Honors Political Economy Key Terms

Economic Revolution

a dramatic shift in the structure of the economy, particularly referring to the Industrial Revolution’s transformation of production and social relations

Industrial Revolution

the period of rapid industrial growth in the 18th and 19th centuries that changed how goods were produced and economies were structured

Market System

an economic system in which decisions about production and consumption are driven by supply and demand in markets

Capitalism

an economic system characterized by private ownership of the means of production and the pursuit of profit

Social Structure

the organized pattern of social relationships and institutions that together form the basis of society

Subsistence Economy

an economy where people produce only what they need to survive, with little to no surplus or trade

Feudalism

a pre-capitalist social system based on land ownership, with a rigid hierarchy of lords, vassals, and peasants

Economic Organization

the way in which economic activity is structured, including production, distribution, and consumption

Production for Profit

a defining feature of capitalist economies where goods are produced not for personal use but to be sold for financial gain

Technological Innovation

new inventions and techniques that increase productivity and efficiency, often driving economic change

Labor Force

the body of people able to work, especially those who are employed in producing goods and services

Division of Labor

the separation of tasks in a system so that workers specialize in specific roles, increasing efficiency

Economic Motivation

the driving forces behind economic decisions, often linked to self-interest and profit

Displacement

the process of people being pushed out of traditional livelihoods due to economic changes like industrialization

Invisible Hand

although discussed more in depth in later chapters with Adam Smith, it’s relevant here as the emerging idea that self-interest in free markets leads to social benefits

Entrepreneur

an individual who organizes and operates a business, taking on financial risks in the hope of profit

Commodification

the process of turning goods, services, or even labor into commodities that can be bought and sold

Scarcity

the fundamental economic problem of having limited resources to meet unlimited wants

Urbanization

the growth of cities as people move from rural areas, often linked to the rise of industrial economies

Economic Theory

a set of principles and models that explain how economies function and how people make economic decisions

Invisible Hand

the idea that individuals pursuing their own self-interest unintentionally benefit society through their economic activities

Division of Labor

the specialization of workers in specific tasks to improve efficiency and productivity

Laissez-Faire

a policy of minimal government interference in economic affairs; "let do" in French

Self-Interest

the principle that individuals make economic decisions based on personal gain, which can lead to collective benefits

Free Market

an economic system where prices are determined by unrestricted competition between privately owned businesses

Capital

wealth in the form of money or assets used to invest in production and generate profits

Labor Theory of Value

the idea that the value of a good is determined by the amount of labor required to produce it

Productive vs. Unproductive Labor

productive labor results in tangible goods and adds to a nation’s wealth; unproductive labor does not produce physical goods

Natural Price

the "true" value of a good based on the costs of production, including wages, rent, and profit

Market Price

the actual price at which a good is sold, influenced by supply and demand and may differ from the natural price

Wealth

for Smith, wealth is not just gold and silver, but the total production and commerce of a nation

Specialization

the concentration of individuals or economies on a narrow area of expertise to increase productivity

Competition

a driving force in the economy that encourages efficiency, innovation, and fair prices

Monopoly

a market situation where a single seller dominates, which Smith viewed as harmful to economic freedom and efficiency

Exchange

the act of trading goods or services, central to Smith’s understanding of how economies grow

Mercantilism

an economic theory Smith critiques, which emphasized accumulating gold and silver through trade surpluses and government control

Natural Liberty

Smith’s concept of individuals being free to pursue their economic interests with minimal restraint, leading to greater prosperity

Wages, Profit, and Rent

the three components of income in Smith’s analysis: wages (labor), profit (capital), and rent (land)

Economic Growth

the increase in a nation's output and wealth, which Smith links to capital accumulation, division of labor, and free markets

Public Goods

goods that are non-excludable and non-rivalrous, which Smith argues may require government provision (like roads or education)

Supply

the total amount of a specific good or service that is available to consumers. In a market economy, the "Law of Supply" suggests that as the price of an item rises, suppliers will attempt to maximize their profits by increasing the quantity of that item for sale

Demand

a consumer's desire and willingness to pay a price for a specific good or service. The "Law of Demand" states that, holding all other factors constant, as the price of a good increases, consumer demand for that good decreases

Equilibrium

the state in which market supply and demand balance each other, and as a result, prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand, while an under-supply or shortage causes prices to go up

Surplus Value

the value produced by labor that is greater than the wages paid to workers; it’s the source of profit for capitalists

Commodification

the process by which things (including labor and relationships) are turned into commodities to be bought and sold

Commodity Fetishism

the perception that the value of commodities comes from the objects themselves, obscuring the labor and social relations behind them

Labor Power

a worker’s capacity to work, which is bought and sold under capitalism like any other commodity

Use-Value vs. Exchange-Value

use-value is the usefulness of a good; exchange-value is what it can be traded or sold for in the market

Means of Production

the physical, non-human inputs used for production—factories, tools, land, etc.

