Oictionary ©i

Free^IMtarket Economics
*xl<^py’
‘Many words have different meanings in economics
than they have in every day use, and many others are
special to the economics discipline. Professor Foldvary’s
Dictionary will allow one to quickly look up the
meaning of both common words used in economics and
specialist terms. It will prove to be an invaluable
reference work for student and professor alike.’
- Dennis C. Mueller, Universitat Wien, Austria

This important and original Dictionary presents

for the first time in an easily accessible form a
wide range of terms and concepts used in free-
market economics. It includes entries on
theories of the market economy, as well as
empirical studies of economic freedom, and
informative biographies of free-market
economists.

Standard dictionaries in economics often omit

many terms used in free-market economics, and
also place a different interpretation on some
terms and concepts, such as ‘ intervention’,
‘regulation’, ‘ownership’ and ‘public goods’. In
addition, they often do not include references
on important and controversial topics such as
free banking. This Dictionary includes definitive
entries that are not covered elsewhere, as well as
explaining key terms and concepts from the
Austrian, Chicago, Virginia Public Choice, Law
and Economics, and Georgist schools of
thought. It also incorporates the essential points
of a particular topic, concept or term used in
law, finance and classical liberal philosophy as
well as many basic terms used in economics.
Sorted alphabetically, with extensive
cross-referencing, this dictionary provides
concise and clear definitions of common as well
as less well known concepts used in free-market
economics.

This Dictionary will be an essential source of

reference for all those in the Public Choice and
Austrian schools as well as those with an interest
in free-market economics.

The economists pictured on the front cover are (from top

left to bottom right):
Milton Friedman, Henry George (courtesy of the
Schalkenbach Foundation), Ludwig E. von Mises (courtesy
of Margit von Mises), Israel Kirzner, Friedrich A. von Hayek
and James M. Buchanan.
DICTIONARY OF FREE-MARKET ECONOMICS
In memory of my parents, Tina and Otto Foldvary, who
encouraged and supported my pursuit of meaning and
knowledge.
 Dictionary of Free-Market
Economics

Fred E. Foldvary
Adjunct Professor of Business, School of Management, John F.
Kennedy University, Walnut Creek, California, USA

park learning centre

UNIVERSITY OF GLOUCESTERSHIRE
P.O. Box 220. The Park
Cheltenham GL50 2QF
Tel: 01242532721

Edward Elgar
Cheltenham, UK»Northampton, MA, USA
© Fred E. Foldvary 1998

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system or transmitted in any form or by any means, electronic, mechanical
or photocopying, recording, or otherwise without the prior permission of the pub¬
lisher.

Published by
Edward Elgar Publishing Limited
Glensanda House
Montpellier Parade
Cheltenham
Glos GL50 1UA
UK

Edward Elgar Publishing, Inc.

6 Market Street
Northampton
Massachusetts 01060
USA

A catalogue record for this book

is available from the British Library

Library of Coagress Cataloguing in Publication Data

Foldvary, Fred E., 1946-
Dictionary of free-market economics / Fred E. Foldvary.
1. Economics—Dictionaries. 2. Free enterprise—Dictionaries.
I. Title.
HB61.F65 1998
98-13479
330'03—dc21
CIP

ISBN 1 85898 432 7

Typeset by Manton Typesetters, 5-7 Eastfield Road, Louth, Lincolnshire, UK

Printed and bound in Great Britain by Bookcraft (Bath) Ltd.
INTRODUCTION

Several free-market schools of economic thought have been active and grow¬
ing during the past few decades, along with classical-liberal and libertarian
political and philosophical literature and associated institutions. A body of
vocabulary used by these schools and their literature has developed that has
not been defined by mainstream reference works, and there are also terms
such as ‘intervention’ used by free-market advocates with meanings that
differ from mainstream usage. A dictionary of free-market economics has
been lacking, and this work arose to fill that gap.
One work along these lines is the Lexicon of Economic Thought by Walter
Block and Michael Walker of The Fraser Institute in Canada. That work,
however, is geared to a detailed exposition of a relatively small number of
concepts, using a free-market perspective, rather than comprehensively but
concisely defining economic terms, as does this Dictionary of Free-Market
Economics. Another predecessor is Mises Made Easier (1974), by Percy L.
Graves, Jr. That work is specialized to the explanation of terms used by
Ludwig von Mises, many of which refer to classical literature and other terms
not germane to this dictionary.
As defined in here, free-market economics consists either of theories of the
market process as it would function without intervention or the theory of
free-market-oriented economists and schools of thought.
One difficult choice was to what extent to include standard economics
terms. The choice made was to include basic general terms, since they are
often given a free-market-oriented meaning or variants of meaning here, and
inclusion makes the work a more useful general reference resource for eco¬
nomics, especially since terms in a definition of a free-market concept may in
turn warrant defining. However, technical terms not related to political economy
or the market process, such as statistical concepts and econometrics tech¬
niques, are excluded. Some philosophical and legal terms and concepts are
included, as they are related to the methodology and theory used by free-
market and classical-liberal thought.
Free-market thought includes analyses and critiques of government inter¬
vention, whether central planning, regulations and restrictions, or taxation.
Thus, terms related to intervention belong in a free-market dictionary, and the
multitude of taxes and regulations and their implemention, such as various
lags, are included, from a free-market-based perspective.

v
vi Dictionary offree-market economics

A dictionary by one author necessarily involves subjective judgments as to

the selection and meaning of the concepts. A work written by a committee
would smooth out personal idiosyncracies, but might suffer from the ‘formal¬
istic interchanges’ John Finneran (1996) writes of in A Tale of Two Diction¬
aries regarding the French dictionary created by the French Academy during
55 years. In contrast, the English dictionary created by Samuel Johnson took
seven years, and it gave out ‘a distinctly individual flavor.’ Finneran also
notes that Johnson’s work had its share of ‘blunders and omissions,’ as no
doubt this edition will as well. My hope is that it will nevertheless provide the
reader with not just a useful reference, but also a tasty treat.
The alphabetization follows the rule that a space is a separate character,
with a hyphen equivalent to a space for the sequence. This will facilitate any
computer-sorting and other processing of the terms. The small capitalized
terms in a definition are key terms that are defined in the dictionary, possibly
a plural; only the terms deemed to be significant for the definition are put in
small capitals. If a variant of the term is deemed significant the actual term is
placed in brackets next to the variant. Where there are two consecutive small
capitalized terms, the second is preceded by an asterisk. Where there is more
than one definition of a term, the number in parenthesis indicates the defini¬
tion number referred to. Where a name is referred to, the entry is according to
the last name.
Some of the prominent free-market economists and those who strongly
influenced free-market thought are included as entries, as are some free-
market institutions. Any omissions do not imply that they have not been
significant. There are many free-market economists and dozens of free-mar¬
ket institutes, so this Dictionary cannot serve as any kind of complete refer¬
ence for these, but more of a representative sampling, although my intent has
been to include the most important historical figures.
My intent has been to provide clear, distinct, and concise meanings for
economic and classical-liberal terms, with expanded explanations only for a
few major concepts. This work is thus a dictionary rather than an encyclope¬
dia. I also tried to make the work enjoyable for browsing and perusing. The
two key scientific and philosophical questions are ‘what do you know?’ and
‘what do you mean?’, and I hope this work will help students of economics
and classical liberal thought elucidate what they mean.
ACKNOWLEDGMENTS

Many thanks to Charles Rowley for his assistance in initiating this project,
Bertrand Lemennicier for suggestions of some names of French free-market
economists, Aeon Skoble for help with the Ayn Rand concepts, John Cobin
on allodialism, members of the libprofs e-mail list for much help, my wife
Janet for language insights, and many others who helped me with concepts,
resources, definitions, and sources.

vii
X& ...
ABBREVIATIONS

abbrev. abbreviation
acc. accounting
Br. British
ec. economics
eth. ethics
fin. finance
Fr. French
Ger. German
Gk. Greek
Lat. Latin
leg. legal
log. logic
n. noun
OED Oxford English Dictionary
phil. philosophy
pi. plural
Russ. Russian
sci. science
syn. synonym

IX
 A

a posteriori. Lat. Afterwards, or following; known from experience and

induction rather than deductively (deduction) derived.

a priori. Lat. From what goes before: beforehand, or prior to. A priori
propositions are prior to derivations therefrom. Deductive (deduction) rea¬
soning is also referred to as a priori. The term is also used for propositions
that are self-evident or derived deductively, without using experience regard¬
ing specific events, though the premises for such reasoning are ultimately
based on general empirical experience. Ludwig von Mises held that an a
priori is one which cannot be traced to a logically prior cause, and is thus a
foundational premise. See also apriorism.

A-D. Advance-decline ratio.

AAA. 1 The highest credit rating assigned to securities (for example corpo¬
rate and municipal bonds) by the Standard & Poor and Moody’s rating
agency; pronounced ‘triple A.’ Lesser ratings are AA (double A) and A
(single A), followed by B ratings, and so on. Such a rating system is also
applied by agencies to banks and shares. 2 Abbrev. American Automobile
Association, Agricultural Adjustment Act, American Accounting Association,
American Arbitration Association.

ab invito. Lat. Coerced (coerce), compulsory. For example, a transfer ab

invito.

ABA. American Bankers Association.

ABA transit number. The number assigned to a US financial institution. It

is inscribed on its checks.

abalienate. To transfer title of. Syn. alienate (alienation).

abandon. 1 To desert or forsake property, giving up claim (2) to it. Aban¬

doned property is that for which an owner (ownership) has permanently given
up possession and all rights. 2 To permanently plug a well.

1
2 abandonment

abandonment. 1 Economic The act of willingly deserting or relinquishing

property, unilaterally giving up claim (2) to it. 2 Ethics The absence of
objective values or meaning of life due to the absence of God, hence human
beings need to determine these without divine guidance. Contrast: forfei¬
ture.

abandonment cost. The cost of abandonment (1). See also shut down
costs. The cost can be social as well as private.

abate. 1 To reduce or eliminate. 2 To deduct or discount part of a payment.

Abatement of taxes is a reduction after an assessment or tax has been levied.
3 Law To annul. 4 To calm or quiet.

abduction. 1 Law Kidnapping; forcibly and illegally carrying off a person.

2 Phil A type of reasoning (reason), neither deductive (deduction) nor
inductive (induction), in which one originates a hypothesis or a premise
based on the creative analysis of facts and prior theory. The term was intro¬
duced by Charles Saunders Peirce.

ability. The power to act. The socialist (socialism) slogan, ‘From each
according to his ability; to each according to his need,’ originated with Louis
Blanc (1811-82), Organisation du Travail (1839). This principle is applica¬
ble to family economies. In a free market catallaxy or extended order,
rewards are ‘to each according to his ability’ when applied to production, and
needs are met by equal and unhampered access to natural opportunities,
along with charity to those with inability.

ability to extract. See ability to pay.

ability to pay. 1A rationale for taxation based on social obligation and the
availability of funds not vital to survival, hence extractable without undue
sacrifice. The concept also can refer to equal tax payments from those with
equal income or wealth. The main alternative rationale is the benefit princi¬
ple of public finance. 2 A bond issuer’s ability to obtain sufficient revenue to
pay the interest and principal of the debt.
The concept of ‘ability to pay’ (1) is typically based on the equal sacrifice
of utility (absolute, proportional, or marginal). Richer payers allegedly lose
less utility per dollar of tax than poorer ones, due to diminishing marginal
utility. Aside from the issue of interpersonal comparing of utilities, the
rationale may in practice be implemented as the ‘ability to extract,’ govern¬
ment taking funds where it can most effectively extract them, just as thieves
rob banks because ‘that’s where the money is.’
 abortive benefits 3

Although ‘ability to pay’ (1) is incorporated in graduated or progressive

tax rates, such tax rates may not in practice tap some of the richest incomes,
which may be sheltered from taxation, but tax lower income more easily
tapped, such as payrolls and sales.
Whether ‘ability to pay’ (1) is equitable (equity) depends on the ethical
(ethic) standard used; typically, equal sacrifice is presumed without any
explicitly derived ethical standard. Whatever the rationale in equity, the abil¬
ity to pay principle sacrifices efficiency, since even the wealthy have less
incentive to exert effort and to invest resources as the tax rate increases,
reducing expected profits. Higher marginal tax rates also create an incentive
for tax avoidance and evasion, reducing the gains from higher tax rates.

abject. Severe; worst; wretched.

abject poverty. Wretched poverty, leaving people suffering from hunger,

sickness, and harsh weather. This is normally due to interventionist (inter¬
vention) policies which stifle prosperity, for as Henry George (1883, p. 78)
wrote, ‘There is in nature no reason for poverty.’ See also nature.

abjure. Renounce by oath.

abolish. Eliminate, destroy, or repeal, as in abolishing slavery (slave) or

barriers to trade.

abomination. Something evil and/or repugnant, such as a tax system that

is not only costly to the payers, but has a high social cost (social costs and
benefits) of compliance and is arbitrary and invasive of privacy.

aboriginal. The first of their kind, such as aboriginal people being the first
human beings to settle some territory.

aboriginal land rights. The natural rights of aboriginal people to the

land they homesteaded (homesteading), rights retained after being invaded
and losing possession. This is a current issue in Australia, Canada, the USA
and other countries.

abortive benefits. The failure (fail) of intended benefits to achieve their

purpose. A government program which imposes greater social costs (social
costs and benefits) (including the excess burden of taxation) than benefits
has abortive benefits, since it decreases net well-being.
4 above par

above par. A share of stock with a market value greater than its par value
or face value.

above the line. 1 The income-tax ‘line’ is gross income; income is listed
above the line, deductions below the line. Gross income less deductions is
adjusted gross income. 2 Before-tax revenue and expenditure.

absentee landlord. An owner of real estate who does not live on the
property and administers it through an agent (2).

absenteeism. The practice of employees taking unauthorized time off work,

possibly as an expression of a grievance.

absolute. Complete, independent, unrestricted, and pure. As in absolute

advantage, absolute authority, absolute governance, absolute truth. Contrasted
with relative, comparative, mixed or impure, partial, or restricted, ‘The abso¬
lute’ in philosophy is the totality of what exists. See relatively absolute
ABSOLUTES.

absolute advantage. In the theory of exchange, including international

trade: the ability to produce an item of a certain quality at a lower average
cost, due to greater productivity, than another agent (1). Contrast: compara¬
tive ADVANTAGE.

absolute cost advantage. The ability of a firm to produce at a lower

average cost than potential entrants to the industry (2), due to resources or
technology not available to the others, such as patents and proprietary knowl¬
edge. Contrast: comparative advantage.

absolute income. The current income of a household (for example during

one year) rather than a lifetime income or permanent income.

absolute income hypothesis. The Keynesian proposition (Keynesian eco¬

nomics) that consumption is basically a function of current or absolute income,
a central element of simple Keynesian macroeconomic *models. The hypoth¬
esis states that the first derivative of the function is positive and less than one,
and that the marginal propensity to consume is less than the average propensity
to consume. This hypothesis is generally not empirically warranted (warrant)
for the long run. Even if warranted, the relationship between consumption and
income is not necessarily linear. Moreover, even if the linear equation C = c0 +
Byd were warranted, total consumption as a function of total income does not
warrant its mathematical manipulation into a determination of national income
 absolute priority rule 5

given c and C if the causation is that consumption is determined by income.

See also life-cycle hypothesis of consumption.

absolute monopoly. An industry (2) in which there is only one firm, or

product for which there is only one provider in its market. (See also entry
monopoly.) This can be created by government, as in the postal monopoly
with first-class mail, by the complete ownership of a natural or locational
resource, or by the market process. A firm that has an absolute monopoly can
set a higher price than if there is competition, resulting in a loss of social
welfare, since the price is higher than the marginal cost of the good, unless
the firm can price discriminate (price discrimination), that is, sell some of the
items at lower prices while keeping the high payers. There may be no real
welfare loss, however, if the market is such that other firms would not be
profitable, price discrimination is not feasible, or if regulation to set a lower
price (for example at marginal cost) has its own failures.
There are many locational monopolies, such as the only dentist in a small
town, but their market power is limited by social relationships and competi¬
tion from other nearby market areas. The potential of entry of new firms also
limits monopoly power. Large absolute monopolies not due to government
protection and barriers are quite rare. If any exist, the monopoly profit, or
economic profit beyond normal returns, can be taxed (tax) without any effect
on output.
Locational or ‘natural’ monopolies provide a service or resource, such as
water or electricity, to a territorial community, and are typically granted a
monopoly by government in exchange for regulation. In some cases, such as
a telephone service, it is possible to have competitive service using the same
infrastructure. For the infrastructure or for resources such as water, providers
(including municipalities and governmental districts) could bid for the fran¬
chise. These territorial (territorial goods) services are also subject to compe¬
tition among communities.

absolute poverty. The condition of families who do not have sufficient

income to obtain basic needs such as food, shelter, and basic medicine. An
income level at or below subsistence.

absolute price. A price measured in money rather than in other goods, thus
having a number based on a unit of account rather than being values relative
to other goods.

absolute priority rule. That creditors be satisfied prior to owners (owner¬

ship) in liquidations.
6 absolute scarcity

absolute scarcity. Scarcity plus fixity (fixed). The condition of there being
scarce (1) resources fixed in quantity, although the total amount available
may be unknown.

absolute tax incidence. The incidence of a tax relative to there being zero
taxation. See incidence of taxation.

absolutism. Phil. The exercise of absolute governance. Absolute govern¬

ment is not limited by any internal laws or organizations. See also its subset,
TOTALITARIANISM.

absorb. 1 To cancel out or negate, for example when litigation costs absorb
profit, hence reducing the profit that would otherwise have existed. 2 Take in
and assimilate, including the acquisition of another enterprise and incorporat¬
ing it into the acquiring firm. 3 To offset sell with buy orders.

absorption. 1 The use of goods by an economy (1) (see also absorptive

capacity). 2 The absorbing (absorb (1)) of one firm by another.

absorption approach. A country’s balance of trade expressed by the

equation B = N - X, B being the balance of trade, N national income, and X
domestic consumption and investment. B is thus affected by changes in N and
X; whether this is more than a trivial residual is the question.

absorptive capacity. The ability of an economy (1) to absorb (2) invest¬

ments (an increase in capital goods or human capital) without decreasing
returns. If there is no change in technology, eventually marginal productivity
declines as investment increases, reducing returns to investments.

abstinence. Postponing consumption to some future date, using resources

instead for loans and investment. The term was used by Nassau Senior in his
theory of interest, in which interest is a reward for abstinence. John Stuart
Mill proposed that abstinence is also a reward for not using up financial
capital. Abstinence or waiting is related in conception to the concept of time
preference, whereby people prefer to have goods in the present than in the
future, but the interest premium is not a return on waiting itself but due to the
excess of quantity demanded over quantity supplied for loanable items when
the interest rate is zero.

abstract. 1 Apart from any concrete or specific exemplar of the concept

under consideration. An abstraction such as a model leaves out minor ele¬
ments of a system, concentrating on the essential ones. See also primacy of
 academic 7

the abstract. 2 A concise summary of a paper or report, often preceding the

main body of an academic paper or article. 3 Law To take or remove, an
abstraction being an unauthorized and injurious taking.

abstract labor. In Marxist economics, labor in the abstract, which is

regarded as creating the market value of products. In free-market economics,
labor consists of concrete individual workers who create a marginal physical
and revenue product, land and capital goods also contributing to value.

abstraction. The outcome of abstracting (abstract (1)), whereby the par¬

ticular becomes generalized, simplified, and more theory-laden. John Locke
regarded abstractions as standards by which actual items are categorized.

absurd. See reductio ad absurdum.

Abu Said ibn Khaldun. Arab historian, sociologist and economist (1332—
1406). Held government positions. President Reagan cited Khaldun as sup¬
porting the view that a reduction of tax rates generates larger tax revenues,
that is the Laffer curve. Khaldun proposed that human geography comple¬
ments historical sociology.

abundance. 1 A condition in which there are sufficient goods for the set of
persons who want them, for example luxury goods can be in plentiful quan¬
tity for those who can pay the price. 2 Prosperity for all members of a
society, all persons being able to obtain the goods that a typical modern
household enjoys.

abuse. Improper use. A harmful departure from reasonable use and treat¬
ment. For example, the abuse of renewable resources can be considered to
consist of their wanton destruction, depriving others of their use, whereas
proper use would preserve the resource. The abuse of animals is treatment
that causes excessive, avoidable suffering. The abuse of power is its exercise
contrary to law.

abusus . Lat. Using up; wasting.

academese. Jargon and dialects spoken by those doing academic work.

academic. 1 Pertaining to scholarly work, such as that done in a university.

2 Theory or concept with slight practical importance, applicability, or rel¬
evance.
8 academic freedom

academic freedom. The freedom to teach subjects as the instructor wishes,

and to publish, without arbitrary governmental, institutional, or doctrinal
restrictions, or regard for any public benefits, so long as the teachings do not
constitute deception.

academic tenure. A permanent grant of a position in a college or univer¬

sity, normally after an initial duration in which the candidate has satisfied
requirements such as prestigious publications and the ability to obtain grant
funds. Tenure allegedly protects the academic freedom of professors, but
under a more market-oriented system, the freedom to teach and publish could
be safeguarded as well. The costs of academic tenure include the inability to
discharge a no-longer effective scholar and teacher, a reduced ability to
decrease the size of a faculty when demand decreases, and the payment of
wages not warranted by performance. The pressure and requirement of tenure
also skew pre-tenured professors to the desires of those with authority to
decide on tenure rather than the interests and concerns of the scholar. The
tenure process can also favor publication over teaching or even certain types
of research. (Such considerations are also discussed in the entry of the same
title in Block and Walker, 1989.)

academician. A scholar or teacher.

accelerate. 1 To apply some force that increases the velocity of an item

(such as a rate of output, payment, or cost) or changes its direction. 2 Hence,
to speed up an accounting or payment process, such as depreciation (1) or a
maturity date, from its normal schedule.

accelerated cost recovery system. In US tax law (the Economic Recovery

Act of 1981, modified by the Tax Reform Act of 1986), a depreciation (2)
period shorter than the actual life of the capital good. The accelerated depre¬
ciation reduces the tax burden and stimulates investment, since an earlier
reduction of taxes frees funds that can earn returns. However, the tax favoring
of capital goods relative to labor will skew investment away from human
capital, resulting in a market distortion.

accelerated depreciation. A tax * accounting of depreciation (1) that may

exceed the actual depreciation, that is the wear and tear, with large deduc¬
tions in the first years, although also justified when assets are more produc¬
tive in their earlier years. Such a depreciation schedule stimulates investment,
similar to the accelerated cost recovery system.

acceleration premium. More pay for greater output.

 accessions tax 9

acceleration principle. The concept of an accelerator linking consump¬

tion and INVESTMENT.

accelerator. A proposition that investment is a function of the rate of

change of output, so that for example as output falls, investment falls. As the
accelerator interacts with the multiplier, an initial decline accelerates into a
major decline. The concept plays a role in some hypotheses of trade cycles.
The hypothesis posits that net investment equals some coefficient (the amount
of capital goods needed to produce a unit of output) times the change in
income. The concept does not take into account the structure (differing
roundaboutness) of capital goods and the effects of land, although some
models have taken into account differing reaction times.

accelerator-multiplier model. A model of growth using the accelerator

and multiplier.

accept. To receive something willingly.

acceptance. An agreement by the recipient to receive an item. The accept¬

ance of a bill or offer by the person to whom it is drawn typically though not
necessarily consists in signing or using it.

acceptilation. The release of a debt by the creditor without receiving pay¬

ment.

access. The ability to approach persons or obtain resources or public records

without arbitrary * barriers. In real estate, access involves rights to adjoin¬
ing transportation routes. In computing or data processing, access involves
obtaining data. Political access depends on the number of governing agen¬
cies, the degree to which special interests are able to influence legislation,
and the size of the voting pool in a jurisdiction.

access/space trade-off. The trade-off between land area and transportation

costs, the choice being more space where land is cheap and transport dear
further from the center of commerce, versus less space but cheaper access
closer to commerce.

accession rate. The number of newly hired workers per month divided by
total employment. This rate is a leading indicator of the business cycle.

accessions tax. A tax on assets transferred without a reciprocal exchange,

such as by gift or inheritance (inheritance tax), levied on the recipient. If
10 accidentalism

these assets are considered legitimately owned by the donor, then an acces¬
sions tax is an intervention, that is an arbitrary taking and alteration of
voluntary behavior. A donor tax, such as a gift or inheritance tax, is paid by
the donor.

accidentalism. Phil. The theory that while all events may be caused, some
cannot be predicted.

accommodate. 1 Help in a complementary (complement) way, as when

monetary policy accommodates a demand *shock that raises the demand for
money by expanding the money supply. 2 Adopt a practice to avoid conflict,
without necessarily adapting to or assimilating it.

accommodative monetary policy. An increase in the money supply by the

monetary authority to temporarily offset higher interest rates due to govern¬
ment borrowing, or to accommodate (1) a demand shock.

account. 1 A contract between two parties, one of which owns assets or

credit and the other of which holds the assets and maintains records of the
amounts, as with a bank account. 2 A record of transactions and assets.

accounting. The activity and resultant reporting of systematically record¬

ing transactions, and the analysis and interpretation of the methods and
reports.

accounting costs. The costs of a firm as recorded by an accountant, hence

the explicit costs and not the implicit *opportunity costs of the owner’s
resources and of the firm’s financial assets.

accounting equation. The identity ‘assets equal liabilities plus net worth’.
This is a result of double-entry bookkeeping.

accounting identity. An equation that balances by definition, such as the

accounting equation and the macroeconomic formula Y = C + / + G where Y
is by definition the sum of the terms of the right side (which assumes that
savings equals investment).

accounting profit. Gross revenues minus explicit *costs, that is the costs
of exchanged items that an accountant would record. An accounting profit
excludes implicit costs, that is payments for factors owned by the proprietor
(proprietary), which when subtracted from the accounting profit, constitute
the ECONOMIC PROFIT.
 ACRS 11

accounting rate of return. Income during some time interval divided by

the average amount of the asset.

accounts payable. Funds due to suppliers for items received,

accounts receivable. Funds owed from those who received goods,

accretion. See accumulation (3).

accrual basis. Accounting based on income and expenses that accrue, in

contrast to a cash basis.

accrue. Accumulate, and recorded as an addition or cost, even if no ex¬

plicit Transaction takes place.

accrued expenses. Liabilities recorded as incurred but not yet paid.

accumulation. 1 An increase due to continuous additions. 2 In Marxism

(Marxist economics), an increase in capital goods. 3 Fin. Adding the income
generated by an asset to the amount of the asset.

achieving society. Concept and name of book by David McClelland (1976).

