economic challenges

business cycle

the naturally varying cycle of economic growth, which can rise or fall over time, measured as the growth of real GDP (Joseph Schumpeter, Irving Fisher)

Ceteris Paribus

-standard assumption in positive economics that is usually translated as ‘all else being equal’

-measuring the effect of one variable on another, all other variables are kept constant (Alfred Marshall)

Factor of production

-input that is used in the production of goods or services

-factors of production:labour, land and capital

-price of labour is wage, the price of land is rent, and the price of capital is the interest rate, which is equal to the opportunity cost of using capital

(-in more modern theories entrepreneurship or ‘human capital’ is added as a fourth factor of production)

Fiscal policy

use of taxation and expenditure policies by the government to regulate and stimulate economic activity (John Maynard Keynes)

Inflation

The rate at which prices in a market rise and the purchasing power falls (Irving Fisher)

economic systems to organise a country

custom system (in which society is organised around tradition and habits)

-command system (in which the government or state decides the quantity, types and prices of the goods being produced, communist)

-market system (decentralized economic system in which firms and consumers pursue their own material objectives and prices are determined by demand and supply of a country’s individual citizens and businesses, government interference is minimal)

Markets

-institutions in which individuals exchange goods and services usually using money as a medium of exchange

-can be distinguished according to the goods or services traded in them (e.g., financial markets, housing markets, labor markets), according to their scope (e.g., regional, national, international markets), or according to their structure (e.g., competitive markets, oligopolistic markets, monopolistic markets)

Monetary policy

set of actions and regulations by the central bank used to control and maintain the size and growth rate of the money supply, the cost and availability of credit and the composition of national debt

Paradigm

orthodox framework containing the assumptions, ways of thinking, and methodology underlying (economic) theories that are most commonly accepted by members of a scientific community

Chrematistiké

Economic activity with the goal of sheer profit making, which was considered unnatural and hence unjust. (Aristotle)

Division of Labour

The separation of tasks in the supply chain which allows for specialization and therefore increased quality and quantity of production. (Xenophon, Adam Smith, Karl Marx)

Exchange value

The quantitative aspect of value of a good or service. It indicates what (quantity of) other commodities it will exchange for, if traded. (Xenophon, Karl Marx)

Feudalism

The medieval system in which people were given land and protection by people of a higher socialclass in exchange for their loyalty and service.

Guild

An association of producers which regulate the supply of a good or service in a local market. All suppliers work within a framework of shared regulations on methods of production and pricing.

Manorial system

Economic system preceding the market system, in which local lords were centres of political, military, economic and social power.

Normative economics

branch of economics that expresses value judgments about economic fairness, the goals of public policy or what the outcomes of economic activity should be

Oikonomia

Household management, which was the only virtuous form of economic activity in the eyes of Aristotle. It comes from οἶκος (oîkos, “house”) + νόμος (nómos, “law”) (Aristotle)

Positive economics

branch of economics that concerns the description and explanation of verifiable economic phenomena (Alfred Marshall, Milton Friedman)

Telos

The purpose of things. According to Aristotle usury was against the “…” of money, as the purpose of money is facilitating exchange. (Aristotle)

Use value

Subjective, qualitative value of a good or service (Xenophon, Karl Marx)

Usury

Lending of money against interest (Aristotle, Thomas Acquinas)

Bullionism

-economic theory that defines a country’s wealth by the amount of precious metals it owns

-monetary policy of mercantilism

Diamond-water paradox

also known as the Paradox of Value, that water is generally more useful and versatile in terms of survival but worth a lot less than a diamond concerning market value (Adam Smith, Paul Samuelson)

Impartial spectator

The part of you that can detach and observe what the rest of you is doing, which is considered the guardian of correct moral behaviour according to Adam Smith. It is one of the main concept used in his ‘Theory of Moral Sentiments’.

