Glossary final PDF

ECONOMIC CHALLENGES: GLOSSARY BSc Economics & Business Economics Year 1; Period 1 dr. R.I. Luttens 1 Contents Preface.................................................................................................................................................... 6 Lecture 1:............................................................................................................................................... 7 Business cycle..................................................................................................................................... 7 Ceteris Paribus..................................................................................................................................... 8 Command system................................................................................................................................ 9 Consumption..................................................................................................................................... 10 Custom system.................................................................................................................................. 11 Factor of production.......................................................................................................................... 12 Fiscal policy...................................................................................................................................... 13 Inflation............................................................................................................................................. 14 Market system................................................................................................................................... 15 Markets.............................................................................................................................................. 16 Monetary policy................................................................................................................................ 17 Paradigm............................................................................................................................................ 18 Production......................................................................................................................................... 19 Scarcity.............................................................................................................................................. 20 School of thought.............................................................................................................................. 21 Lecture 2:............................................................................................................................................. 22 Chrematistiké..................................................................................................................................... 22 Division of Labour............................................................................................................................ 23 Exchange value.................................................................................................................................. 24 Feudalism.......................................................................................................................................... 25 Guild.................................................................................................................................................. 26 Just Price Doctrine............................................................................................................................. 27 Manorial system................................................................................................................................ 28 Normative economics........................................................................................................................ 29 Oikonomia......................................................................................................................................... 30 Philosopher king................................................................................................................................ 31 Positive economics............................................................................................................................ 32 Telos.................................................................................................................................................. 33 Use value........................................................................................................................................... 34 Usury................................................................................................................................................. 35 Lecture 3:............................................................................................................................................. 36 2 Bullionism......................................................................................................................................... 36 Capital............................................................................................................................................... 37 Diamond-water paradox.................................................................................................................... 38 Impartial spectator............................................................................................................................. 39 Invisible Hand................................................................................................................................... 40 Labour theory of value...................................................................................................................... 41 Law of population............................................................................................................................. 42 Market Price...................................................................................................................................... 43 Mercantilism...................................................................................................................................... 44 Natural Price...................................................................................................................................... 45 Physiocracy....................................................................................................................................... 46 Price-specie flow mechanism............................................................................................................ 47 Real price........................................................................................................................................... 48 Trade balance.................................................................................................................................... 49 Lecture 4:............................................................................................................................................. 50 Comparative advantage..................................................................................................................... 50 Corn laws........................................................................................................................................... 51 Felicific Calculus............................................................................................................................... 52 General Glut...................................................................................................................................... 53 Industrial Revolution......................................................................................................................... 54 Iron Law of Wages............................................................................................................................ 55 Marginal land.................................................................................................................................... 56 Poor laws........................................................................................................................................... 57 Positive checks.................................................................................................................................. 58 Preventative checks........................................................................................................................... 59 Recession........................................................................................................................................... 60 Ricardo’s Theory of Rent.................................................................................................................. 61 Stationary State.................................................................................................................................. 62 Utilitarianism..................................................................................................................................... 63 Lecture 5:............................................................................................................................................. 64 Alienation.......................................................................................................................................... 64 Capitalism.......................................................................................................................................... 