Entrepreneurial (Entrepreneur) achievement involves new ideas and the de¬
sire to succeed, a personality trait.

acid test ratio. The sum of cash, securities, and receivables divided by
current liabilities, used in financial analysis to measure a firm’s solvency.
This is also called a ‘quick ratio.’ It is normally desirable for the ratio to be at
least 1:1.

acquaintance, knowledge by. Knowledge obtained from observation and

experience, in contrast to knowledge by description.

acquisition. The absorbing (absorb) of one firm by another, especially by

purchasing its common stock.

acquisitive offenses. Theft and other crimes against title and possession of
PROPERTY.

across the board. Applying to all members of a group.

ACRS. Accelerated Cost Recovery System.

12 act

act. 1 An activity (1) or a state of being. 2 A demonstration and expression

of the actor’s will, hence a voluntary exercise of power, a choice among
options. 3 Laws, decisions, and commands of a government agency.
According to the sociologist T. Parsons, the act (2) is the basic unit of
sociological analysis. In law, corporations are legal persons and act as an
agency.

act of God. An event not caused by human action and which cannot be
prevented. Insurance policies have clauses for such events.

act of state. Action by a state government affecting another state govern¬

ment, rather than action by a state government directly affecting its citizens.
Such action is inherent in sovereignty, and outside the jurisdiction of domes¬
tic courts. In US and British law, an act of state does not apply to citizens or
subjects, hence may not be used to violate or restrict constitutional rights.

act utilitarianism. An ethic by which the moral *value of an act is the

amount of additional happiness, well-being or utility (utility, marginal) it
induces among some set of persons. An act is thus the basis of moral value.
See also utilitarianism for rule-utilitarianism. Problems with act utilitarian¬
ism include i) the derivation of the ethic; ii) when an act has differing effects
on different persons, why the well-being of some outweighs the suffering of
others; iii) how to measure well-being and compare individual utilities. These
problems can be resolved if a universal ethic is first derived and then applied
to acts, although the prime determinant of moral values would be the rules of
the ethic rather than unmeasurable utility.

acting. 1 Performing an act (2). 2 Representing or substituting for another.

acting man. A term used by Ludwig von Mises in Human Action (1949,
1966) to emphasize that persons *act purposefully (purposeful).

actio personalis moritur cum persona. Lat. The personal right to action
(4) or property expires with the death of the person. One application can be
to a patent or copyright that confers a lifetime right that is not inheritable.

action. 1 The purposeful pursuit of ends. See also human action. 2 Fin. The
performance of a stock or an exchange market. 3 An activity (1) that is
required. 4 Leg. A lawsuit or other legal proceeding.

action lag. A duration of time between the decision to enact policy and its
actual implementation. See also administrative lag.
 acts/omissions question 13

action of contract. Leg. Action (4) to enforce a contract.

action research. Empirical research in the field, in which the researcher

becomes a participant in the group studied and may act also as a consultant to
the group.

actionable. Eligible for action (4), such as damage, misrepresentation, neg¬

ligence, or nuisance.

active. 1 Having intense activity. 2 Productive of return, yield, or profit.

active balance. The portion of the money stock which has a high velocity,
mainly currency and current account deposits. The rest of the money
supply consists of idle balances. Changes in velocity normally involve trans¬
fers between active and idle balances.

active fiscal policy. Discretionary fiscal policy (discretionary policy), at¬

tempting to influence economic variables as well as obtain revenues, which
can result in volatile (volatility) policy.

active management. Seeking above-average profit relative to risk.

activity. 1 A change of state. Contrast: state of being. 2 The intensity of

activity (1); that is, how busy some agent (1) or organization is. 3 Trading
volume.

activity analysis. The determination, such as with linear programming, of

optimal combinations processing using a given amount of inputs, each proc¬
ess being an ‘activity’.

activity rate. In the UK, the labor force participation rate, or ratio of
workers to the relevant population.

activity ratio. Any of various measures of the intensity of activity in a firm,

such as sales divided by assets, generating cash flow, indicating liquidity or
efficiency.

actor. A person (or group of persons on behalf of an organization) who acts

purposefully (purposeful). An agent (1) can be an actor or a person acted upon.

acts/omissions question. The ethical question of whether moral evil is

only committed by the activity (1) of an actor, or whether moral evil can
14 actual

also be committed by omission, that is the failure to perform some activity. If

the latter is the case, then in a pure market (pure market economy), agents (1)
have positive moral and legal obligations even in the absence of a contract.

actual. Existing empirically (empirical) rather than hypothetically or what

was planned, potential, contracted for, or expected in the future, hence the
true, real, correct, physical, or ex post situation.

actual cash value. The market price or value of a contract when it is or

would be cashed out or redeemed.

actual cost. The price paid regardless of market price or value.

actual market value. The price an item fetches in a market.

actually existing socialism. as it is and was, rather than as it

Socialism
theoretically should be or was alleged to be by government propaganda. This
term was used by dissidents.

actuarial. Regarding insurable risks and the probabilities of incurring them,

used in computing payable premiums.

ad hoc. Lat. Concerning a particular case, with no systematic justification

or general application. The term can be pejorative if it is used for what is
claimed (claim (3)) to be general and justified.

ad hominem. Lat. Argument directed to the person, that is one’s opponent

or object of criticism, rather than ad rem. Scientific dialogue is ad rem\ a
discussion of an economist’s life and influences is ad rem if that is the
subject, and not otherwise. The ad hominem fallacy consists of ad hominem
premises and ad rem conclusions.

ad judicium. Lat. Argument based on judgment, so named by John Locke,

for sound, warranted (warrant), ad rem arguments, that is those using logic
and evidence.

ad libitum. Lat. However one desires.

ad rem. Lat. Relevant to the thing or topic being discussed, as opposed to

AD HOMINEM.
 addiction 15

ad valorem tax. Lat. A tax on the exchange of assets or on assets, measured

by the value of the assets. Examples include sales, value-added, and property
taxes. With respect to income taxes, it is a flat tax.

ad voluntatem. Lat. According to one’s will.

AD. Aggregate demand.

AD-AS. A macroeconomic * model and analysis using aggregate demand

and aggregate supply curves. In such models, the intersection of the curves
determines the equilibrium national output and the price level, although if the
AS curve is vertical, only the price level is determined by this intersection,
AS being already determined by the labor market and the aggregate produc¬
tion function. Some Austrian school economists (Austrian economics), sus¬
picious of aggregates in general, disdain such models.

Adam Smith Institute. A FREE-MARKET-oriented organization that does

policy research in London, UK,, founded in 1977. There are also Adam Smith
institutes in other countries.

Adams, John. Second president of the USA, he was also a political theorist
and revolutionary, arguing that the US colonies were not legally under the
jurisdiction of the British parliament.

adaptive expectations. Expectations about the values of future variables

based on projections from a weighted average of past values, without taking
into account theories or models of policies of actors that can change the
projection, hence not taking into account all information, in contrast to ra¬
tional expectations. However, if the theory or model is a fog, that is, over¬
whelmingly uncertain, or forecasting errors were made previously, then ra¬
tional expectations become adaptive. For example, if nothing is known about
how interest rates will move, then the rational expectation of the future
interest rate is a projection of the recent movement in the interest rate.

addiction. A strong continuous desire for some item beyond that needed
for health, so that deprivation causes distress. Hence the demand is extremely
inelastic, and some question whether the preferences of an addict are really
voluntary. The policy in a pure market is to allow an adult addict to exercise
his preference, since one may also choose to end the addiction and enter into
remedial therapy. Those advocating Ramsey taxes would place a high tax
burden on addicts.
16 adherent

adherent. A supporter and follower of a school of thought or cause.

adiaphora. Gk. Moral indifference or neutrality. In market ethics, morally

good and neutral acts are within the market, and evil acts are outside of and
violate the market. Acts which are neither good nor evil are morally neutral.

adjudicate. To decide a problem in a court of law. It is the ultimate process

followed by market agents (1) in settling disputes peacefully by having an
agent (2) with legal authority to determine a decision. Other dispute-resolu¬
tion methods are arbitration and mediation.

adjunct. Added or connected but secondary and subordinate, hence, an

instructor who contracts with a college or university to teach courses, typi¬
cally part time and for much lower wages, since there is no economic rent
with such employment.

adjust. To alter to fit a condition, such as adjusting for a change in the price
level.

adjustment lag. The duration of time in which a variable adjusts to changes

in its determinants.

adjustment process. The equilibration of the money supplies and foreign

exchange in international trade so that imports and exports balance. In a gold
standard, movements of gold are equal and opposite to movements of other
goods, so that a country with a surplus of exported goods imports gold, which
increases the money supply, increases prices, thus decreasing exports and
increasing imports until the trade balances. With a floating exchange rate,
some money movements offset goods, but mainly the exchange ratios change
to balance the payments.

adjustment speed. The time it takes for a surplus or shortage to disappear

in the market for a good.

administer. To manage and control an organization, or to carry out a task.

administered prices. Prices set by the government rather than the market
such as with a regulated industry (2), or by monopolistic or oligopolistic
(oligopoly) firms when the costs of changing prices exceed the short-run
losses from deviating a bit from market clearing, or unilaterally by the
management of one firm rather than by negotiation with its partner firms.
 advance-decline line 17

administrative cost 1 The overhead in collecting taxes. 2 Management

COST.

administrative lag. The time between the realization by a monetary *au-

thorjty that some action is desirable, and the actual action.

administrative law. The branch of law dealing with governmental admin¬

istrative agencies. In the USA, the right of due process and judicial review
are, by legal principle if not practice, protections against arbitrary and
harmful acts by administrators.

administrative socialism. Central planning, control, and ownership of

productive assets and processes, rather than the socialism of anarchist (anar¬
chism; workers’ cooperatives.

adolescence. Possibly an outcome of intervention, it is a period of time

between puberty and the age of legal maturity or majority, in which a distinct
teenage culture creates faddish demands for music, films, clothes, drugs and
other items. Adolescence is not a purely natural stage, but is partly an out¬
come of mandatory school attendance, lack of apprenticeship programs, re¬
strictions on teenage labor, and laws prohibiting teenagers from marrying and
assuming adult responsibility. There is also in modem society an absence of
rites of initiation into adulthood. The social problems of adolescence are at
least in part outcomes from such policies.

ADR. American Depository Receipt.

adult. A fully grown and physically mature person, having attained the age
of majority, that is, legal authority and responsibility over one’s own life.
Much of market theory implicitly has adults as its domain of actors.

adulteration. Mixing a substance not normally included in a product into

the product (1), without informing the consumer, hence constituting fraud.

advance. A loan against expected earnings, or a payment before the

1
provision of a service. 2 An increase. 3 A closing price higher than in the
previous period.

advance-decline line. The number of advances (3) minus declines.

18 advance-decline ratio

advance-decline ratio. The number of stocks which advance (3), divided

by those which decline. This is one signal about the overall direction of an
exchange market.

advantage. N. A favorable or better attribute, ability, or condition. See

also ABSOLUTE ADVANTAGE, COMPARATIVE ADVANTAGE.

adverse balance. A deficit in the balance of trade, considered adverse by

some because of the mercantilist (mercantilism) conception that exports are
good and imports bad.

adverse selection. The problem that those buying insurance are those most
likely to receive payouts. When possible, the remedy is to differentiate the
customers and charge (1) those with higher risk higher premiums. There can
be legal barriers to this remedy, as well as asymmetric information limiting
its scope.

adverse supply shock. An increase in factor prices, creating a supply

*shock that reduces aggregate supply.

advertise. To publicize and promote one’s bids or offerings and increase

goodwill in order to increase the demand. Most advertising is by private
companies, but governments also advertise (for example, state lotteries). One
element in advertising is information, and another is persuasion to change
preferences. Advertising is criticized as a social waste, but aside from the
information, advertising provides the variety that some customers like, helps
build brand reputation, is a vehicle for competition, and pays for media such
as newspapers and television. Advertisements directed to children may be
problematic, but those directed to adults do not impinge on consumer sover¬
eignty so long as there is no deception. See synthesized demand.

advisor. An organization that contracts with a mutual fund to provide

knowledge and advice on investments and their management.

Aenesidemus of Cnossos. Skepticism is a basic element of scientific, hence

economic, method, and skepticism relies on the tropes posited by Aenesidemus,
a defender of Pyrrhonism. Some of the tropes involve subjective values and
differing perceptions, hence can contribute to the theory of subjectivity in
economics.

aesthetics and economics. Aesthetics is the study of art and beauty. What
is pleasing as perceived by the senses involves logic, psychology (genetically
 affirmative action 19

determined responses to color, and so on), culture, and personally subjective

tastes. The elements of logic and psychology incur an element of objectivity
(objective) to aesthetics, so that for example a ‘well-written essay’ has both
objective and subjective elements. Among the relationships of aesthetics to
economics are: i) aesthetics as a goal of production (rather than purely instru¬
mental utility); ii) the role of aesthetic values in the formation of theory (see
elegant); iii) aesthetic values as a public good and their provision by the
market process, that is the question of whether there would be more beauty
(for example in civic architecture) in an unhampered market or with interven¬
tionist planning; iv) the depiction of economic ideas through art (whether
visual, poetic, prose, or musical). A question that can be posed is why there
seems to be little poetry devoted to the beauty of free markets.

aetiology. Etiology, the determination and assignment of causes.

affairs. In economics, the totality of one’s activities and assets, including

one’s property and business (1).

affiliated company. A company that has a substantial proportion of its

stock (2) owned by another company.

affiliated person. A person who can influence the policy of a corporation;

for example directors, high-level executives, and major share owners.

affinity card. A credit card affiliated with a nonprofit organization which

receives funds in proportion to the amount spent.

affirm the antecedent. In a statement S: ‘if X then Y’, X is the antecedent,

and to affirm the antedecent is to validly conclude Y from the premises X.
Syn. modus ponens.

affirmantis est probare. Lat. The burden of proof is on one who affirms.

affirmative action. 1 The policy of favoring the members of a particular

group (previously disadvantaged) among equally qualified candidates. 2 Re¬
verse discrimination in favor of specified previously disadvantaged groups,
so that lesser qualified applicants might be admitted in order to satisfy criteria
such as the desire for diversity or longer-term equality.
Neither (1) nor (2) necessarily imply quotas as an outcome, since
affirmative action per se is a process. Affirmative action creates more tempo¬
rary inequality in order to more quickly advance long-term equality, hence
aggressively ‘affirming’ the goal of equal opportunity. Both (1) and (2) can
 20 affluence

be and in practice are mandated by law in the USA and other countries. In a
free market, affirmative action would be a voluntary option for private
enterprise; government would not engage in (2) and would engage in (1)
only to remedy recent negative arbitrary discrimination. Equal opportunity
would provide economic justice without discrimination. One cost of reverse
discrimination is to lower the esteem of the positions held by members of the
group subject to affirmative action, even when obtained by superior merit.

affluence. Having such a high degree of wealth and income that much of
one’s purchasing consists of discretionary items rather than needs such as
food, medicine, and shelter.

affluent society. A country in which a large middle- and upper-class have a

great deal of discretionary income and wealth. The term was used by John
Kenneth Galbraith (1958), who argued that further output should be shifted
to GOVERNMENT-determined consumption for social services. In this view,
since needs and basic comforts have been provided, further wants are artifi¬
cially created by advertising (advertise). Such a view is countered by the
~ subjectivity of values, the proposition that human desires are unlimited, the
feasible provision of public goods by private and voluntary enterprise, the
social cost of transfer seeking associated with government expenditure, and
the excess burden of taxation as it has existed in affluent countries. The poor
and lower-income classes might also argue in favor of their having greater
private consumption rather than more government spending.

afford. Able to pay for something, or able to obtain something without

great sacrifice.

after-hours trading. Exchanging shares of stock after the closing for nor¬
mal trading.

after tax. Net, after having paid taxes. The real return on an asset is after
price inflation and after taxes.

AG. Aktiengesellschaft. A Swiss or German corporation.

against the box. A short sale of stocks which the seller owns but rather
than delivering them, he borrows them from a broker.

Age of Enlightenment. The era in Europe from about 1650 to 1800, during
which there was a great advance in philosophy and science, particularly in
 agenda 21

the recognition of human equality, liberty, and natural rights, with greater
tolerance for dissent and minorities.

age of majority. The age at which a youth legally becomes an adult and
may contract sui juris.

Age of Reason. Congruent with the Age of Enlightenment, the age of

reason was characterized by the recognition that truth, including social
ethics and the proper basis of government, is discovered using reason, rather
than relying merely on tradition, authority, or whim.

agency. 1 An entity that acts (1). 2 An organization acting on behalf of

customers, subjects, members, or citizens. A governing agency is the organi¬
zation that conducts governance, whether of a government or an association.

agency cost. The costs of having an agent (2), including the cost of moral
HAZARD.

agency problem. A principal-agent problem of corporations due to their

separation of ownership from control. Managers pursue their own goals, such
as maximization of their salaries and options, rather than the best interests of
the shareholders. A partial remedy is the common practice of payment in
stocks and options, especially for the chief executive officer, but executive
pay may become greater than warranted by performance and the competition
for managers. Legal reforms making it easier to sue while making the loser of
lawsuits pay the legal costs of the winner may help.

agency shop. A virtual union shop, prevalent in the government sector in

the USA, where workers pay the equivalent of union dues while the union
acts as the bargaining agent (2), circumventing right-to-work laws.

agency theory. The theory concerning the relationship between a principal

and an agent (2), the latter having an agenda that differs from that of the
principal who hires him. The two parties may also have differing perceptions
of risk. See agency problem.

agenda. A list of things to be done. In politics and public choice, the

agenda consists of the candidates, topics, and items presented to voters (vot¬
ing) and decision makers. If voters only have the choice among the items in
an agenda, the agenda setters have great power, since they determine and
limit the set of choices. The order in which the agendas or items to be voted
on are presented can determine the outcomes.
22 agent

agent. 1 A person or organization which acts and through its activity

achieves some effect. 2 An agent (1) acting on behalf of another. See princi¬
pal AND AGENT.

agglomeration. A gathered-together dense mass, such as people in a city

or stores in a shopping district. See diseconomies of agglomeration, econo¬
mies OF AGGLOMERATION.

aggravation. Harm done by a crime or tort beyond the defining elements of

the crime or tort.

aggregate corporation. A corporation with more than one shareholder.

aggregate demand. Abbrev. AD. The totality of demand or expenditure for

all goods in an economy (1), based on net domestic product. In AD-AS
analysis, it is graphed against the price level, with a downward-sloping
curve, since for a given amount of nominal *income (hence money supply), a
lower price level enables buyers to obtain a greater quantity of goods. This
aggregate equilibrium demand curve shifts with income, thus demand-side
analysis posits that greater spending, for example by government, shifts the
curve outward, to more goods, if the aggregate supply curve is upward-
sloping. But that effect also depends on where the funds come from and the
relationship between savings and investment. If all savings are invested, then
domestic sources of funding do not shift aggregate demand, although foreign
spending can shift the curve. If the aggregate supply curve is vertical, a shift
in aggregate demand does not change output but only the price level. Some
Austrian school economists (Austrian economics) question the usefulness or
meaning of the concept of aggregate demand.

aggregate expenditure. The totality of nominal *expenditure in an economy

(1) during some time period. The significant expenditure categories are con¬
sumer and capital goods, but national accounting and analysis thereof typi¬
cally have as their categories private consumption of domestic goods, private
domestic investment, net exports, and government spending, hence Y = C +1
+ G + (X - M). Syn. national output. See also national income.

aggregate output. 1 National income calculated by summing value-added,

priced at factor cost. 2 Gross domestic product.

aggregate production function. Aggregate expenditure or national output

as a function of macroeconomic inputs or factors, namely land, labor, and
capital goods. In the short-run function, land and capital goods are held
 aggregates 23

constant, with labor variable. In macroeconomic models, the quantity of

labor is set by the labor market, and this is then carried to the aggregate
production function to determine national output. Some economists think the
concept of an aggregate production function is meaningless. It seems, how¬
ever, that it is conceptually sound to envision greater output when there are
more ECONOMY-wide inputs.
Due to diminishing returns on the fixed factors, the short-run aggregate
production function has a positive first and a negative second derivative.
More workers increase output, but at a declining rate. Note that this is not a
model of the growth of the labor supply over time, but of various amounts of
labor at a particular moment in time. Most depictions of the function only use
two factors, implicitly weaving land into capital goods, whereas in classical
and geo-economic theory, the productivity of land is an important distinction.

aggregate supply. Abbrev. AS. The totality of supply for all goods in an
ECONOMY (1) (the NET DOMESTIC PRODUCT). The AGGREGATE PRODUCTION FUNCTION
determines the aggregate supply as a function of factor inputs. In AD-AS
analysis, AS is graphed against the price level. In the classical macroeco¬
nomic model, the AS curve is vertical, since output is determined in the
labor market, where wages are set at market-clearing rates.
In demand-side and Keynesian economics, the AS curve can be upward-
sloping if there are idle resources stuck above market-clearing rates. For
example, if nominal wages are stuck above the market-clearing rate, an
increase in the money supply raises the price level, lowering the real wage,
hence increasing the quantity of labor demanded, thus raising output. Suc¬
cessive increases in the price level thus are associated with successive in¬
creases in output.
A question in such demand-side theory is why the wage level would be
above market-clearing in the first place, and why there would be economy-
wide rigidities. The long-term wage contract as a rationale for sticky-wage
manipulative monetary policy has been shown by Foldvary and Selgin (1995)
to be inconsistent with rational expectations.

aggregates. N. A set of items gathered into a whole. An example is aggre¬

gate expenditure, which sums the expenditures of many items and catego¬
ries. Aggregation of diverse items, even when they belong to some common
category, can mask the importance of diversity within the category. For
example, treating capital goods as an aggregate masks the capital structure
(1), with some capital goods being more roundabout than other, lower-order,
capital goods. Austrian economists especially are suspicious of the meaning¬
fulness of aggregates, including data.
24 aggregation problem

aggregation problem. The problem of deriving macroeconomic theory vari¬

ables, and relationships from the behavior and variables of microeconomic
items. An example is a social welfare function.

aggression. The initiation of an unprovoked attack, forcefully invading

(invasion) the domain of another, in violation of the rights of the victim.
Aggression violates free-market principles.

aggressive. 1 Inclined and tending to commit aggression. 2 Having initia¬

tive, bold, active; willing to take risks for large gains.

aggressive growth fund. An aggressive (2) mutual fund, taking on a high

risk to attain superior appreciation.

aggrieved. Having suffered a loss, harm, or violation of rights.

aging. An increase in the median age of a population. The economic impact

is a greater proportion of persons not in the labor force, hence when there are
pay-as-you-go government welfare programs for the aged funded by payroll
taxes, as is common with social security programs, the burden of depend¬
ency on workers and employers increases. In traditional societies, except
when food is scarce (2), the aged are not a social problem because they live
with their offspring in extended families and provide child-care services.
Dietary and environmental causes of illness contribute to the medical burden
of the aged; these causes are significantly increased by intervention subsidiz¬
ing (subsidy) unhealthy practices (for example by fraudulently implying a
product is healthy) and preventing the provision of innovative remedies for
disease.

agio. 1 The difference in value between monetary or interest-rate vari¬

ables and values, such as present-day funds versus future funds (the agio for
interest and discount rates), or gold versus paper currency. 2 A fee paid to
exchange currencies.

agio theory of interest. The theory that interest is due to time preference,
with present-day goods being more desirable than future goods, the rate of
discount being the natural rate of interest. The Austrian theory of interest
(Austrian economics) is an agio (1) theory.

agnostic. 1 Neither believing nor disbelieving, pending warrants, hence

having a skeptical attitude and suspending judgment. 2 The view (coined by
T.H. Huxley) that some phenomenon such as God cannot possibly be known.
 agricultural revolution 25

that is, proven or disproved, although an agnostic can also be a theist or

atheist by faith. By extension, the agnostic doctrine of knowledge is that
nothing can be proven, there is no absolute knowledge, and all beliefs are
relative.

agora. Gk. 1 In ancient Greece, a place of assembly, particularly market

places. 2 An Israeli coin, one-hundredth of a shekel. 3 In modem usage,
particularly among free-market adherents, the market or the free market,
used for poetic effect.

agoric. MARKET-like.

agoric systems. Computer systems in which resources are bought and sold
in AuenoN-type markets.

agrarian revolution. A major increase in agricultural output due to the use

of better capital goods, including superior seeds. There can be a cost in less
variety and vulnerability of large-scale single crops to diseases. Syn. agricul¬
tural revolution.

agreement. A contract or voluntary * acceptance of terms among per¬

sons. Agreement is the basis of free-market organizations and transactions.
A blanket agreement covers a wide range of items, not necessarily enumer¬
ated. A gentlemen’s agreement is a verbal agreement based on trust.

agribusiness. A large company that produces and distributes agricultural

products.

agricultural economics. The economics of agriculture, a major branch of

economics, with departments and schools (or faculties, as in Europe) devoted
to the field.

agricultural reform. The reform of either techniques or land tenure in

agriculture. See also land reform. Besides better capital goods and train¬
ing, organizational reform such as the formation of cooperatives, and finan¬
cial reform such as access to credit (1), are elements of creating more
productive techniques. The reform of land tenure can lead to greater produc¬
tivity by shifting sites to more intensive and more efficient use, for example
from large estates that underuse land or from inefficient state farms.

agricultural revolution. See Agrarian revolution.

26 agricultural subsidies

agricultural subsidies. Government *policy which transfers income to

farm owners, including funds and price supports. Consumers and taxpayers
bear much of the burden, while the owners of farmland obtain much of the
benefit, since such subsidies become capitalized in the value (capitalized
value) of farmland. Farming interests have concentrated benefits and their
representatives use logrolling to obtain these subsidies.

agricultural system. Physiocracy, called thus by Adam Smith in The Wealth

of Nations 1776, 1976.

agriculture. The production of plant and animal products (1) for food,
fiber, and fuel. Agriculture is classified as a sector of an economy, the other
two typically being manufacturing and services. Development normally shrinks
employment in the agricultural sector.

ahistorical. Presenting a theory as though it had no history, when it does

have historical elements. For example, theory which treats human beings as
atomistic (atomism) individuals (other than as a conditional premise) is
ahistorical, since human beings have historically lived in organized communi¬
ties.

aid. A transfer of resources; government aid forcibly transfers resources

from taxpayers to foreign and domestic recipients. Much foreign aid has been
wasted or diverted from its intended recipients, and a lack of development
due to policy * barriers may not be overcome with aid.

air rights. The right to use or benefit from the air space above the surface
of land owned (landowner), or collect damages, for example from noisy
airplane flights.

airline deregulation. The removal of price controls and other restrictions on

airlines. Previous to regulation, airlines in the USA functioned as a cartel.

Alchian, Armen (1914—). Professor emeritus at UCLA and author with W.