Invisible Hand

Metaphor for the market system, which solves the economic problem without intervention from custom and command. The unobservable force that drives supply and demand to an equilibrium in a free market with multiple actors. (Adam Smith)

Labour theory of value

The value theory of the Classical Economists, that states that the price of a good or service is determined by the amount of labour needed to produce it instead of the utility someone acquires from it. (Adam Smith, David Ricardo, Karl Marx)

Market Price

-current (short-run) price at which a product or service is sold/bought in a market

-nominal price, meaning the value is not adjusted for inflation (Adam Smith)

Mercantilism

-economic policy/system of a country that focuses on the accumulation of wealth, or more specifically precious metals, through maximizing exports and limiting imports via tariffs and quotas

-mainly utilised between the 16th and 18th century

-Mercantilists saw international trade as a zero-sum game, which means that gains in wealth from one country are at the expense of the other (Jean-Baptiste Colbert, Thomas Mun)

Natural Price

The price to which goods and services seem to gravitate naturally in the long run (Adam Smith)

Physiocracy

-Economic school of thought during the second half of the 18th century, which mainly resided in France

-thought that the entire wealth of a nation derived solely from land agriculture, also known as the Gift of Nature (François Quesnay)

Price-specie flow mechanism

-against the use of Mercantilism as main economic policy

-states that countries with positive trade balances are effectively importing gold (money) in exchange for their exports (increase in gold causes inflation, which makes prices rise and in turn makes imports more competitive)

-countries with negative trade balances are exporting gold in exchange for imports (decrease in gold causes deflation, which makes price fall and exports more competitive internationally)

-causes the balance of trade to shift in both countries

-trade balance is relatively unimportant because it tends to balance itself out in the long term (David Hume)

Real price

gives a more realistic picture of economic purchasing power since the nominal price adjusted for the inflation rate (Adam Smith)

Trade balance

difference between a country’s exports and its imports over a certain amount of time (David Hume)

Comparative advantage

economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors, not necessarily at a greater volume (David Ricardo)

Absolute advantage

ability to produce more or better goods and services than somebody else (David Ricardo)

Corn laws

Mercantilist tariffs placed on the import of corn in the UK between 1815 and 1846, designed to protect the British agricultural sector. When the prices reach a floor level, imports are banished. (David Ricardo, Thomas Malthus)

Felicific Calculus

Methodology invented by Jeremy Bentham to calculate pleasure and pain, which is considered one of the main precursors of cost-benefit analysis. It bases its calculations on the factors of intensity, duration, propinquity and many more. (Jeremy Bentham)

General Glut

-exists when there is excess supply in all markets

-meaning general shortage of demand to consume the total production

-Jean-Baptiste Say argued that general gluts could not occur because supply creates its own demand (Say’s Law)

-Malthus rejected Say’s Law

Iron Law of Wages

-popular amongst the Classical Economists

-when wages increase, workers will have more children

-pressure on the food supply lowers the standard of living

-more labor in the economy lowers wages

-natural price of labor is equal to the subsistence wage (David Ricardo, Thomas Malthus)

Poor laws

-Legislation regulating poverty relief in the UK

-heavily influenced by the insights of Malthus’ Iron Law of Wages

-Poverty was a result of population pressure and all poverty relief would defeat its purpose, as population pressure would only increase (David Ricardo, Thomas Malthus)

Positive checks

Circumstances that increase the number of deaths like wars epidemics etc. (Thomas Malthus)

Preventative checks

Circumstances that decrease the number of births like family planning in China (Thomas Malthus)

Recession

A sequence of two or more business quarters of economic decline.

Stationary State

-state of the economy in which there is no economic growth anymore

-considered negative by Ricardo and Malthus, Mill saw the stationary state as a way to end the rat-race of industrial life (John Stuart Mill, David Ricardo)

Alienation

-process of being separated from your own individual ‘self’ due to living in a society with established social classes

-being a mechanistic part of the society and more specifically the production process

-Workers are deprived from their right to think due to having to execute a simple repetitive task for the production of a good with capital owned by the bourgeoisie (Karl Marx)

Capitalism

-Most common mode of economic organization in our time

-Capitalism relies on the market system for its economic order

-the owner of the firm is the residual claimant of the fruits of production after workers are being paid their wage

-Marx considered it a necessary precursor of Socialism and Communism

Class struggle

-conflict of interests between the proletariat and the bourgeoisie in a capitalist society

-leads to an uprising of the proletariat and the seizing of the means of production, thereby ending Capitalism (Karl Marx & Friedrich Engels)

Commodity

A good produced with the sole intention to be sold on the market. It is considered the opposite of a private good.