65 Class struggle.................................................................................................................................... 66 Commodity........................................................................................................................................ 67 Communism...................................................................................................................................... 68 3 Dialectic materialism......................................................................................................................... 69 Exploitation....................................................................................................................................... 70 Proletariat.......................................................................................................................................... 71 Socialism........................................................................................................................................... 72 Surplus value..................................................................................................................................... 73 Lecture 6:............................................................................................................................................. 74 Consumer Surplus/Producer Surplus/Social Surplus........................................................................ 74 General Equilibrium Theory............................................................................................................. 75 Gossen’s First Law............................................................................................................................ 76 Gossen’s Second Law....................................................................................................................... 77 Marginal Utility................................................................................................................................. 78 Marginalist Theory of Value............................................................................................................. 79 Partial Equilibrium Theory................................................................................................................ 80 Process of tâtonnement...................................................................................................................... 81 Saleableness....................................................................................................................................... 82 Spontaneous order............................................................................................................................. 83 Walrasian auctioneer......................................................................................................................... 84 Lecture 7:............................................................................................................................................. 85 Conspicuous consumption................................................................................................................. 85 Human Capital................................................................................................................................... 86 Institutions......................................................................................................................................... 87 Institutional School............................................................................................................................ 88 Nudging............................................................................................................................................. 89 Organisations..................................................................................................................................... 90 Lecture 8:............................................................................................................................................. 91 Animal spirits.................................................................................................................................... 91 Austerity............................................................................................................................................ 92 Automatic stabiliser........................................................................................................................... 93 Boom/Bust......................................................................................................................................... 94 Debt-quota......................................................................................................................................... 95 Great Depression............................................................................................................................... 96 Keynesian Multiplier......................................................................................................................... 97 Macroeconomics............................................................................................................................... 98 Marginal Propensity to Consume...................................................................................................... 99 Lecture 9:........................................................................................................................................... 100 4 Cantillon effect................................................................................................................................ 100 Creative Destruction........................................................................................................................ 101 Debt deflation.................................................................................................................................. 102 Kitchin cycle/Juglar cycle/Kondratieff cycle.................................................................................. 103 Money Illusion................................................................................................................................ 104 Quantity Theory of Money.............................................................................................................. 105 Risk.................................................................................................................................................. 106 Lecture 10:......................................................................................................................................... 107 Austrian school................................................................................................................................ 107 Game theory.................................................................................................................................... 108 Libertarianism................................................................................................................................. 109 Methodological individualism......................................................................................................... 110 Microeconomics.............................................................................................................................. 111 Prisoner’s dilemma.......................................................................................................................... 112 Totalitarianism................................................................................................................................. 113 Lecture 11 & 12:................................................................................................................................ 114 Behavioural economics................................................................................................................... 114 Bounded rationality......................................................................................................................... 115 Capabilities approach...................................................................................................................... 116 Econometrics................................................................................................................................... 117 Loss aversion................................................................................................................................... 118 Mental accounting........................................................................................................................... 119 Monetarism...................................................................................................................................... 120 Prospect theory................................................................................................................................ 121 Theory of satisficing........................................................................................................................ 122 Tinbergen rule................................................................................................................................. 123 Exercise material............................................................................................................................... 