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 re- de 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, at- tracting 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 vic- tims 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 pro- of 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 under- takes 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.

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