of payments and, currency, unless there are frequent realign- consequently, its exchange rate. An over- ments. valued exchange rate leads to a CURRENT References ACCOUNT balance of payments deficit and bearish speculative capital movements; an Giavazzi, F. and Spaventa, L. (1990) The ‘New’ EMS, Paper No. 369, London: undervalued exchange rate creates a cur- Centre for Economic Policy Research. rent account surplus and an influx of capital. Volatile exchange rates and vola- exchange rate premium (F3) tile interest rates coincide. The difference between the forward ex- References change rate and the expected future spot exchange rate. Isard, P. (1978) Exchange Rate Determina- tion: A Survey of Popular Views and exchange rate regime (F3) Recent Models, Princeton, NJ: Interna- The system chosen by national govern- tional Finance Section, Department of ments for the mutual determination of Economics, Princeton University. their exchange rates. The main choice is Stein, J.L. et al. (1997) Fundamental determinants of exchange rates, 2nd edn, concerned with the extent to which there Oxford and New York: Clarendon are fixed parities between different curren- Press. cies, e.g. under the BRETTON WOODS system Witteveen, H.J. (1982) The Problem of and under the EUROPEAN MONETARY SYSTEM Exchange Rates, New York: Group of or FLOATING EXCHANGE RATES. Thirty. exchange rate target zone (F3) exchange rate agreement (F3) A softer version of a fixed exchange rate A foreign exchange hedging technique regime which permits wide bands for each requiring only the net amount owed at currency participating provided that the the end of a banking day to be paid. countries concerned take corrective action Otherwise, purchases and sales of a for- when the values of their currencies come eign currency at different times require close to their limits. several transactions; this kind of agree- See also: European Monetary System ment requires only one. References Exchange Rate Mechanism (F3) Williamson, J. (1985) The Exchange Rate A crucial element of the EUROPEAN MONE- System, Washington, DC: Institute for TARY SYSTEM which links the values of International Economics. participating European currencies and limits the extent of their fluctuations to 2.25 exchange risk (F3) per cent against the rest in the system, The risk of an exchange rate changing and unless a wider band has been specially thereby lowering the value of one’s holding negotiated, e.g. Spain’s and the UK’s 6 per of another currency. A MULTINATIONAL COR- cent. Also it produces indicators of cur- PORATION, for example, constantly faces the rency divergence against the ecu, makes risk when doing business in another coun- available short-term credit to support in- try that the foreign currency it acquires tervention in foreign exchange markets on there will fall in value. behalf of currencies which diverge too far exchange standpoint epistemology (D4) and, in extreme cases, realigns currencies An approach to studying economics fa- at new EXCHANGE CROSS-RATES. The ERM vouring market and market policy mea- reduces speculative gains from changes in sures. exchange rate movements and concen- trates the minds of investors on the inter- Exchequer (E5) est rate offered for deposits in a particular The UK government’s account held at the © 2002 Donald Rutherford

Bank of England. Holding this account is recently announced and payable at that one of the activities of the Bank of time. England as a CENTRAL BANK. executive leasing (G2) Exchequer White (E5) The offering of management services by The daily internal Bank of England state- experienced mid-career managers for short ment which shows its cash needs by periods, usually for less than a year. detailing flows into and out of the bank, Leasing is attractive to companies when a chiefly as a consequence of the govern- particular type of skill is needed either to ment’s receipt of tax payments and dis- cope with an unusual task, e.g. organizing bursement of governmental expenditures. a merger, or during an interregnum until a If the bank is short, it will buy bills; if permanent executive is appointed. there is excess cash in the banking system, it will sell them. executive stock option (J3, M1) Part of the remuneration of a manager excise duty (H2) granting the right to purchase stocks/ An indirect tax levied on a specific good, shares at a preferential price. This form of especially petrol, alcohol or tobacco. Du- incentive rewards executives who increase ties of this kind have been an important the market value of a company. source of government revenue in some countries, e.g. the USA, for longer than exercise price (G1) see put price INCOME TAXES. Given the INELASTICITY of demand for these goods, they provide a exit–voice (D0) reliable source of revenue. Also, the duties A distinction used to classify the physical have been imposed as TARIFFS to protect or verbal methods individuals use to domestic industries from the competition reveal their preferences. ‘Voice’ can take of imports. the form of voting (as in democratic politics) or complaints (as under grievance See also: direct and indirect taxation procedures); ‘exit’ is movement away from a less desired situation, e.g. a particular excise tax (H2) see excise duty employment, region or country. ‘Exit– exclusion principle (D0) voice’ can be applied to collective or A major characteristic of a PRIVATE GOOD: individual choice. one person’s consumption excludes others’ See also: Tiebout hypothesis consumption, e.g. my consumption of a piece of fruit excludes your consumption References of it. PUBLIC GOODS are non-exclusive, e.g. Hirschman, A.O. (1970) Exit, Voice and my consumption of the benefit of the Loyalty: Responses to Decline in Firms, nation’s armed services does not reduce Organizations and States, Cambridge your consumption. MA: Harvard University Press. exclusive dealing (L4) exogenous expectations (E0) A RESTRICTIVE PRACTICE in a market whereby EXPECTATIONS that are given and are thus distributors agree not to trade with firms excluded from an economic model or which are not party to an agreement. In theory. Few economists would now take return for loyalty a rebate on purchases is this view of expectations. often given. exogenous growth model (O4) ex dividend (G2) A process of ECONOMIC GROWTH driven by An ORDINARY SHARE which does not bear an outside factor, especially technical the entitlement to receive the dividend change or foreign trade. © 2002 Donald Rutherford