124 5 Preface Economic theories do not come out of thin air. Crucial for the course Economic Challenges is the insight that economists, both in the present and in the past, respond to the social, political and economic circumstances of their time. Studying the development of economic thought in its historical context is an excellent way to appreciate the richness of economics as a scientific tradition. In class, each lecture starts with the discussion of an important period in economic history, starting from classical antiquity up to modern times. Each lecture ends with the discussion of a current 'economic challenge', like climate change, markets and morality, Brexit, limits on growth, aging, sweatshops, market failures, the influence of advertising, the Euro crisis, robotization, nuclear threat, big data and the Covid-19 pandemic. The relevance of the theory to the contemporary debate is always demonstrated. Along the way, we introduce the most important works of leading thinkers in economics such as Adam Smith, Karl Marx, Alfred Marshall and John Maynard Keynes. The fact that their ideas differed greatly from each other about the correct way of doing research and making policy underlines the philosophy of this course that tackling important social questions from different angles promotes the understanding of what economics is all about. This Glossary compiles the most important keywords used in the course. This document is meant to be an inspiring collection of knowledge and a helpful resource in preparing for the exam. Students are expected to be able to link the keywords of this glossary to their respective definitions and thinkers (and vice versa). Clearly, all provided quotes and reference materials (images + web-links) are solely meant for illustrative purposes and are not mandatory for the exam. Completing the exercise material at the end of this document could be helpful (and fun!) in preparing for the exam. Students are strongly encouraged to email me ([email protected]) suggestions of new additions of keywords, interesting links, graphs or cartoons in order to make this glossary a truly ‘living’ document. In the discipline of economics, where different ideas and paradigms do not always converge, it is important to keep speaking the same language. Therefore, it is my wish that this glossary of keywords can provide a first solid foundation in your training to becoming a professional economist. Enjoy the course and your studies in the EBE or Minor in Economics program! Roland I. Luttens 6 Lecture 1: Business cycle Definition: The naturally varying cycle of economic growth, which can rise or fall over time, measured as the growth of real GDP. Thinker(s): Joseph Schumpeter, Irving Fisher Quote: “Why do entrepreneurs appear, not continuously, that is singly in every appropriately chosen interval, but in clusters? Exclusively because the appearance of one or a few entrepreneurs facilitates the appearance of others, and those the appearance of more, in ever-increasing numbers.” – Joseph Schumpeter Reference material: See also: Recession, Boom/Bust, Kondratieff cycle, Juglar cycle, Kitchin cycle 7 Ceteris Paribus Definition: A standard assumption in positive economics that is usually translated as ‘all else being equal’. In measuring the effect of one variable on another, all other variables are kept constant. Thinker(s): Alfred Marshall Quote: “We may assume the superiority ceteris paribus of the demonstration which derives from fewer postulates or hypotheses - in short from fewer premises” – Aristotle; Posterior Analytics Book 1 Part 25 Reference material: http://stickfigureeconomics.blogspot.com/2012/05/ http://conversableeconomist.blogspot.nl/2016/08/alfred-marshall-and-origin-of-ceteris.html https://www.thebalance.com/ceteris-paribus-definition-pronunciation-and-examples-3305723 https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.4.2.187 See also: Positive economics 8 Command system Definition: A system in which the government or state decides the quantity, types and prices of the goods being produced. It is usually considered one of the main characteristics of a communist economy, in which the central planner replaces the price mechanism of the market system. Quote: If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion – F.A. Hayek (The Constitution of Liberty part 1 chapter 6) Reference material: https://www.youtube.com/watch?v=B43YEW2FvDs https://www.youtube.com/watch?v=Ve6K10-Yx_M https://www.cpb.nl/en/history See also: Custom system, Market system 9 Consumption Definition: The act of consuming a good or service with the aim of satisfying human wants. Thinker(s): Adam Smith, Alfred Marshall Quote: “Consumption is the sole end and purpose of all production, and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” – Adam Smith WoN Book IV Chapter 8 Reference material: https://www.youtube.com/watch?v=Y-Unq3R--M0 See also: Production, Conspicuous consumption 10 Custom system Definition: A system in which society is organized around tradition and habits. Custom introduces elements of regularity, predictability and conformity into social relationships. Reference material: http://www.bbc.com/news/world-asia-india-35650616 See also: Command system, Market system 11 Factor of production Definition: A factor of production is an input that is used in the production of goods or services. The factors of production include labour, land and capital. The 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. Quote: The one important distinction between the two factors of production is that in a free society, ownership of the human factor, labor, cannot be concentrated while ownership of the non-human factor, capital, can be – Louis O. Kelso Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.– Abraham Lincoln: First Annual Message December 3 1861 Reference material: 12 Fiscal policy Definition: The use of taxation and expenditure policies by the government to regulate and stimulate economic activity. Thinker(s): John Maynard Keynes Quote: Too often in recent history liberal governments have been wrecked on rocks of loose fiscal policy – Franklin D. Roosevelt Reference material: http://www.nber.org/chapters/c6888.pdf https://www.huffingtonpost.com/marshall-auerback/the-real-lesson-from-the_b_700525.html https://www.youtube.com/watch?v=otmgFQHbaDo https://www.youtube.com/watch?v=ntxMOKXHlfo http://www.taxpolicycenter.org/briefing-book/what-characteristics-make-fiscal-stimulus-most- effective See also: Monetary policy 13 Inflation Definition: The rate at which prices in a market rise and the purchasing power falls. Thinker(s): Irving Fisher Quote: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” – John Maynard Keynes Reference Material: https://www.youtube.com/watch?v=UMAELCrJxt0 https://www.youtube.com/watch?v=T8-85cZRI9o https://www.youtube.com/watch?v=GJ4TTNeSUdQ See also: Real price, Money illusion, Quantity theory of money 14 Market system Definition: The third way of organizing economic society, besides custom and command. The market system is a 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 respectively. Government interference is minimal and the government does not engage in central planning. Thinker(s): Adam Smith, Alfred Marshall, Friedrich Hayek Quote: “The great virtue of a free market system is that it does not care what colour people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another” – Milton Friedman Reference material: See also: Capitalism, Custom system, Command system 15 Markets Definition: Markets are institutions in which individuals exchange goods and services usually using money as a medium of exchange. Markets 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). Reference material: https://www.nytimes.com/2014/12/17/world/europe/dutch-flower-auction-long-industrys-heart-is- facing-competition-.html https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/shelliekarabell/2016/ 04/30/royal-floraholland-hollands-wall-street-for- flowers/&refURL=https://www.google.nl/&referrer=https://www.google.nl/ See also: Market system 16 Monetary policy Definition: The 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. Thinker(s): Milton Friedmann Quote: “If you continue to use monetary policy to attempt to promote full employment the result would be that you would have higher inflation, and that you would not have lower unemployment” – Milton Friedman Reference material: https://www.youtube.com/watch?v=4TihoBfdCe8 See also: Fiscal policy 17 Paradigm Definition: The orthodox framework containing the assumptions, ways of thinking, and methodology underlying (economic) theories that are most commonly accepted by members of a scientific community. Thinker(s): Thomas Kuhn, Karl Popper Reference material: See also: School of thought 18 Production Definition: The act of creating or manufacturing a certain good or service, for which factors of production are used. Forms the basis of the supply curve in the Marshallian framework. Thinker(s): Alfred Marshall Quote: “It is the aim of good government to stimulate production, of bad government to encourage consumption” – Jean-Baptiste Say Reference material: See also: Factor of production 19 Scarcity Definition: The insufficiency or shortness in availability of time, resources, skills and goods, due to the unlimited wants of mankind. Scarcity is the ultimate problem underlying economics and drives actors to allocate resources efficiently. Quote: “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics” – Thomas Sowell Reference material: 20 School of thought Definition: A particular set of ideas held by a specific group. School of thoughts create paradigms. Reference material: See also: Mercantilism, Physiocracy, Utilitarianism, Institutional School, Austrian School, Monetarism, Paradigm 21 Lecture 2: Chrematistiké Definition: Economic activity with the goal of sheer profit making, which was considered unnatural and hence unjust. Thinker(s): Aristotle Quote: “There are two sorts of wealth-getting: one is a part of household management, the other is retail trade: the former necessary and honourable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest”. – Aristotle Politica