Allen of FREE-MARKET-oriented textbook University Economics. Some of his
articles are reprinted in Economic Forces at Work (Liberty Press, 1977). His
paper ‘Uncertainty, Evolution, and Economic Theory’ (1950) made the point
that the market process is one of survival of the profitably ‘fit’ firms which do
maximize profits.

aleatory contract. An agreement whose fulfillment depends on uncertain

(uncertainty), uncontrollable events, beyond the will of the parties.
 allodari 27

alien corporation. A domestic company incorporated abroad.

alienable. Capable of being transferred or abandoned (abandon).

alienation. 1A transfer of property to another. 2 An early Marxist term and

concept (derived from Hegel and Feuerbach) for the feeling of detachment,
separation, apathy, estrangement and/or resentment felt by the proletariat
because these workers do not own the capital goods and land which they
work with, hence they see themselves as mere objects, means to others’ ends.
Contrary to this view, how workers are treated, how much they are empow¬
ered and their working conditions, has much to do with their identity and
sympathy for the companies they work for, their products (1), and themselves.
3 Estrangement from government due to its coercion and the inability of the
victim to change the policy or to escape from it. 4 The Freudian concept of a
psychological estrangement from natural peaceful human inclinations and
instincts because of the constraints of civilization that represses these, so that
man becomes a stranger to himself. Evidently these constraints are enforced
by the state to prevent nature from re-emerging. The economic impact is the
enforced consumption of items that natural man would not prefer.

all faults. A sale in which faults in the product (1) which do not change the
identity of the goods, and in which there is no fraud, are covered, hence not
actionable. Syn. as is.

All Ordinaries Index. A price index of major stocks on the Australian

Stock Exchange.

All-Share Index. Financial Times Actuaries All-Share Index of about 700

companies on the London Stock Exchange.

allocation function. The provision of goods and services by government.

The other two functions in Richard Musgrave’s taxonomy are redistribution
and stabilization (stable). Free-market thought has been critical of the latter
two functions, while the refutation of market-failure arguments, along with
public-choice theory, has cast doubt on the proposition that allocation too
must be governmental, as a general proposition.

allocative efficiency. The optimal set of outputs produced in the most

efficient way with the most efficient combination of inputs.

allodari. Allodiaries (see allodiary).

28 allodial

allodial. Concerning land *title held without any obligation to another

agency such as a lord, state, or other co-owner, hence free of any vassalage,
fealty, rental payment or tax. See also feudalism, geoism. In allodial policy,
the land tenure consists of many holdings rather than a governmental (gov¬
ernment) ALLODIARY.

allodialism. The social system, or belief in such, based on allodial *land

♦ownership. One proponent is John Cobin.

allodiary. A person who has title to land under allodial tenure.

allodification. Making land tenure * allodial.

allodium. Land under allodial *ownership.

allowance. 1 Money given or paid for a particular reason, or periodically as

a gift. 2 A deduction (1) from taxable income.

alpha. 1 Fin., Gk. The return of a mutual fund relative to a general market
portfolio of the same risk (2). Thus, a positive alpha indicates superior
performance. See also beta. 2 Letter commonly used for the constant in a
regression equation in econometrics.

altruism. The practice and desire of selflessly benefitting (benefit) others

rather than one’s narrow self-interest. Sympathy differs from altruism in that
with sympathy, one derives utility (utility, marginal) from benefitting oth¬
ers, while with pure altruism, one does it from a sense of duty or obligation,
although ‘altruism’ is also used to refer to acts due to sympathy. Followers of
Ayn Rand disdain such self-sacrifice. In natural moral law, benefitting
others is morally good (good, morally), but not a moral obligation. With a
market consisting of voluntary *action, benefits to others fall within the
domain of free markets. Contrast: egoism.

amalgamated company. An amalgamation or combination of firms into

effectively one firm, which then has great market power. Syn. trust (2).

ambiguity. Vague, doubtful, uncertain (uncertainty), unclear, or multiple mean¬

ings. Whether of language in a theoretical proposition or in a contract, it is good
scientific and legal practice to have clear and distinct meanings for key terms.

ambitus. Lat. Obtaining a government office through purchase rather than

by election or appointment by merit.
 amoral 29

ameliorations. Improvements.

amenities. 1 The benefits of the public goods in a community such as

swimming pools, also including the natural conditions (views, air, climate).
These typically become capitalized (capitalization) in land *rent or prop¬
erty * value. 2 A negative easement, hence constraining the rights of the
owner.

American Depository Receipt. A security issued by a domestic bank,

which represents and is backed by the holding of the foreign security by the
bank, the ADR receiving the dividend. These trade on the US and UK stock
exchanges. Since ADRs represent foreign stocks, there is a currency *risk
(1) in addition to the value risk (1).

American Economic Association. The major US professional organiza¬

tion of economists. It holds an annual conference in conjunction with other
economic societies. Its The Journal of Economic Literature presents a record
of published work.

American Enterprise Institute. An organization which conducts research

on the impact of policy on enterprise and the economy.

American Institute for Economic Research. Based in Massachusetts, the

AIER focuses its research on the business cycle, monetary economics, and
land-value taxation (land-value tax). It sells its publications to the public,
including booklets on personal finance. The methodology espoused derives
from the work of Dewey and Harwood.

American rule. In law, the practice of making the winner of a lawsuit pay
his own attorney fees unless statute law or a contract specifies awarding
such fees. In the English rule, the losing party pays the attorney fees of the
winning party. The American rule amounts to a tax on parties who are sued
and win their cases. Free-market economies encompass the English tort
system.

AMEX. The American Stock Exchange in New York City.

amittere legem terrae. Lat. Not protected by the law of the land. This is one
way a free society can deal with criminals, or those who refuse to pay for
community services, by literally making them outlaws.

amoral. 1 Without regard to morality. 2 Nonmoral.

30 amortization

amortization. The repayment of principal or depreciation (1) of capital

goods value over the life of the loan or asset.

ampliative argument. An argument whose conclusions are derived not just

from the explicit premises but also from unstated, implicit premises. Coined
by Peirce, this characterizes much reasoning (reason).

amplitude. The difference between output at the peak and trough of a

BUSINESS CYCLE.

amusement tax. A sales tax on tickets for amusement parks, sports events,
and so on, normally ad valorem (ad valorem tax).

analysis. The logical (Logic) separation of a concept into parts so that one
may study the structure and then derive an explanation for the phenomenon.

analytic. 1 Regarding analysis. 2 Mathematical, stemming from the view

that the only vehicle for theory is mathematical models, hence that rigorous
analysis is necessarily mathematical, a view emphatically rejected by Aus¬
trian (Austrian economics) and geo-economists (geo-economics) (see Boettke,
1996). 3 Phil. A property of a proposition, that it is necessarily true, or even a
tautology, since it follows from and is already incorporated in the meaning of
the terms and premises.

anarchism. The political philosophy of social harmony without any state

or imposed * government. Rules and community *goods are instead provided
by voluntary * association. Anarchist rules derive from an ethic by which
rights are mutually respected in peaceful cooperation. Major anarchists in¬
clude William Godwin, Max Stirner, Benjamin Tucker, Pierre-Joseph
Proudhon, Mikhail Bakunin, Peter Kropotkin, Leo Tolstoy, and Murray
Rothbard. See also anarchy, archism.
Tucker and Rothbard were libertarians, and Tolstoy a geo-anarchist, and
the rest cooperatives (cooperative), mutualists, or socialists (socialism).
Anarchism is generally split between collectivists (collectivism) who advo¬
cate cooperative enterprise and oppose individual private (1) property, and
individualists (individualism) or anarcho-capitalists (anarcho-capitausm) who
advocate individual liberty and regard individual property as proper. A third
variant is geo-anarchism, in which land is commonly owned but other prop¬
erty is held individually.
If there are multilevel networks of associations, up to a continental asso¬
ciation of associations, then there is a continuum rather than a sharp line
between anarchism and minarchism. If most of society is organized in net-
 animal rights 31

works of associations, then effectively there is a uniform rule of law even

under anarchism.

anarcho-capitalism. Individualist (individualism) allodial *anarchism,

hence a social system with private enterprise, allodial *land *ownership,
and no imposed *government.

anarcho-geoism. Syn. of Geo-anarchism.

anarcho-syndicalism. The movement and philosophy of trade union anar¬

chism, in which the means of production is held by labor unions and worker
COOPERATIVES.

anarchy. 1 The practice of anarchism. 2 Social or violence, often

chaos
used pejoratively. The term ‘anarchy’ is misleadingly used in this sense when
there is anomie or internal conflict, associating the absence of effective
governance with conflict, whereas anarchy (1) is peaceful and orderly
(order). This negative meaning was due to self-styled anarchists such as
Bakunin who advocated violent revolution.

anarchy of production. The Marxist-economics notion that the pure ’“mar¬

ket process is not orderly (order) but chaotic (chaos).

Anderson, James (1739-1808). Scottish agricultural economist, he pioneered

the concept of differential rent as the price for superior land, thus influenc¬
ing David Ricardo.

angel-of-death provision. that exempts unrealized gains from

Tax *policy
taxation on the death of the owner, when the property is valued on a stepped-
up basis (step up of basis). The effect is to lock in property that is to be
inherited; owners borrow funds rather than sell property and pay a capital
gains TAX.

angild. In Saxon law, the value of a person or object, which amounted to

the compensation (1) due the victim of a crime.

Angliae jura in omni casu libertatis dant favorem. Lat. English law in all
cases should be favorable to liberty.

animal rights. The natural rights of animals, with the view that while
human beings have the right to obtain utility (utility, marginal) from ani¬
mals, animals have the right not to be unduly harmed, such as suffering
32 animal spirits

beyond what is reasonably needed for material utility (not the utility of
sadists who enjoy the suffering). If animal rights are recognized, then the
implication for the market process is that acts which violate the rights of
animals are prohibited or fined. Some animal-rights advocates go to unwar¬
ranted extremes, placing the rights of nonperson animals equal to those of
persons.

animal spirits. 1 Lively vigor. 2 The antiquated notion that sensation and
movement depend on a fluid called ‘animal spirits.’ 3 The term as appropri¬
ated by J.M. Keynes and then Joan Robinson for investment based on emo¬
tional factors, for example pessimism or optimism. Animal spirits as an
explanation for major turns in the economy rather begs the question of the
cause of the pessimism or optimism, and why sentiments should change.

annual percentage rate. The true cost of borrowing for t years, calculated
as the annual compounded percentage:

APR = 100 ((1 + total credit payment)/amount of credit)1/l.

annual report. A publication by corporations of their finances and opera¬

tions during their fiscal or calendar year. Investors and lenders use it to
evaluate the firm.

annuity. A periodic payment for a fixed number of years or for the life of
the annuitant. One annuitizes a lump sum by transforming into such pay¬
ments, insurance * companies averaging out expected lifetimes.

antecedent. 1 Log. In the conditional statement ‘if X then Y,’ X is the

antecedent and Y the consequent. See affirm the antecedent. 2 Law Prior in
time.

antenuptial agreement. A contract prior to marriage to determine divi¬

sion of property after divorce or death of one of the spouses. This normally
must be in writing to be enforceable. Syn. prenuptial agreement.

anthropology. The science of human origins and culture. Cultural anthro¬

pology intersects with economics in economic anthropology, the study of the
influence of culture on economies and vice versa. In a free market, cultural
expression is voluntary, whereas with intervention, cultural rules are im¬
posed on unwilling minorities, thus skewing consumption and production
from what free agents (1) would choose. Institutional economists (institu¬
tional economics) pay attention to culture, and some Austrians (Austrian
 antitrust 33

economics) also do so or favor doing so. Among anthropologists doing eco¬

nomic analysis is Spencer MacCallum, who has written on proprietary com¬
munities and their financing. A basic premise of social science, that human
beings form one species, is derived from anthropological theory.

anti-combines legislation. Canadian antitrust law.

anti-dumping law. A legal minimum price for imported (import) goods,

preventing imports below the normal production price.

anti-poverty programs. Policy and government funds intended to allevi¬

ate poverty with welfare (2) transfers, or possibly reduce poverty. Typically,
such programs treat the effects and not the underlying causes, such as taxa¬
tion and legal restrictions which limit enterprise and thus employment and
after-tax wages.

anti-trust. Alternative spelling of antitrust.

anticipated inflation. Expected price inflation.

antinomian. Gk. One who desires to be exempt from social customs and
government law, other than the most basic norms, but who also does not
engage in revolutions to overturn the laws.

antique. An old object no longer being made, often a collectible. By

extension, antiques are any goods no longer in production.

antitrust. The policy of breaking up large firms, amalgamated companies,

and cartels, allegedly to enhance competition and reduce firms’ market
power. The policy also can include the prohibition of practices such as price
discrimination and exclusive contracts. Many free-market economists view
antitrust policy as misguided, since there is global rivalry among firms in a
domestically concentrated (concentration) industry (2), large firms can re¬
duce per-unit costs and fund more research, potential entry limits monopoly
power, and the policy can be excessive or politically influenced. Ironically,
government itself is the source of much monopoly power, whether with
enterprises such as postal service, or in protecting labor union monopolies,
protecting domestic industry from foreign competition, and in monopolistic
government itself, that is limiting competitive governance, for example by
limiting decentralization of government or access to elections by minor
political parties.
34 apartheid

apartheid. Intervention enforcing the separation of races, with some placed

in inferior status, particularly as was practiced in South Africa until 1992.

apathy. Without feeling, hence lacking either sympathy or antipathy to¬

wards something. Since sympathy motivates benevolent (benevolence) acts
as well as participation in the political process, a society with a large degree
of political apathy will have a low level of voting, and one having social
apathy will have few donations. The prevalence of apathy when great evils
occur helps perpetuate those evils. Apathy complements greed and igno¬
rance to create and maintain social problems. See also sympathy.

APC. Average propensity to consume.

apodictic. Provable as true with certainty, because logic makes it so. For
example, if B is a subset of A, then the existence of B must imply that of A.
Axiomatic-deductive *theory is apodictically true if the premises must be
true, such as when their negation involves some logical contradiction. Ludwig
von Mises held that propositions of praxeology are apodictic.

appearance and reality. Economics delves beneath the superficial appear¬

ance of phenomena (phenomenon) to elucidate the underlying reality. A sim¬
ple example is the difference between nominal and real interest rates. Karl
Marx thought his theory involved this process, but all economic theory
attempts to do so. Followers of Henry George call the discovery of the
underlying reality ‘seeing the cat.’

application lag. The time interval between enacting policy and actually
(actual) implementing the policy. This is one of several lags which can make
even desirable policy ineffective when conditions change.

applied economics. The application of general economic *theory to specific

events or topics.

appraise. To estimate the market price of an item. See also assess.

appreciation. An increase in the value of an asset. Accounting practice

typically does not recognize unrealized appreciation, although from an eco¬
nomic viewpoint maybe it should.

apprenticeship. Learning a craft under supervision of a firm or person

engaged in it. This practice has been undermined with laws mandating school¬
ing until the late teens, prohibiting the employment of youth, mandating
 arbitration 35

minimum wages, and subsidizing (subsidy) formal and college education. See
also ADOLESCENCE.

appropriate technology. Technology suitable for local conditions, particu¬

larly in economic development. GovERNMENT-sponsored development, often
with foreign governmental aid, is sometimes inappropriate, if not damaging.
The market process selects what is appropriate, since PROFrr-making agents
(1) generally economize.

approval voting. An election system in which the electors vote (voting)

for those options they approve of, and the one with the highest votes is the
winner. This method avoids the paradox of voting that plagues simple ma¬
jority-rule systems. See also Borda count.

approvals. Collectiblessent on request to a collector, who then selects

those items he desires, and returns the rest. This is also referred to as ‘on
approval.’

APR. Annual percentage rate.

apriorism. The doctrine that there is a priori knowledge, that is knowledge

that is prior to experience.

aquatic rights. Rights to use the sea and other waters, and to soil beneath
the waters.

arable land. Land fit for plowing and growing crops.

arbitrage. The purchase of an asset where it is relatively cheap and its sale
where it is higher priced, thus the practice eventually leveling out the prices
and tending to keep them uniform. In Israel Kirzner’s concept of the entre¬
preneur, arbitrage plays a key role.

arbitrary. 1 Discretionary, based on whim or personal, desire. 2

subjective
Not based on rationality (2), but on the desires and interests of those with
power. Hence, arbitrary law is interventionist (intervention), since it is not
based on natural law or on principles that enhance an economy. Random¬
ness, however, is not necessarily arbitrary, such as when the situation calls for
a random choice (for example toss of a coin).

arbitration. The binding resolution of a dispute at the request of the par¬

ties, an alternative to more costly litigation.
36 archism

archism. The opposite of anarchism, hence the belief that a state and
imposed *government is necessary for social harmony. See also anarchism,
MIN ARCHISM.

archy. A society with a ruler; the practice of archism.

area. 1 An amount of territory. 2 A topic or scope,

argument. Statements in support of a conclusion.

argument from intimidation. A concept of Ayn Rand, a method of squash¬

ing real debate with psychological pressure, such as claiming that it is im¬
moral to hold the opposite view.

argumentum a contrario. Lat. Arguing the contrary to make the opposite

point.

aristocracy. In Greek thought this meant rule by the best, but in practice it
has been rule by a small elite which typically owns most of the land. Tradi¬
tionally, the aristocracy was also the nobility.

Aristotle (384-322 BC). Greek philosopher of great influence, who also

wrote on economics. He distinguished between use and exchange value. He
defended private (1) property, but opposed the use of interest, not under¬
standing its meaning.

arm’s length. Without financial link between contracting parties.

arms, right to bear. A right guaranteed by the Second Amendment of the

US Constitution, said to be a needed defense against tyranny, hence a protec¬
tor also of a FREE MARKET.

Arrow, Kenneth (1921-). American economist famous for his impossibil¬

ity theorem. He won the economics Nobel prize in 1972, jointly with Sir
John Hicks. He and Debreu showed in 1954 that multimarket equilibrium
requires forward markets. His Social Choice and Individual Values (1951,
1966) presented the proposition that it is impossible to have a social ranking
that is consistent with individual rankings. By undermining imposed collec¬
tivism, Arrow, though favoring welfare intervention, is a contributor to free-
MARKET thought.
 asset 37

artificial. Not due to the natural economy, that is, a free market and volun¬
tary action, but to intervention.

artificial persons. Organizations such as corporations treated by law as

persons, in contrast to natural persons.

arts policy. Subsidy and protection of arts by government, which involves

evaluations that are necessarily arbitrary, given the subjectivity (subjective)
of tastes. Protection from foreign art is advocated to protect national culture,
contrary to the choices of the consumers. See also aesthetics and economics.

AS. Aggregate supply.

as is. Of goods for which the seller offers no warranty other than honesty.

as much as the market will bear. See bear, what the market will.

ask. A seller’s offering price, in contrast to the buyer’s bid.

assault. A willful attempt or threat to use unlawful force to injure another

person.

assay mark. A mark placed on a bar of precious metal to indicate the

weight.

assertion. 1A proposition. 2 A proposition lacking warrants.

assessed value. The value of real estate according to the assessment,

which can be a certain fraction of market value.

assessment. 1 Appraisal (appraise) of property such as real estate by a

governing agency, often multiplied by some fraction less than one, to estab¬
lish the assessed value. 2 A payment by a property owner (ownership) based
on an assessment (1) to pay for the cost of common services, for example in a
CONDOMINIUM Or RESIDENTIAL ASSOCIATION. See SPECIAL ASSESSMENTS.

asset. 1 An owned item that is valuable. These are divided into real assets
and financial assets. Other distinctions are between current and fixed assets,
and capital goods and land, and tangible versus intangible assets. 2 An entry
on one side of a balance sheet, indicating a resource owned; the other side
shows liabilities and net worth. 3 A valued attribute, such as good looks.
38 asset allocation decision

asset allocation decision. In modern portfolio theory, the division of in¬

vestment funds into various types of assets (1) to achieve the highest return
relative to the chosen level of risk (2).

asset specificity. The lack of alternative uses for an asset (1), making the
owner (ownership) vulnerable to another party, hence inducing the ownership
of the asset within the firm using it.

asset tax. Also called a ‘wealth tax,’ it is an ad valorem tax on all assets (1)
owned. One variant is a voluntary tax in exchange for recognition and
protection of title. Even when imposed, an asset tax has a lower excess burden
than an income or sales tax, but a tax only on fixed assets has an even lower
burden.

association. 1A voluntary organization whose aim is to benefit its mem¬

bers in the pursuit of some interest or commonality. Syn. club. 2 A group of
persons joined by some legal or biological tie, for example families. 3 An
unincorporated organization.

assurance. Insurance against a known occurrence with an unknown time,

for example death.

asymmetric information. Unequal information held by parties of a con¬

tract or transaction. Remedies include information sources, warranties,
price adjustments, and contractual provisions. Some asymmetry, however, is
unavoidable as a fact of life.

at or better. An order to sell at some price or higher, or to buy at some

price or lower. One tells the broker, for example, to buy at $10 or better.

at the market. Buying or selling at whatever the market price is, or the best
price currently available, rather than at or better. Syn. market order.

Atlas Economic Research Foundation. An organization based in Virginia,

it helps to create and develop independent public policy research organiza¬
tions internationally by providing intellectual entrepreneurs with advice,
financial support, workshops, and access to a network of leaders who share a
commitment to achieving a free society. It presents annually the Sir Antony
Fisher International Memorial Award for the most worthy books.

Atlas Shrugged. The title of a landmark novel by Ayn Rand. It influenced

many libertarians (libertarianism) and Objectivists (objectivism) towards free-
 aurophobia 39

market ideas. In a discussion of sacrifice, a character asks another about the

mythical Atlas, ‘who carried the world on his shoulders’, and the other says,
‘I’d tell him to shrug’. Rand has the people who ‘carry the world’ on their
shoulders - entrepreneurs, inventors, engineers, creators generally - go on
‘strike’ against a society which doesn’t value their role in it - shrugging, so to
speak.

atomism. The concept of society as basically composed of interacting indi¬

viduals or families. This is ahistorical, since human beings have lived in
organized groups, though not necessarily under an imposed *government.
Hence, public-goods theory that treats society as atomistic is unrealistic.
Entrepreneurs who wish to provide some works can deal with the commu¬
nity governance without having to contract with every individual.

atomistic competition. A market structure with so many firms and no large

ones, all making a uniform product, that collusion is infeasible. Each firm is
therefore a price taker, having no market power. See also perfect competi¬
tion, COMMODITY EXCHANGE.

auction. A public sale of property to the highest bidders (bid), thus also
establishing market values. In the ‘English auction,’ the bidding starts with a
low price. In a second-price auction, the highest bidder takes the good at the
price of the second-highest bidder. In a sealed-bid auction, bidders do not
know the prices bid by the others. See also Dutch auction.

auction market. A market which operates as though in an organized auc¬

tion with continuous competitive bidding (bid) and offering. The concept is
used in equilibrium theory.

audit. Examination of accounting records, such as by a taxing agency or by

internal or external experts, and verifying them. The taxation of transactions
such as income or sales requires audits, but the assessment (2) of publicly
evident assets (1) such as land does not.

augmented GDP. The official GDP plus items not included but which are
additions to or subtractions from economic well-being. Home production, for
example, would be added, and environmental degradation subtracted as a
type of depreciation (1).

aurophobia. Fear of the gold standard that there would not be enough
gold or that it would be too rigid or that it would be bad to deprive govern¬
ment of the control of money.
40 Australian stock exchange

Australian stock exchange. The National Stock Exchange of Australia,

abbreviated ASX, with exchanges in several cities.

Austrian economics. A school of economic thought originating in Vienna,

Austria having the following key methodological features: i) axiomatic-de¬
ductive reasoning for the basic, universal theory; ii) marginal analysis; iii)
methodological individualism and purposeful human action; iv) an emphasis
on discrete goods and disaggregated, heterogenous variables; v) the use of
interpretive understanding (Verstehen)\ vi) an emphasis on subjective values.
Major topics of interest among Austrians include entrepreneurship (entrepre¬
neur); money and banking, especially critiques of central banking (central
bank), with alternatives such as free banking; capital theory, including the
structure of roundabout capital goods and production; the market process
and spontaneous order; a critique of German historicism; a critique of so¬
cialist central planning as well as intervention; governance and the evolu-
tion of rules; the analysis of time and interest rates; decentralized knowl¬
edge; uncertainty; and learning. Austrians have also criticized Marxism,
Keynesianism, and the neoclassical emphasis on mathematical formalism
(see Boettke, 1996). With its critique of intervention and interest in market
processes, Austrian economists tend to be FREE-MARKET-oriented.
The school was founded with the publication of Carl Menger’s Principles
of Economics (1871,1976). Other key Austrians include Friedrich von Wieser,
Eugen von Bohm Bawerk, Ludwig von Mises, Friedrich Hayek, Joseph
Schumpeter, Gottfried Haberler, Fritz Machlup, Ludwig Lachmann, Murray
Rothbard, and Israel Kirzner. Centers of Austrian thought include George
Mason University, Auburn University, New York University, and California
State University at Hayward, particularly institutes at these universities.

Austrian theory of business cycles. The Austrian (Austrian economics)

school theory of business cycles is financial and also based on its capital
theory. An injection of money by the monetary authority artificially lowers
interest rates, inducing malinvestments in more roundabout capital goods
(roundaboutness) than is warranted by the market demand for consumer
goods. When interest rates and other costs rise, investment slows and the
expansion halts, turning into a contraction. See also the geo-Austrian syn¬
thesis.

autarky. A deliberately self-sufficient economic policy, imposing a lower

standard of living by foregoing trade.

authoritarian. Governed by the whims of an authority (2), rather than by

the consent of the governed. Hence economically, authoritarian production
 autonomy 41

and consumption are chosen by authorities rather than the free choices of
investors and consumers.

authority. 1A person with recognized competence and knowledge about a

topic, or power and position agreed to by the parties. 2 An agent (1) who
authorizes or claims (2) legitimacy for governance, law, and doctrine based
on its power and prestige and on unwarranted beliefs rather than truth or
voluntary acceptance.

autochthonous. Indigenous and aboriginal.

automatic fiscal stabilizers. Government spending and taxation that coun¬

teract the business cycle without any change in policy. Taxes decrease and
spending increases during a depression because income is lower and welfare
applications higher. However, if the extra expenditure comes from domestic
borrowing, and funds would have otherwise been invested, then the effect is
largely one of substitution of government for private spending rather than
stabilization. Taxes or charges (1) on land rent are fiscal stabilizers by
reducing speculative real-estate purchases, holdings, and construction that
would otherwise be malinvestments and choke off further investment due to
high prices for land for current use.

automatic stabilizers. Processes which maintain ECONOMY-wide equilib¬

rium. For example, with gold as international money, an excess of exports
results in an importation of gold, increasing the prices of exports, hence
bringing trade into balance.

automation. Technology that replicates what labor does, hence replaces

labor. Automation increases productivity unless its main motive is to escape
legally imposed arbitrary costs. The term was coined by D.S. Harder of
General Motors in 1935. In an economy without barriers, the displaced labor
can find alternative employment, although obsolete capital goods may be
scrapped. See also creative destruction.

autonomous (expenditure). Expenditure independent of current income.