exogenous variable (C1, C6) expenditure function (E2) An economic variable whose values are An equation used to describe the con- not determined by the other variables of sumption possibilities for a consumer at a an economic model. given set of prices. See also: endogenous variable expenditure tax (H2) expectations (D0, E0) A tax based on the amount actually spent The views of households or firms or by a consumer. Proponents of such taxa- governments about the future. They are tion argue that the tax might be easier to based either on the simple view that the collect than capital or income taxes and future will be like the past or on a more that the growth of personal savings (which sophisticated view that the future will be would escape the tax) is encouraged. There partly like the past and partly different have been many supporters of this type of because of responses to previous forecast- taxation, including John Stuart MILL, MAR- SHALL, Irving FISHER, KALDOR and the ing errors. This is now the dominant MEADE Committee. theme of much of macroeconomics. The study of expectations has become much See also: double taxation of savings more elaborate than it was in the hands of MYRDAL and KEYNES. References Kaldor, N. (1955) An Expenditure Tax, See also: adaptive expectations; ex ante London: Allen & Unwin. variables; exogenous expectations; extrapolative expectations; Keynes expecta- expense preference (M1) tions; rational expectations; regressive A manager’s weighted preference for a expectations particular type of cost. As managers often prefer an expansion of staff (as a means of expected monetary value (E4) being in charge of a larger establishment), The product of the probability of the ith they will prefer extra expenditure on staff outcome and the value of the ith outcome: to other forms of expenditure. Xn EMV = pi :Xi expense ratio (M2) see cost ratio i¼1 expected utility (D0) expensive easy money (E4, G2) The product of the probability of the ith OKUN regarded this as credit extensively outcome and the utility of the ith out- available, and therefore easy, but offered at come: higher interest rates and thus expensive. Xn experience good (D0) EU = pi :Ui A GOOD usually purchased frequently by a i¼1 consumer who acquires information about See also: Bernoulli hypothesis; prospect it through the repeat purchases. theory See also: search good References Savage, L.J. (1954) Foundations of Statis- experimental economics (C9) tics, New York: Wiley. The study of simulated markets in order to test microeconomic theory. This attempt expedited funds availability (G2) to give economic theory firm foundations The prompt availability of check deposits has always been methodologically contro- by US commercial banks. versial. © 2002 Donald Rutherford

References firms will not be discouraged from export- Hey, J. (1991) Experiments in Economics, ing by the risk of buyers’ defaulting. Oxford: Blackwell. Exports net of imports are included in the Kagel, J. and Roth, A. (eds) (1995) The GROSS DOMESTIC PRODUCT. Handbook of Experimental Economics, Princeton, NJ: Princeton University See also: import Press. Export Import Bank (G2) expert system (M1) Washington bank set up in 1934 as an Computer software that reproduces the agency of the US federal government to expertise of a specialist by providing a set facilitate and finance exports, e.g. by issu- of rules and a knowledge base so that a ing guarantees, direct loans and insurance user is asked a set of questions before the programmes to minimize buyers’ default. computer program gives advice. The many applications of these systems include con- export promotion (F3) trolling production plants and insurance A set of measures, usually taken by a underwriting. national government, to subsidize the marketing overseas of domestically pro- explicit contract (D0) duced goods and to guarantee foreign An agreement whose terms are stated payments for them. clearly by the parties. This is usually in writing and legally enforceable. export requirement (F2) A rule imposed by a host government on See also: implicit contract theory foreign investors to export a minimum explicit cost (D0) percentage of their output. This is a policy Actual money expenditure incurred to response to the practice of a MULTINA- obtain a factor of production or a good TIONAL company of diverting to other or service. markets the output of a domestic producer it has taken over to the detriment of the See also: implicit cost host country’s pattern of trade. exploitation (J7, Q2) export subsidy (F1, H2) 1 Using or misusing a natural resource. A reduction in the cost of exports brought Extraction of minerals constitutes use; about by a government grant. There can misuse arises from causing long-term be reductions in the costs of labour, of damage to the environment. capital or of export financing, as well as 2 Treating labour unjustly by either pay- more favourable tax treatment. SMITH re- ing it less than its MARGINAL PRODUCT or ferred to such subsidies as ‘bounties’. extracting SURPLUS VALUE from it. ex post variables (E0) export (F3) Variables which show actual economic The sale to a resident of another country outcomes, e.g. the amount of fixed invest- of a domestically produced good or ser- ment which has been undertaken. In the vice. Unless an economy is self-sufficient, 1930s there was much discussion in macro- it will be necessary for it to export in order economics of how ex ante savings and to be able to pay for the imports de- investment that were different in amount manded by its residents. The volume of a became equal ex post. One possibility was country’s exports has many determinants, for there to be saving at each round of including the exchange rate, marketing income generated from an ex ante invest- methods, delivery times, product design ment excess over ex ante saving. and government subsidization, especially the guarantee of export finance so that See also: ex ante variables © 2002 Donald Rutherford