Book 1 Reference material: See also: Oikonomia 22 Division of Labour Definition: The separation of tasks in the supply chain which allows for specialization and therefore increased quality and quantity of production. Thinker(s): Xenophon, Adam Smith, Karl Marx Quote: “Just as the various trades are most highly developed in large cities, in the same way food at the palace is prepared in a far superior manner. In small towns the same man makes couches, doors, ploughs and tables, and often he even builds houses, and still he is thankful if only he can find enough work to support himself. And it is impossible for a man of many trades to do all of them well. In large cities, however, because many make demands on each trade, one alone is enough to support a man, and often less than one: for instance one man makes shoes for men, another for women, there are places even where one man earns a living just by mending shoes, another by cutting them out, another just by sewing the uppers together, while there is another who performs none of these operations but assembles the parts, Of necessity, he who pursues a very specialized task will do it best.” – Xenophon Cyropaedia Book VIII, ch. ii “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” – Adam Smith, WON Chapter 1 Reference material: Figure 1: Adam Smith’s pin factory https://www.britannica.com/topic/division-of-labour See also: Exploitation, Alienation 23 Exchange value Definition: The quantitative aspect of value of a good or service. It indicates what (quantity of) other commodities it will exchange for, if traded. Thinker(s): Xenophon, Karl Marx Quote: “Then the same things are wealth for the one knowing how to use each of them and not wealth for the one not knowing how; just as flutes are wealth for the one knowing how to play the flute in a manner worth mentioning, while for the one not knowing how they are nothing more than useless stones... unless he sells it... in which case it becomes wealth” – Xenophon Oikonomikos 1: 10-11 See also: Use value 24 Feudalism Definition: The medieval system in which people were given land and protection by people of a higher social class in exchange for their loyalty and service. Reference material: https://www.huffingtonpost.com/john-w-whitehead/the-age-of-neofeudalism_b_2566546.html See also: Manorial system 25 Guild Definition: 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. Reference material: From left to right: Amsterdam’s old town hall, the Nieuwe Kerk & the Waag, the old guildhouse on the Nieuwmarkt. On the right in the background the Damrak with ship masts. Dating: 1585-1604 – Reinier Craeyvanger https://www.britannica.com/topic/guild-trade-association 26 Just Price Doctrine Definitions: A doctrine advanced as response to the ethical debate surrounding usury in the Middle Ages. For Aquinas the just price is the current price, which depends on location, time and risk of transport. Willingness to pay should not influence the price and profit making is only virtuous if there is a just price in exchange. Thinker(s): Aristotle, Thomas Aquinas Quote: “Let A represent a builder, B a cobbler, C a house and D a shoe. Then the builder ought to receive from the cobbler some part of his work, and to give him his own work in exchange. If then there is proportionate equality in the first instance, and retaliation or reciprocity follows, the result of which we are speaking will be attained. Otherwise the exchange will not be equal or permanent.” - Aristotle The Nichomachean Ethics Book 5 Reference material: http://www.bbc.com/news/world-40806702 27 Manorial system Definition: Economic system preceding the market system, in which local lords were centres of political, military, economic and social power. Reference material: [ See also: Feudalism 28 Normative economics Definition: Normative economics is the branch of economics that expresses value judgments about economic fairness, the goals of public policy or what the outcomes of economic activity should be. Thinker(s): Amartya Sen Reference material: https://plato.stanford.edu/entries/economic-justice/ https://www.investopedia.com/terms/n/normativeeconomics.asp See also: Positive economics 29 Oikonomia Definition: 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”) Thinker(s): Aristotle Quote: “There are two sorts of wealth-getting: one is a part of household management, the other is retail trade: the former necessary and honourable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest”. – Aristotle Politica Book 1 Reference material: http://www.sparknotes.com/philosophy/politics/section1/page/2/ https://baconfromacorns.com/household/ https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.30.1.225 See also: Chrematistiké 30 Philosopher king Definition: The ideal ruler of the state in the eyes of Plato. The philosopher king pursues true knowledge and has access to Plato’s ‘idea-world’. The rationale behind a philosopher as ruler is that “a true pilot must of necessity pay attention to the seasons, the heavens, the stars, the winds, and everything proper to the craft if he is really to rule a ship.” – Plato - The Republic, 6,488d) Thinker(s): Plato Quote: “The society we have described can never grow into a reality or see the light of day, and there will be no end to the troubles of states or indeed, … , of humanity itself, till philosophers become kings in this world, or till those we now call kings and rulers really and truly become philosophers, and political power and philosophy thus come into the same hands” - Plato - The Republic 47d Reference material: https://www.youtube.com/watch?v=ALXsaT6bqL0 https://www.theguardian.com/commentisfree/2012/may/10/empty-chair-for-philosopher-king 31 Positive economics Definition: Positive economics is the branch of economics that concerns the description and explanation of verifiable economic phenomena. Thinker(s): Alfred Marshall, Milton Friedman Quote: “Positive economics is in principle independent of any particular ethical position or normative judgments. As Keynes says, it deals with “what is,” not with “what ought to be.” Its task is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision. scope, and conformity with experience of the predictions it yields. In short, positive economics is, or can be, an “objective” science, in precisely the same sense as any of the physical sciences” – Milton Friendman (1953), Essays in Positive Economics Reference material: http://www.nytimes.com/2013/10/21/opinion/yes-economics-is-a-science.html See also: Normative economics, Ceteris Paribus 32 Telos Definition: The purpose of things. According to Aristotle usury was against the telos of money, as the purpose of money is facilitating exchange. Thinker(s): Aristotle Quote: “For money was intended to be used in exchange, but not to increase at interest” – Aristotle, Politica Book I Reference material: https://www.britannica.com/topic/teleology 33 Use value Definition: Subjective, qualitative value of a good or service Thinker(s): Xenophon, Karl Marx Quote: “Then the same things are wealth for the one knowing how to use each of them and not wealth for the one not knowing how; just as flutes are wealth for the one knowing how to play the flute in a manner worth mentioning, while for the one not knowing how they are nothing more than useless stones... unless he sells it... in which case it becomes wealth” - Xenophon - Oikonomikos 1: 10-11 Reference material: https://muse.jhu.edu/article/37773/pdf See also: Diamond-water paradox, Exchange Value 34 Usury Definition: Lending of money against interest Thinker(s): Aristotle, Thomas Acquinas Quote: “The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term usury … which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parents. Wherefore of all modes of making money this is the most unnatural.” Aristotle – Politics, Book I, 10, no. 5 Reference material: http://www.bbc.co.uk/religion/0/23448808 https://nypost.com/2018/01/13/how-america-is-fighting-back-against-predatory-lending/ 35 Lecture 3: Bullionism Definition: An economic theory that defines a country’s wealth by the amount of precious metals it owns. Thinker(s): Jean-Baptiste Colbert Quote: “It is simply, and solely, the abundance of money within a state (which) makes the difference in its grandeur and power” – Jean-Baptiste Colbert Reference material: Figure 1: Gold reserves by country as of November 2017 (in metric tons) https://mises.org/library/jean-baptiste-colbert-and-louis-xiv See also: Mercantilism 36 Capital Definition: Capital is one of the three production factors, used to increase the productivity of labour of workers. Thinker(s): David Ricardo, Karl Marx Quote: “Capital is that part of the wealth of a country which is employed in production and consists of food, tools, raw materials, machinery, etc. necessary to give effect to labour” – David Ricardo “Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.” – Karl Marx Kapital Volume 1 Chapter 10 Reference material: http://davidharvey.org/reading-capital/ See also: Factors of production 37 Diamond-water paradox Definition: The 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. Thinker(s): Adam Smith, Paul Samuelson Quote: “It is scarcity and plenty that make the vulgar take things to be precious or worthless; they call a diamond very beautiful because it is like pure water, and then would not exchange one for ten barrels of water.” – Galileo Galilei – Dialogues Reference material: https://www.investopedia.com/ask/answers/032615/how-can-marginal-utility-explain-diamondwater- paradox.asp https://muse.jhu.edu/article/37773/pdf See also: Use value, Exchange value, Marginal utility 38 Impartial spectator Definition: 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’. Thinker(s): Adam Smith Quote: “When I endeavour to examine my own conduct, when I endeavour