In Keynesian thought (John Maynard Keynes), investment is largely autono¬
mous.

autonomy. Self-governing, whether of a person, group, or territory. In a

free-market *economy, individuals are autonomous, forming voluntary as¬
sociations of free persons.
42 avarice

avarice. The seeking of ever more wealth. It is sometimes used as a syno¬

nym for greed, but it is useful to distinguish wanting riches from obtaining
riches by immoral means. Avarice may not be noble, but as a motivator for
production and entrepreneurship, it can result in social benefit. See greed.

average annual returns. The annually compounded returns were they con¬
stant during the period.

average down. To reduce the average price paid for an investment by

purchasing more at lower prices.

average propensity to consume. Total expenditure for consumption di¬

vided by total income. This is an important concept in Keynesian economics,
since Keynes thought that this average decreased with income, but studies
show that in the long run, it does not.

average propensity to save. One minus the average propensity to con¬

sume, since income is either saved or consumed.

average rate of tax. Total tax payments (for all taxes or particular ones) as
a proportion of gross income (revenue minus costs).

Averch-Johnson effect. The skewing of production towards a greater capi¬

tal-good intensity in regulated industries that have a set rate of return.

avoidable tax. A tax that one need not pay if one creates the tax shelters
that escape it or one adopts an alternative way of handling an item, which is
not taxed. Of course one can avoid sales taxes by not purchasing items, and
income taxes by not generating income, but genuine avoidance occurs when
one achieves the result one desires without paying the tax penalty.

avoidance. Escaping a tax by legal means, illegal ones being evasion.

axiom. A proposition that is a premise for other propositions but is itself

not derived from other propositions, hence is foundational to some body of
theory.

axiom of dominance. The axiom that more is better; the desires of people
for goods is unlimited.

axiomatic. Having axioms.

 axiomatic-deductive 43

axiomatic-deductive. Regarding theory deduced from axioms, and the meth¬

odology of deriving pure theory from universally applicable axioms. See
also DEDUCTIVE METHOD.
 B

back. Ec. To exchange at a fixed rate on demand, as for example gold backs
banknotes when they can be so converted to gold.

backdoor financing. A government agency’s borrowing from the US treas¬

ury as a substitute to appropriations from Congress. When Congress cancels
the debt, it retroactively appropriates the funds.

bad. N. A negative good, generating disutility. Since people do not volun¬

tarily (voluntary) obtain bads (unless a good turns bad), these are often
externalities due to the failure of government to recognize property rights by
which the victims could obtain compensation (1), or also policies and prod¬
ucts of government that some disfavor. Often, one person’s good is another’s
bad.

Bagehot, Walter (1826-77). Editor of The Economist, among his writings

was his Postulates of English Political economy, which sought to list the
premises from which classical economics is derived.

bailout. Ec. An ad hoc subsidy by government to cover the debts of an

agency such as a city government or a bank.

Bakunin, Mikhail (1814-76). Russian anarchist (anarchism) who advo¬

cated a federation of independent collectivist associations with rights to
secession. But he also helped associate the term ‘anarchism’ with violence
due to his advocacy of revolution, methods which influenced the Bolshevik
cause.

balance of payments. An accounting of all exports and imports in foreign

trade. The two basic categories are the current and the capital account. Gener¬
ally, exports, borrowing, and the sale of assets (1) pay for imports so the
payments, along with currency movements, balance to zero. Exports of goods
and imports of financial capital are indicated as positive (+), hence a deficit in
goods is balanced out with a surplus in financial capital from abroad.

balance of trade. A misleading term, since what is meant is only the

balance in merchandize trade, excluding services and financial capital flows.

45
46 balance sheet

If exports of goods exceed imports, the balance is said to be ‘favorable,’ a

throwback to mercantilist thought (mercantilism).

balance sheet. An accounting report of the assets (2), liabilities, and net
worth (equity) of an organization at some moment in time.

balanced budget. A budget in which expected current income equals cur¬

rent planned expenditure. Note that when the budget is divided into a current
and a capital account, funds borrowed for capital-goods investments do not
unbalance the budget, as they are offset by expected future benefits from the
investment.

bank. Generally, a financial intermediary, but specifically, one with a spe¬

cific government charter. Banks accept deposits and loan or invest the funds,
and can affect the money supply. Other institutions such as credit unions also
have deposits and make loans, but they are chartered under a different agency
and have restricted powers. Banks issue checks which depositors use to
transfer funds, while credit unions and money-market funds issue share drafts
payable through a bank.
In many countries, banks must be tied to the government central bank, for
example be members of the Federal Reserve System in the USA, and they
are subject to restrictions in their branch locations and other operations. In
addition, the government mandates that banks use the government currency
rather than issue their own private bank notes. The ability to expand the
money supply is regulated by the central bank, that is in the USA, banks have
a required reserve ratio, and the Federal Reserve System affects bank re¬
serves by its expansion of the money supply.

bank note. See banknote.

Bank of England. The British central bank. Established in 1694, it gained

monetary policy independence on May 6, 1997. Its nickname is the ‘Old
Lady of Threadneedle Street.’

bank reserves. See reserves.

Bank Secrecy Act. A US Federal Act of 1970, the ‘Currency and Foreign
Transactions Reporting Act,’ 31 USCA § 1015+. It requires financial institu¬
tions to report to the internal Revenue Service cash transactions of over
$10,000. The Act also requires the reporting of large cash movements to or
from abroad, as well as reporting on foreign bank accounts and possibly
other transactions.
 barrel of oil 47

banking. Generally, the institutions and system of holding savings and

making loans. Banking is lumped together with money to form the category
of ‘money and banking’ for applied analysis and teaching.

banking principle. A proposition of the banking school that the banking

system will not overissue notes convertible into gold.

banking school. A school of thought about money and banking that de¬
bated the currency school in Great Britain in the 1800s. It argued against
regulation of banknotes, since with conversion of notes into gold, the market
would supply the funds according to demand for notes for near-term transac¬
tions.

banknote. A currency note, or paper currency, issued by a bank. These are

bearer notes, hence money substitutes. Banknotes in excess of reserves are
called fiduciary media.

bankruptcy. A legal declaration of insolvency, permitting the orderly reso¬

lution of debts, but also typically voiding some of the debt. This latter
intervention permits the abuse of borrowing funds without having to repay,
thus making personal loans more risky. Besides reducing the availability of
credit, this reduces interest earned and increases interest paid on debt. In the
USA, under Chapter 11, a bankrupt enterprise is reorganized, while under
Chapter 7, the enterprise is liquidated.

bar admission. Legally, the bar consists of all the members of the legal
profession, and admission to the bar is a license to practice law within some
jurisdiction. Complex laws, drawn by lawyers, and requiring the assistance of
lawyers, thus create a privilege to those holding the license required in order
to do legal work for others, providing lucrative gains in a litigious society.

Barclays index. An index of major stocks on the New Zealand Stock

Exchange.

bare. 1 Naked; without any covering or furnishings. Bare for exam¬

land,
ple, is without improvements. 2 Minimal, for example a bare living.

bargain. 1A contract. 2 To negotiate an agreement. 3 A purchase at a lower

than normal price.

barrel of oil. Unit of oil volume, equal to 159 liters or 42 US gallons.

48 barrier

barrier. An obstruction to a flow or activity. GovERNMENT-erected barriers

impede enterprise, reducing employment and investment. Barriers include
taxation, regulation, prohibition, and license to impose costs on other par¬
ties. Subsidies are also barriers, aside from their funding, since they place
those not obtaining the subsidy in an unfavorable relative position.

barriers to entry. Barriers that make it more costly for new firms to enter
an industry (2). Some are generated by markets, such as economies of scale
which necessitate a large investment. Others, such as licensing, are due to
intervention by government. Whether barriers due to patents and copyrights
are interventions or enhance the market process is debated by free-market
economists.

Barro, Robert J. (1944-). Professor of Economics at Harvard University,

previously at the University of Chicago and the University of Rochester. A
new-classical free-market economist, he is known for his Ricardian equiva¬
lence theorem, which posits that there is no future tax burden from debt
financing if taxpayers increase savings to fund future tax liabilities.
Among Barro’s books are Black Monday and the Future of Financial Mar¬
kets (1989), A Cross-country Study of Growth, Savings, and Government (1989),
New Classicals and Keynesians, or the Good Guys and the Bad Guys (1989),
World Interest Rates and Investment (1991), Macroeconomics (1993), Democ¬
racy and Growth (1994), Economic Growth (with Xavier Savier-i-Martin) (1995),
Inflation and Growth (1995), Getting it Right: Markets and Choices in a Free
Society (1996), Reflections on Ricardian Equivalence (1996), and Determi¬
nants of Economic Growth: A Cross-country Empirical Study (1997).

base money. Also called the ‘monetary base,’ it is the final means of money
payments. At the present time, base money consists of currency and bank
reserves. Under a gold standard, the base money is gold, while other pur¬
chasing media such as banknotes are base-money substitutes. An increase in
the monetary base can be multiplied into a several times greater expansion of
the money supply.

basis point. A one-hundredth of a percent (.01%). The term is used for

changes in interest rates.

basket. Group, such as a basket of commodities or of currencies, in which

each item has a fixed quantity. Money can be backed by such baskets.

Bastiat, Frederic (1801-50). French laissez-faire economist and legal phi¬

losopher par excellence. He used fable and satire to argue against interven-
 Becker, Gary Stanley 49

tion and for free trade, saying, for example, that if protection from foreign
trade is desirable, we should be protected from free imports of sunlight. A
major insight of his is ‘what is seen and what is not seen,’ that is that
government benefits and protections are visible and evident, while the costs,
though they be much greater overall, are invisible and not evident without
some analysis. See appearance and reality. His major work was The Law, in
which Bastiat wrote that liberty precedes legislation, and that lawful plunder
is unlawful law that perverts the true law.

battery. Leg. The unlawful application of force.

Bauer, Peter (1915-). Economist, at the London School of Economics 1960-

83, who criticizes foreign aid and espouses markets for economic develop¬
ment.

bear. 1 To bring forth, have, or support; pay interest. 2 Named after the
animal, a person who expects the prices of commodities or securities to fall,
for example short sellers (short sale). Such persons are described as bearish.
The contrary is a bull.

bear market. A continuing decline amounting to 20 percent or more in a

stock market average.

bear, what the market will. The highest price that an item will fetch or
bear (1) in an auction-type market for normal (1) arm’s-length buyers.

Becker, Gary Stanley (1930—). Professor of Economics and Sociology at

Chicago and member of the Mont Pelerin Society, Becker has described
himself as a ‘free-market person’ who believes that ‘individuals responding
to incentives can do very well.’ He has extended economic analysis such as
utility maximization and cost-benefit to social areas such as crime, discrimi¬
nation as a preference, education, economics of the family, and human capi¬
tal. His doctoral dissertation, written under the supervision of Milton Fried¬
man, published as The Economics of Discrimination (1957, 1971), asked how
much people are willing to give up to avoid interaction with others, with the
implication that public policy can discourage discrimination by raising the
price of it. In 1983, the Sociology Department at Chicago offered him a joint
appointment.
In 1992 he received the Nobel prize for Economics for ‘having extended
the domain of economic theory to disciplines such as sociology, demogra¬
phy and criminology’ and for showing that rational economic incentives
influence decision making in ‘areas where researchers formerly assumed
50 beg the question

that behaviour is habitual and often downright irrational.’ In 1997, he was

appointed a member of the Pontifical Academy of Sciences by Pope John
Paul II.
Among his positions, he served as President and Vice-President of the
American Economic Association, and is an associate member of the Institute
of Fiscal and Monetary Policy of the Ministry of Finance in Japan. He has
also been writing a column for Business Week since 1985.
Recent books by and about Becker include The Economics of Life, with
Guity Nashat Becker (1996); Gary Becker in Prague (1996); Accounting for
Tastes (1996); Essence of Becker (1996).

beg the question. To assume an issue that is in dispute. An example is the

issue of whether economic theory can apply to nonhuman animals; arguing
that economics only pertains to human beings, since animals cannot reason,
begs the key question under discussion, whether some animals can reason.

beggar thy neighbor. Policy to increase domestic output by policy that

negatively affects other countries, such as by currency devaluation or tariffs.
Such effects are typically temporary, with long-term damage, as markets
adjust and other countries retaliate.

behavior. The manner in which a person or some variable acts (2).

behavioral assumption. The premises about the behavior of agents (1),

from which a theorem is derived, for example profit or utility maximization.
The basic behavioral postulate in economics is that of economizing. Narrow
self-interest should be an assumption for theory conditional on that premise,
rather than a behavioral claim (3) about human beings.

below the line. 1 Figures not included in an total. 2 Deductions

accounting
and exemptions from gross income. 3 Promotion expenses other than adver¬
tising (advertise).

beltway. A freeway circling a city; specifically, the one around Washing¬

ton, DC, the inside said to be dominated by the federal government and its
spend/control mentality, while the ‘American side’ (outside the beltway)
represents the feelings and thoughts of ordinary citizens, who generally disfavor
TRANSFER SEEKING.

beneficiary. One who inherits property according to a will or specification

in a contract. Syn. devisee.
 between reason and instinct 51

benefit. An increase in well-being, from the viewpoint of a knowledgeable

recipient.

benefit principle. In public finance, a quid pro quo between a tax or fee
and the service it pays for. A benefit tax is justified by the corresponding
benefit received by a taxpayer, even if he does not voluntarily pay the tax.
The benefit can be an increase in asset (1) value due to a service rather than
the direct use of a service. Examples are a bridge toll or an assessment (2)
based on site rent to pay for local streets, the latter based on the capitaliza¬
tion of the benefit into land rent and land value. The alternative rationale for
taxation is ability to pay. The benefit principle is more efficient and less
distorting of market outcomes. User fees adhere to the benefit principle.

benefit societies. Also known as ‘friendly societies’ and ‘fraternal socie¬

ties,’ organizations engaged in mutual aid, such as pooling funds for insur¬
ance and lending. These were common during the 19th century, before they
were displaced with government programs and restrictions (Mixon, 1996).

benevolence. The desire and practice of voluntarily (voluntary) acting for

the benefit of others, whether from altruism or from sympathy.

best as enemy of the good. The attitude that if one cannot obtain perfec¬
tion, one should not obtain the item at all, even though it in fact is better than
not obtaining it.

best economic system. The system which generates the greatest efficiency,
or else the greatest justice and liberty, or both. Free-marketeers generally
posit a harmony between efficiency and equity, so that there is no trade-off,
that is private property is just and more efficient than government controls.

beta. Fin., Gk. 1 From the Greek letter, beta is a measure of the volatility of
a stock or mutual fund compared to a market average (S&P 500). If a stock
tends to move in the same direction as the market, the beta is positive. A beta
greater than one means the item is more volatile than average. See also alpha.
2 Letter commonly used as a coefficient of an independent variable in a
regression equation.

between reason and instinct. A concept of F.A. Hayekthat the basic

institutions and rules of society have not been designed, nor are they a result
of human instinct, but are ‘between’ them, having developed via social
evolution.
52 bid

bid. An offer of payment by one wishing to buy an item. See also auction.

big bang. A sudden implementation of some policy, usually liberalization,

such as setting prices free. In the UK, a big bang occurred in 1986 with the
deregulation of the capital market. See also shock therapy.

big brother. Pejorative term for big government that watches and controls
activity, from George Orwell’s novel 1984.

big business. Large companies have great impact on an economy, the term
often used pejoratively.

big government. Government that has a large share of GDP and interferes
excessively with business and private life. The term is often used pejoratively.

big labor. Large unions (unions, labor) that can affect the economy, for
example with strikes and wage negotiations, the term often used pejoratively.

big landowners. Landowners owning a large proportion of the land value

and obtaining much of an economy’s rent; often pejorative.

bigger fool. The person to whom one hopes to sells a speculative item
before the bubble (1) bursts.

bill of rights. A declaration of constitutional rights, especially as intended

to correspond with and derive from natural rights. The concept goes back to
the Magna Carta of 1215. Prime examples include the English Bill of Rights
of 1689; the constitution of the State of Virginia in 1776, with its bill of rights
authored by George Mason; the French Declaration of the Rights of Man and
of the Citizen, 1789; the Bill of Rights in the first ten amendments to the US
Constitution; and the United Nations’ declaration of human rights, which
includes alleged welfare rights along with natural rights.

bioeconomics. The intersection of biology and economics.

black economy. The black market, though sometimes referring only to the
evasion of taxation.

black market. The market for illegal voluntary items, legal items at illegal
prices and quantities, or otherwise legal items that are produced, traded, and
consumed while evading (evasion) regulation and taxation, as well as the
GDP. Syn. underground economy, informal economy. The greater the inter-
 Bohm-Bawerk, Eugen von 53

ventions, the greater the black market, in some cases making up half the
economy. A free market has no black market because it does not limit
ENTERPRISE.

blacklist. A list of persons shunned because they violated rules.

blight. Urban areas that have decayed; ugly slums with run-down build¬
ings, high unemployment, and crime. This is typically a result of tax *policy
that penalizes improvements and employment, a culture that disparages work
and education, lack of law enforcement against violence, and prohibitions of
substances that stimulate illegal provision and turf wars.

blind trust. A trust in which the owner has no knowledge of the assets
(1); government officials set these up to avoid conflict of interest.

blue chip. Stocks of large, sound, growing companies; after poker chips,
blue ones being more valuable.

blue economy. The economy other than crime or the black market, that is
the legal economy, called so in the UK from the publication of the national
income accounts, known as the Blue Book.

blue laws. Laws prohibiting work or entertainment on Sundays.

blue sky laws. Laws prohibiting the sale of what the seller does not own,
for example the sky.

board of directors. A group of persons elected by and representing the

shareholders or unit owners of a corporation or association. They are respon¬
sible for the policy and operation of the organization, and delegating the
operation to hired managers. Members of a board are individually liable for
the performance.

Bohm-Bawerk, Eugen von (1851-1914). A member of the Austrian school

(Austrian economics) and minister of finance of Austria, Bohm-Bawerk held
the Chair of Economics at Vienna after von Wieser. Extending the foundation
Menger laid out, Bohm-Bawerk developed the core of Austrian theory, which
helped establish Austrian economics as a distinct school. He laid out a theory
of roundabout production (roundaboutness), the period of production, the
structure of capital goods, and a theory of interest rates. His theory of
interest is based on time preference, and influenced subsequent neoclassical
theory; Senior also had a time-preference theory, which Bohm-Bawerk criti-
54 bond

cized. He also stated that land and labor are the original factors of production
from which capital goods are produced. He also employed the wages-fund
concept and circulating capital in the determination of interest rates, as
distinct from the time-preference origin.
In the Austrian theory of capital goods that he developed, following Menger,
there is a structure of higher- and lower-order capital goods, the higher-order
ones being more roundabout and requiring more time for the payoff. Higher
interest rates flatten the capital-goods structure; in equilibrium, productivity
is geared to the rate of interest. Bohm-Bawerk’s major theoretical works have
been collected in Capital and Interest (1921,1959).
Knut Wicksell as the ‘Swedish Austrian’ based his theory of interest on
Bohm-Bawerk’s, expressing it in an improved and clearer fashion. However,
this capital and interest theory has not penetrated into the mainstream. Mason
Gaffney, however, has been integrating Austrian capital theory with geo-
economic theory, for a unified theory involving both land and capital goods,
including the ‘period of production.’
Bohm-Bawerk in Karl Marx and the Close of his System (1898) also
established the Austrian tradition of critiquing Marxism, thus also socialism
and intervention in general. Mises and Hayek would later carry out the
critique of central planning, with contemporary Austrians such as Peter
Boettke investigating the Soviet system and the transition from socialism.

bond. A debt instrument with periodic payments of interest, usually at a

fixed rate, but possibly indexed to inflation. The principal is paid when the
bond matures, unless it is a consol. A debenture bond is one for which no
security is set for the repayment of principal. A junk bond is a low-quality
bond. A zero-coupon bond rather than paying cash interest is bought at a
discount and redeemed at maturity at the full face value. Bonds are rated by
companies such as Moody’s and Standard & Poor’s, the riskier bonds having
a higher yield, that is a risk premium. The market value of a bond is directly
proportional to its risk-adjusted yield and inversely proportional to the long¬
term interest rate. In economic theory, bonds are used as a generalization of
interest-bearing instruments.

book value. A corporation’s balance-sheet equity divided by the number of

shares. Market value differs because it is based on expectations, and book
value may not reflect asset (1) market values.

boom. The part of an expansion phase of a business cycle in which output is

growing at a high rate, with much investment. Speculation in stocks and real
estate typically sets in. Booms often end in busts because much of the impetus
was due to subsidies rather than pure market processes. Key artificial stimuli
 bourgeoisie 55

include the expansion of money by central banks, artificially lowering interest

rates, and the expansion of public works paid for by the taxation of productive
effort, which becomes capitalized (capitalized value) into higher land values,
anticipation of which sets off a speculative real-estate boom fueled by the
credit expansion. When prices begin to rise, especially real estate and interest
rates, the rate of growth of investment slows, eventually leading to the bust. The
Japanese boom of the 1980s and bust of the 1990s is an example.

Borda count. A method of voting, proposed by J.C. Borda in 1781, that

overcomes the paradox of voting. For n choices, a voter gives n points to the
top choice, n-1 points to the next best, and so on down to 1 point for the
lowest choice. The alternative with the most points wins. See also approval
voting.

borrow. To obtain an item from another person, with the promise to return
it, and typically to pay interest as compensation (1) for the use of it.

bottom. 1 The lowest prices of an investment vehicle. 2 The smallest level

of governance. 3 The trough of a cycle.

bottom line. The net income or profit when all is said and done. Also a
metaphor for the most important aspect of a deal.

bottom-up investing. Placing the primary investment criterion on the qual¬

ity of a corporation, rather than the overall direction of the market.

bottom-up voting. A multilevel method of voting in which people elect a

neighborhood council, groups of neighborhood councils elect a higher-level
district council, these councils in turn elect a higher-level regional council,
and so on to the highest level.

bounded cognition. The proposition that cognitive ability to process in¬

formation is limited, so people simplify the task with decision rules and
habits. This economizing is fully consistent with rationality.

bounded rationality. See bounded cognition. What is bounded is not re¬

ally rationality but cognitive ability.

bourgeoisie. Fr. The property-owning middle-class, as it developed during

the Industrial Revolution, and its culture emphasizing family, work, and
order. The class is distinct from the clergy, the aristocracy, and the propertyless
proletariat. Such class distinctions are important in Marxist thought.
56 Bourne, Randolph

Bourne, Randolph (1886-1918). He wrote articles for The Seven Arts

opposing America’s participation in World War I, an unpopular stance. Bourne
was arrested, and a trunk full of his manuscripts was stolen. A poem by John
Dos Passos (1932, p. 106) has Bourne’s ghost crying out, ‘ War is the health
of the state' (italics in the original), which he wrote in an unpublished manu¬
script, The State.

bourse. A stock market, commonly called so in Europe.

boycott. Targeting a firm or product with a refusal to make purchases or

associate with it.

bracket creep. An increase in tax rates under a graduated income tax due
to inflation’s increasing nominal income. Indexing solves this.

branch banking. A bank having multiple offices and banking locations.

This has been restricted in some US states and by the federal government
across states. Restrictions on branch banking led to small, unstable ‘wildcat’
banks in the USA during the early 1800s. The Scottish free-banking system
pioneered branch banking.

Bretton Woods. The New Hampshire resort where an international mon¬

etary conference took place and designed a global monetary system named
after the site. The result was fixed exchange rates for currencies, with the
dollar tied to gold at $35 per ounce. The IMF and World Bank were also
created to make international loans. The dollar standard based on $35 gold
became unrealistic as the dollar was inflated and gold flowed out of the USA.
The system was terminated in 1971, after which a managed float system was
adopted for the major currencies. Volatile currencies have been costly for
enterprises and have created macroeconomic instability, problems that would
be avoided with a global gold standard combined with free banking.

broadcast spectrum. The electromagnetic spectrum bands used to broad¬

cast radio and television transmissions. This is a type of economic *land. One
free-market approach to the spectrum is for government to lease spectrum
frequencies to users at market rates, and place no restrictions on the owner¬
ship and contents of the broadcasts. Currently the opposite is done; the
owners pay no fees for using the spectrum, ownership is licensed, and the
contents of broadcasts is restricted.

broken joint. A metaphor for the dysfunctional working of money as al¬

leged by Keynesian economists. See loose joint, tight joint.
 Buchanan, James M. 57

broker. An agent (2) who buys or sells property for a client.

Brown effect. Named after Harry Gunnison Brown by Nicolaus Tideman,

the effect of increasing the current use of land due to a decrease in specula¬
tive (speculation) holding when land rent is taxed. This is due to different
expectations about the future price of land, since if everyone had the same
expectation, there would be no speculation.

Brown, Harry Gunnison (1880-1975). He was the leading follower of

Henry George among professional economists of his day. Brown studied
under Irving Fisher at Yale and later taught at the University of Missouri. His
book The Economics of Taxation (1924, 1979) is a classic in tax incidence
theory. Topics of his writings include land and rent, taxation (especially of
land value), financial capital and interest, monetary economics (as an adher¬
ent of Fisher’s monetary approach), pricing theory, and international trade.
He also wrote a textbook, Basic Principles of Economics (1942 and various
other editions). Brown’s work is described and analyzed in Ryan (1987). See
also GEO-ECONOMICS.

bubble. 1A speculative boom with a great increase in the market prices of a

class of items, far beyond that warranted by usual historic values or cost
fundamentals. Prices then collapse, just as an expanding soap bubble eventu¬
ally bursts. Stock, commodity, and real-estate markets are prone to bubbles,
which may involve cycles. 2 A fraudulent investment operation.

Buber, Martin (1878-1965). Jewish religious philosopher and advocate of

decentralized ‘socialism of spontaneity.’ He proposed an economic solution
in 1921 (‘A Proposed Resolution on the Arab Question’) to multiethnic
conflict, specifically for then Palestine, based on commonly owned land, self-
governing small communities, and equally sovereign nations within a confed¬
eration (Buber, 1983). He called this an ‘intra-national’ approach which
would replace politics with economics. This resolution of ethnic conflict over
land, with the added geo-economic concept that title holders pay rent, is one
market-compatible approach to the problem of ethnic conflict, notwithstand¬
ing Buber’s socialist self-label.