extended equilibrium (D5) 2 The reliability of a country in servicing An expansion of the concept of GENERAL its external debt to banks and other EQUILIBRIUM to include the natural environ- countries. ment. external debt (F4, H6) extended fund facility (F3) The debt a country owes to foreign banks A type of INTERNATIONAL MONETARY FUND and governments which accumulates loan introduced in 1974 which is granted through its persistent BALANCE OF PAYMENTS to a country which agrees to an economic deficits. An attempt to achieve economic adjustment programme over a three-year growth in a short time period is often the period. Repayment begins four and a half cause of such indebtedness. In extreme years after the loan is granted and is cases of foreign indebtedness, national extended over a six-year period. The facil- governments will attempt to reschedule ity was used to the extent of about $100 their debts and, in a crisis, apply to the million annually in the 1970s, and by the INTERNATIONAL MONETARY FUND for loans. mid-1980s had risen to over $2 billion per year. It can be used in conjunction with a See also: internal debt SUPPLEMENTARY FINANCING FACILITY. external economy of scale (D0) external account (F4, G2) A reduction in the AVERAGE COSTS of a firm 1 The BALANCE OF PAYMENTS accounts of a as a result of the expansion of the whole nation. industry of which it is part. A major 2 A bank account of a person who is not example of these economies occurs in the a resident of the country. case of the training of labour: the general expansion of an industry requires more external balance (F4) skilled labour to provide a pool of suitable The state of a country’s BALANCE OF PAY- labour for other firms. MENTS such that it is neither in deficit nor in surplus. In accounting terms, the bal- See also: internal economy of scale ance of payments always balances because externality (D0, Q0) of the principles of double-entry book- The benefit or cost to society or another keeping. However, in economic terms, for person of a private action (e.g. production a country to have an external balance or consumption); a third-party effect. there must be an equality between the Since PIGOU’s discussion of the distinction flows of payments and receipts between between SOCIAL AND PRIVATE COST, it has been that country and the rest of the world in a a central concept of WELFARE ECONOMICS. given time period. ‘Internalizing an externality’, in the case of See also: internal balance 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) The Theory of Interna- social cost. tional Economic Policy, Vol. I, The Balance of Payments, ch. 10, London external labour market (J4) and New York: Oxford University Press. A market consisting of competing employ- Swan, T.W. (1963) ‘Longer run problems of ers and competing workers. Workers can the balance of payments’, in H.W. Arndt and will enter firms at different pay and and W.M. Corden (eds) The Australian Economy, Melbourne: F. W. Cheshire. status levels but often with lower remuneration than in oligopolistic firms with external credit rating (F4, G2) INTERNAL LABOUR MARKETS. Much of the 1 The rating accorded to a bank of its external labour market is coterminous exposure to risk. with the SECONDARY LABOUR MARKET. © 2002 Donald Rutherford

external shock (E6) cluding the USA, property was held in this A large unanticipated change in world way by occupation rather than established economic conditions which impacts upon title. Also known as informal ownership. a particular national economy. Shocks can extrapolative expectations (D0, E0) take many forms, including a shift in the EXPECTATIONS based on the past level of an TERMS OF TRADE, a slowdown in the growth economic variable and whether that vari- of world export demand and an increase able is increasing or decreasing in value. in the interest rates set by world financial markets. However, the major shocks of the References 1970s, particularly the increase in the price Metzler, L.A. (1941) ‘The nature and of oil, had an uneven impact on the stability of inventory cycles’, Review of prosperity of particular nations with pro- Economics and Statistics 23: 113–29. ducing countries welcoming the shocks extreme value theory (C8) and consumers having to make major An account of the probabilities associated adjustments. with extreme and rare events. It is used in See also: structural adjustment policy; financial economics to model the maxima supply-side shocks and minima of a series. Inferences have to be made about the levels of a process for extralegal property (P0) which there is no data. The MARKOV CHAIN Assets, especially houses, which lack a MODEL has been used to examine extremes. legal title because of the absence of a system of PROPERTY RIGHTS in that country. extremum (C1, C6) Often this occurs in developing countries An extreme value, i.e. a maximum or a with the consequence that the de facto minimum. owners cannot use their property as col- See also: optimization problem lateral for loans. In many