to pass sentence upon it, either to approve or condemn it, it is evident that, in all such cases, I divide myself, as it were into two persons; and that I , the examiner and judge, represent a different character from that other I, the person whose conduct is examined into and judged of. The first is the spectator, whose sentiments with regard to my own conduct I endeavour to enter into, by placing myself in his situation, and by considering how it would appear to me, when seen from that particular point of view. The second is the agent, the person who I properly call myself, and of whose conduct, under the character of a spectator, I was endeavouring to form some opinion. The first is the judge; the second the person judged of. But that the judge should, in every respect, be the same with the person judged of, is as impossible that the cause should, in every respect, be the same with the effect..” – Adam Smith – The Theory of Moral Sentiments III.I.2 Reference material: https://dspace.lboro.ac.uk/dspace- jspui/bitstream/2134/15650/1/Sen%20on%20Smith%20Ian%20Fraser.pdf 39 Invisible Hand Definition: 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. Thinker(s): Adam Smith Quote: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self- love, and never talk to them of our own necessities but of their advantages." – Adam Smith – Wealth of Nations "He... intends only his own gain... but is... led by an invisible hand to promote an end which was no part of his intention." – Adam Smith – Wealth of Nations Reference material: https://www.britannica.com/topic/invisible-hand https://hbr.org/2012/04/there-is-no-invisible-hand See also: Market system 40 Labour theory of value Definition: 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. Thinker(s): Adam Smith, David Ricardo, Karl Marx Quote: “The values of commodities are directly as the times of labour employed in their production, and are inversely as the productive powers of the labour employed.” – Karl Marx “Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.” – Adam Smith Reference material: https://www.encyclopedia.com/places/africa/togo-political-geography/labor-theory-value See also: Marginalist theory of value 41 Law of population Definition: The theory, invented by Thomas Malthus, that states that the population grows at a geometric rate (or exponentially), while the world’s food supply grows at an arithmetic rate (or an equal proportioned rate). The law is concerned flawed due to fact that it did not take into account factors such as the development of technology, disease, war etc. Thinker(s): Thomas Malthus Quote: “Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will shew the immensity of the first power in comparison of the second.” – Thomas Malthus – An Essay on the Principle of Population “Famine seems to be the last, the most dreadful resource of nature. The power of population is so superior to the power in the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction; and often finish the dreadful work themselves. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague, advance in terrific array, and sweep o¤ their thousands and ten thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow, levels the population with the food of the world.” Thomas Malthus - Essay, 1st edition, p139- 140 Reference material: Figure 1: Food production and population in West Africa https://www.youtube.com/watch?v=r1ywppAJ1xs http://www.fao.org/fileadmin/templates/wsfs/docs/expert_paper/How_to_Feed_the_World_in_2050.p df http://www.economicsdiscussion.net/articles/malthusian-theory-of-population-explained-with-its- criticism/1521 42 Market Price Definition: The current (short-run) price at which a product or service is sold/bought in a market. The market price is a nominal price, meaning the value is not adjusted for inflation. Thinker(s): Adam Smith Reference material: See also: Natural price, Real price 43 Mercantilism Definition: The 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. It was 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. Thinker(s): Jean-Baptiste Colbert, Thomas Mun Quote: “We’re going to build our steel industry back, and we’re going to build our aluminium industry back by instituting tariffs” – Donald Trump Reference material: https://qz.com/894085/donald-trumps-mercantilist-trade-policy-was-debunked-by-economist-adam- smith-more-than-200-years-ago/ https://www.nytimes.com/2016/03/11/us/politics/-trade-donald-trump-breaks-200-years-economic- orthodoxy-mercantilism.html https://www.britannica.com/topic/mercantilism See also: Bullionism 44 Natural Price Definition: The price to which goods and services seem to gravitate naturally in the long run Thinker(s): Adam Smith Quote: “The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating.” – Adam Smith “Let us suppose that all commodities are at their natural price, and a change of fashion should increase the demand for silks, and lessen that for woollens; their natural price, the quantity of labour necessary to their production, would continue unaltered, but the market price of silks would rise, and that of woollens would fall; and consequently the profits of the silk manufacturer would be above, whilst those of woollen manufacturer would be below, the general and adjusted rate of profits. Not only the profits, but the wages of the workmen, would be affected in these employments. This increased demand for silks would however soon be supplied, by the transference of capital and labour from the woollen to the silk manufacture; when the market price of silks and woollens would again approach their natural prices, and then the usual profits would be obtained by the respective manufacturers of those commodities.” – David Ricardo – On the Principles of Political Economy and Taxation; Ch. IV See also: Market price 45 Physiocracy Definition: Economic school of thought during the second half of the 18th century, which mainly resided in France. The Physiocrats thought that the entire wealth of a nation derived solely from land agriculture, also known as the Gift of Nature. Thinker(s): François Quesnay Quote: “With all its imperfections, Physiocracy is perhaps the nearest approximation to the truth that has yet been published upon the subject of political economy.” – Adam Smith Reference material: https://www.marxists.org/reference/subject/economics/quesnay/1759/tableau.htm https://mises.org/library/physiocracy-and-free-trade-18th-century-france 46 Price-specie flow mechanism Definition: Famous critique, invented by David Hume, against the use of Mercantilism as main economic policy. The price-specie flow mechanism states that countries with positive trade balances are effectively importing gold (money) in exchange for their exports while those with negative trade balances are exporting gold in exchange for imports. The increase in gold in countries with positive trade balances causes inflation, which makes prices rise and in turn makes imports more competitive. Conversely, the decrease in gold in countries with negative trade balances causes deflation, which makes price fall and exports more competitive internationally. This causes the balance of trade to shift in both countries. Thus, Hume argued that a trade balance is relatively unimportant because it tends to balance itself out in the long term. Thinker(s): David Hume Quote: “It is very usual, in nations ignorant of the nature of commerce, to prohibit the exportation of commodities, and to preserve among themselves whatever they think valuable and useful. They do not consider, that, in this prohibition, they act directly contrary to their intention; and that the more is exported of any commodity, the more will be raised at home, of which they themselves will always have the first offer.” – David Hume Reference material: http://www.econlib.org/library/LFBooks/Hume/hmMPL28.html See also: Mercantilism, Bullionism 47 Real price Definition: The nominal price adjusted for the inflation rate. The real price gives a more realistic picture of economic purchasing power. Thinker(s): Adam Smith Quote: “The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.” – Adam Smith – Wealth of Nations Book I Chapter V Reference material: Figure 1: Real wage growth (wage level 2000 = 100) http://geolib.com/smith.adam/won1-05.html See also: Market price 48 Trade balance Definition: The difference between a country’s exports and its imports over a certain amount of time. Thinker(s): David Hume Quote(s): “We do have a Trade Deficit with Canada, as we do with almost all countries (some of them massive). P.M. Justin Trudeau of Canada, a very good guy, doesn’t like saying that Canada has a Surplus vs. the U.S.(negotiating), but they do...they almost all do...and that’s how I know!” – Donald J. Trump Reference material: https://tradingeconomics.com/united-states/balance-of-trade https://www.nytimes.com/2018/03/05/us/politics/trade-deficit-tariffs-economists-trump.html See also: Mercantilism, Price-specie flow mechanism 49 Lecture 4: Comparative advantage Definition: Comparative advantage is an 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. Comparative advantage is contrasted with absolute advantage. Absolute advantage refers to the ability to produce more or better goods and services than somebody else. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume. Economist(s): David Ricardo Quote: “"[I]f I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of broad cloth, in exchange for a hundred pounds of lace, I take the quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home. The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange." – Robert Torrens Reference material: https://www.youtube.com/watch?v=HneRNVtahYw http://www.economicsonline.co.uk/Global_economics/Comparative_advantage.html 50 Corn laws Definition: 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. Economist(s): David Ricardo, Thomas Malthus Quote: “I maintain that the existing corn laws are bad, because they have given a monopoly of food to the landed interest over every other class and over every other interest in the kingdom” - Joseph Hume, (On the corn laws and the claims of the agriculturists to relief from taxation) Reference material: https://www.britannica.com/event/Corn-Law-British-history https://www.youtube.com/watch?v=-iostWBLJ0M See also: Mercantilism 51 Felicific Calculus Definition: 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. Thinker(s): Jeremy Bentham Quote: Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. – Jeremy Bentham Reference material: https://www.youtube.com/watch?v=yOT-IfUzOwk http://www.economictheories.org/2008/12/jeremy-bentham-felicific-calculus.html See also: Utilitarianism 52 General Glut Definition: A general glut exists when there is excess supply in all markets. That is, there is a 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, a result known as Say’s Law. Malthus famously rejected Say’s Law. Economist(s): Jean-Baptiste Say, Thomas Malthus Quote: “It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products.” - Jean-Baptiste Say Reference material: https://www.youtube.com/watch?v=BW45ZaR5XZo http://delong.typepad.com/sdj/2010/03/the-general-glut-of-thomas-robert-malthus.html 53 Industrial Revolution Definition: A collective name for the extreme social, political and economic changes that occurred during the 18th and 19th century. The Industrial Revolution is characterized by the replacement of hand tools and inefficient manual labour by power tools and large mechanized concentrated production in city establishments. Production efficiency went up by an extreme amount and the technological invention, such as the steam engine and the locomotive, changed the way society was structured concerning its social classes, population density and traditions. Thinker(s): David Ricardo, John Stuart Mill, Karl Marx Quote: “If you go back to 1800, everybody was poor. I mean everybody. The Industrial Revolution kicked in, and a lot of countries benefited, but by no means everyone.” - Bill Gates Reference material: https://www.youtube.com/watch?v=zhL5DCizj5c See also: Division of labour, Exploitation, Alienation, Proletariat, Capital 54 Iron Law of Wages Definition: Theory, popular amongst the Classical Economists, that when wages increase, workers will have more children. This has two effects: there is pressure on the food supply, which lowers the standard of living. And there is more labor in the economy, which lowers wages. From the law the Classical Economists concluded that the natural price of labor is equal to the subsistence wage. Thinker(s): David Ricardo, Thomas Malthus Quote: “When the market price of labor is below its natural price, the condition of the laborers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labor has increased, that the market price of labor will rise to its natural price, and that the laborer will have the moderate comforts which the natural rate of wages will afford”. - David Ricardo, Theory of Profit Reference material: https://wiki.mises.org/wiki/Iron_law_of_wages https://prezi.com/0v0foyxdsuky/david-ricardo-the-iron-law-of-wages/ See also: Preventative checks, Positive checks 55 Marginal land Definition: The last piece of land that is being cultivated in the agricultural process. According to Ricardo’s theory of rent, no rent is charged on the marginal land. Thinker(s): David Ricardo Reference material: See also: Ricardo’s Theory of Rent 56 Poor laws Definition: Legislation regulating poverty relief in the UK, which was completely redesigned in the 1830’s with the Poor Law Amendment Act. The Poor Laws were 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. Thinker(s): David Ricardo, Thomas Malthus Quote: “To remedy the frequent distresses of the common people, the poor law of England have been instituted; but it is to be feared that though they may have alleviated a little the intensity of individual misfortune, they have spread the general evil over a much larger surface.” - Thomas Malthus, (Essay on the Principle of Population) Reference Material: Figure 1: The Poor Laws and the thoughts on charity and poverty relief https://www.youtube.com/watch?v=2govtUmuTSk= http://www.nationalarchives.gov.uk/education/resources/1834-poor-law/ See also: Corn laws, Iron Law of Wages 57 Positive checks Definition: Circumstances that increase the number of deaths. Thinker(s): Thomas Malthus Quote: “To act consistently, therefore, we should facilitate, instead of foolishly and vainly endeavouring to impede, the operation of nature in producing this mortality, and if we dread the too frequent visitation of the horrid form of famine, we should sedulously encourage the other forms of destruction, which we compel nature to use.” - Thomas Malthus Reference material: See also: Preventative checks, Iron Law of Wages 58 Preventative checks Definition: Circumstances that decrease the number of births. Thinker(s): Thomas Malthus Quote: "The labourer who earns eighteen pence a day and lives with some degree of comfort as a single man, will hesitate a little before he divides that pittance among four or five, which seems to be just sufficient for one.” - Thomas Malthus Reference Material: https://www.britannica.com/topic/one-child-policy See also: Positive checks, Iron Law of Wages 59 Recession Definition: A sequence of two or more business quarters of economic decline. Quote: “You cannot spend your way out of recession or borrow your way out of debt.” – Daniel Hannan (Speech to Gordon Brown in the European Parliament, March 24th, 2009) Reference material: https://www.britannica.com/topic/Great-Recession-of-2008-2009-The-1661642 https://www.youtube.com/watch?v=nBh6PlC9_1g See also: Boom/Bust, Business cycle 60 Ricardo’s Theory of Rent Definition: Theory that determines the economic advantage obtained by the use of land for production. It states that the rent for a piece of land should be the difference in production output between that piece of land and marginal land of the same size. Thinker(s): David Ricardo Quote: After all the fertile land in the immediate neighbourhood of the first settlers were cultivated, if capital and population increased, more food would be required, and it could only be procured from land not so advantageously situated. - David Ricardo, (The Theory of Rent) Reference material: http://www.economicsdiscussion.net/theory-of-rent/ricardian-theory-of-rent-meaning-assumptions- statement-and-features/7454 https://www.youtube.com/watch?v=cOeVp_HWC0I http://economicsconcepts.com/ricardian_theory_of_rent.htm https://www.ft.com/content/33cff8ea-ebf2-11e3-ab1b-00144feabdc0 See also: Marginal land 61 Stationary State Definition: The 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. Thinker(s): John Stuart Mill, David Ricardo Quote: A stationary condition of capital and population implies no stationary state of human improvement. There could be as much scope as ever for all kinds of mental culture and moral and social progress. - John Stuart Mill Reference material: https://www.youtube.com/watch?v=7lrbnqclVfM https://panarchy.org/mill/stationary.1848.html See also: Industrial Revolution 62 Utilitarianism Definition: Ethical theory that takes the ultimate good to be the greatest happiness of the greatest number and defines the rightness of actions in terms of their contribution to the general happiness. Thinker(s): Jeremy Bentham, John Stuart Mill Quote: “It is the greatest good to the greatest number of people which is the measure of right and wrong.” - Jeremy Bentham Reference material: See also: Felicific calculus 63 Lecture 5: Alienation Definition: The process of being separated from your own individual ‘self’ due to living in a society with established social classes. One is distanced from his or her humanity due to 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. Thinker(s): Karl Marx Quote: “A direct consequence of the alienation of man from the product of his labor, from his life activity and from his species life is that man is alienated from other men. When man confronts himself, he also confronts other men. What is true of man’s relationship to his work, to the product of his work and to himself, is also true of his relationship to other men, to their labor.” - Karl Marx “The alienation of man thus appeared as the fundamental evil of capitalist society” – Karl Marx Reference material: http://uregina.ca/~gingrich/250j2703.htm https://www.youtube.com/watch?v=PZ4VzhIuKCQ See also: Communism, Exploitation 64 Capitalism Definition: Most common mode of economic organization in our time. Capitalism relies on the market system for its economic order. The capitalist, the owner of the firm is the residual claimant of the fruits of production after workers are being paid their wage. Marx considered Capitalism a necessary precursor of Socialism and Communism. Thinker(s): Karl Marx Quote: “Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all.” – John Maynard Keynes “Capitalism works better than it sounds, while socialism sounds better than it works.” – Richard Nixon “Capitalism does not permit an even flow of economic resources. With this system, a small privileged few are rich beyond conscience, and almost all others are doomed to be poor at some level. That’s the way the system works. And since we know that the system will not change the rules, we are going to have to change the system” – Martin Luther King Reference material: See also: Market system, Socialism, Communism 65 Class struggle Definition: The conflict of interests concerning the proletariat and the bourgeoisie in a capitalist society, which according to Marx would finally lead to an uprising of the proletariat