Communism

The economic system, advocated for by Karl Marx, in which the means of production and resources are owned by the ‘common’. Production is planned by a central planning agency and the market is controlled by the government. Resources are plentiful till the extent that any citizens can take or use resources according to his or her needs. (Marx considers this the final stage of the six modes of production that society has to go through and the most beneficial form of society for the entire population.)

Dialectic materialism

-every economic society is built as an economic base of workers and a superstructure of non-economic activity and thought (ideas, laws, ethos)

-Superstructures cannot be selected randomly and rebellion takes place due to the invention of new technology and production processes that render the traditional production processes obsolete

-class struggle and revolution (Karl Marx)

Exploitation

The process of creating surplus value by the capitalist at the expense of the worker. (Karl Marx)

Socialism

-economic system that would occur as a transitional stage between capitalism and communism

-Means of production are owned by the government, but income and consumer goods are private

-Production is centrally planned (Marx&Oscar Lange)

Surplus value

value remaining when the cost of maintaining the worker (his subsistence cost) has been subtracted from the total value of the product he produces (Marx)

Consumer Surplus/Producer Surplus/Social Surplus

-consumer surplus: measure of the benefit of the consumer from a transaction, which is analyzed through calculating the difference between what consumers are willing to pay for a good or service and the market price

-producer surplus:difference between the market price a producer receives and the cost of production needed to produce the good

-sum of these two surpluses is known as the social surplus (Alfred Marshall)

General Equilibrium Theory

Economic theory that tries to analyze the emergence of an equilibrium of supply and demand over multiple interacting markets. (Léon Walras)

Gossen’s First Law

Economic law that states there is decreasing marginal utility of consumption.

Gossen’s Second Law

The law that states that the ratio of marginal utility/price needs to be the same for all goods at the utility maximizing level.

Partial Equilibrium Theory

analysis of the relationship of a limited number of variables in one market, while the rest of the variables is kept constant in the analysis (ceteris paribus assumption)

Saleableness

-also known as liquidity

-degree to which an object or service is easily sold to other actors

-the most ”…”-able good is money.

Spontaneous order

Order that comes from the undesigned actions of man, it is a key concept in Libertarian theory.

Walrasian auctioneer

Metaphor for the price adjustment mechanisms in the market. Key element of the process of tâtonnement.

Human Capital

skills, knowledge, and experience that individuals possess, which can enhance their productivity and value in the workforce hence economic value

Institutional School

(Veblen, Commons) late 19th-20th century

-School of thought

-social, politcal, and institutional factors shaping economic behaviour

-rejects notions of individuals as purely rational actors

-interactions between institutions

Nudging

Influencing economic decision making without legislative coercion or financial repercussions. It is considered as one of the main innovative concepts in the discipline of behavioral economics.

Organisations

Structured units of people that are managed and guided towards pursuing collective goals.

Animal spirits

The instincts and emotions that underlie irrational human behaviour. (John Maynard Keynes)

Austerity

Collective name for policies aimed at cutting government spending with the goal to decrease government debt (John Maynard Keynes)

Boom/Bust

Natural deviations from the long-run equilibrium in the economy. Booms and busts together form business cycles.

Debt-quota

Amount of debt as proportion of a country’s GDP.

Great Depression

-stock market crash known as Black Tuesday in 1929

-global economic depression in the 1930s

-global GDP fell by 15%

-unemployment rate in the US climbed up to 25%

- Keynes: the Great Depression was induced by austerity of the US government

Keynesian Multiplier

Government spending brings about positive externalities that cause an increase of GDP larger than the original spending. (John Maynard Keynes)

Macroeconomics

Field in economics that analyzes movements in the overall economy, trends in prices, output and unemployment. It also investigates the effectiveness of government policy (both budgetary and monetary policy). (Irving Fisher, John Maynard Keynes, Milton Friedman)

Marginal Propensity to Consume

-measures how large of a proportion an individual would spend rather than save when his income increases

-lies between 0 and 1.

