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“Bah! Humbug”, was Scrooge’s opinion of charitable giving. Some economists reckon charity goes against economic rationality. Some have argued that the popularity of charitable giving is proof that people are not economically rational. Others argue that it shows that altruism is something that people get pleasure (utility) from, and so are willing to spend some of their income on it. An interesting question is the extent to which the state is competing with private charity when it redistributes money from rich to poor or spends more on health care and whether this is inefficient.
Industry:Economy
Other things being equal. Economists use this Latin phrase to cover their backs. For example, they might say that “higher interest rates will lead to lower inflation, ceteris paribus”, which means that they will stand by their prediction about inflation only if nothing else changes apart from the rise in the interest rate.
Industry:Economy
A guardian of the monetary system. A central bank sets short-term interest rates and oversees the health of the financial system, including by acting as lender of last resort to commercial banks that get into financial difficulties. The Federal Reserve, the central bank of the United States, was founded in 1913. The Bank of England, known affectionately as the “Old Lady of Threadneedle Street”, was established in 1694, 26 years after the creation of the world’s first central bank in Sweden. With the birth of the Euro in 1999, the monetary policy powers of the central banks of 11 European countries were transferred to a new European Central Bank, based in Frankfurt. During the 1990s there was a trend to make central banks independent from political intervention in their day-to-day operations and allow them to set interest rates. Independent central banks should be able to concentrate on the long-term needs of an economy, whereas political intervention may be guided by the short-term needs of the government. In theory, an independent central bank should reduce the risk of inflation. Some central banks are legally required to set interest rates so as to hit an explicit inflation target. Politicians are often tempted to exploit a possible short-term trade-off between inflation and unemployment, even though the long-term consequence of easing policy in this way is (most economists say) that the unemployment rate returns to what you started with and inflation is higher. An independent central bank, because it does not have to worry about persuading an electorate to vote for it, is more likely to act in the best long-run interests of the economy.
Industry:Economy
In any period, the economies of countries that start off poor generally grow faster than the economies of countries that start off rich. As a result, the national income of poor countries usually catches up with the national income of rich countries. New technology may even allow developing countries to leap-frog over industrialized countries with older technology. This, at least, is the traditional economic theory. In recent years, there has been considerable debate about the extent and speed of convergence in reality. One reason to expect catch-up is that workers in poor countries have little access to capital, so their productivity is often low. Increasing the amount of capital at their disposal by only a small amount can produce huge gains in productivity. Countries with lots of capital, and as a result higher levels of productivity, would enjoy a much smaller gain from a similar increase in capital. This is one possible explanation for the much faster growth of Japan and Germany, compared with the United States and the UK, after the Second World War and the faster growth of several Asian “tigers”, compared with developed countries, during the 1980s and most of the 1990s.
Industry:Economy
An agreement among two or more firms in the same industry to co-operate in fixing prices and/or carving up the market and restricting the amount of output they produce. It is particularly common when there is an oligopoly. The aim of such collusion is to increase profit by reducing competition. Identifying and breaking up cartels is an important part of the competition policy overseen by antitrust watchdogs in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper. The desire to form cartels is strong. As Adam Smith put it, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices. ”
Industry:Economy
The winner, at least for now, of the battle of economic “isms”. Capitalism is a free-market system built on private ownership, in particular, the idea that owners of capital have property rights that entitle them to earn a profit as a reward for putting their capital at risk in some form of economic activity. Opinion (and practice) differs considerably among capitalist countries about what role the state should play in the economy. But everyone agrees that, at the very least, for capitalism to work the state must be strong enough to guarantee property rights. According to Karl Marx, capitalism contains the seeds of its own destruction, but so far this has proved a more accurate description of Marx’s progeny, communism.
Industry:Economy
The composition of a company’s mixture of debt and equity financing. A firm’s debt-equity ratio is often referred to as its gearing. Taking on more debt is known as gearing up, or increasing lever age. In the 1960s, Franco Modigliani and Merton Miller (1923–2000) published a series of articles arguing that it did not matter whether a company financed its activities by issuing debt, or equity, or a mixture of the two. (For this they were awarded the Nobel Prize for economics. ) But, they said, this rule does not apply if one source of financing is treated more favorably by the taxman than another. In the United States, debt has long had tax advantages over equity, so their theory implies that American firms should finance themselves with debt. Companies also finance themselves by using the profit they retain after paying dividends.
Industry:Economy
Markets in securities such as bonds and shares. Governments and companies use them to raise longer-term capital from investors, although few of the millions of capital-market transactions every day involve the issuer of the security. Most trades are in the secondary markets, between investors who have bought the securities and other investors who want to buy them. Contrast with money markets, where short-term capital is raised.
Industry:Economy
A production process that involves comparatively large amounts of capital; the opposite of labor intensive.
Industry:Economy
The profit from the sale of a capital asset, such as a share or a property. Capital gains are subject to taxation in most countries. Some economists argue that capital gains should be taxed lightly (if at all) compared with other sources of income. They argue that the less tax is levied on capital gains, the greater is the incentive to put capital to productive use. Put another way, capital gains tax is effectively a tax on capitalism. However, if capital gains are given too friendly a treatment by the tax authorities, accountants will no doubt invent all sorts of creative ways to disguise other income as capital gains.
Industry:Economy