countries, 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 increase in factor PRODUCTIVITY in the ab- See also: stock and flow concepts 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 1 The cost of employing a FACTOR OF PRO- export industries (single factorial terms) or DUCTION. by the ratio of the index of productivity 2 A method of valuing the NATIONAL IN- change of the country’s export industries COME. This valuation at factor cost to the corresponding index for the foreign 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. See also: terms of trade 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. See also: bill of exchange 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. See also: just price 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 domestic 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 See also: 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 falling knife (G1) 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 See also: dead cat bounce ‘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. See also: US federal finance 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) See also: 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 See also: prime rate of interest 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 government. Federal finance systems vary in (1) See also: Federal Savings and Loan In- the degree of fiscal autonomy of lower surance Corporation © 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 economic 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 See also: 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 See also: Resolution Trust Corporation 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. feminist economics (D1) See also: 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. Fed funds (E5) see federal funds 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 president 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

for which the trade balance is zero. It is planning for a particular sector extends to usually positively sloped but with full planning both for the industry concerned international capital mobility it becomes and for the industries linked to it. horizontal. See also: linkage See also: Mundell–Fleming model filtering (R2) The downgrading of residential property, either by splitting it into smaller units affordable to lower income groups or by the movement of more prosperous residents to outer suburbs. Urban economists use this to explain the creation of inner city slums. Chicago is a major example of this process. final demand (R2) The demand for goods and services by the ultimate consumers, domestic and foreign households. final good (D0) A good directly used by its ultimate consumer, unlike an INTERMEDIATE GOOD. The distinction between final and inter- fiat money (E5) mediate goods is crucial to the construc- Anything declared to be acceptable as tion of an INPUT–OUTPUT table. MONEY by a CENTRAL BANK or finance ministry in charge of the currency. It is final income (E2) this declaration, rather than the intrinsic The amount of disposable income avail- value of the money as a good (as is the able to a household for expenditure and case with gold and silver coinage), which saving. It is measured as gross earnings gives it value. Fiat money mostly takes the minus taxation and social security contri- form of banknotes. butions plus housing benefits and transfers. See also: token money final offer arbitration (J5) see pendulum fiduciary issue (E5) arbitration An inconvertible issue of banknotes not backed by gold: as the name suggests, final salary pension (J3) these notes are issued in faith. In the A retirement income calculated according nineteenth century when banknotes con- to a formula based on a person’s final stituted a larger proportion of the MONEY employment salary and years of service. SUPPLY than now, controlling the size of the finance constraint (E4) see cash-in- fiduciary issue was important; this is no advance constraint longer so. financial accounting (M4) See also: Bank Charter Act 1844; fiat The recording of the business transactions money of a firm in a manner ordered by the filiere concept (D2, L0) ` legislation of the country of domicile of A French term for vertical lines of produc- that firm. The main elements of it are the tion intimately linked together. When ap- construction of a balance sheet to measure plied to industrial planning, it means that 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- See also: accounting; management accou- 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 OVERTRADING are also common causes of banking, insurance and other types 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 CENTRAL BANK in restoring liquidity and cial sector of the same or related types of institution, as well as the disproportionate general business confidence is crucial. growth of cities such as New York, Lon- See also: 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 financial journalism (G0) and Policy, Cambridge: Cambridge Uni- 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. See also: leverage; leveraged management See also: 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 See also: bubble; financial crisis; run on a 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- financial supermarket (G2) see financial 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- See also: disintermediation tion which performs the crucial role of References linking product, factor and money markets. 