(John Maynard Keynes)

Cantillon effect

-increase in the supply of money has localised effects on inflation

-as new money ripples through the economy, different goods experience price changes at different moments

Creative Destruction

-technical innovation that induces the destruction of the old economic structure

-((temporarily) allows for economic profit)

-Joseph Schumpeter believed that it would be the end of capitalism in the long run

Debt deflation

-causes the real value of debt to rise

-governments have to cut spending further

-consumers default on their loans

-banks turn insolvent

=recessions

-according to Fisher the main cause of the Great Depression

Kitchin cycle/Juglar cycle/Kondratieff cycle

Kitchin: Economic cycle of 3 to 5 years caused by inventory fluctuations

Juglar: Economic cycle of 7 to 11 years caused by fluctuations in investment in fixed capital.

Kondratieff: Economic cycle of 45 to 60 years caused by long-run technological innovation (Irving Fisher, Joseph Schumpeter)

Money Illusion

-tendency of people to think in nominal instead of real terms (amount of money is more important than its actual purchasing power)

-causes stickiness of prices and the lack of indexing for inflation of contracts (Irving Fisher, John Maynard Keynes)

Quantity Theory of Money

-characterized by the equation: MV = PY

-M as the amount of money in circulation

-V as the velocity of money

-P as the aggregate price level

-Y as the output in the economy (Irving Fisher)

Austrian school

(Menger, Mises, Hayek)

-School of thought

-founded in the late 19th century by Carl Menger

-believes social phenomena are the results of the actions and motivations of individuals(methodological individualism)

-economic liberalism+ critical views on mainstream economics

Game theory

-study of strategic decision making (by rational players in situations of potential co-operation and/or conflict)

Libertarianism

-collection of ideas and paradigms that advocate for the upholding of liberty as most important principle

-seeks to maximize political freedom and autonomy and is sceptic towards the expansion of the state’s authority and control

Microeconomics

Discipline in economics that studies how individuals and firms make choices in the allocation of scarce resources in various market settings.

Prisoner’s dilemma

Famous game where both players have a dominant strategy that leads to an outcome where both are being worse-off.

Totalitarianism

Form of government that does not permit individual freedom and that seeks to subordinate all aspects of individualism to the authority of the state.

Behavioural economics

-field of economics connected to psychology, social environment, cognition and emotions on economic decision making

-does not assume rationality of economic actors

Bounded rationality

-ability of rational decision making of economic actors is bounded by both cognitive and time limitations

Capabilities approach

-focusses upon individuals’ capability of achieving the kind of lives they have reason to value

-Sen’s approach to development on which the HDI is based

-‘poverty’ is understood as deprivation in the capability to live a good life

Econometrics

Field in economics that investigates economic relationships using mathematical and statistical techniques.

Loss aversion

-associated with prospect theory (Kahnemanns theory involving risk & uncertainty)

-pain of losing is psychologically about twice as powerful as the pleasure of gaining

Mental accounting

-set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities

-people classify personal funds differently and for that reason engage in irrational decision-making in spending

-one of the fundamental concepts in the branch of behavioural economics.

Monetarism

-Economic school of thought

-money supply is the chief determinant of short- run economic activity

-Monetary policy is deemed much more important than fiscal policy

Prospect theory

-indicates that people are loss-averse; since individuals dislike losses more than equivalent gains, they are more willing to take risks to avoid a loss.

Theory of satisficing

-adequate or satisfactory result than attaining the most ideal outcome

-pragmatic

-attainment of the most optimal solution might cause unnecessary expenditure of time, energy and resources

-decision making based on an acceptability threshold

Tinbergen rule

Rule that states that for each policy objective there is need for at least one policy instrument.

Marx downfall of capitalism

1.higher demand for labour

2.higher wages

3.introduction of labour saving capital goods

4.smaller and smaller base for surplus value

5.bigger and bigger firms fall

protagonists of “Das Kapital”

workers&capitalists

at the start of a recession, the economy experiences…

1.an increase in savings & a decrease in consumption and investments

2.the interest rate drops

3.more funds are available for borrowing

4.an increase in consumption and investments and a decrease in savings

5.the recession ends quickly

Joseph Stiglitz

wrote the globalisation and its discontents & has a critical standpoint on globalisation

Becker’s POV

-addicts maximalize short run utility

-the better policy to fight crime is increasing fines and decreasing surveillance