THE MACMILLAN DICTIONARY OF MODERN ECONOMICS David W. Pearce M © Aberdeen Economic Consultants, 1981 Softcover reprint of the hardcover lst edition 1981 978-0-333-26962-6 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. First published 1981 by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies throughout the world ISBN 978-1-349-04783-3 ISBN 978-1-349-04781-9 (eBook) DOI 10.1007/978-1-349-04781-9 Lexicographer 'A Writer of dictionaries-a harmless drudge.' Samuel Johnson (1755) 'Letter to Lord Chesterfield', Boswell, Life of Johnson. Contributing authors David W. Pearce, Professor of Political Economy, University of Aberdeen. Maxwell Gaskin, Professor of Political Economy, University of Aberdeen. Alex G. Kemp, Senior Lecturer in Political Economy, University of Aberdeen. Robert Shaw, Senior Lecturer in Political Economy, University of Aberdeen. John T. Addison, Associate Professor of Economics, University of South Carolina. John A. Cairns, Lecturer in Political Economy, University of Aberdeen. Hilary C. Campbell, Associate Researcher in Political Economy, University of Aberdeen. Ronald T. Edwards, Senior Economist, PEIDA, Edinburgh. Robert F. Elliott, Lecturer in Political Economy, University of Aberdeen. John Forbes, Research Economist, University of Glasgow. Tony Harris, Lecturer in Political Economy, University of Aberdeen. Ian D. McAvinchey, Lecturer in Political Economy, University of Aberdeen. Gavin A. Wood, Lecturer in Political Economy, University of Glasgow. Peter W. Wood, Lecturer in Political Economy, University of Aberdeen. Preface The idea for this dictionary of economics originated within the reference books division of Macmillan Press. When we were approached to put that idea into practice there was widespread agreement that there was a need for something different in this area of reference studies, despite the excellent contributions that already existed. The dominant thought was that the 'average undergraduate' (for which no entry will be found in this dictionary or, we suspect, any other) needed to be led, sometimes gently, sometimes a little more forcibly, into realms that lay beyond the conventional first year economics course. Hence the coverage of the current dictionary. It extends signi ficantly beyond what the first year student will need. At the same time, and here we can only hope we have succeeded, it covers all that the traditional market has aimed at. In short, we felt there was a demand for coverage of the words and phrases, concepts and institutions that a first year student might want, and more. Economics is undergoing yet another 'revolution', albeit one that it is difficult to secure great perspective on at the time of writing. We have therefore done our best. In so doing, all the authors are conscious that they have been selective in choosing entries, that the 'balance' in a book authored by no less than fourteen people must inevitably be open to criticism and that they will have omitted something, somewhere which others will see as being far more important than many of the entries chosen. To this end all criticism and suggestions for improvement are welcomed. For the moment, we believe that the dictionary we offer is unique, tempting and useful. Each entry contains cross references except in the few cases where a word or phrase is 'self contained'. To build a picture of a given area of economics, the reader is therefore encouraged to pursue the cross references indicated at the end of each entry. We have also included many business terms which some will argue do not belong in a dictionary of economics. The growth of courses in business finance and analysis, however, testifies to the need to make such an excursion in a dictionary of this kind. We have also included 'potted' bibliographies of celebrated economists. It is not too difficult to decide who deserves mention when they are dead-although students of the history of thought will dispute that statement-but it proved decidedly controversial as to whom among the living should deserve entry. We therefore followed a general rule, again which some will dispute, that those who have received the Nobel Prize for Economics should automatically gain mention. Others, perhaps no less deserving, receive mention because they have lent their names to a particular growth model, a theory of this or a theory of that. We have not eschewed the use of simple mathematical symbolism. When used, it is explained in each entry. Where the axe had to fall, for reasons of time and space, was in the area of institutions. International institutions of note are therefore included, but institutions peculiar to one country are generally but not always excluded. It proved impossible, for example, to explain some words in current usage without reference to UK banking institutions. Against this, we are very conscious that many important Acts of Parliament, Royal Commissions, committees of investigation and so on are excluded. If future editions allow, that is one area we would seek to remedy. The ready enthusiasm with which we greeted the initial idea for a new dictionary of economics contrasted somewhat with the failing tempers that characterized the indecent haste of the final preparation of the manuscript. That most of the ill temper focused on the so-called 'editor' was predictable, and apologies are owed to all other authors in this respect. The work share in the dictionary is virtually impossible to allocate. Everyone gave freely of their time and it is best to think of each author as