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 See also: limited partnership 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- See also: intermediate good 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 See also: specific training © 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. See also: 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 See also: price discrimination 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. See also: Second World; Third World See also: second economy 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, as a factories chiefly in Great Britain from preparation for the SINGLE MARKET of 1992. 1760 to 1830. See also: tax harmonization See also: industrial revolution 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 modern 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 government 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 fiscal incidence (H6) see budget incidence 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 See also: military–industrial complex 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. See also: Tiebout hypothesis See also: federal finance 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

See also: neutral budget; tax structure See also: 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. See also: fine-tuning; fiscal neutrality 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 See also: public finance 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 economic statistics 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) See also: average total cost; circulating A US fund achieving the best return to capital; human capital; quasi-fixed factor; capital employed relative to the return on variable cost 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. See also: central planning; 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. See also: gross domestic fixed capital formation See also: 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 flat grant (H2) see grant in aid 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 1 An INCOME TAX levied at the same rate clean development mechanisms. for every level of income. The justification 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. See also: 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. See also: progressive tax flight from money (E4) flat tax (H2) see flat rate tax A reduction in the DEMAND FOR MONEY 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-flop arbitration (J5) see pendulum 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) see stock and flow concepts 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 INCOME accounts showing financial trans- 2 The minimum rate of interest which an 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 See also: 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 A minimum controlled price, e.g. a MINI- Social Accounting: Appraisal, Analysis 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 prevented from falling below pre-set minima flypaper effect (H7) by government purchases of excess pro- The effect of giving grants, particularly duction. If P1 is the floor price and Pe is under a system of FEDERAL FINANCE, 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 received these grants. See also: dedicated budget; earmarking; ringfencing Fogel, Robert William, 1926– (B3) Educated at Columbia and Johns Hopkins Universities, he taught at Rochester, 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) See also: locked-in industry 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 See also: locked-in knowledge 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 transferring 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 See also: bilateral aid; multilateral aid; and Statistics 25: 26–39. tied aid © 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- NANCE activities. Central banks intervene Investment in the businesses of another 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 be contrasted with PORTFOLIO INVESTMENT, leave the market. A stable exchange rate 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, as a form of See also: forward market; spot market 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 See also: multiplier their industries by stronger, foreign economies, 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) See also: state trading organization 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) See also: blue economy; 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- See also: bracket creep; 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- See also: export promotion port and information systems and resulted 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 proprietor’s lifestyle or average profit margins, to See also: vertical integration assess a person for payment of a lump- forward linkage (L0) see linkage 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 Besancon, 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 See also: division of labour 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. See also: 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 See also: First World; Second World; the franchising company, competition law Third World 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. See also: Banking School See also: Common Agricultural Policy 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. See also: creative accounting; long fraud 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 See also: Corn laws; protection; Smoot– Ages, when they were known as ‘staples’. Hawley Tariff Act 1930 See also: in-bond manufacturing 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 See also: European Free Trade Associa- 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, or COMPARATIVE 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 STAGFLATION (1968) which modified house prices and the number of houses in the PHILLIPS CURVE (by the inclusion of EX- PECTATIONS) and introduced the concept of each price range. 