Relations of Production

the social relationships people enter into in the process of producing goods (e.g., employer/worker)

Exploitation

the process by which capitalists extract surplus value from workers, paying them less than the value they produce

Mode of Production

the overall system of economic production (e.g., feudalism, capitalism), combining productive forces and relations of production

Historical Materialism

Marx’s theory that history progresses through material (economic) conditions rather than ideas

Alienation

the separation of workers from the products of their labor, from the labor process, from themselves, and from others under capitalism

Class Struggle

the ongoing conflict between different classes with opposing interests, seen as the driving force of history

Reification

treating human relationships and processes as things, often seen in the way capitalism obscures social labor behind commodities

Bourgeoisie

the capitalist class who owns the means of production and employs wage laborers

Proletariat

the working class who sell their labor power to survive and have no ownership of the means of production

Class Consciousness

awareness by the working class of their shared exploitation and their potential collective power

Revolution

the overthrow of one class by another, particularly the expected uprising of the proletariat against the bourgeoisie

Communism

a classless, stateless society in which the means of production are communally owned

Abolition of Private Property

a core tenet of communism, referring not to personal possessions but to private ownership of productive assets

Dialectical Materialism

a philosophical approach to understanding change through contradictions in material conditions and class dynamics

Oppressor vs. Oppressed

a recurring theme in Marx’s writing where every historical epoch is marked by a dominant class exploiting a subordinate one

Internationalism

the idea that the working class across nations must unite for global revolution: “Workers of the world, unite!”

False Consciousness

a condition in which the working class fails to recognize their exploitation, often due to ideology or capitalist propaganda

Dictatorship of the Proletariat

a transitional socialist state in which the working class holds political power before reaching a stateless, classless society

Aggregate Demand

the total demand for goods and services in an economy at a given time and price level. Central to Keynes’s theory

Aggregate Supply

the total output (goods and services) that firms in an economy are willing and able to produce at a given price level

Macroeconomics

the branch of economics dealing with the economy as a whole, including inflation, unemployment, and economic growth. Keynes is considered a founding figure

Fiscal Policy

government policy on taxation and spending, which Keynes emphasized as a tool to manage economic cycles

Monetary Policy

• central bank actions involving interest rates and money supply, which Keynes saw as less effective during deep recessions

• central banks usually try to do two main things: manage inflation, and promote maximum employment

Unemployment

a key concern for Keynes, who argued that economies could get stuck with high unemployment without government intervention

Full Employment

the level of employment where virtually everyone who wants to work can find a job; a target of Keynesian policy

Underemployment Equilibrium

a situation where the economy settles at a level of output and employment below its potential, requiring policy intervention

Involuntary Unemployment

when people are willing to work at current wages but can’t find jobs, contradicting classical economic theory

Multiplier Effect

the idea that an initial increase in spending (especially government spending) leads to a larger increase in total economic output

Marginal Propensity to Consume (MPC)

the portion of additional income that a consumer spends rather than saves. A key part of calculating the multiplier

Investment

spending by businesses on capital goods. Keynes emphasized its sensitivity to expectations and interest rates

Animal Spirits

a term Keynes used to describe the emotions and instincts that influence investor and consumer behavior, beyond rational calculation

Expectations

the beliefs individuals hold about the future, which heavily influence investment and consumption decisions

Deficit Spending

when a government spends more than it earns in revenue, often advocated by Keynes during recessions to boost demand

Demand Management

the use of policy tools to influence overall demand in the economy, a central idea in Keynesian economics

Public Works

government-funded infrastructure projects aimed at reducing unemployment and stimulating demand

Liquidity Preference

Keynes’s theory explaining the demand for money: people prefer liquidity and need higher interest rates to give it up

Interest Rate

the cost of borrowing money. Keynes argued that it affects investment but isn’t always enough to stimulate demand on its own

Savings Paradox (Paradox of Thrift)

the idea that while saving is good for individuals, if everyone saves more during a downturn, demand falls and the economy worsens

Globalization

the overarching theme of the book. Defined by Friedman as the integration of markets, finance, and technology in a way that shrinks the world and connects people more deeply than ever before

The Lexus

symbol of modernization, economic prosperity, technological advancement, and the drive for progress

The Olive Tree

symbol of identity, culture, tradition, and roots—what connects people to place and history

Tension (Lexus vs. Olive Tree)

the central metaphor of the book: the ongoing struggle between the forces of globalization (Lexus) and those of cultural identity and tradition (Olive Tree)

The Three Balances of Globalization

the power between nation-states, the power between states and global markets ("supermarkets"), and the power between states and "super-empowered" individuals

Electronic Herd

Friedman's term for global investors and capital markets that move money instantly and shape economies—includes Wall Street, bond traders, hedge funds, and more

Golden Straitjacket

a metaphor for the economic policy framework that countries must adopt to thrive in globalization (e.g., deregulation, free markets, open economies). It brings growth—but limits autonomy

Supermarkets vs. Superpowers

refers to the rising influence of global businesses and markets (supermarkets) compared to traditional political powers (superpowers)

Integration

the deep interconnection of nations through trade, capital flow, communication, and culture

Disintegration Anxiety

the fear that rapid global changes will erode traditional values, cultures, and national identities

Global Mindset

a perspective that understands global interdependence and adapts to the logic of global systems

System

Friedman views globalization as a “system” that replaced the Cold War system—marked by integration instead of division

Cold War System

the global order before globalization; characterized by division, superpower rivalry, and walls/barriers