Buchanan, Janies M. (1919—). Nobel prizewinner of 1986 and a member

of the Mont Pelerin Society, Buchanan founded and is a leading economist
of the Virginia School of Political Economy, having made contributions in
public-choice theory and constitutional economics. The school originated at
the Thomas Jefferson Center in the University of Virginia at Charlotte, moved
to Virginia Polytechnic Institute and State University at Blacksburg, and
58 budget

finally settled at George Mason University, where he has directed its Center
for Study of Public Choice. Buchanan also has been a leading contributor to
the theory of clubs, contractarianism, optimality, liberty, and subjective
costs, the latter topic challenging traditional marginal-cost pricing. Buchanan
along with Gordon Tullock founded the Public Choice Society in 1962, and
its journal, Public Choice.
Buchanan studied at the University of Tennessee and obtained his Ph.D. at
the University of Chicago. He was highly influenced by the theories of Frank
Knight and Knut Wicksell as well as Italian 19th-century public finance. The
Italians, like Wicksell, presented public finance as an agreement by citizens to
pay taxes and submit to government authority in exchange for services.
Buchanan’s economic approach treats public choice as a political market, with
self-interested, utility-maximizing agents (1). The Calculus of Consent (1962,
1965), co-authored by Gordon Tullock, has been highly influential in public
choice, examining how constitutional rules are chosen and which rules can
preserve the social contract. Buchanan’s numerous books and articles, often
with co-authors, examine many facets of public economics.

budget. An accounting of planned expenditure and expected income, nor¬

mally for one year. It is sound practice to have a current budget for consump¬
tion and a capital budget for major investments that take place or have
payouts of greater than one year.

budget deficit. Current expenditures that exceed current income. Some

governments deliberately have a deficit in order to stimulate the economy
(particularly if the borrowing is from abroad). Deficits also occur because
expenditure has strong constituents, taxation is unpopular, and the constitu¬
tional system permits and induces shifting the costs to future generations in
the form of either higher taxes and interest payments or else the repudiation
of the debt.

budget surplus. Current expenditures that are less than current income.
The surplus, which is savings, can be used to reduce debt or to build an
endowment for future use.

building cycle. See real-estate cycle.

building society. A mutual-aid financial institution, similar to credit un¬

ions, specializing in loans for real estate.

bull. A person who expects market values to increase. Such persons are
described as bullish. The contrary is a bear.
 business cycle 59

bull market. A market in which average share prices have a sustained and
substantial increase in value.

bullion. Gold, silver, and platinum ingots or bars.

bureaucracy. Rule by bureaus, or administrative offices and departments.

The bureaucracy consists of a hierarchy of departments and agencies of a
large organization, which administer policy using complex rules, procedures,
and specifications, imposing depersonalized and laborious processes on af¬
fected parties. Theories of bureaucracies presented by Mises, Niskannen,
Weber, and others involve the tendency of the bureaucrats to maximize their
budgets and to pursue their agenda as well as that of the organization. Private
bureaucracies in for-profit corporations tend to avoid extreme waste because
of competition, but such constraint does not apply to government, especially
to states. Decentralization, demonopolization, and privatization are anti¬
dotes to excessive government bureaucracy.

Buridan’s ass. An illustration by Aristotle, later associated with the phi¬

losopher Jean Buridan (1295-1356), of an ass faced with two equally desir¬
able bales of hay and starving because it could not decide between them.
Critiques of indifference curves assert that pure indifference implies such an
impossibility to choose, when in fact one does choose. However, one could
decide randomly, for example by tossing a coin.

business. 1 Commercial enterprise and trade engaged in for gain and liveli¬
hood. 2 An organization which conducts business (1).

business cycle. Also called the trade cycle. A repeating pattern of expan¬
sion and contraction of output in an economy. There are cycles of varying
type and duration, including seasons within a year, short inventory or politi¬
cal cycles of about four years, medium (Juglar) cycles of about 9-10 years,
major cycles of about 18-20 years (see real-estate cycle), and possibly
‘long wave’ Kondratieff cycles of about 60 years.
The expansion is also called the upswing and, in the latter stages, the
boom. The contraction is also called downswing, recession, and bust. The
bottom of the cycle is called the trough or depression. The top is called the
peak, or, in some cases, a crisis, when a panic or crash quickly turns the
boom into a bust. The points of inflection occur when the second derivative
switches signs, that is during the expansion, the change of the rate of
growth turns negative, and during a contraction, the change of the rate of
contraction turns positive. The decrease in the rate of growth eventually
halts the growth and then leads to a decline. Hence, the seeds of the
60 business ethics

depression are sown at the height of a boom, when rate of growth begins to
decline.
Explanations of the cycle, particularly of the downturn, are generally di¬
vided into financial and real theories. The key variable is investment. The
Austrian-school theory (Austrian economics) is financial, based on credit
expansion that creates higher-level investments that turn out to be unprofit¬
able. The geo-economic theory is real, based on the real-estate cycle. Neo¬
classical real business cycle theory centers on clusters of innovations. Neo¬
classical theory also posits random shocks which create fluctuations. The
regular repeated pattern of major depressions since the early 1800s seems to
cast doubt on random shocks or innovations as the main determining cause of
the cycles.

business ethics. The code of conduct that governs an enterprise, such as

honest dealing and equal treatment of employees. Also the study of such.

business risk. Risk due to the type of business engaged in.

bust. The downturn of an economy, ending in depression.

butterfly effect. That small changes in the inputs of a function can have a
large effect on the dependent variable, a principle of ‘chaos’ or turbulence
theory. To the degree that this exists, it makes policy ineffective, since the
effects cannot be predicted.

buy. To obtain an item by exchanging something else, usually money, for it.
A ‘good buy’ is something which one got at a low price.

buyers’ market. Excess supply, leading to buyer’s ability to set terms.

by-product. A product other than the main ones intended in the production
process, generally of low or negative value.

bylaws. The rules governing an association, based on its charter, articles of

association, or master deed.
 c

C. Symbol for consumption in macroeconomic equations. In Keynesian

economics, consumption is first recognized as a function of income, but then
by moving all of Y to the left side of the equation, income becomes a function
of autonomous consumption. See consumption function.

cadastral survey. A survey and recording of land titles, boundaries, and

values.

calculation. See economic calculation.

calculus. Higher mathematics dealing with derivatives, the slopes of curves

(hence the maxima and minima of functions), and integration, areas under a
curve, much used in modem neoclassical economics, its applications and
methods criticized by some schools of thought (see Boettke, 1996). Calculus
is also a more general term for calculating values, as in the book The Calcu¬
lus of Consent (Buchanan and Tullock, 1962, 1965). Also, the basic concepts
of a first derivative, indicating the rate of change (or slope) of a variable, and
the second derivative, indicating the change in the slope, are useful even if
not expressed mathematically; for example see business cycle.

call option. An option to buy an asset (1) at a certain price during some
period of time. The opposite is a put option.

cambist. One who buys and sells foreign currencies.

Cambridge school, modern. A successor to schools of thought centered in

Cambridge, England, starting with Marshall, Robertson, and Pigou, then
highly influenced by J.M. Keynes along with Ricardo and Marx. The school
after World War H, also called post-Keynesian, became critical of neoclassi¬
cal theory, using instead a macroeconomic approach. The adherents tend to
favor mixed and socialist economies. Among the economists associated with
the school were Robinson, Kaldor, and Sraffa.

canons of taxation. Criteria for judging a tax system. The two famous
canons are by Adam Smith and Henry George. Smith’s criteria in the Wealth
of Nations (1776, 1976) were equality, certainty (clear manner and quantity).

61
62 Cantillon effect

convenience, and economy in collection. George’s criteria in Progress and

Poverty (1879, 1975) were minimal excess burden, economy in collection,
certainty (least opportunity for corruption and evasion), and equality. George
showed how a tax on land rent satisfies the canons best.

Cantillon effect. When the money supply is expanded, prices do not all rise
at the same rate, but at differing rates depending on the areas of the money
injection as it flows and spreads, hence an increase in the money supply alters
the structure of prices. This perhaps reduces the explanatory power of the
EQUATION OF EXCHANGE.

Cantillon, Richard (c. 1680-1734). Irish-born French economist who

analyzed entrepreneurs, economic systems, and economic processes. His
thought on entrepreneurship included uncertainty and arbitrage. His work on
money and banking included the Cantillon effect. His great work was his
Essay on the Nature of Commerce in General (1755).

cap. (market value) of a company. A small cap is a company

Capitalization
with a market value of about $1 billion or less. A large cap is a company with
a market value of $1 billion or more. A mid cap is a company with a market
value of $400 million to $7 billion. A mini cap is a company with a market
value of less than $100 million.

capital. Financial capital or capital goods, that is both or either. Capital is

also divided into fixed capital (long-term capital goods) and circulating
capital (financial capital and inventory). Also, a metaphor for human skills
and knowledge, which one can invest in as with capital goods.

capital account. In the balance of payments, the account of major pur¬

chases and sales of long-term assets (1).

capital accumulation. See capital formation.

capital asset pricing model. In modern portfolio theory, the pricing of

returns in a diversified portfolio as based on their beta (1) volatility, more
volatile securities warranting higher yields. Investing using this model thus
uses volatility-adjusted criteria. See William Sharpe.

capital budget. The section of a budget that allocates expenditure for

investment in capital goods.

capital consumption. The depreciation (1) or consumption of capital goods.

 capital goods 63

capital decumulation. See capital consumption.

capital deepening. Increasing the capital-labor ratio.

capital flight. The escape of financial capital from a country due to its high
taxes and policy of confiscation.

capital formation. Additions to the capital stock.

capital gain. For realized gains, the selling price minus the purchase price,
and for unrealized gains, the current market price minus the purchase price.
For the real gain or income, the nominal gain due to inflation is subtracted. A
negative gain is a capital loss.

capital gains tax. A tax on capital gains, usually realized gains. When
nominal capital gains taxes include inflationary gains, the tax taxes the capi¬
tal as well as any income. Hence, to only tax the income, the capital gains
tax must be indexed to inflation (as it is in the UK), and depreciation (1)
must also be indexed, since otherwise capital goods are overtaxed. A tax
only on realized capital gains tends to lock in the asset, to avoid the tax
penalty, whereas a tax also on unrealized gains makes the gain tax neutral
with respect to timing the sales. The limitation on the deductibility of capital
losses further skews the tax with respect to risk; risky projects are tax pun¬
ished either way. A pure free-market economy would have no gains tax,
avoiding the lock-in problem, other than, in a geocracy, possibly a charge (1)
on unrealized gains in land value to supplement charges on land rent.

capital goods. The factor of production consisting of produced goods.

Neoclassicals, Marxists and some Austrians (Austrian economics) lump land
in with capital goods, while classical and geo-economic theory makes land a
distinct factor as not produced by human effort. Capital goods are also
distinct from financial capital. Income from capital goods is a capital re¬
turn; it is misleading to call this ‘interest.’ Shares of stock are titles to assets
that are part financial and part real.
Capital goods are not just physical items, but are embedded with knowl¬
edge. Capital goods can also be intangible, such as a recipe or a computer
program, as distinct from the media on which they are imprinted. Moreover,
Austrian theory treats capital goods as heterogenous; higher-order capital
goods are more roundabout (roundaboutness). A lower interest rate makes
the structure higher, inducing more roundaboutness, while higher interest
rates flatten the structure (see business cycle). Capital goods also have a
period of production, which is the time it takes for the payback of the
64 capital intensive

investment, unlike land, which has no period, since it is not produced. Syn.
REAL CAPITAL. See also INTEREST.

capital intensive. Production with a high ratio of capital goods to labor.

capital-labor ratio. The ratio of capital goods to labor, or the average

amount of capital goods used per worker. This can be measured by the value
of capital returns to wages, or the value of the capital stock divided by the
number of workers.

capital markets. The market for capital goods, land, and long-term finan¬
cial assets. As pointed out by Ludwig von Mises, these are of great impor¬
tance in a market economy, hence their absence is a major source of failure in
a centrally planned economy, since it lacks rational economic calculation.

capital-output ratio. The ratio of the capital stock to output.

capital reswitching. Normally, given some investment demand, a greater

quantity of investment is made at lower interest rates. However it is possible
that due to the heterogeneity of capital goods, at some lower rate, firms
switch back to less capital-intensive methods, so that investment then falls as
the interest rate falls. This is contrary to neoclassical (neoclassical econom¬
ics) and Austrian theory (Austrian economics), but one can question its
empirical importance.

capital return. The return on the ownership of capital goods. It is anti¬

quated and inaccurate to call this ‘interest.’ The capital return is made up of
depreciation (1) plus interest on the non-depreciated asset.

capital stock. The aggregate of capital goods, measured for example by its
market value, that is the present value of capital returns.

capital structure. 1In Austrian (Austrian economics) capital theory, a

pyramid-like arrangement of capital goods according to their roundaboutness.
The lowest level of goods is consumer goods. The second level is goods that
produce the consumer goods, the third level being goods that produce the
second level, and so on. The structure is functional rather than referring to
specific goods, which can be used in various ways, for example an automobile
can sometimes be a consumer good and other times (such as when used as a
taxi) be a capital good. 2 The various types of a company’s shares of stock
and debt.
 capitalization 65

capital tax. Asset tax.

capital theoretic approach. Thus called, an approach that treats all factors
of production as capital goods generating income, the capital valued at the
net present value of the future yields.

capital theory. Theory about capital goods and their yields.

capital widening. Increasing the amount of capital goods while keeping

the capital-labor ratio constant, hence not capital-deepening.

capitalism. (The OED cites the earliest use by Thackeray in 1854. The
term was popularized by Marxist writers.) 1 A label for industrialized
mixed economies. 2 Private enterprise using money, with the private owner¬
ship of capital goods and land and their yields. 3 For Marxists, a system in
which workers do not own the capital goods with which they work. By
Marxist doctrine, the property-owning class, the capitalists, are able to
extract the surplus value from the exploited propertyless working class, the
proletariat, due to the army of the unemployed that drives the wage level to
SUBSISTENCE.
The term ‘capitalism’ is used for polemics and propaganda. Critics of
markets use the term with shifts of meanings, so that in one passage it is (1) a
label for the mixed economy that has social problems such as unemployment
and poverty, then the meaning shifts to (2) as private enterprise is blamed for
causing the problems, and finally the meaning shifts to (3) as an unwarranted
conclusion.
Clearer synonyms for (2) are market economy or free enterprise, while a
clearer meaning for (1) is a mixed or interventionist economy. As for (3),
excess profits in capital goods would increase the supply and drive down the
profits, so only a rent on a non-expandable resource, rather than capital,
could have a surplus value, and even then, barriers to enterprise are needed to
prevent the unemployed from becoming self-employed.

capitalist. (The OED cites the first use of the term by A. Young in 1792 for
‘moneyed men.’) 1 An owner of capital. 2 A person engaged in business and
has capital with which to employ others. 3 Regarding capitalism.

capitalization. 1 Ec. The conversion of a stream (of income or cost) into an

asset value. The present value of an asset equals the expected net yields
divided by a discount or interest rate. 2 Fin. The value of the net assets of a
company. See cap.
66 capitalized value

capitalized value. The discounted present value of a stream of income.

For fixed perpetual income and a fixed interest rate, the capitalized value
equals the annual yield divided by the interest rate. If the asset has an ad
valorem tax, then one divides by the sum of the interest and tax rates, that is p
= y / (i + t) where p is the price, y the annual yield, i the interest rate, and t
the tax rate.

capitation tax. A head tax.

capture theory. The capture or taking over of a regulatory agency by the

industry (2) being regulated, so that policy will favor the industry, or perhaps
protect it from new competitors. Since those in the industry have expertise in
it, they are appointed to regulatory positions, and the industry can also exert
political influence. This theory was developed especially by George Stigler.

carbon tax. A tax on fossil fuels, either on the amount of carbon dioxide or
the value of the product, intended to reduce carbon dioxide emission. Whether
the carbon tax would make much difference in the amount of.carbon dioxide
is disputed, since practices such as burning the rain forests may dominate. A
general pollution charge (1) may be sufficient for environmental protection.

cardinal. Ec. Reporting how many, as with numbers used in counting.

cardinal utility. A quantitative approach to utility (utility, marginal), in

which the intervals between utility levels are scalable, though not measurable
with specific numbers. For example, given goods X and Y, one could say,
cardinally, that X is only slightly preferred to Y or else greatly preferred. With
ordinal utility, one can only say that X is preferred to Y. Most economists think
of utility as ordinal, yet when marginal utility is compared to a price, it seems
that cardinality may be silently snuck in through the back door.

Carlyle, Thomas (1795-1881). Scottish writer who in 1849 in his Latter-

day Pamphlets, ‘No. 1, The Present Time,’ described economics as ‘what we
may call, by way of eminence, the dismal science,' because of the pessimistic
Malthusian scenario that population growth outruns the growth of production
(August, 1971). Technology has forestalled the dismal scenario of diminish¬
ing returns, but economists joke that public-choice theory, showing how
mass democracy degenerates into transfer-seeking by interest groups, has
made economics a dismal science all over again.

carrying charge. The cost of owning property, such as taxes, insurance,

and storage; usually the opportunity costs are not included.
 cat 67

cartel. An agreement among firms, including government-owned oil pro¬

ducers as with OPEC, in an oligopolistic (oligopoly) market to act together
as a monopolist (monopolistic), setting a common price or quantity. Cartels
are unstable, since it profits a member to lower its price a bit to increase its
sales. Also, new firms outside the cartel arise when the economic profit is
high, and high prices encourage the development of substitutes.

case study. A study of an example of some theory or application.

cash. Liquid, transferable purchasing media, namely currency and, more

broadly, demand deposits. When gold is money, cash consists of monetary
gold plus money substitutes, that is bank notes and demand deposits.

cash basis. Accounting based on actually paid or received funds rather

than those which only accrue.

cash flow. Retained earnings plus the provision for depreciation (1). As the
source of internally generated funds, it is a measure of the viability and future
prospects of a firm. Dividends are a skewed measure of performance, since
companies may prefer to minimize dividends’ payments due to their double
taxation. If there are net expenses, then there is negative cash flow.

cash ratio. The ratio of the cash banks hold and their liabilities.

Cassel, Gustav (1866-1945). Swedish economist. In The Nature and Ne¬

cessity of Interest (1903), Cassel posited that the human lifespan creates a 2
to 3 percent floor on interest rates. His Theory of Social Economy (1918)
described a simplified version of Walrasian general equilibrium theory. In
The World’s Monetary Problems (1921), he presented the purchasing power
parity theory of international exchange rates. During the 1930s, Cassel, a
classical liberal, was a critic of Keynesian countercyclical policy as well
as Soviet central planning. See Carlson (1994).

casual employment. Employment which is uncertain, irregular, temporary,

or incidental, and usually without fringe benefits.

cat. From the Georgist expression, ‘seeing the cat.’ A Georgist was looking
at a jumbled drawing which was supposed to contain a picture. After sensing
some of the parts, suddenly the picture was clear: it was a cat. He then
realized that an economy is like the drawing, a confusing jumble unless one
realizes the underlying principles, when one sees the cat. Once one sees the
cat, the drawing is never again a jumble.
68 catallactics

catallactics. Economic exchange and other market phenomena, theory

thereof, and an alternative term for ‘economics’ proposed by Hayek and used
by Mises.

catallaxy. An exchange *economy.

catastrophe theory. Theory regarding discontinuity in various contexts,

including economics, in which sudden changes (catastrophes) are caused
(cause (1)) by gradual changes that suddenly reach a critical point and cause
a rapid discontinuity, such as an earthquake. A financial panic or a market
crash are caused by prior structural and behavioral patterns and events that
may not be noticed until the catastrophe happens.

categorical imperative. From Kant, an unconditional and objective moral

injunction, such as ‘do not coerce others.’ The free market is based on such
an imperative, delineating the domain of market-compatible acts from mar¬
ket-violating acts.

cats and dogs. Highly speculative securities.

causal principle. A foundational *principle of science that all events and

effects have causes (1).

causality. The fact that effects and events have causes. Mises regards cau¬
sality as a category or necessary element of human action.

cause. 1 An origination of a phenomenon, as an agent (1) producing the

outcome, such that if that origination did not exist, the same phenomenon
would not occur. A cause of a cause is also a cause of the effect. See also
causality. 2 A reason for the existence of a phenomenon. 3 A social or
political movement or ideology.

caveat emptor. Lat. Let the buyer beware. The policy that the buyer, as¬
suming the risk, has the responsibility to check on the worthiness of an item
he buys. In a free market, the buyer has the responsibility of assuming risks,
once they are disclosed.

caveat venditor. Lat. Let the seller beware. The seller has the responsibility
of ensuring the quality and integrity of the product sold. In a free market, the
seller has the responsibility to avoid fraud and to disclose the harmful char¬
acteristics of what he sells.
 central government 69

CCR. Community collection of rent.

censorship. As a restriction of expression, censorship is also an economic

intervention in the enterprise of providing ideas and images, both on the
provider and consumer.

Center for Market Processes. An organization, based in Virginia at George

Mason University, which supports studies in Austrian economics.

Center for Study of Public Choice. An organization at George Mason

University which studies and supports public choice theory, using the ap¬
proach of the Virginia School of Political Economy. See James Buchanan.

central bank. A bank for all other banks in a jurisdiction, and the bank for
the government, providing clearing and lending services, as well as the major
agent (2) implementing a country’s monetary policy. Typically, a central
bank provides the national currency as an absolute monopoly and regulates
(regulation) the banks. The Bank of England is the central bank in the UK,
and the Federal Reserve System in the USA. Sweden’s Riksbank is the
oldest. Countries where the central bank is more independent of political
influence tend to have more monetary stability and less inflation. Some
countries have currency boards rather than central banks, and historically,
economies with free banking, such as Scotland, had no central banks. A pure
free-market *economy would either have no central bank or else confine it to
voluntary services. See free banking.

Central Europe. Countries between the Commonwealth of Independent States

(former Soviet republics) and Western Europe, such as Poland, Czechia, Slovakia,
Hungary, and Slovenia. Germany and Austria could also be considered to be in
Central Europe, though they were in the Western side of the Iron Curtain.
People in the Baltic countries, not part of the CIS, also consider themselves to
be Central Europeans, while Ukraine and Belorussia are in Eastern Europe and
the CIS. The countries of Central Europe have achieved a transition to mixed
economies and are striving to join the European Union and NATO.

central government. The highest-level government, normally the govern¬

ment of the state, in contrast to the governments of the subdivisions or the
states of a federation. Historically, government power has tended to become
concentrated (concentration) in the central government, leaving the public
with less access and influence. An antidote may be a change in the voting
system to communitarian democracy, devolving (devolution) power to small
local jurisdictions.
70 central planning

central planning. The totalitarian control over the substantial elements of

an economy by a planning bureau that treats the economy as one large firm.
This was practiced by the Soviet Union, China, and the other Soviet-style
countries, a practice now abandoned by all except North Korea. However,
market economies as well as countries that retain large government sectors,
such as Cuba, have some central planning, such as central banking controls
over the currency. Ludwig von Mises in his work Socialism (1922) showed
how central planning is inefficient due to its lack of capital markets and poor
ability to perform economic calculation.

centralization. The of political and economic power in the

concentration
central government, contrary to federalism and decentralization. Decen¬
tralization creates competition among political jurisdictions, leading to less
waste and control, but local governments can be oppressive as well. Thus, to
ensure liberty, decentralization needs to be carried to its logical conclusion,
individual choice in governance.

certainty. Knowledge without any doubt or puzzle. Also, precision and

accuracy rather than vagueness and ambiguity. Certainty is relative and con¬
ditional. I am quite certain of my name, but it is possible that my mind has
been fooled. I am certain, given that I have not been fooled or that my
memory is not playing tricks.
Empirical *propositions are always subject to uncertainty, because no
observation can be certain, other than one’s own existence. Some logical
deductions (2) are certain.

certainty equivalents. The rate of return of a volatile (volatility) asset

relative to that of a certain return that makes an investor indifferent among
them, since the risk premium makes the risk-adjusted returns equivalent.

change in demand or supply. A shift of the demand or supply schedule,

so that for example greater quantities are demanded or supplied at all
prices.

change in quantity demanded or supplied. A movement along a demand

or supply curve or schedule, quantity being a function of price.

chaos. Disorder, utter confusion, and lack of form or structure beyond any
probability measurement, like a wild mob. See also turbulence, with which
it should not be confused, and order. Markets can be turbulent at times, but
they have a spontaneous order.
 chattel 71

chaos theory. Turbulence theory,

characteristics. The approach and theory developed by K. Lancaster for

consumer demand, that what is demanded are the characteristics of goods
rather than the physical goods. The concept was extended to public and
private goods by Auld and Eden (1990) and Foldvary (1994b). Distinguish¬
ing goods that are public or private according to characteristics overcomes
the problem of physical goods which are mixed, that is those that have both
private and public characteristics.

charge. 1 A payment, such as a price, fee, or tax, or to request or impose

such. 2 Credit.

charity. 1 Voluntary donations to other persons and organizations that are

engaged in benevolent activities. 2 An organization that receives charity (1)
other than for its own members. 3 See charity, principle of.
Income taxes usually allow deductions for charity if expenses are itemized,
and organizations need to qualify in order for donations to be tax-deductible
and for the income of the charity to be tax-exempt. Some nonprofit organi¬
zations, such as churches, are implicitly subsidized by government by mak¬
ing them exempt from property taxes, while they consume tax-paid services.
In a free market, donations to charities fill the gap of activities that
commercial enterprise normally does not fund, as well as helping those in
unfortunate circumstances. Moreover, since in theory, poverty and unem¬
ployment are minimal if not eliminated by a free market, charity would
normally be sufficient for such needs. See also sympathy.

charity, principle of. In reasoning (reason), the principle of charity pre¬

scribes that one interprets an opposing view in its best light, so as to soundly
defeat it rather than beat a straw man.

charta de foresta. Lat. ‘Laws of the forest,’ allegedly part of the Magna
Carta, granted by Henry III in 1217.

chartae libertatum. Lat. The two English charters of liberty, the Magna
Carta and the charta de foresta.

chartist. One who studies graphs of stock, bond, or commodity prices and
volumes to do technical analysis, that is, find patterns (such as previous highs
and lows, and moving averages) that predict future prices.

chattel. Movable property.

72 chattel slavery

chattel slavery. The ownership of other human beings. Some natural-law

theorists hold that a contract to make oneself a chattel slave is morally
unenforceable, since natural rights are inalienable. See Locke (1690, 1947),
Second Treatise, paragraph 23.

cheap money. Low interest rates, which as policy stimulating investment

in the short run, only to create malinvestments, inflation, and a slump later.

Cheung, Steven N. S. An economist who, like Ronald Coase, has worked

on the theory of firms and social cost (social costs and benefits). Cheung
emphasizes lower transaction costs as the reason for firms. His books include
The Theory of Share Tenancy; with Special Application to Asian Agriculture
and the First Phase of Taiwan Land Reform (1969), The Myth of Social Cost
(1978, 1980), and Will China go ‘Capitalist’?: An Economic Analysis of
Property Rights and Institutional Change (1982).