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 in a HISTOGRAM. analysis. His distinctive approach to ECO- See also: frequency curve 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. Great Depression to the FEDERAL RESERVE SYSTEM’s reducing the US money stock in Friedman, Milton, 1912– (B3) US economic prophet of CAPITALISM and the period 1929–33 by one-third. In the MONETARISM and leading libertarian econo- stock market crashes of October 1987, 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 Milton Friedman, 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. fringe banking crisis (G2) see secondary front-end loading (G2) banking crisis 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- See also: labour cost 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 See also: structural deficit 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 See also: 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 responsible 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. See also: natural rate of unemployment See also: labour’s share of national in- 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

when the current and capital accounts are have a gap of this kind as a fall in incomes both in balance and the economy is reduces tax revenues and a rise in unem- internally balanced at a full-employment ployment increases welfare expenditures. level. A departure from equilibrium can See also: budgetary policy; Gramm– result in an underuse of resources, infla- Rudman-Hollings Act tion and inefficiency. See also: external balance; internal bal- fungible asset (D0) ance An asset which loses its identity through use. WORKING CAPITAL, unlike FIXED CAPITAL, fundamentals (E6) is fungible. The key economic statistics used to judge the state of an ECONOMY. At the simplest future (D0, G1) level, these are the inflation, growth and An agreed contract for the sale or pur- unemployment rates. A deeper analysis chase of an ASSET, CURRENCY or COMMODITY includes the rates of savings and produc- at a future date. tivity, external debt and current balance of payments. See also: option; spot price fundamental value (G1) future goods (D0) That price of a security in a LIQUID MARKET The product of INVESTMENT. By the sacrifice equal to the present value of its future of present consumption, it is possible to earnings. devote resources to capital goods which by See also: efficient market a ROUNDABOUT METHOD OF PRODUCTION create a greater volume of future goods than the funding (H6) present goods not available for consump- Conversion of short-term debt to long- tion today. term debt. Before governments had con- See also: Bohm-Bawerk ¨ trol over CENTRAL BANKS, funding was seen as a means of protecting a treasury against futures market (G1) a short-term collapse of confidence in A currency, commodity or security market government securities leading to heavy which permits present dealing for future sales of TREASURY BILLS and GOVERNMENT delivery. Centres for futures trading in- BONDS. Funding can also be practised by a clude Chicago, London, New York, Paris firm, e.g. it can raise cash to pay off short- term liabilities such as bank loans by and Toronto. The ‘products’ include com- issuing shares, thereby lengthening its modities, currencies and STOCK MARKET PRICE INDICES. Trading is done ‘on the debt. margin’, i.e. only a small percentage of funding gap (H6, M2) the value of the contract has to be paid by A shortage of revenue to meet the expen- the buyer or seller, but further MARGIN diture demands on a fund. This problem is CALLS are made if there is an adverse often encountered in the public sector market movement against the contracting since a variety of forces, e.g. demographic party. Falls in the value of futures con- changes, can lead to expanding pro- tracts in the autumn of 1987 prompted grammes; also, for ideological and other further calls to be made. In the 1980s there reasons there may be a reluctance to was a considerable increase in futures increase taxes. ECONOMIES in recession often markets for financial assets. © 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 COMPARATIVE ADVANTAGE demonstrates his credit that one of his most thorough how this is possible. books is his late survey of economic thought in 1987. See also: absolute advantage 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

galloping inflation (E3) see hyperinflation tries to increase the level of minimum consumption, lower the prices of neces- game theory (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 See also: 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, BoHM-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 solution concepts utilized are the NASH Gang of Four (O0) EQUILIBRIUM, the CORE, the Neumann–Mor- The Republic of Korea, Taiwan, Hong genstern stable set and the SHAPLEY value. Kong and Singapore. Major applications include BILATERAL See also: newly industrialized country 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 MONETARY CONTROL 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) See also: alpha stock; beta stock; 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. gender discrimination (J7) see sexual See also: Dillon Round; Kennedy Round; discrimination Tokyo Round; Uruguay Round; World gender division of labour (J2) Trade Organization 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 See also: medium of account; medium of is a half-way house between microeco- exchange; money nomics and macroeconomics. generalized system of preferences (F1) See also: Arrow–Debreu model A proposal made at the 1964 meeting of UNITED NATIONS CONFERENCE ON TRADE AND References 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) See also: most favoured nation Part of a budget providing finance for a variety of purposes. general market equilibrium (D5) The EQUILIBRIUM of a market with several See also: dedicated