being equally responsible, or equally at fault. The more than occasionally bewildering task of typing the manuscript was begun by Mrs. Pearl Watson in truly efficient style, subsequently to be equalled by Mrs. Betty Jones. That the task was beyond one secretary towards the end was quickly realized. Entries flew faster into the 'in tray' than they appeared in the out tray. Winnie Sinclair, Phyl McKenzie, Aileen Fraser, June Begg and Sandra Galbraith all shared the final dash to the final furlong. We owe them everything in terms of seeing the book actually materialize. We also owe a debt of thanks to Shaie Selzer of Macmillan for being very patient, for extending at least one deadline and for providing the encouragement in the form of nearly threatening letters towards the end of the preparation period. It would be a miracle if such an enterprise were not full of errors and omissions. We make no claim to miracles, merely to having done the best that we can in the time available. David W. Pearce. General Editor A AACB But studies of identical twins, who pre See Association of African Central Banks sumably do not differ in ability, have yielded much reduced estimates of the A Priori. A term which describes a pro rate of return to education; the true rate of cess of reasoning deductively from initial return may be as low as 5 per cent rather premises to conclusions. Such an ap than the usual estimate of 10 per cent and proach may be contrasted with one based above, although there are disputes over on induction from observed facts. In some the findings. Persistence of schooling ex cases, the results of a priori reasoning penditures in such circumstances might may be compared with empirical evidence be attributable to the consumption value in order to test a hypothesis. However, of education. Even so, schooling does many of the theorems of welfare econ influence earnings-~.wen for identical omics cannot be tested against evidence twins-and thus schooling can continue and their validity rests upon the correct to be viewed as an investment. (See ness of the premises from which they are Hwnan Capital.) logically deduced. Thus, welfare econ omics is often described as being a priori. Ability to Pay Theory. An approach to taxation which states that burden of tax Abatement Cost. The cost of abating a ation should be distributed in accord nuisance such as pollution or congestion. ance with ability to pay. The theory is In terms of pollution the cost curve will based on the concept of equal sacrifice. typically slope upwards at an increasing Sacrifice refers to the loss of utility which rate as pollution is progressively reduced. is incurred when tax payments are made. This is because it is usually comparatively There are three possible measures of equal cheap to 'clean-up' some part of a polluted sacrifice-equal absolute, equal propor environment but extremely expensive to tional and equal marginal (or least ag remove the last units of pollution. An gregate). No definition is obviously con example would be noise where engines ceptually superior. Whether the tax sys can be muffled thus reducing noise by a tem is progressive, proportional or re noticeable amount. Further reductions in gressive depends on which measure is noise might, however, require expensive employed and on the assumed slope of the engine redesign or wholesale changes in marginal utility ofi ncome schedule(s}. Any road structures, locations etc. one definition is actually consistent with all three tax structures when different ABEDA assumptions are made about the slope of See Arab Bank for Economic Development the marginal utility of income schedule. If in Africa the latter is assumed to be declining the three measurements do not always give Ability and Earnings. Measures of ability . consistent conclusions about the appro and levels of education ('schooling') are priate tax structure. The equal marginal highly correlated; raising the possibility sacrifice definition produces the most pro that much of the estimated return to gressive tax structure. The validity of the education is in fact a return to ability. theory depends on the ability to make Until recently, however, it was not interpersonal comparisons of utility. This thought that allowance for ability much is denied in modern welfare econ reduced the rate of return to education. omics. The theory although superficially 1 Abnormal Profits Absolute Value attractive thus has several major limi consumption would be functionally re tations and defects. lated to income in the following way. First for any change in income the correspond Abnormal Profits. ing change in consumption would be in See Super N orrnal Profits the same direction but of a smaller magni tude, the marginal propensity to consume Above the Line. would be less than 1; See Below the Line 0< IlC/llY < 1, Abscissa. The value on the horizontal (or where 'Il' means 'small change in.' X) axis of a point on a two dimensional Second the marginal propensity to con graph. (See also Ordinate.) sume would be less than the average propensity to consume; Absenteeism. Failure to report for work although the terms of the labour contract IlC C -< require the worker to do so and the llY Y contract is still operational. The over employed worker will resort to this where Finally the rate of change of the marginal control of the terms of the labour contract propensity to consume would be negative; is lax or where sanctions for non that is that the slope of the consumption compliance are negligible. In particular