Chicago school. A school of thought originating and centered at the

University of Chicago. The School’s principles include value-free econom¬
ics, neoclassical price theory, free-market allocation of resources as effi¬
cient, and monetarism. Adherents include giants such as Frank Knight,
Jacob Viner, Milton Friedman, Henry Simons, Ronald Coase, Gary Becker,
and George Stigler. Its public-choice approach differs from that of the
Virginia School, which disputes the efficiency of political markets (Rowley
andVachris, 1996).

children. Human beings below the legal age of maturity and fetuses above
the legal age of personhood. In a free market, children have the right to
perform suitable work, the right to receive care and protection, and rights to
property. While their freedom over their actions may be limited, they have
the right to pursue their own future goals. John Locke discussed the rights
and upbringing of children in his works, something quite rare for his time
(Yolton, 1993, p. 37). A.S. Neill’s book Summerhill: A Radical Approach to
Child Rearing (1960) presents an approach to education without compulsion.

Chodorov, Frank (1887-1966). A leading Georgist libertarian (libertari¬

anism) like his friend Albert J. Nock, Chodorov was an opponent of war and
imperialism. He was the founding editor of The Freeman, associate editor of
Human Events, and author of The Economics of Society, Government and
State (1946), One is a Crowd (1952), The Rise and Fall of Society (1959),
The Income Tax: Root of All Evil (1954), and Out of Step: The Autobiography
of an Individualist (1962). Some of his essays are collected in Fugitive
Essays (Liberty Press, 1980).
 citizen dividend 73

While living in Chicago, Chodorov read a friend’s copy of Progress and

Poverty (1879, 1975) by Henry George, which gave him his life cause:
liberty with economic justice. In 1937, he became the director of the Henry
George School of Social Science at New York City, serving until 1942.
Chodorov was a major influence on the post-war old-Right conservative
(small government) and libertarian movements, including William F. Buckley
and Murray N. Rothbard. He published the journal Analysis, which then
merged with Human Events. Chodorov also helped found the Intercollegiate
Society of Individualists. Some of his Georgist libertarian friends founded
the journal Fragments, which still carries on Chodorov’s libertarian, indi¬
vidualist Georgism.

choice. A purposeful selection from known options. Choice can be private,

confined to the chooser, or public, selected for others as well as oneself.
Public-choice theory studies the latter.

chronic unemployment. Unemployment that persists even during prosper¬

ous times and is not due to structural changes. The leading cause (1) is
barriers to enterprise that leave behind the less able and less determined,
along with inadequate schooling.

circulating capital. Capital goods with a relatively rapid turnover, for

example up to one year, such as inventory and goods in the process of being
produced. When available funds are invested in fixed capital, less is available
for circulating capital, which is the near-term source of revenues. If there is a
wages fund, it is circulating capital, providing the means to pay for inputs.
Hence, intervention that artificially increases fixed capital is a source of later
diminution of circulating capital and production, a malinvestment as in geo-
Austrian cycle theory (geo-Austrian synthesis). Mason Gaffney has done
work in this area.

circulation credit. Credit created by new banknotes and demand deposit

not taken from existing funds, as is commodity credit.

citizen. An officially recognized member of a country. In a democratic

country, a citizen is an equal co-owner of the country and its assets, having
one vote; in effect, the country is a cooperative owned by the citizens.
Citizens in many countries have economic legal rights not assigned to other
residents.

citizen dividend. A payment to a citizen (or perhaps also to other resi¬

dents) as One’s share of the returns on commonly owned assets such as
74 Citizens for a Sound Economy Foundation

natural resources, as practiced, for example, in Alaska for oil royalties. Some
geoists advocate the payment of equal citizen dividends as a supplement or
even instead of using the collected land rent (land-rent tax) for government
expenditures, leaving the decision of the allocation of expenditures to indi¬
vidual citizens.

Citizens for a Sound Economy Foundation. A nonprofit educational in¬

stitution with headquarters in Washington, DC, which conducts research and
publishes analyses on sound economic policy. The CSE Foundation is affili¬
ated with Citizens for a Sound Economy, a public-interest advocacy group
with a membership of 250,000. CSE promotes initiatives which reduce inter¬
vention and promote growth.

civic. Regarding communities, especially urban ones, and citizens.

civic association. A voluntary organization that provides community serv¬

ices to its members. The members can be residential as well as commercial.
Examples include condominiums, residential associations, and cooperative
housing.

Civic Education Project. A privately funded organization headquartered

in Yale University, connected with the Soros foundations, that has sent col¬
lege teachers to Eastern Europe and other countries to teach social science, as
a part of a broader effort to restore democracy and open societies in those
countries.

civic goods. Collective goods provided for a community, such as streets,

parks, and security.

civil. Regarding citizens and citizenship, distinct from religious, military,

and criminal affairs. Civil law, derived from Roman law rather than common
law, pertains to individual relations. A civil action is a non-criminal court
case against a person or company. In a free society, civil action is conducted
by individuals against individuals, not government against individuals, which
should be in the domain of criminal law, subject to constitutional rights.

civU asset forfeiture. The confiscation of assets (1) by government as a

non-criminal action, not subject to the legal rights of persons accused of
crimes. The victim need not be convicted or even accused of a crime, and the
perpetrator of the civil offense is regarded to be the property and not the
owner. See deodand. (See Reed, 1992).
 Clarke tax 75

civil disobedience. Deliberate violation of laws thought to be unjust, in

order to change them or at least avoid the tyranny or evil of conforming to
them. The term originated with Henry David Thoreau in his essay On the
Duty of Civil Disobedience; he also practiced it by going to jail rather than
pay taxes during the war with Mexico. Civil disobedience was practiced by
Mahatma Gandhi in India and by Martin Luther King’s civil rights move¬
ment. Civil disobedience offers a way to peacefully challenge laws that
violate liberty and to promote liberty, including free markets.

civil law. The law concerning contract and tort, applying person to person
rather than state to person, as with crimimal law, although in modem times
civil law is being applied or misapplied as state to person.

civil liberties. Personal liberties, such as free speech, freedom of religion,

freedom of peaceful lifestyles, and freedom of association. Civil liberty is
tied to economic liberty, since the means are economic, for example to have a
free press, one must be free to obtain and use a press.

civil rights. The legal rights of citizenship, such as voting and becoming a
candidate for elected positions.

civil service. Non-military government employees, ideally appointed and

selected on merit according to uniform rules.

civil society. Voluntary associations and commerce, the rule of law, and an
equality of rights. The transition from socialist central planning is towards
civil society as congruent with market economies.

civilization. Social order, culture, capital goods, and amenities, all of which
are in jeopardy by various forces as identified by those warning of the
‘decline of civilization.’

civitas. Lat. In Roman law, an independent union of citizens, such as were

the Greek city states. Locke stated that the English equivalent is a common¬
wealth.

claim. 1A potential exertion of effective demand. Hence, money is a claim

on wealth, since it is readily accepted within an economy in exchange for
wealth. 2 To request what one is entitled to. 3 To assert a proposition.

Clarke tax. A tax related to demand revelation in collective choice, devel¬

oped by Edward Clarke. Clarke (1971) proposed a tax that charges (1) the
76 class

voter the net marginal cost to others of including his preference in the
decision.

class. 1 A group of students and a teacher. 2 A subset of society with

common economic characteristics, with a relationship of superiority and
subordination between classes, hence a class struggle. In Marxist (Karl
Marx) thought, the two classes are the proletariat and the capitalists, while
Oppenheimer viewed them as landed conquerors, the conquered losing their
lands. In a libertarian (libertarianism) view of classes, the ruling class con¬
sists of those with governing power, who extract wealth from those producing
it, and who impose their values on others.

classical. Referring to classical economics.

classical dichotomy. The split between the real and the financial sides of an
economy. Classical economics states that the determination of the price level
is separate from the determination of output and relative prices. Given some
amount of output, the price level will adjust to the supply of money, that is the
money stock times the velocity of money. Output depends on the market for
factors and not on the money supply. In the short run, money supply changes
can affect output by increasing nominal *demand, but when prices rise, there
can be a reversal of demand, and no long-run effect other than from the
dislocation of relative prices and of resources wasted on ventures that turn out
to be unprofitable. Demand-side theory posits that money changes do affect
output when there are idle resources due to price rigidities. Rational expecta¬
tions theory shows that in the long run, agents (1) anticipate the money ma¬
nipulation, hence lose their rigidity (see Foldvary and Selgin, 1995).

classical economics. A school of economic thought, especially in the UK,

from the mid 1700s to the latter 1800s, emphasizing economic growth, free
trade, and the three factors of production. Key classical economists were
Adam Smith, Jean Baptiste Say, David Ricardo, Nassau Senior, and John
Stuart Mill. Henry George and John Cairnes have been called the ‘last of
the classical,’ although George was critical of some classical concepts such
as Malthusian doctrine. The classical labor theory of value was adopted by
Marxists (Karl Marx) and then turned against market economics; however,
some classical economists, such as Say and Senior, held a subjective value
theory. Classical doctrine posits a long-run subsistence wage due to popula¬
tion growth and the diminishing marginal product of land, but countered by
rising wealth due to growth with free trade. The classical also held to supply-
side macroeconomics, in contrast to the preceding Mercantilism and its re¬
incarnation with Keynes. Geo-economics retains classical elements such as
 clubs, theory of 77

the distinction and importance of the three factors of production and the
distribution (1) of income among the factors. In modern times, supply-side
economics has been termed the classical model. See Sowell (1974).

classical liberal. Favoring economic and civil liberty; ‘liberal’ in the 19th-
century and European usage. In this philosophy, government should mainly
be limited to protection and justice. The lacuna in classical liberalism is
public finance, since classical liberals weaken liberty if a tax on peaceful
effort is permitted in order to fund even the approved functions of the state.
The lacuna can be filled by geo-economic policy or by a libertarianism which
goes further than classical liberalism in rejecting taxation.

classical model. A supply-side model of the determination of output and

the price level. The factor markets (for example labor, with capital goods and
land held constant) determine the amount of labor at market-clearing wages,
which then determines output, hence a fixed (vertical) aggregate supply in
relation to the price level. In demand-side models, some markets do not clear,
and there is excess supply, such as of labor or savings, that is stuck. Free-
market policy would remove interventions that lead to such rigidities, rather
than treating the effects with more intervention and deficit spending, which
in the long run bring inflation and distortions.

clean float. A floating exchange rate without intervention.

clear. 1To offer just that quantity which is demanded (demand (2)), hence
with neither a shortage nor a glut. 2 To present checks for payment among
banks. 3 Lucid; readily understandable and unambiguous. 4 To cover ex¬
penses, or profit after expenses. 5 Correct and unencumbered, as with clear
title.

closed shop. Legally required union (unions, labor) membership in order

to work for a This provides the union leaders with monopoly *power.
firm.

club. An organization providing services to its members. The goods are

collective but typically excludable.

club goods. Excludable Collective goods, such as provided by clubs.

clubhouse goods. Collective goods that are both excludable and congestible.

clubs, theory of. Theory of the determination of the optimum (optimal)

amount of collective goods and membership size of clubs, a key paper
78 Coase, Ronald H.

being Buchanan (1965). Club theory also examines alternative ways of fi¬
nancing the club goods, such as with the rent generated by the club goods
(Fold vary, 1994b).

Coase, Ronald H. (1910—). Coase is famous for his theory of the firm and
especially his Coase theorem in Coase (1960) regarding external effects,
one of the most cited articles in economics. Born in Great Britain, he has
taught at the London School of Economics, the University of Virginia, and
the University of Chicago, and served as editor of the Journal of Law and
Economics. His theory of the firm (1937) states that firms exist to minimize
transaction costs. His 1974 essay ‘The Lighthouse in Economics’ is a case
study of a good that had been assumed to require government funding, but
which in Great Britain in fact had been funded by users (thus inspiring the
logo of The Independent Institute). Coase won the Nobel Prize in economics
in 1991 ‘for his discovery and clarification of the significance of transaction
costs and property rights for the institutional structure and functioning of the
economy.’ His main themes are in The Firm, The Market, and The Law
(1988) and Essays on Economics and Economists (1995). He also wrote
British Broadcasting: A Study in Monopoly (1950).

Coase theorem. A theorem presented by Coase (1960), ‘The Problem of

Social Choice,’ which showed how if parties to externalities can bargain
without transaction costs, and property rights and boundaries are clear
(5), they will attain an optimal solution regardless of the initial allocation of
the property rights: when sparks from a train burn a field, the lesser of the
cost of the damage or the cost of preventing the damage will be paid. Since
transaction costs are high when many parties are involved, the theorem im¬
plies that institutions are needed to cope with the externality, but it also
informs that the reciprocal costs need to be taken into account as well as the
problem of government failure.
The article and theorem influenced the subsequent literature on law and
economics and the economics of property rights.

Cobb-Douglas production function. A production function in which the

factors of production are multiplied together, each factor raised to a power:
Q = A • La • Kb ■ Nc, where Q is output, A, a, b, c are constants determined by
technology and government policy, and L, K, and N are labor, capital, and
natural resources. In most applications, c is zero and the other exponents sum
to one. Cobb and Douglas (1928) simplified the function to two factors (N
usually gets lumped in with K), but stated (p.165) that ‘... We should ulti¬
mately look forward to including the third factor of natural resources in our
equations and seeing to what degree this modifies our conclusions and what
 collect 79

light it throws upon the theory of rent.’ The Cobb-Douglas form is also used
for utility (utility, marginal).

cobweb. A dynamic model whose graph looks like a spider’s web, where
one begins off the market-clearing price and hops from the supply to the
demand curve horizontally and vertically, either converging to market-clear¬
ing or diverging, depending on the elasticities of the curves. For conver¬
gence, the elasticity of the demand curve must be greater than that of the
supply curve. Divergence presumes that the agents don’t learn from past
experience and don’t use futures markets. If farmers pre-sell their produce in
the futures market over some time interval, they add to supply until the future
price is at the cost of production, leading to convergence. Divergent cobwebs
do not contradict the principle of equilibration, since equilibration is based
on known data, and divergence eventually ends.

coerce. To compel someone to do something against his will, or to forcibly

prevent someone from doing what he desires to do. The force can include a
threat of physical force. See also intervention. Liberty is the absence not of
coercion but of coercive harm,.since one may use coercion in self-defense to
prevent the initiation of force. Usually, ‘coercion’ is used to mean an initia¬
tory coercion.

coercion. The act of coercing (coerce).

coercive. Using coercion.

cognition. The capacity (in speed and amount) to perceive, reason, remem¬
ber, and mentally process information. See bounded cognition.

coin. A true coin is an amount of metal with a particular size, shape (usu¬
ally a flat disk), and recognizable picture. These are then used as currency,
based on the metallic content. Similar disks but with a face value much
higher than the metal value are commonly called ‘coins’ but are actually
tokens used as currency.

collapse. A sudden fall or breakdown, such as a fall in the price of one or

more stocks, a business failure, or the breakdown of an economy or govern¬
ment.

collect. To assess (assessment) a charge (1) and receive the funds due.
1 2
To save and arrange examples of a class of objects in an organized way.
80 collectible

collectible. A class of attractive physical items that people collect (2). The
term particularly applies to items no longer being produced or of limited
production, so that if demand increases, the items will increase in value.
*

collective. For and by a group, or (n.) the group itself.

collective choice. Social choice and public choice, decisions made on be¬
half of a group, such as by voters and legislators.

collective goods. Also called public goods, collective goods are simulta¬
neously used by more than one person, the amount used or available to each
person being the whole amount of the good. All other goods are private
(private good (2)) or severable (severable good). Samuelson (1954) laid out
the distinction in mathematical form. In the characteristics approach, it is
the attributes of goods, their characteristics and properties, which is collec¬
tive or private, rather than the physical goods.
Other attributes are sometimes assigned to collective goods, such as their
being non-excludable, with club goods a third category, but the Samuelson
benchmark only distinguishes between collective and severable uses. Also,
the conclusions drawn by Samuelson and others that voluntary, market provi¬
sion is precluded from the very nature of collective goods, that is their
vulnerability to free riding (free rider), is neither logically nor empirically
warranted (Foldvary, 1994b).

collectivism. A family of concepts involving placing power and ownership

in groups rather than in individuals. In forced collectivism, the group has
coercive authority over the individual, while in voluntary collectivism, the
members willingly delegate decisions to the group.

collectivization, agricultural. The confiscation of private (1) and commu¬

nal farm lands, forcing the farmers into large government-run farms.

colonialism. The doctrine and practice of conquering other territories in

order to exploit their natural and human resources, as well as for the prestige
of expanding the ruler’s realm and extending the area of the dominant ethnic
group. The term is still applied to regions in which ethnic minorities are ruled
and restricted by the dominant ethnic group of a country.

command and control. Regulationspecifying methods in detail, such as

requiring specific ways of handling pollution. This is usually less efficient
than levying a charge (1) and letting the firm find its own way to minimize
costs.
 commodity credit 81

command economy. An economy in which the central government plans

and operates production. The enterprises are told what to produce and given
quotas. The result is often poor quality and a shortage of usable consumer
goods. The planning itself often fails, and a black market develops not only
for consumer goods but also among enterprises to overcome the coordination
failures. Ludwig von Mises showed why central planning fails in his book
Socialism (1922).

commanding heights. The vital, most important industries in an economy,

such as banking, energy, and transportation. States such as the Soviet Union
which sought to control an economy took control over the commanding
heights.

commandment. See Ten Commandments.

commerce. The exchange of goods and money, associated transportation

and communications, and related institutions.

commercial. Regarding for-profit enterprise and commerce.

commercial policy. Regulation of external trade.

commercial speech. Advertisements (advertise) and other expressions re¬

lated to commerce. It had not been accorded the same legal protection as non¬
commercial speech, despite there being no distinction in the US First Amend¬
ment, but more recently has been better protected against intervention. How¬
ever, bans on advertising some substances still exist, and some types of
expression such as nudity are restricted in commercial and non-commercial
speech, as well as in commercial activity such as photography.

commission. The wages paid to a salesperson, broker, or agent (2), often as

a proportion of sales.

commodity. Something produced for sale in a Market. More specifically,

the ‘commodity market’ takes place in exchanges that buy and sell items of
uniform quality, such as foods (grains, soybeans, coffee, sugar, cattle), met¬
als, other raw materials, currencies, and derivatives such as indexes of stocks
and interest rates.

commodity credit. Bank loans based on 100 percent reserves, in contrast

to circulation credit.
 82 commodity exchange

commodity exchange. The solution to the puzzle of how in an atomistic

market (atomistic competition) the price of a good can change if no firm can
affect the price. The answer is in the commodity exchange, a central clearing
house of bids and offers for the commodity, in which traders and hedgers buy
and sell spot and futures contracts.

commodity market. See commodity exchange.

commodity money. Money in which the unit of account is a certain amount

of a commodity. In a gold standard, for example, money is gold, and the unit
such as a dollar is defined as a certain weight of gold. The money is not
backed (back) by the commodity; the money is the commodity itself. Paper
notes are backed by the real money. Commodity money may be a basket of
commodities, with a fixed amount of each good.

common. Owned or used by anyone in some domain. Common ownership

means anyone may use the property, and the benefits either go to the users or
are allocated equally to all in the domain. With government ownership, the
government acts like a firm and can exclude persons from the property, as it
" does with military bases. The atmosphere and oceans are commonly owned.

common elements. The collective goods of a condominium, including the

outside walls and roof, the gardens and grounds, parking, and amenities such
as swimming pools and tennis courts.

common law. Law that developed from customs and from court decisions
rather than statute law and legislation, and also distinct from remedies in
equity. Common law is the residual law of countries, states, and provinces of
English descent; the California Civil Code specifically provides that English
common law is the ‘rule of decision’ in the courts of the State. (The term
‘common law’ has different meanings in non-English countries.)

common market. A customs union that permits the unrestricted movement

of capital and labor among the members. A country without internal trade
barriers among its regions is a common market, as is a union of countries
such as the European Union. See also economic union.

common stock. Shares of stock of a corporation which have voting rights.

The other type is preferred stock, which has a prior claim (2) on earnings.

commons. Lands owned collectively by residents of a community. Parcels

may be allocated to certain families, or the usage may be in common, as with
 Community Collection of Rent (CCR) 83

a park. The Enclosure movement took commons front villages and trans¬
ferred them to the aristocracy. See also tragedy of the unmanaged commons.

commonwealth. The common or public welfare. Hence, a government for all

the members rather than a privileged (privilege) class or the ruler. John Locke
in the Second Treatise (paragraph 133) defined it as an independent commu¬
nity, what the Romans called ovitas. The term ‘commonwealth’ is in the title of
four US states, the Commonwealths of Virginia, Kentucky, Pennsylvania, and
Massachusetts. It is also invoked in the British Commonwealth of Nations and
now the Commonwealth of Independent States in the former Soviet Union.

commune. A community jointly owning and operating real estate or an

enterprise. Primal tribes often own territory communally. A modem example
is the Israeli kibutzim. Typically, income is also distributed according to need
or in an egalitarian way.

communism. 1 The common *ownership of property. Most families have

such ownership. 2 Totalitarian (totalitarianism) rule and ownership of pro¬
duction by parties calling themselves ‘Communist’ since, in Marxist thought,
communism would follow capitalism (3) and socialism.

communitarian democracy. Political power centered in small neighborhood

communities. Elected neighborhood councils in turn elect representatives to
higher-level districts, which in turn elect the next higher level, up to the
highest level. This reduces the role of mass media and transfer-seeking,
especially when combined with similarly decentralized public finance.

communitarianism. Values centered on communities, usually coercively

imposed on individuals. However, a market-based communitarianism is also
possible, based on consensual communities (Foldvary, 1994b).

community. A group of people with some common interest and interaction

in its pursuit. Territorial communities have a governing agency that provides
the members in the territory with services. They can be government jurisdic¬
tions or CONTRACTUAL COMMUNITIES. See also PROPRIETARY COMMUNITY.

community charge. So called, a head tax imposed in the UK in 1989-90

to replace real-estate taxes. There was popular opposition, and the tax was
repealed.

Community Collection of Rent (CCR). The view that land rent properly
belongs to a relevant community, whose governing agency collects it from
 84 commuting

siteholders on behalf of the members. The rent funds can be spent for com¬
munity services or paid to the members as an equal citizen dividend. The
implementation of CCR by a government is commonly referred to as land-
value taxation (land-value tax). The payment by a landholder is called a rent
assessment. CCR is called the ‘public collection of rent’ when the community
is large.

commuting. Travel from residence to work and back. Interventions creat¬

ing long and congested (congestion) commuting include a property tax sys¬
tem that induces sprawl, the implicit subsidy of automobile use, the lack of
congestion pricing, dysfunctional financing of public transit, and restrictions
on private transit such as jitneys.

company. A for-profit firm, or more specifically in the UK, a corporation.

comparable worth. Legislation intended to eliminate discrimination (dis¬

criminate) against women by requiring equal pay for work of comparable
value based on qualifications. Besides infringing on the rights of the owners
of enterprises, comparable worth is based on the long-rejected labor theory
_ OF VALUE.

comparative advantage. An advantage in opportunity cost, that is having

a lower opportunity cost. An example is a doctor who hires a nurse. Even if
the doctor can nurse better, the nurse is hired because the doctor has a high
opportunity cost in lost earnings if the doctor were to do nurse’s work.
Similarly, one country may have an absolute advantage over another in
many goods, but if the less productive country has a relative advantage in
some goods, trade is worth while. Each worker, firm, or country specializes
in those goods for which they have comparative advantage, to mutual gain.
The concept of comparative advantage was discovered by Torrens and
others in the early 1800s, and is most commonly associated with David
Ricardo. John Stuart Mill added to the theory by including reciprocal demand.

comparative economic systems. The study of economic systems such as

market economies, mixed economies, and command economies, contrasting
their operation and performance. It may also include theoretical systems not
currently implemented.

comparative statics. Coined by Oppenheimer (Schumpeter, 1954, 1986, p.

855), it is the comparison of a new and old equilibrium after some exogenous
change has altered the old one. For example, a shift in demand will result in a
new price and quantity. The alternative method is dynamic analysis.
 compound interest 85

compensation. 1 Payment received for losses or paid-for benefits. 2 In¬

come.3 Adjustment for income, as with the compensated demand curve, in
which the income effect (extra purchasing power due to a fall in price) is
removed, thus holding real income constant.

compensation principle. Well-being is increased if, after some change,

any losers are compensated (compensation (1)) by the gainers to their mutual
satisfaction. Nicholas Kaldor elaborated it. It is market-based for actual com¬
pensation, rather than hypothetical compensation which does not take place,
hence does not really compensate.

compete. To engage in rivalry, or to be successful in rivalry, especially by

increasing one’s relative share of the market.

competition. Rivalry among economic agents (1), both among those sell¬
ing and those buying goods. Each buyer or seller is in effect bidding or
offering against the others, because buyers cannot all have a scarce (1) good
and sellers cannot sell their good if others can sell it for less. Competitive
markets thus tend to reduce supernormal profits if there is entry into the
field, and they allocate resources to the goods most desired by consumers.
See also atomistic competition, concentration.
A related meaning of ‘competition’ is the degree of monopoly or any
monopolistic power, more competitive industries having less monopoly power.
Having more competitors reduces the ability of firms to control the price of
their products (see perfect competition). However, the presence of market
power does not imply an absence of rivalry, hence of competition.

competitiveness. The ability to successfully compete with other firms or

other economies. For countries, a measure developed by Feenstra and Rose
(1997) is the degree to which a country exports new goods earlier than others.

complement. A good that tends to be used in conjunction with another

good, like cups and saucers. Technically, complementary goods have a nega¬
tive cross elasticity of demand. See also perfect complement.

compliance cost. The cost of complying with regulations and taxes. The
annual cost in the USA has been estimated at $677 billion, $6800 per house¬
hold (Crews, 1996).

compound interest. Interest that is periodically paid on the accumulated

past interest as well as the principal. The final amount in t years for interest
rate i for principal p is p times (1 + i)‘. The period can become infinitely
86 concentration

small, in which case interest is continuously compounded, with the formula

en. The time for money to double with continuous compounding is 69 di¬
vided by the interest rate.

concentration. A measure of the number and relative size of the units in a

distribution (3), such as firms in an industry (2), directly proportional to the
inequality (index) and inversely proportional to the number of units of a
distribution (3), hence C = I / N (Foldvary, 1995). Concentration can be
measured as various ratios (percentage of the total held by the top n firms), or
a measure of the whole distribution. The most common total measure is the
Herfindahl index (H). A completely concentrated industry is an absolute
monopoly, with H = 1, while a highly unconcentrated, atomistic, industry has
a H close to zero. Hall and Tideman (1967) developed an alternative meas¬
urement that is related to the Gini coefficient of inequality. The inverse of
concentration is diversification.
Conventional economists deem high industry concentration to be less com¬
petitive, while more free-market-oriented analysts see rivalry even with few
firms (indeed, the most successful competitors), global competition lowering
the effective concentration, and government countermeasures not helpful to
consumers. Economies of scale produce efficiencies as well.

concentration ratio. The percentage of market share held by the largest n

firms, n usually set from 4 to 8. These ratios are published in the Census of
Manufacturers. While economists typically believe that low concentration
ratios indicate more competition, the Austrian (Austrian economics) concept
of competition as rivalry implies that rivalrous competition can occur with
higher ratios, although it is generally agreed that barriers to entry create
social WASTE.

concept. An idea about some class of items that constructs some mental
image of it. For example, a ‘firm’ is a concept.

conceptual realism. The treatment of mental constructs or ideal types

such as ‘national income’ as having the reality of a concrete existent, what
A.N. Whitehead called the ‘fallacy of misplaced concreteness (Greaves, 1974,
p. 24).’

concrete existent. A tangible object, rather than a mental construct. A

‘government’ is a mental construct, while an apple is a concrete existent. A
police officer is a mental construct, while the human being and the uniform
are concrete existents. But even concrete existents are theory-laden, that is
interpreted with meaning.
 congestion 87

conditional right. A moral or legal right subject to a condition. For exam¬

ple, a license gives one the legal right to drive a car on the condition that one
is not intoxicated.

conditional theory. Theory of the form: if X then Y. The theory does not
assert that X is necessarily true, but if X is true, then the theory states that Y
is TRUE.

condominium. An association with individual units of property and com¬

mon elements in which each unit is assigned a percentage interest in the
common elements, which is also its percentage of the vote and of the assess¬
ments (2). Hence, the association itself owns nothing. The economic effect is
that the amenities and other common elements generate site rent, which is
then collected (collect) as the assessments, an example of private geo-
economic financing.