and the seizing of the means of production, thereby ending Capitalism. Thinker(s): Karl Marx & Friedrich Engels Quote: “The history of all previous societies has been the history of class struggles.” - Karl Marx, (The Communist Manifesto) “The ideas of the ruling class are in every epoch the ruling ideas, i.e. the class which is the ruling material force of society, is at the same time its ruling intellectual force. The class which has the means of material production at its disposal, has control at the same time over the means of mental production, so that thereby, generally speaking, the ideas of those who lack the means of mental production are subject to it. The ruling ideas are nothing more than the ideal expression of the dominant material relationships, the dominant material relationships grasped as ideas.” - Karl Marx (The German Ideology) Reference material: https://www.youtube.com/watch?v=gR3igiwaeyc https://www.youtube.com/watch?v=CWF_0lkBhjY See also: Proletariat, Capitalism, Alienation 66 Commodity Definition: A good produced with the sole intention to be sold on the market. It is considered the opposite of a private good. Quote: “A commodity appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing, abounding in metaphysical subtleties and theological niceties.” – Karl Marx Reference material: https://www.thoughtco.com/we-will-never-run-out-of-oil-1146242 http://cdn.intechopen.com/pdfs/32334/InTech- Global_trends_of_fossil_fuel_reserves_and_climate_change_in_the_21st_century.pdf 67 Communism Defintion: 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. Thinker(s): Karl Marx & Friedrich Engels Quote: “Let the ruling classes tremble at a communist revolution. The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries, unite!” - Karl Marx (The Communist Manifesto). Reference material: https://www.youtube.com/watch?v=qElx_EyTTKA https://www.youtube.com/watch?v=fSQgCy_iIcc http://www.econlib.org/library/Enc/Communism.html See also: Capitalism, Class struggle, Proletariat, Socialism 68 Dialectic materialism Definition: Marx’ philosophy, based on Hegel’s Dialectism (development of ideas as a loop of thesis, antithesis, synthesis), in which 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. The clash of rigid superstructure and dynamic base leads to class struggle and revolution. Thinker(s): Karl Marx Quote: “In the eyes of dialectical philosophy nothing is established for all times, nothing is absolute or sacred.” - Karl Marx Reference material: https://www.youtube.com/watch?v=9YBszYv9h4g https://www.marxists.org/glossary/terms/d/i.htm See also: Communism, Class struggle 69 Exploitation Definition: The process of creating surplus value by the capitalist at the expense of the worker. Thinker(s): Karl Marx Quote: “No sooner is the exploitation of the labourer by the manufacturer, so far, at an end, that he receives his wages in cash, than he is set upon by the other portions of the bourgeoisie, the landlord, the shopkeeper, the pawnbroker, etc.”- Karl Marx, (The Communist Manifesto) Reference material: https://www.youtube.com/watch?v=4Ttbj6LAu0A See also: Class struggle, Capitalism, Surplus value 70 Proletariat Definition: Marxian term to describe the working class as a collective. Thinker(s): Karl Marx Quote: “Not in vain does it [the proletariat] go through the stern but steeling school of labour. It is not a question of what this or that proletarian, or even the whole proletariat, at the moment regards as its aim. It is a question of what the proletariat is, and what, in accordance with this being, it will historically be compelled to do.” - Karl Marx, (The Communist Manifesto) Reference material: http://www.ruthlesscriticism.com/proletariat.htm http://uregina.ca/~gingrich/s28f99.htm See also: Communism, Class struggle 71 Socialism Definition: An 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. Thinker(s): Karl Marx, Oskar Lange Quote: “The meaning of peace is the absence of opposition to socialism.” - Karl Marx, (The Communist Manifesto) Reference material: https://www.youtube.com/watch?v=B3u4EFTwprM https://www.youtube.com/watch?v=OBYmeLBWjeI See also: Communism, Capitalism 72 Surplus value Definition: Surplus value refers to the value remaining when the cost of maintaining the worker (his subsistence cost) has been subtracted from the total value of the product he produces. Thinker(s): Karl Marx Quote: “The directing motive, the end and aim of capitalist production, is to extract the greatest possible amount of surplus value, and consequently to exploit labor-power to the greatest possible extent.” - Karl Marx Reference material: See also: Exploitation 73 Lecture 6: Consumer Surplus/Producer Surplus/Social Surplus Definition: The consumer surplus is a 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 what they are actually paying, i.e. the market price. The producer surplus is the difference between the market price a producer receives and the cost of production needed to produce the good. The sum of these two surpluses is known as the social surplus, sometimes also called the economic surplus. It is considered as a good measure of welfare. Thinker(s): Alfred Marshall Quote: “We have already seen that the price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it: so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price; and he thus derives from the purchase a surplus of satisfaction.” – Alfred Marshall Reference material: Figure 1: determining consumer and producer surplus in a Marshallian supply-demand graph https://www.youtube.com/watch?v=_6kwhF6hoqQ https://www.britannica.com/topic/consumer-surplus 74 General Equilibrium Theory Definition: Economic theory that tries to analyze the emergence of an equilibrium of supply and demand over multiple interacting markets. Thinker(s): Léon Walras Quote: "Walras is... the greatest of all economists. His system of economic equilibrium, uniting, as it does, the quality of ‘revolutionary creativeness’ with the quality of classic synthesis, is the only work by an economist that will stand comparison with the achievements of theoretical physics.” - Joseph Schumpeter Reference material: Figure 1: Attaining general equilibrium http://www.economicsdiscussion.net/firm/general-equilibrium-theory-with-diagram/6002 See also: Process of tâtonnement, Partial equilibrium theory 75 Gossen’s First Law Definition: Economic law that states there is decreasing marginal utility of consumption. Thinker(s): Hermann Heinrich Gossen Quote: “It is quite apparent that Gossen has completely anticipated me as regards the general principles and method of the theory of Economics. So far as I can gather, his treatment of the fundamental theory is even more general and thorough than what I was able to scheme out.” - Willian Jevons Reference material: Figure 1: Total utility & marginal utility https://www.businesstopia.net/economics/micro/law-diminishing-marginal-utility https://www.britannica.com/topic/utility-economics#ref189361 See also: Marginal utility, Gossen’s second law 76 Gossen’s Second Law Definition: The law that states that the ratio of marginal utility/price needs to be the same for all goods at the utility maximizing level. The law is considered a core concept in the modern theory of consumer behaviour. Thinker(s): Hermann Heinrich Gossen, Carl Menger Quote: “For a person who is free to choose between several pleasures, but whose time is insufficient to satisfy them all, however different the absolute magnitude of each pleasure may be, to bring the sum of his pleasures to its greatest, he must pursue all pleasures partially until the relation is such, that the magnitude of each single pleasure at the moment is broken off shall be the same for all pleasures” – Hermann Heinrich Gossen Reference material: See also: Gossen’s First Law 77 Marginal Utility Definition: The extra utility derived from the last unit of consumption. Thinker(s): William Stanley Jevons Quote: “The merchant had observed that the marginal utility of daughters decreases with surprising rapidity” - Joan Robinson (Contributions to Modern Economics) Reference material: 78 Marginalist Theory of Value Definition: Value theory stating that value is determined at the margin of consumption and production. The value to the consumer of the last unit of consumption is equal to the cost of the last unit of production. Thinker(s): William Stanley Jevons, Carl Menger Quote: “Cost of production determines supply, supply determines final degree of utility, final degree of utility determines value.” – William Stanley Jevons Reference material: https://www.marxists.org/archive/mandel/works/marxist-economic-theory/marginalists.htm See also: Labour theory of value 79 Partial Equilibrium Theory Definition: The 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). It is often considered the opposite approach to general equilibrium theory. Thinker(s): Alfred Marshall Quote: “One of the most important skills of the economist, therefore, is that of simplification of the model. Two important methods of simplification have been developed by economists. One is the method of partial equilibrium analysis (or microeconomics), generally associated with the name of Alfred Marshall and the other is the method of aggregation (or macro-economics), associated with the name of John Maynard Keynes.” - Kenneth Boulding (Economics as a Science) Reference material: Figure 1: Partial equilibrium in two countries See also: Ceteris paribus , General equilibrium theory 80 Process of tâtonnement Definition: A metaphor for the workings of the market: the Walrasian auctioneer shouts out a price and all participants in an imaginary auction send in their demand and supply at the given price. The Walrasian auctioneer then changes the price and repeats the process until demand equals supply. Thinker(s): Léon Walras