function will become flatter as income employers who are currently experiencing rises. While short-run time series and labour shortage may be reluctant to use cross-section evidence on the form of the the ultimate sanction of sacking. consumption function broadly support Keynes' hypothesis, long-run evidence Absentee Landlord. An owner of land or contradicts it. In consequence this form of property who lives away from his estate, consumption function enters only the collecting rents and administrating his most simple models. (See also the Short business through some intermediary or run Consumption Function; the Cross agent. section Consumption Function; Long-run Consumption Function; Relative Income Absolute Advantage. Hypothesis; Life-cycle Hypothesis; See Comparative Advantage Permanent Income Hypothesis and Endogenous Income Hypothesis.) Absolute Cost Advantage. A concept re ferring to those advantages possessed by Absolute Monopoly. established firms who are as a con See Monopoly sequence able to sustain a lower average total cost than new entrants irrespective Absolute Prices. Money prices as op of size of output. Examples of sources of posed to relative prices; that is the price of absolute cost advantages are: control of goods and services expressed directly in the supply of key factor inputs, patents terms of a quantity of the monetary unit. and superior techniques available only to (See Price.) established firms. (See Barriers to Entry.) Absolute Scarcity. Absolute Income Hypothesis. This hy See Scarcity pothesis states that consumption expendi tures (C) are a function solely of current Absolute Value. (also known as personal disposable income (Yd): C modulus.) = C (Yd)' This view of the determinants of The value of a variable ignoring its sign. consumption was detailed in THE GENERAL Thus the absolute value of a positive THEORY by Keynes who hypothesized that number is just that number, while the 2 Absorption Approach Accelerator Principle absolute value of a negative number is for some period before benefiting from an itself multiplied by minus one. investment. Abstention in this sense of 'waiting' is scarce and requires a reward or Absorption Approach. A method of payment in the form of interest. analysing the effects of a devaluation or These two elements of abstinence pro depreciation of a country's exchange rate vide a theory of the supply of savings on its balance of trade. The approach which can be used in conjunction with a focuses attention on the relationship be demand for investment to explain the tween national product (Y) and national existence of a positive rate of interest. absorption (A), where the latter is defined as the use of goods for the purposes of Acceleration Coefficient. consumption and investment by the private See Accelerator Coefficient and public sectors of the economy. The balance of trade (B) can only be positive Accelerated Depreciation. (i.e. in surplus) ifY exceeds A. Thus in its See Depreciation simplest form the relationship may be written as B = Y - A. Accelerating InOation. An increasingly If the balance of trade is to improve sharp rise in the rate of inflation. If then devaluation or depreciation must government attempts to hold unemploy raise Y relative to A. In an economy with ment below the natural rate of unemploy unemployment resources this is possible, ment this will result in accelerating in since the decline in the exchange rate flation. (See also Siumpflation.) should be a greater stimulus to Y than A. At full employment, however,Y cannot be Acceleration Principle. increased, so that B can only improve if A See Accelerator Principle falls. The merit of the approach is that it draws attention to the need for com Accelerator. plementary return, e.g. some degree of See Accelerator Principle deflation, if a decline in the exchange rate is to improve the balance of trade in Accelerator Coefficient. The multiple by conditions of full employment. which new investment increases in re sponse to a change in income. New invest Abstinence. A term which describes the ment is hypothesized to be some multiple necessity of foregoing present consump greater than one of the change in income tion in order to allow capital accumu because the value of a machine is usually lation. It was first used by Nassau Senior well in excess of the value of its annual in his theory of the rate of interest. For production. (See Accelerator Principle.) Senior, the creation of capital goods in volved saving from current income in Accelerator Principle. The theory that order to augment the capital stock, and the level of aggregate net investment de create a greater future stream of con pends on the expected change in output. sumption goods. As such it implies that a In its naive form, it can be expressed reward for such behaviour is required if 1, = a~Y'-l +b capital accumulation is to continue. Interest is the reward for abstemious where 'a' is the accelerator coefficient, '~' behaviour, and the rate of interest reflects means 'small change in' and ~Y'-l serves the scarcity of capital. as a naive proxy for the expected change in J. S. Mill extended the notion of absti output, and b is replacement investment. nence to include a reward for foregoing The theory hypothesizes that firms at consumption ofc apital itself. Since capital tempt to maintain a fixed ratio of desired goods take time to produce commodities capital stock to expected output. In the for consumption the individual must wait naive version there is no role for the 3