Condorcet, marquis de (1743-94). French political theorist who discov¬

ered the possibility of majority-rule cycling in social choice (see impossibil¬
ity theorem). He also proposed the ‘Condorcet’ system of pairwise voting,
comparing every pair of candidates, but this too can cycle.

confederation. A union of organizations, usually sovereign states, in which

each state retains substantial domestic governance. The USA were a confed¬
eration prior to the adoption of the Constitution. The public finance can
either be confederate-wide revenue collection or payments by the states to the
confederation.

confiscation. A seizure by a government. It is not a normal tax that can be

anticipated, but a sudden taking of property without compensation (1). Illegal
substances are often confiscated, but also governments have confiscated prop¬
erty to nationalize (nationalization) it. In the USA, all levels of government
confiscate property as civil acts. See civil asset forfeiture, deodand, seizure
AND FORFEITURE.

congestible. Of a collective good, having a marginal cost of admitting

another person into the domain. A congestible good is capable of becoming
crowded, crowding being a disutility.

congestion. Crowding. The disutility of an extra person because it leaves

less available space and fewer resources per person. One countermeasure is
to charge (1) a user fee proportional to the congestion, such as a higher
88 congestion fee

bridge toll at peak use. Greater density in general, however, can also have
increasing returns from larger markets and a greater division of labor.

congestion fee. A fee (1) charged to a user of a congestible good. Exam¬

ples include bridge tolls during rush hour, higher fees for public transport
during crowded hours, and higher telephone charges during business hours.

conjecture. A proposition that seems plausible but has not yet been war¬
ranted (warrant). See also hypothesis, speculation, theorem.

conscription. One of the categories tracked in Economic Freedom of the

World 1775-1995 (Gwartney et al, 1996), conscription or a military draft
forces people into the military. Besides being involuntary servitude, conscrip¬
tion is a selective tax with an economic cost of what the conscripts would
otherwise produce. An all-volunteer army shifts the cost to the whole popula¬
tion and lets those with lower opportunity costs enter the service.

consensual community. A voluntary community, for which membership is

voluntary. These include proprietary communities and civic associations.
See CONTRACTUAL COMMUNITY.

consensus. A general agreement arrived at not by voting but by discussion

until differences are resolved; some may go along without agreeing if judg¬
ments are not converging and they believe that some decision is better than
none.

consensus facit legem. Lat. Consent creates law. Hence, contractors create
their own private law.

consent. Agreement with the acts and proposals of others; conjoint will.
The point has been made that true consent is actual, or overtly expressed: the
alleged tacit consent of law (because one does not move away) is not a true
agreement, but can be due to the higher cost of moving, just as a choice
between two unpleasant prison cells is not a free choice to be in either. One
may consent operationally, relative to the alternative current choice under
current constraints, but not constitutionally, given an alternative set of con¬
straints one would prefer. See constitutional economics.

consequences. The results of a decision or set of rules. See unintended

CONSEQUENCES.
 consideration 89

consequent. In the conditional statement ‘if X then Y,’ X is the antecedent

and Y the consequent. See deny the consequent.

consequentialism. The view, usually utilitarian (utilitarianism), that the

proper moral criterion for policy consists of the consequences. An alternative
view is deontological ethics, such as that of natural rights, that a policy
which violates natural rights is wrong regardless of the consequences, and
that which does not violate rights should be considered by the respective
agents by whatever criteria they choose. A third view is that natural rights
themselves are based on consequences, so that a partial and conditional
consequentialism is built into the rights’ position. A problem with
consequentialism is the determination of the consequences, given subjective
values, the arbitrariness of the time horizon, and the impossibility of know¬
ing all the intended, let alone the unintended, consequences.

conservation. The act of conserving (conserve).

conservativism. The ideology of conserving (conserve) the prevailing cul¬

ture and power relationships. Conservatives as a type typically view their
culture as superior or morally correct, hence they wish to restrict other
cultures, including religions and expressions. They oppose the egalitarian
(egalitarianism (1)) treatment of women or minorities currently in a subordi¬
nate power relationship. They favor the power structures of the state, church,
and military, and thus promote nationalism and the sanctity symbols of power
such as the national flag. Where market economies are current, they oppose
government intervention that imposes restrictions on current powers over
enterprise and property, but do not favor radical changes such as complete
FREE TRADE.
Hence, while often opposing greater economic intervention, conservatism
also typically favors substantial government control over expression and
opposes enterprise that expresses alternative cultures in sexual expression,
clothing and body coverage, religious practices, drug production and use, and
non-traditional occupations by males or females. In the USA, the label is
confused, since some classical liberals are labeled conservative due to their
opposition to economic intervention. Thus, Hayek wrote an essay on ‘Why I
am Not a Conservative’ as a postscript to The Constitution of Liberty (1960).

conserve. To economize or to keep from damage.

consideration. Something of value paid in exchange for receiving a good

or service.
90 consol

consol. A bond that never matures, paying interest until the issuer buys it
back. A compounding consol would pay interest in other consols rather
than in cash. Originally, a consol was an annuity issued by the British
government for the ‘consolidated funds,’ replacing a variety of bonds and
funds.

constant dollars. When comparing dollar (or other currency) amounts in

different years, adjusting the values for inflation using some base year, for
example using 1996 dollars, so that one compares real (3) amounts of what
is measured.

constitution. The fundamental rules of an organization, not dependent

upon or authorized by other rules. Hence, a constitution consists of the
supreme rules, from which all the other rules are derived. Constitutions are
also called charters, articles of association, and master deeds.

constitutional economics. Part of public economics, it studies the choice of

constraints rather than choice within constraints, as defined by James
Buchanan (1990). At the constitutional level, one freely chooses to join a
consensual community by accepting its rules, thus achieving unanimity. The
rules then provide for representative and majority rule for the operational
level, where it is efficient. Constitutional economics examines various alter¬
native rules to determine which constraints and empowerments best mini¬
mize transfer-seeking or inefficiency. The journal Constitutional Political
Economy is devoted to that field.

constitutional failure. The violation of constitutions by governments be¬

cause the constitutional structures failed (fail) to be specific enough or be¬
cause the constitution failed to provide adequate enforcement structures and
processes. When power is usurped by a tyrant who ignores the constitution,
the constitution is overpowered, rather than a failure. Failure is due to a
constitution’s own inadequate provisions.
The US Constitution’s First Amendment, for example, states that Congress
shall pass no law restricting the freedom of speech, yet Congress has re¬
stricted expression in broadcasting as well as commercial speech. The Con¬
stitutional guarantee against takings is violated by seizure and forfeiture
confiscation. The Ninth Amendment recognizing non-enumerated rights is
almost ignored, and the Tenth Amendment limiting federal power is over¬
come by grants of funds to the states conditional on meeting requirements,
and there are mandates to the states despite the dual sovereign powers of the
states and the federal government.
 consumer sovereignty 91

constraint. Something that restrains and confines, such as constitutional

provisions limiting the powers of government, or a hard budget line limiting
spending. A ‘soft’ budget constraint can be stretched. Mathematical eco¬
nomic models typically find the optima (optimal) of variables subject to
some constraint.

constructive possession. Having the power and intent of control.

consume. To use up economic value. When one consumes food, one uses it
up, so there is no value left. When one consumes an automobile, the con¬
sumption is the depreciation (1), or wear and tear, since the car still has value
and has not been used up.

consumer. One who purchases consumer goods.

consumer durable. A good which is a final good, not used to produce

other goods, but is not used up all at once, but over time, hence is durable and
is effectively a capital good providing services over a long duration. Exam¬
ples include cars, furniture and refrigerators. Their production is related to
real estate, since a new house or office needs furnishings. In US national
accounting, they are classified as consumer goods.

consumer goods. Goods that are final products (not used to produced any¬
thing else) and are intended to be consumed (consume). Consumers include
individuals, families, organizations, and government.

consumer goodwill. A favorable view of a firm by consumers.

consumer price index. An index (indexed) of price inflation for a typical

basket of consumer goods (there is also a retail price index). Since consumer
goods are constantly changing, there is no clear (3) way to construct such an
index. It has been thought that in the USA, the CPI is too high because it does
not take into account improving quality and shifts to lower-priced substi¬
tutes. See core inflation rate.

consumer sovereignty. Freedom of choice in consuming (consume), a fun¬

damental element of a market economy. In mixed (mixed economy) and
interventionist economies, consumers do not have full sovereignty, since
some products are restricted, prices are skewed, and much of consumption is
imposed collectively (collective).
92 consumer’s surplus

consumer’s surplus. A consumer’s purchase price being less than the most
he would have willingly paid, hence the difference is his surplus. In graphs, it
is the area between the demand curve and the price. There is also a producer’s
surplus.

consumerism. A movement to provide more information, honesty, and

standards for consumer goods. Critics say this creates excessive regulation,
since the remedy for fraud should be via the courts.

consumers’ cooperative. A cooperative that sells consumer goods to its

members as well as to the public. They can provide specialized goods, more
consumer information, services such as home economists, and can boycott
disfavored firms and products. The members share in any profits as dividends
in proportion to shares owned or rebates on the amount of their purchases.

consumption. The act of consuming (consume), or using up economic

value. The amount or value of goods consumed.

consumption function. Consumption (or purchases of consumer goods) as

a function of income. Keynesian economics posits a linear function that
includes a variable for autonomous consumption, the amount that would be
consumed even at zero income. Since the slope of the function is less than
one, a lower proportion of income is consumed as income rises. Empirical
studies show that in the long run, autonomous consumption is zero, so that
consumption is proportional to income. This demolishes the Keynesian model
of income determination, which depends on a consumption function crossing
the income line, with investment and government riding on top.

consumption tax. A tax on income not saved. This can be a sales tax or an
income tax with savings exempt. While income taxes penalize savings, con¬
sumption taxes penalize borrowing (borrow), since one has to borrow extra
to also pay the tax, and then pay interest on the extra borrowing. While a
sales tax reduces the record-keeping and form-filling burden of individuals,
there is otherwise no economic reason to favor consumption taxes over in¬
come taxes, since the excess burdens are similar. The burden of taxes on
consumption ultimately fall on the factors generating the income, such as
wages. To remove disincentives, taxes both on income and on consumption
need to be removed.

contestability. The feasibility of a firm entering an industry (2), a perfectly

contestable one being no cost barriers at all.
 cooperative 93

Continental currency. Paper money issued by the Continental Congress to

help pay for the American Revolutionary War. The currency was so inflated
that, as the saying goes, it was ‘not worth a continental.’

contingent valuation. The pricing of items that don’t have commercial

markets by presenting persons with hypothetical choices and asking them
how much they would be willing to pay or be paid to obtain them. This is
used for environmental cost-benefit analysis, although it is criticized, since
the answers may not be meaningful. An alternative is demand revelation.

contract. A voluntary agreement creating mutual obligations among com¬

petent parties. Correctly completed contracts are enforceable by law. Some
agreements, such as a chattel slave (chattel slavery) contract, are legally or
morally not enforceable. See also social contract.

contractarianism. A social philosophy as Well as constitutional econom¬

based on a constitutional contract, that is, an agreement on a constitution,
ics
which forms the basis for further operations. What is right or wrong is
whatever the contractors agree to.

contracting out. The provision of a service by government by contracting

the production to a private (1) firm. This is often more efficient because the
private firms are in competition and have more flexible labor policies and are
less subject to political influences. It privatizes production but not provision.

contractual community. A proprietary community or a subdivision com¬

posed of multiple owners bound by contract in an association; either one is
a voluntary association at the constitutional (constitution) level of joining
the community and agreeing to its basic law.

convertibility. Of a currency, the ability to convert it to another currency

or to GOLD at MARKET PRICES.

cooperative. A nonprofit corporation in which the shareholders are mem¬

bers each having one vote. The main types of co-ops are producer, consumer,
housing, and financial, for example credit unions. They achieve the socialist
(socialism) aim of workers and consumers owning their means of production
and distribution (2), while in a market context. These are outcomes of a
cooperative movement that began in Rochdale, England, in 1844, which not
only seeks to form cooperatives but to move society towards greater coopera¬
tion and less conflict. A motto of cooperatives is ‘cooperation among co¬
operatives.’ See also consumer’s cooperative. The Mondragon workers’ co-
94 cooperative individualism

operatives in the Basque region of Spain is an example of cooperative suc¬

cess. In a housing cooperative, the member owns a share of the whole
property and leases his unit from the co-op.

cooperative individualism. Individuals freely joining associations and co¬

operating with one another rather than achieving ends through conflict. Some
advocates such as Edward Dodson also include geocratic (geogracy) princi¬
ples.

coordination. Bringing plans and activities into mutually beneficial align¬

ment. The market coordinates individual plans via prices and profits.

copyright. The legal protection of a text from copying. The legal notice is
in effect a contract between buyer and seller, saving transaction costs. Copy¬
rights recognize that labor products can be intangible, but as a contract and
extension of the author’s mind, it would seem that a copyright should expire
with the death of the author. Some free-marketeers do not favor copyrights.

Coquelin, Charles and Guillaumin. Editors of Dictionnaire de l’Economie

Politique (1853), Coquelin writing the article on political economy.

core. A set of equilibrium prices.

core inflation rate.The consumer price index excluding volatile prices as

with many food and energy products.

Corn Laws. Laws until 1846 which taxed and prohibited grain imports to
prop up the price. Classical economists recognized that the effect was to
increase the price of farmland while hurting consumers, and urged the repeal.

corn model. A model in classical economics used by Ricardo and George

to illustrate the determination of wages and rent, using a single product, corn.
This model is now ignored in neoclassical economics and economics text¬
books. It is still central to geo-economics. The wage level is set at the rent-
free margin of production, and the corn output of more productive land is
rent.

corporate income tax. A tax on the profits of corporations. In the USA,

this is an excise tax on the privilege of operating as a corporation, the tax
measured by the profits of the firm. Since dividends are subject to tax as
well, corporate income in the USA is subject to double taxation. The UK has
an imputation system in which the tax is levied whether or not the profits are
 cost-benefit analysis 95

distributed as dividends, shareholders getting a tax credit for the tax paid by
the company.

corporation. Also called a joint stock company or a limited company, a

firm with an independent legal status as an artificial person, whose owners
usually own tradable shares. The shareholders have limited liability; only
their investment is at risk. A board of directors elected by the shareholders
is responsible for the operations. This structure enables corporations to obtain
large amounts of funds for investment. Principal and agent problems arise,
such as weak boards, high salaries for executives, and stock options as
delayed costs.

correction. A decline of 10 percent or more in the price of a stock of stock

market average. If the decline continues, then it becomes a bear market or, if
sudden, a crash. A decline supposedly ‘corrects’ for an increase that was not
warranted by the fundamentals of the firm or economy.

corruption. A payment to a government official to give the payer some

private (1) advantage beyond that provided by law. Also, the exercise of
power and taking of assets by a government official beyond that warranted by
law.

corvee. Fr. Forced unpaid labor.

cosmos. Gk. Kosmos The ordered universe. In society, the spontaneous

order, or what Hayek called the extended order (see Chapter 2, Hayek,
1973).

cost. A loss, or what must be paid in order to obtain something. Economi¬

cally, a cost is the opportunity that must be foregone in order to obtain
something. The true cost of buying something is not the money paid, but the
next best thing one could have obtained with the funds. This ‘opportunity
cost’ concept, developed by Wieser, includes the time and resources involved
in obtaining an item. Costs imposed on others are called externalities, ver¬
sus costs one bears, which are private costs. The private costs plus the
externalities equal the social costs (social costs and benefits). See also
HISTORIC COST.

cost-benefit analysis. A major tool of applied economics, it evaluates the

gains and losses of a project to determine the expected net gain. For govern¬
ment projects or the evaluation of projects that impact the public, many of the
costs and benefits are difficult to quantify, since they are subjective and do
96 cost of living

not trade in markets. The appropriate discount rate (1) may also not be clear
(3). Politically, the analysis is subject to manipulation. Still, it is often better
to do the analysis badly than not to do it at all, since a written report at least
provides a focus for debate and may prevent blatantly inefficient practices.
One possible measure of the costs and benefits of territorial goods is rent,
since amenities increase the rent and negative externalities decrease it. Thus,
a good should be provided at the amount for which the induced marginal rent
equals the marginal cost, where the marginal rent is declining.

cost of living. The measured by an index, of consumer

price level, goods,
including the consumption of housing services.

cottage industry. Production for markets that takes place in home residen¬
cies, commonly using telecommunications.

council. Representatives elected as legislators or administrators, similar to

a board of directors. Also, a group of advisors.

countercyclical. Moving in the opposite direction of the business cycle, or

policy that is intended to counteract the cycle. Such policy that treats effects
rather than causes (1) may lead to long-term economic distortions and debt
burdens.

country fund. A mutual fund that invests in shares of a foreign country or

region.

coupon. The nominal interest rate of a security, or a warrant presented for

payment of the interest.

covenant. An agreement, especially in real estate. Civic associations typi¬

cally have covenants specifying how alterations to the individual and com¬
mon properties may be done, so as to conform to community standards. The
basic covenants can be in the master deed, hence unchangeable, unlike mu¬
nicipal zoning that can be changed. For example, forests can be preserved in
perpetuity by a covenant.

crack-up boom. The term used by Mises for the final stage of accelerating
inflation, in which there is a flight into goods as the money system breaks
down.

crash. A decline of 20 percent or more in a market index within a few days,

as with the US stock market in 1929.
 credit squeeze 97

creative destruction. The replacement of old products and technology with

new ones brought forth by successful entrepreneurs. The term is associated
with the Austrian economist Joseph Schumpeter (1976).

credentialism. The requirement of degrees for positions for which educa¬

tion has little to do with the jobs. Diploma inflation occurs when the supply
of credentials increases more than the positions really requiring them, allow¬
ing employers to upgrade the standard for qualification. This is rational for
employers, since the credentials serve as a proxy for the needed skills, but not
for employees, who need to invest too much in education. The excessive time
required for job credentials may reflect the subsidy of college education and
the resultant cultural (culture) prestige of diplomas.

credible. Believable policy due to past performance and structures to remedy

exploitation of the belief. Constitutional provisions are more credible since
they are more difficult to change, unless the government can easily ignore or
evade constitutional law. Ultimately it is actual structures (strucutres of gov¬
ernment) and performance rather than promises and texts that provide credibility.

credit. 1A loan of funds or goods, or the ability to readily obtain a loan. 2

An accounting entry on the right side of a double-entry account. 3 An in¬
crease in the amount of funds, hence a tax credit offsets a tax liability, and
crediting an account adds value to it. 4 The ability of borrowers to pay back
their loans, thus the availability of ready loans.

credit creation. The expansion of the money supply by a banking system

using fractional reserves (fractional reserve banking) by loaning out funds
in excess of the original deposits. Funds lent are redeposited into the banking
system and loaned out again, minus a reserve, hence it multiplies into new
money according to the credit multiplier. With free banking, or competitive
note issue and redemption of notes into base money, the expansion is limited
by the public demand for money. For central bank *monopoly (1) money,
there is no limit to the credit and money creation.

credit money. Banknotes and bank deposits.

credit multiplier. The ratio of credit creation to an increase in the reserve

assets (or a decrease). It is basically l/(c + r), where c is the ratio of cash to
bank deposits, and r is the banking reserve ratio.

credit squeeze. A reduction in the rate of increase in the money supply by

the monetary authority, raising interest rates and reducing credit (1) for
98 credit transfer

investment, thus slowing growth or inducing a recession. It can also take the
form of restrictions imposed by government on lending.

credit transfer. A transfer of funds from one agent’s (1) account to anoth¬
er’s. Giro (giro system) banks and the LETS system operate this way without
checks.

credit union. A cooperative which pools members’ savings and lends only
to its members. They are often formed from a group with some common
interest. The aim is better service for the members, especially those with
modest accounts.

crime. An act (1) contrary to law. Organized crime is committed by organi¬

zations who often commit extortion and monopolize some industries and
territories for some legal as well as illegal products. In some economies,
organized crime dominates many sectors in conjunction with a corrupt gov¬
ernment, forming a kleptocracy. Morally, government commits crime when
it acts contrary to natural law.
The ‘economics of crime’ applies theory to crime, including concepts such
as criminals’ decisions based on the costs/benefits of crime. The economic
analysis of law enforcement and crime reduction is another field.

crimes without victims. Also called ‘victimless crimes,’ the prohibition of

acts (1) which do not coercively (coercive) harm others. The criminalization
of victimless acts is also an economic intervention, since they restrict and
prohibit associated enterprise, which then flourishes in the underground
ECONOMY.

cross-elasticity of demand. The responsiveness of the quantity sold of a

good when the price of another good changes, measured as the percentage
change in quantity divided by the percentage change in price.

crowding out. A decrease in private investment (1) due to government

borrowing which raises interest rates or to taxation that reduces funds
available for investment as well as the incentive to invest.

crown lands. In Canada and England, lands belonging either to the sover¬
eign (monarch) or to the government or the nation.

cui bono .Lat. For whose good. In analyzing actual policy, the investiga¬
tion of who is benefitting, or which interest groups would benefit.
 current account 99

culture. The cultivation of the mind, hence the totality of the human dis¬
coveries and creations (beliefs, attitudes, practices, institutions, and artifacts),
of a people that have a common history. Culture co-determines economic
activity along with purely economic (incentive) elements. Some cultural ele¬
ments are enforced by governments, intervening (intervention) in dissenting
subcultures.

culture of poverty. The culture of some poor people whose attitudes,

beliefs, and habits contribute to the barriers that keep them in poverty.
Regulatory and tax barriers combined with disincentives of the welfare sys¬
tem reinforce the cultural barriers.

cumulative voting. A voting system in which each voter has a number of

votes and may allocate them to any one or more of the candidates. This
measures the intensity of preference. This method is often used for share¬
holders of corporations.

currency. The circulating cash of a particular country. Currency apprecia¬

tion is the rise in value of a currency relative to others. Currency depreciation
(2) is the contrary. Currency devaluation is a reduction in the exchange rate
when it is fixed by government. The increase in the fixed value is a currency
revaluation. A currency reform replaces a currency which has been inflated,
often with many zeros in the denominations, with a new, sounder currency,
sometimes with a change of name. Currency risk is the possibility of changes
in the value of a foreign currency which then affects the profit of an invest¬
ment.

currency principle. The proposition of the currency school that monetary

stability is best achieved by controlling the amount of currency using an
automatic rule system, mainly by the amount of gold.

currency school. A 19th-century British school of thought regarding money

and banking which advocated the currency principle in opposition to the
BANKING SCHOOL.

current account. 1 The accounting of income and expenditure for con¬

sumption, operations, and short-term items, rather than the long-term major
investments that are entered into the capital account. Normally, it is good
practice to fund current expenses from current income unless one really
wishes to reduce future consumption in order to finance current consumption.
2 A British checking account paying no interest.
100 current charges

current charges, user fees.

current dollars. Dollar (or other currency) measurements not adjusted for
price inflation, hence nominal rather than real (3) comparisons. Adjusted
dollars are constant dollars.

custom. Traditional practice and belief, some of which is formalized and

made compulsory by law.

customer. One who buys goods. Because he has money, which is generally
accepted, and the seller has goods that he needs to sell, the customer is
normally in a better bargaining (bargain) (2) position, hence is catered to by
the seller (‘the customer is always right’).

customs duties, tariffs.

customs union. A trading bloc of countries such as the European Union, in

which trade barriers among members are eliminated and a common set of
trade barriers are imposed on countries outside the bloc. See also common
market, economic community, free-trade area. While increasing trade within
the bloc, the union can divert efficient trade from outside the bloc to the
inside, where production is less efficient but the price is lower due to the
absence of tariffs.

cyber. Concerning media created by computers and the internet system,

including communications, data, and institutions such as gopher and the
world wide web. These are also referred to as ‘virtual,’ since the objects are
not the tangible equipment but the intangible data, relationships, and other
MENTAL CONSTRUCTS.

cybergovernance. Self-governance in virtual or cyber communities. Coined

by Richard MacKinnon.

cyberlaw. Law regarding cyber or virtual communities.

cybernation. The increased use of computers and electronic communica¬

tion and data, often with substitution of such capital goods for labor.

cycle. A similarly repeating series of fluctuations. The main ones in econo¬

mies are seasonal cycles, agricultural cycles, and business cycles, also called
trade cycles.
 cycling 101

cycling. Any system of voting on several issues that has no determined

solution, given individual preferences. See impossibility theorem.
s]

'
 D

Darwinism. See evolution.

Davenant, Charles (1656-1714). A writer of economic pamphlets and

disciple of Sir William Petty. He stated that restrictions on trade serve special
interests rather than the public interest. Other insights of his were that a bill
of exchange becomes a money substitute and that the final incidence of taxes
(incidence of taxation) rests on land.

Davenport, Herbert J. (1861-1931). An institutionalist (institutional eco¬

nomics) who developed some Austrian-type (Austrian economics) concepts
regarding value, cost, and capital theory (Gunning 1997a, 1997b). He also
wrote on public finance, including arguments against Henry George’s single
tax, although he sympathized with its aim of deriving public revenue from
income not due to effort. His works include Value and Distribution (1908)
and Economics of Enterprise (1914).

David Hume Institute. A research institute in Edinburgh founded in 1985.