Quote: “The markets best organized in the competitive mode are those in which sales and purchases are made by the crying out of offers, through the intermediation of agents such as brokers, commercial agents, and criers, who centralize the offers in such a way that no exchange takes place without its conditions being announced and known, and without the sellers being able to lower the price and the buyers to raise it. This is the way of functioning of the stock exchanges, organized commodity markets, the markets for grain, fish, etc.” – Léon Walras Reference material: Figure 1: The process of tâtonnement https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/tatonnement See also: Walrasian auctioneer, Invisible Hand 81 Saleableness Definition: Also known as liquidity, saleableness is the degree to which an object or service is easily sold to other actors. The most saleable good is money. Thinker(s): Carl Menger Quote: “The theory of money necessarily presupposes a theory of the saleableness of goods.. If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case,—presenting only a difference of degree—of a generic phenomenon of economic life—namely, the difference in the saleableness of commodities in general.” – Carl Menger Reference material: https://mises- media.s3.amazonaws.com/On%20the%20Origins%20of%20Money_5.pdf?file=1&type=document https://mises.org/library/origin-money-and-its-value https://www.economist.com/node/21560554 82 Spontaneous order Definition: Order that comes from the undesigned actions of man, it is a key concept in Libertarian theory. Thinker(s): Carl Menger, Ludwig Von Mises, Friedrich Hayek Quote: “It would be no exaggeration to say that social theory begins with—and has an object only because of—the discovery that there exist orderly structures which are the product of the action of many men but are not the result of human design.”- Friedrich Hayek Reference material: https://www.economist.com/blogs/democracyinamerica/2014/09/hayek-and-libertarianism https://www.minneapolisfed.org/publications/the-region/hayeks-legacy-of-the-spontaneous-order See also: Invisible hand 83 Walrasian auctioneer Definition: Metaphor for the price adjustment mechanisms in the market. Key element of the process of tâtonnement. Thinker(s): Léon Walras Reference material: https://www.economist.com/node/226168 See also: Process of tâtonnement, General equilibrium theory 84 Lecture 7: Conspicuous consumption Definition: The concept, invented by Veblen, describing the purchase of certain goods and services to display one’s wealth (and social class). Thinker(s): Thorstein Veblen Quote: “Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure.” - Thorstein Veblen, (The Theory of the Leisure Class) Reference material: http://www.conspicuousconsumption.org/ https://www.nytimes.com/2014/11/23/upshot/conspicuous-consumption-yes-but-its-not-crazy.html https://www.youtube.com/watch?v=7P18tsmanxE See also: Consumption 85 Human Capital Definition: The term that refers to the stock or supply of knowledge, habits, social and personal attributes embodied in the capability to produce labour and hence economic value. Thinker(s): Gary Becker Quote: ‘The most valuable capital is that invested in human” - Alfred Marshall “Human capital analysis starts with the assumption that individuals decide on their education, training, medical care, and other additions to knowledge and health by weighing the benefits and costs. Benefits include cultural and other non-monetary gains along with improvement in earnings and occupations, while costs usually depend mainly on the foregone value of the time spent on these investments.” - Gary Becker, (Human Capital: a theoretical and empirical analysis) Reference material: https://www.youtube.com/watch?v=ivy1QmWUtQI See also: Capital 86 Institutions Definition: Set of rules, norms, habits and behaviors that can be seen as an indispensable part of society. Thinker(s): Thorstein Veblen Quote: “Every person, as every institution, and, above all, every religion is to be judged not by the amount of atrocities or the wrong committed but by the right conduct.” – Mahatma Ghandi “Marriage is a great institution, but I'm not ready for an institution.” – Mae West Reference material: https://www.youtube.com/watch?v=C9t8i0sWRBY https://www.youtube.com/watch?v=wdKBfXRpNsk See also: Institutional school, Organisations 87 Institutional School Definition: School of thought that views markets as a result of the complex interaction of economic, political, cultural and social institutions. Thinker(s): Thorstein Veblen, Gary Becker Quote: "Institutional economics" alone meets the demand for a generalized description of the economic order. Its claim is to explain the nature and extent of order amid economic phenomena, or those concerned with industry in relation to human well-being. In the words of Edwin Cannan, it attempts to tell "why all of us are as well off as we are" and "why some of us are better off than others." Such an explanation cannot properly be answered in formulas explaining the processes through which prices emerge in a market. Its quest must go beyond sale and purchase to the peculiarities of the economic system which allow these things to take place upon particular terms and not upon others. - Walton Hamilton, (The Institutional Approach to Economic Theory) Reference material: https://www.youtube.com/watch?v=5QheQ7G5e4g https://www.exploring-economics.org/en/orientation/institutionalist-economics/ See also: Institutions 88 Nudging Definition: 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. Thinker(s): Richard Thaler Quote: “A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” - Richard Thaler, (Nudge: Improving Decisions About Health, Wealth, and Happiness) Reference material: https://www.youtube.com/watch?v=lha5tQO0H-8 https://themarketmogul.com/nudge-theory/ https://behavioralpolicy.org/what-is-nudging/ See also: Behavioral economics 89 Organisations Definition: Structured units of people that are managed and guided towards pursuing collective goals. Thinker(s): Kenneth Arrow, Herbert Simon Quote: “There are many other organisations beside the government and the firm. But all of them, whether political party or revolutionary movement, university or church, share the common characteristics of the need for collective action and the allocation of resources through non-market methods.” - Kenneth Arrow Reference material: https://www.youtube.com/watch?v=wO_-MtWejRM https://www.youtube.com/watch?v=bSohYxyJp9A See also: Institutions 90 Lecture 8: Animal spirits Definition: The instincts and emotions that underlie irrational human behaviour. Thinker(s): John Maynard Keynes Quote: “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities” - John Maynard Keynes Reference material: https://www.theguardian.com/business/2010/aug/22/animal-spirits-economic-recovery http://media.economist.com/media/pdf/animal-spirits-akerloff-e.pdf See also: Boom/bust 91 Austerity Definition: Collective name for policies aimed at cutting government spending with the goal to decrease government debt Thinker(s): John Maynard Keynes Quote: “The boom, not the slump, is the right time for austerity at the Treasury.” – John Maynard Keynes Reference material: https://www.nytimes.com/2011/12/30/opinion/keynes-was-right.html https://www.economist.com/blogs/freeexchange/2013/11/economic-history-2 See also: Debt-quota 92 Automatic stabiliser Definition: Self-activating policies and programs that reduce fluctuations in the economy. Reference material: Figure 1: Budget deficits and surpluses US with and without automatic stabilizers http://www.taxpolicycenter.org/briefing-book/what-are-automatic-stabilizers-and-how-do-they-work https://www.cbo.gov/sites/default/files/113th-congress-2013- 2014/reports/43977_AutomaticStablilizers_one-column.pdf See also: Business cycle 93 Boom/Bust Definition Natural deviations from the long-run equilibrium in the economy. Booms and busts together form business cycles. Reference material: See also: Business cycle 94 Debt-quota Definition: Amount of debt as proportion of a country’s GDP. Reference material: Figure 1: Government debt-quota 2016 https://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS?view=chart http://ec.europa.eu/eurostat/statistics-explained/index.php/Structure_of_government_debt See also: Austerity 95 Great Depression Definition: Heralded by the stock market crash known as Black Tuesday in 1929, the Great Depression was a global economic depression in the 1930s, in which global GDP fell by 15% and the unemployment rate in the US climbed up to 25%. According to Keynes the Great Depression was induced by austerity of the US government, however Friedman argued that it was caused by a monetary contraction. Thinker(s): John Maynard Keynes, Milton Friedman Quote: “The Great Depression in the United States was caused – I won’t say caused, was enormously intensified and made far worse than it would have been by bad monetary policy.” – Milton Friedman “What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.” – Paul Krugman Reference material: Figure 1: Great Depression (1929-1941; blue) vs. Great Recession (2007 - ; orange): Unemployment Rate Figure 2: Private Domestic Final Purchases: Index (1929/2008; Q1 = 100) https://www.britannica.com/topic/Bitter-Face-Off-Between-Keynesian-Economics-and-Monetarism- The-1905030 See also: Business cycle, Austerity, Monetary policy 96 Keynesian Multiplier Definition: Government spending brings about positive externalities that cause an increase of GDP larger than the original spending. The size of this positive effect is represented by the Keynesian Multiplier. Thinker(s): John Maynard Keynes Quote: "... a large volume of loan expenditure under government auspices. It is beyond my p

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