budget 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. See also: isolated market equilibrium 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 productive 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. See also: expenditure tax 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. General Theory (E0) see Keynes’s General Theory See also: parasitic city 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 See also: human capital; specific training 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- See also: commodity trade structure ment. geometric mean (C1) See also: craft union; industrial union 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 See also: arithmetic mean; 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- See also: arithmetic progression 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 Henry George 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 indices 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 economists in the nineteenth and early twentieth See also: Zipf’s law 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 demanded 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 statistician 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

been applied to the measurement of INDUS- shares sold internationally through the TRIAL CONCENTRATION. foreign branches of a bank. Ginny Mae (G3) see Government See also: American Depository Receipt National Mortgage Association 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. See also: Big Bang; 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 gliding rate (F3) see sliding parity by the establishment of institutions not subject to national governments. global depository receipt (G1) A bank certificate referring to domestic See also: multinational corporation © 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. See also: key rate; wage round 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 economic depression, 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 See also: effectual demand; Malthus; Mill, gold. If international transactions were John Stuart; Say’s law 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 See also: non-goal equilibrium 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 See also: tax farming 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 See also: instrument variable; target vari- 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) debtor countries introduced EXCHANGE CON- A financial arrangement made by a com- 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. See also: commodity reserve currency; dollar standard; gold exchange standard 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 See also: dollar standard 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. See also: 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 See also: dollar standard; gold bullion 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 See also: gold bullion standard 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 See also: soft landing 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. VALUE. 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 Dt ðr À 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 See also: bad; brown good; consumer which had the task of collecting economic durable; illth; wealth; white good 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 See also: fine-tuning; fiscal policy; in- or central government. Lower levels of comes policy; monetary policy; 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) see days of grace projected deficit of $318 billion was announced. This draconian measure has gradualist monetarism (E3) given questionable powers to the OFFICE OF A form of MONETARISM that accepts that MANAGEMENT AND BUDGET and CONGRESSIONAL the association between money supply BUDGET OFFICE as well as necessitating un- increases and price increases is a long- popular spending cuts in successive years. term phenomenon. Thus, in the short run, In 1986, the US Supreme Court ruled the there is a limited role for the stimulation automatic SEQUESTRATION provision of the of aggregate demand through the use of Act unconstitutional. fiscal and monetary policies. However, monetarists of this kind would prefer there grandfather clause (F1, K2) to be no DEMAND MANAGEMENT because of An item in an agreement permitting the their belief that, as an economy is basically retention of laws in conflict with the self-adjusting, manipulation of aggregate essence of the agreement. GATT con- demand would cause fluctuations. FRIED- tained such clauses. MAN (USA) and Laidler (UK) have ad- hered to this view; the NEW CLASSICAL grandfathering (Q0) ECONOMICS writers are instant monetarists. Distributing tradable permits to pollute according to countries’ existing levels of See also: instant monetarism 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- See also: bracket creep; progressive tax 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 See also: beggar-my-neighbour policy; de- much of fiscal policy, as it is concerned pression; recession; slump with providing TRANSFER INCOMES for persons 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 models takes the form Mij ¼ Pi Pj =dij 2 Great Leap Forward (N1, P2) where Mij is the amount of movement China’s attempt in its Second Five-Year between i and j, Pi is the population of Plan of 1958–62 to replace Soviet-type place i, Pj is the population of place j and planning with its own over-ambitious de- 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 lasting 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) See also: corporate governance (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 particular 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 bein

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