Sir Alan Peacock was its first executive director. Its research, publications,
conferences and other events have been primarily concerned with market
approaches to public policy, and it has attracted support from Nobel laureates
in economics such as Professors James Buchanan, James Meade and George
Stigler.

de minimis non curat lex. Lat. The law does not concern itself with triviali¬
ties. Hence, trivial negative externalities are not actionable (action) in a
MARKET ECONOMY.

deadweight debt. Debt not covered by any asset, as is the case with most
national debts.

deadweight loss. A loss of producer’s or consumer’s surplus stemming from

the price of a good being higher than marginal cost or to a tax that increases
the cost. A lower quantity is purchased than would be the case without a tax or
under ideal conditions, such as the elimination of artificial barriers to entry.
However, if this loss is based on an unrealistic comparison with ‘perfect’
competition, it is no real loss, since one cannot lose what one cannot gain.

103
104 death tax

death tax. A tax on the property of a person who dies or its transfer, hence
an inheritance or estate tax. Since the income and wealth were already taxed
when obtained, the death tax is a form of double taxation. However, in the
USA, capital gains escapes taxation upon death, since inheritors receive it on
a stepped-up basis, although the asset may be taxed as a whole. (See step up
of basis.)

debenture. A bond backed by the general credit (4) of the company rather
than its specific property.

debit. Acc. The left side of a double-entry account (2). The right side is a
credit.

Debreu, Gerard (1921—). French-born American economist, professor at

Chicago, Yale, and Berkeley, and winner of the 1983 Nobel prize in econom¬
ics for his mathematical proof of the existence of general equilibrium. With
Arrow he confirmed Walrasian (Leon Walras) equilibrium prices with the
use of set theory and topology, and he showed how a competitive (competi¬
tiveness) market ensures a stable allocative efficiency. His major book is
The Theory of Value, an Axiomatic Analysis of Economic Equilibrium (1959,
1971). While Austrian (Austrian economics) and other economists question
the relevance of the general equilibrium construction, the demonstration of
the theoretical soundness of an ECONOMY-wide market even under unrealistic
assumptions nevertheless is a bulwark against accusations of chaos by critics
of the market.

debt. The net amount of assets borrowed (borrow), which one is obligated
to repay. When public revenues are based on land rent, then the debt be¬
comes capitalized (capitalization) into lower land values, since it is a liabil¬
ity on future rents. This would create an incentive to avoid unproductive debt.

decentralization. The shift of government bureaus and operations from the

central government to the lower levels of government, bringing them under
more direct and local control. This increases flexibility, incorporates decen¬
tralized knowledge, and reduces the bureaucracy and political influences of
the central government.

decision lag. The time interval between the recognition that some policy
action is desired, and the policy decision.

decision theory. The theory of rational decision making. Some companies

use such theory in their planning process. A related field is game theory. One
 defamation 105

common decision-making method is to list the weighted benefits and costs of

the decision. Another technique is a determination tree, starting with the
major options, and then, successively, for each subordinate option, setting
down the subsequent options and their likelihoods. A branch of decision
making involves group decisions, which can weed out error, but can also tend
to conformity, especially with the leader. Intuition - subconscious reasoning
- is part of the decision-making process used by successful entrepreneurs.
See also rationality.

deconstruction. 1 The disassembly of a theory by breaking it into parts and

mercilessly examining each part. Two key questions in this process are ‘what
does this mean’ and ‘how do they know.’ Texts which superficially seem
reasonable can often be revealed as meaningless, contradictory, and/or un¬
warranted. 2 A philosophy and movement developed by the French postmodern
philosopher Derrida that we cannot obtain knowledge of reality, hence we
can only comment on the texts of ideas, but in that case, the deconstruction
(2) is itself also an unwarranted and meaningless text.

decriminalization. Legislation which makes acts (2) that were formerly

crimes subsequently non-criminal.

deduction. 1 A subtraction, such as from taxable income. Income taxes

skew expenses and outlays towards those that are tax deductible. 2 A logical
conclusion.

deductive method. The methodology of deriving propositions, hence theory,

from premises. In a field of science, universally applicable theory is derived
from general axiomatic propositions. Classical, neoclassical (neoclassical
economics), microeconomic, Austrian (Austrian economics), geo-economic,
and other schools and bodies of economic theory use axiomatic-deductive
methodology for their pure theory, though not to the exclusion of specific
empirical studies. See foundational, praxeology.

deed. A written agreement, especially to convey title to real estate.

deed fee. A user fee paid to a community in return for holding a title to
LAND.

defamation. Libel or slander. As a deliberately deceptive ruining of anoth¬

er’s reputation, it is a type of fraud, although some libertarians (libertarian¬
ism) would not prohibit it.
106 deficit

deficit. The excess of expenditures over income (budget deficit) or imports

of goods exceeding exports (trade deficit). Whereas it is normally sound
economic practice to avoid budget deficits on current accounts, demand-side
advocates have claimed that government budget deficits provide beneficial
economic stimulation. Aside from creating a political bias towards deficits
even during boom times, the policy can lead to long-term distortions and
instability, and also does not confront the causes of depression. See Buchanan
et al.. Deficits (1986).

definist fallacy. Defining a concept with a different word for the same
concept or in a manner biased towards one’s argument, so that the conclusion
is true by faulty definition. For example, if a critic of markets defines ‘capi¬
talism’ as coercive exploitation, then his conclusion that capitalism is bad
because it exploits people commits the definist fallacy.

definition. A brief set of statements which provides the meaning of a term

and possibly some background. Sound theory begins with clear definitions
for the key terms. The question ‘what do you mean?’ seeks to clear semantical
ambiguities prior to the substantive question, ‘how do you know?’

deflation. A continuing decrease in the price level. A decrease in the

money supply relative to desired money holdings can be caused by an abso¬
lute decrease in the money stock or by productivity gains manifested in
decreasing prices. A gradual deflation of prices relative to wages is normal
with commodity money, but a sudden contraction of the money supply can be
destabilizing and can lead to a depression. The term also refers to the adjust¬
ment of a price index for inflation, that is using a deflator.

degradation (environmental). The destruction of the habitat for wildlife

as well as human life, including pollution, the destruction of forests and
wildlife, and the destruction of protective features such as the ozone layer.
These are effects of the failure by governments to establish property rights
throughout the earth so that the invasion of the property is subject to pay¬
ments for the damages.

demand. 1A schedule of quantities purchased at various prices. There are

three types of demand: individual, market, and aggregate. Individual demand
is the quantities of a good which someone desires at various prices at some
moment or duration in time. Market demand is the sum of individual de¬
mands, while aggregate demand for all goods is the relationship between a
price level and expenditure for output (since at lower prices, a given money
stock will buy more goods). Another taxonomy is notional demand, which is
 democracy 107

just desire, and effective demand, the willingness plus the ability to pay. See
also law of demand. 2 To purchase something. The quantity demanded of a
good is the amount purchased at a particular price - this is a different
meaning from demand (1), since (2) does not refer to the entire schedule. An
increase in demand (1) means a shift of the entire demand schedule at all
prices, in contrast to a change in the quantity demanded (2) when the price
changes. 3 To request payment. Payable on demand means whenever re¬
quested.

demand deposit. Funds in banks, against which checks can be written, and
which can be withdrawn on the demand (3) of the depositor.

demand for money. The demand (1) to hold cash. The price level rises if
the money supply increases beyond the demand for money.

demand revelation. A tax that discloses the demand (1) for a collective
good by charging the marginal cost of changing the outcome (Tideman and
Tullock, 1976). See also Clarke tax.

demand-side. Theory and policy stating that a shift in aggregate demand

can alter total output. This would be because the aggregate supply curve is
upward-sloping, due to idle resources such as labor at too high prices which
are stuck. Rational expectations and new-classical theory point out that
when expansionary policy is expected, prices will rise in anticipation, making
the policy ineffective. Austrian (Austrian economics), geo-economic, and
Virginian public-choice theory (Virginia school of political economy) point
to various interventions which cause rigidities, in which case the effective
remedy is clear.

democracy. Rule by the people. In direct democracy, the members vote on

policy options, while in representative democracy, the members vote for
representatives who then make the public choice on policy. Majoritarian
democracy imposes majority rule on unwilling minorities, whereas under
unanimous democracy, all members voluntarily participate at the constitu¬
tional level.
Some critics of markets advocate economic democracy in which voters
make decisions that are made by private agents (1) in an unhampered market
economy. Actually, ‘economic democracy’ is practiced in a market setting
within corporations and civic associations. Such voting is usually representa¬
tive and according to the shares of property, but in cooperatives, each mem¬
ber has an equal vote. Such organizations also incorporate the unanimity
principle, since the owners voluntarily (voluntary) join the associations.
108 demonstrated preference

Public choice theory studies actual and alternative democratic governmen¬

tal structures and their impact on an economy, while economic philosophy
also examines the connection between democratic governance and liberty.
The problem of democracy is how to structure it so that the apparatus is not
co-opted by special interests. Structural options include communitarian de¬
mocracy, constitutional constraints, federalism and decentralism (decentrali¬
zation), and a division of powers in separate branches of government. The
latter three have not prevented the centralization of power in the USA, how¬
ever, so a more fundamental structure is required if that is a goal. See also
voting.

demonstrated preference. The demonstration of preferences by the re¬

sults of choice, a term used by Murray Rothbard.

Demsetz, Harold (1930-). Economics professor at Chicago, the Hoover

Institution, and (emeritus) UCLA, he developed the theory of economic
property rights as a condition for markets (Demsetz, 1964, 1967). He also
developed the theory of incomplete contracts, such as for employment,
property rights being influenced by information costs. He has also written on
the private production of public goods (1970) and on concentration in indus¬
try (2). Demsetz is a member of the Mont Pelerin Society.

denationalization. Turning over or returning government enterprises and

property to private (1) ownership.

denationalized money. Money provided by private agents (1) such as

banks rather than by the state or a central bank. See Hayek (1990).

deny the consequent. Given the true statement ‘if X then Y,’ then to deny
the consequent is to argue validly that if Y is false, so is X. Syn. modus
tollens.

deodand. In old English law, personal property which was the instrument
of killing a person, would be forfeited to the crown for distribution in alms.
This law became the basis for civil asset forfeiture, the confiscation of
property without conviction and the notion that it is the property that is at
fault.

deontological ethics. Morality based on duty (1), an objective * ethic,

and/or moral rights, rather than directly on consequences, in contrast to
TELEOLOGICAL * UTILITARIANISM or CONSEQUENTIALISM. But if the duty is tO avoid
harmful consequences, then a deontological ethic is not only consequential
 derivative 109

but also provides a non-arbitrary way to judge consequences, unlike pure

consequentalism.

dependency ratio. The ratio of dependents such as children, the unem¬

ployed, and retired persons, to those working. As it increases, especially as
the proportion of the aged increases, the burden on workers who pay social
security taxes and other forms of welfare increases, and the viability of those
transfers (transfer payments) becomes more questionable.

deposit insurance. Insurance, now mainly by government, of the deposits

of banks and other financial institutions. The wasteful malinvestments of the
1980s in the USA were to some extent made possible by this governmental
insurance, which made it superfluous for the depositors to monitor the sound¬
ness of the banks and savings and loans. But the bank failures of the 1930s
cannot be blamed on deposit insurance, so more fundamental elements led to
the savings and loan debacle.

depreciation. 1 A physical reduction of the ability of a capital good to

contribute value to output, reducing the value of the asset (1). Besides wear
and tear, obsolescence can cause depreciation; a reduction in market value in
itself is not depreciation, because it is not physical. Hence, land is not
depreciated. Labor could in principle be depreciated; the write-offs of capital
goods but not labor biases taxation against labor. The consumption of capital
goods is an expense allocated over the life of the asset. US tax rules, however,
do not index depreciation for inflation, therefore in the later years, the true
value is not deducted, in effect taxing the capital good, a problem remedied to
some extent by the accelerated cost recovery system. 2 A fall in the value of
a currency relative to others.

depression. Also called a slump, a bottom, and the trough of a business

cycle, a depression follows a recession, and is a lengthy time of low output,
high unemployment, and generally hard times. Historically, the major depres¬
sions have coincided with the bottoms of the real-estate cycle.

deregulation. The removal of arbitrary restrictions and controls on enter¬

prise. This supply-side policy reduces costs, increasing output while reducing
prices. Supply-side policy also involves detaxation.

derivative. 1 The instantaneous change in a dependent variable when an

independent variable changes. The first derivative provides the slope of a
curve, or the rate of change; economically, it provides the marginal function
(for example of cost, revenue) when the curve is of the total function. The
110 design

maxima and minima of curves are found where the derivative or slope is
zero. The second derivative provides the rate of change of the first derivative,
hence the change in the slope. See business cycle. 2 A financial instrument or
resource derived from an underlying security, commodity, or factor. For
example, a futures contract in corn is derived from the spot or physical
market for corn and its expected price in the future. Options are another
common derivative.

design. A non-random structure. Specifically, a plan for a political or eco¬

nomic system.

despotism. Unconstrained and tyrannical government power held by one

person.

defaxation. The removal or reduction of taxes, just as deregulation re¬

duces REGULATION.

determined. Having a known or derivable outcome.

determinist. that predicts an outcome to a historical process, as

Theory
with determinist Marxist (Marxist economics) theory that predicts the over¬
throw of market economies. See also nondeterminist.

devaluation. A reduction in the value of a currency whose value is fixed

by government. It lowers the price of exports while it increases the price of
imports, a mixed blessing, if that.

development. See economic development.

devisee. Beneficiary of a will.

devolution. Decentralizationand the transfer of political power to subor¬

dinate jurisdictions, such as transferring the responsibility for welfare (2)
assistance from the federal to the state government in the USA, or transfer¬
ring some authority from the British parliament to a Scottish legislature.
Legally, devolution is any transfer of property or office from one person to
another.

differential rent. The origin of the rent of land, namely the difference
between the productivity of a plot of land relative to land at the rent-free
margin (1). The theory of differential rent was developed by James Anderson,
David Ricardo and Henry George. In the classical-economics agricultural
 direct taxes 111

model, land differs in fertility and locational advantages, and as the margin
of production moves to less productive land, rent increase in the more pro¬
ductive land, since all the product after paying for labor and capital goods
goes to rent. George extended the concept to all land, and also developed the
theory that the wage level is set at the margin of production. Thus he devel¬
oped a marginal productivity theory of wage determination and its relation¬
ship to rent. The concept of differential rent is congruent with that of the
marginal product of land. Ricardo, George, and others drew the logical
conclusion that the rent which arises from the differential unrelated to the
efforts of the landowner could be taxed without any excess burden.
Henry George took the theory of rent further, finding that rent arises not
only from the movement of the margin of production to less productive land,
but also due to the increasing productivity of land with increasing commerce
and technology. But this rent in urban and industrial land is also a differen¬
tial.

differentiated goods. See product differentiation.

diffusion. The spreading of innovations among firms.

Dillon’s rule. A ruling in 1911 by US Judge Dillon by which any doubt

concerning municipal power is resolved by the courts against the municipal
corporation. This helped tilt political power away from local government in
favor of state government. See home rule.

Dilthy, Wilhelm (1833-1911). A German social philosopher, he was a

developer of the concept of Verstehen, the understanding of the meaning of
human action and expression, and of history, a methodology of the human
but not the physical sciences.

diminishing marginal utility. In neoclassical (neoclassical economics) theory,

die diminution of the extra utility (utility, marginal) a person obtains with
increasing amounts of a good. In Austrian (Austrian economics) utility theory,
ends are ranked in decreasing order of importance, and a good serving those
ends will diminish in utility as it is applied to ends of ever lower importance.

diminishing returns. See law of diminishing returns.

direct taxes. Taxes levied on the agent who explicitly pays the tax rather
than collecting it from some other ultimate payer. A direct tax is not levied on
any activity of an agent, but directly on the agent and his income or property.
Economically, direct taxes include head (poll), property, death, and income
112 Director’s law

taxes, while sales taxes are indirect, since a seller pays it but collects the tax
from the buyer, who actually pays it. The distinction between direct and
indirect taxes is not that of the incidence or burden, but concerns the explicit
payer and the object of taxation.
The US Constitution distinguishes between direct and indirect taxes,
direct ones requiring apportionment by the population of the States. The
federal tax on corporate income is thus not legally a direct tax on profits but
an indirect excise tax on the privilege of operating as a corporation. The
16th Amendment to the US Constitution has been interpreted by the Su¬
preme Court as placing the personal income tax in the category of an
indirect, excise tax, thus not subject to the enumeration clause. The US
income tax is thus on the activity of earning income, measured by the
amount of income. This legal ruling originated in the Hylton case of the
1790s, when a tax on carriages was ruled to be indirect, since Congress did
not apportion the tax by population.

Director’s law. Aaron Director’s hypothesis that income redistribution in

a democracy favors the middle class, since the median voter is of that class.

dirigisme. Fr. The control of an economy by government, as the French

kings did during the 1600s. The term is used as a label for state intervention.

dirty float. Floating exchange rates, usually set by supply and demand,
but with intervention by central banks to affect the rates.

dirty public goods. Collective goods which benefit the population in gen¬
eral but not those living near them. A noisy airport, for example, leaves an
‘externality footprint’ in the vicinity. If the local bad is already there, the
market has adjusted by capitalizing (capitalization) down the price of local
sites. In a market context, site rights and covenants could include quiet
enjoyment, which could be rented by a firm that wished to create the bad, if
the price was right.

disabilities. A lack of normal functions; handicaps such as not being able

to see or hear, or having to use a wheelchair. The Americans With Disabilities
Act of 1990 began with the good intentions to help the physically handi¬
capped, but the law has been extended to behavioral problems, and the
requirement to install expensive structures that are not cost effective. See
O’Quinn (1991).

discoordinating. While markets coordinate (coordination) plans and ac¬

tivities, innovations make previous operations less profitable, hence alter
 discriminate 113

plans. The term ‘discoordinating’ is used for this, but it is not really a lack of
coordination, but an alteration of coordinates.

discount rate. 1 The rate at which future items are discounted in value,
either by individuals or by markets. The market discount rate is the same as
the interest rate (actually, a family of rates). See time preference. 2 The
interest rate charged (charge (1)) on loans by the Federal Reserve system to
private banks.

discourse. A continuing conversation among many parties with respect to

some issue or policy. Some conceptions of morality and of democracy are
connected with the ability to engage in social discourse.

discretionary policy. Government fiscal and monetary policy which does

not follow fixed rules, but lets policy makers change the policy according to
how they judge the circumstances. While this provides flexibility, it also
opens the door to manipulation, political influences, and also can fail due to
the knowledge problem. Market alternatives, for example free banking, can
provide flexibility without the politics.

discriminate. To distinguish among persons other than on merit. In deci¬

sions on employment, renting or selling housing, entrance to colleges, and so
on, those who discriminate select applicants on the basis of elements not
related to qualifications. Sex/gender, race, ethnicity, nationality, religion, cul¬
tural practices, appearance, marital status, sexual orientation, and age, when
unrelated to the qualifications, are common characteristics of discrimination.
Minority ethnic groups are commonly discriminated against by government
in many countries, if not persecuted and oppressed. ‘Statistical discrimina¬
tion’ occurs when someone is not personally biased against some characteris¬
tic but associates it with the probability of success, hence uses such discrimi¬
nation as a rule of thumb. The economics of discrimination are analyzed in
Becker (1971).
Discrimination is illegal in many contexts in the USA and other countries.
In a pure market economy, government is obligated not to discriminate, but
private agents may discriminate as an exercise of their property rights and
personal liberty. A strong market for labor and the absence of subsidies (for
example for college students) would tend to minimize negative discrimina¬
tion, since it would be costly for employers to reject qualified workers, and
the price system would ration entrance to colleges. The elimination of barri¬
ers to self-employment would further reduce the injuries of discrimination.
So long as barriers maintain high unemployment, employers will be able to
discriminate despite contrary law. See also price discrimination.
114 diseconomies of agglomeration

diseconomies of agglomeration. Diseconomies caused by urban growth

and dysfunctional policy, such as congestion and pollution.

diseconomy. A reduction in productivity with increasing size.

disequilibrium. A situation in which gains from trade have not yet been
exhausted (exhaustion of gains from trade), hence there is movement to¬
wards such exhaustion unless there are discoordinating counterforces, such
as innovation or a diverging cobweb, which upset previously equilibrating
action and open up new paths towards equilibration. Disequilibrium at the
microeconomic level can consist of temporary gluts and shortages of a
product, where the market is not clearing (clear (1)).

disincentive. A reduction in the incentive for gain by imposing costs (such

as taxes) and restrictions that reduce the gain.

disincentive taxation. Taxation which reduces incentives. See also incen¬

tive taxation.

dismal science. See Thomas Carlyle.

displacement effect. The historical tendency of national government ex¬

penditures to rise during a war or crisis, and then not fall to its previous level,
hence the long-term trend towards ever larger proportions of government
expenditures.

distortion. Waste and inefficiency, thus loss of well-being, caused by

policy such as arbitrary * regulation and the taxation of productive activity.
Prices and profits become skewed (skewed market), hence distorted, from
what they would be in a free market.

distribution. 1 Functional distribution, the allocation of income and cre¬

ated wealth to the owners of the factors producing it, for example accord¬
ing to their marginal products or monopoly gains. 2 The physical delivery
of goods to intermediaries and consumers. 3 The elements of a set and their
respective shares of the total, such as the distribution of market shares in an
industry (2) among firms or the distribution of income among classes of
population. In statistics, a set of values and their relative frequency. A
normal distribution and its mean and variance forms the basis of probability
theory and much of econometrics. See also redistribution.
 dividend 115

distributive justice. The fairness or justice of the distribution (1, 3) of

income and wealth in an economy. The ethic used in such normative analysis
can be based on an outcome or on the process. Ethical views based on
outcomes are typically egalitarian (egalitarianism (2)) or posit merit goods
(merit goods and bads), distributions to the poor to prevent deprivation; such
policies typically treat effects without remedying the causes. Ethical views
based on process view an outcome as just, if the process of generating
income is just. Free-market analysis generally considers any voluntary
arrangement to be a just process. However, this leaves open the question of
the original ownership or endowment of natural resources.
The Georgist or geo-economic ethical premise is that since self-ownership
does not extend to nature, the rent of these resources is properly common
and can be collected as revenue for governance and collective goods, whereas
allodial free-marketeers view homesteading or the status quo titles as proper,
except possibly for cases such as the latifundia inherited from the Spanish
conquest in Latin America. Taiwan is an example of an economy which
developed while maintaining a relatively equal distribution (3) of income, in
part because of its land reform and taxation of land rent and land gains.

distributive socialism. A variant of socialism in which income is redistrib¬

uted (redistribution) according to an egalitarian (egalitarianism (2)) criterion.
Even if production is in private hands, if productive effort is taxed to redistrib¬
ute, it is still to that extent socialized, with the resultant disincentives.

disutility. Negative utility (utility, marginal) caused by a bad. See also

externality. A good can turn into a bad good if there is too much. Labor is
considered to have disutility in typical neoclassical theory (neoclassical
economics), but work can also be satisfying.

diversification. Divergence in a distribution (3), the inverse of concentra¬

tion. Diversification is directly proportional to the number of units (the range
of items) and inversely to the inequality (index) of the units of a distribution
(3) (more inequality yields less diversification), hence the formula D = N/I
(Foldvary, 1995). Applications include the number of products a company
produces, the number and proportions of different types of investments in a
portfolio, the variety of industries in an economy, and the diversity of stu¬
dents or workers.

dividend. A payment to a shareholder as a return on his investment (2). In

the USA, dividend income is taxed as well as corporate profits, resulting in
double taxation for taxable incomes. The UK avoids this with a tax credit to
shareholders to offset the tax due. See also citizen dividend.
116 divisia money index

divisia money index. An index of the money supply, being a weighted

combination of various moneys, measuring it more effectively than the usual
Ml, M2, and other direct measures, «

division of labor. The specialization of labor, increasing productivity as

workers become more specialized according to their comparative advantage,
and also increasing the range of products, since more labor is available to
produce other goods. The concept can be generalized to the division of
capital goods and the division of land, and the division of resources in
general, but Adam Smith focused the discussion on labor in his Wealth of
Nations (1776, 1976).

division of resources. The specialization of input resources into particular

uses and applications, such as specialized labor, tools, and lands. The most
commonly discussed type is the division of labor.

doctrine. A set of related propositions, especially of religious, political and

economic thought. Movements and schools of thought have doctrines which,
if warranted (warrant), are theories.

dogma. 1 The official creed of an organization, upheld by its authority. 2

By extension from (1), beliefs of persons who refuse to engage in dialogue
with those who question these beliefs.

dollar. A name for the unit of account of many English-speaking coun¬

tries, for example the USA, Canada, Australia, New Zealand, Singapore, and
Hong Kong. Until 1934 the US dollar was defined as .048379 ounce of gold
($20.67 per ounce), and from 1934 to 1971, $35 could be exchanged for an
ounce of gold internationally. Now the US dollar, along with other curren¬
cies, is hat money. After World War II, with the Bretton Woods Agreement,
the US dollar became an international reserve currency and is still the most
important global currency.

dollar voting. As an analogy with political voting, a consumer votes for

goods with dollars or other currency. This private choosing allocates goods
more efficiently (efficient) than political choosing (‘Dollar vote,’ Block and
Walter, 1989).

domain. 1A field of thought, rights, territory, or action. One’s domain can

consist of one’s property, including one’s person. Mathematically, a domain
consists of the values a variable can take. 2 The ultimate, paramount, owner-
 dumping 117

ship of land, normally as the sovereign power claimed by states as in eminent

domain.

domestic labor. See home production.

donation. A gift to a charity or other benevolent (benevolence) or mutual

organization or cause.

double-entry bookkeeping. The accounting system in which every trans¬

action has two entries, a credit (2) and a debit. Credits record the source of
funds, and debits the expenditures. The debits and credits must necessarily
balance.

double taxation. Economically, the taxation of the same item in the same
tax period (year) more than once, such as corporation dividends when income
is taxed as corporate income and by personal income in the USA. (Interest
and dividend income are not taxed twice just because they come from the
principal that was taxed, since the principal generates new income.) Double
taxation also occurs when income is taxed by two jurisdictions, and there is
no tax credit or deduction. Legally, however, double taxation means taxing
the same item of the same owner in the same year twice by the same govern¬
ing body, which is why economic double taxation is not illegal.

doubt policy of liberty. The policy principle that when in doubt do not
intervene (intervention). Err on the side of not restricting.

downsizing. A firm becoming more efficient by reducing its less produc¬

tive (productivity) employees and operations.

droit-droit. Fr. A double right, of possession and of the property, hence its
yield. In ancient law, these rights were distinct, and this phrase indicated the
union of the two. The possession of land was thus recognized as distinct
from its ownership and right to its rent.

duarchy. Government with two joint rulers, as with spouses.

dues. Periodic payments members pay to a club.

dumping. Selling a good at a price below the cost of production other than
brief promotional sales. Firms are accused of doing this to drive out the
competitors, and then raise the price. Though illegal in many cases, it is not
evident that dumping is generally successful. If the dumper later makes
118 durable goods

economic profits, this will invite competition again. A permanent dumping

by foreigners due to a subsidy benefits the domestic consumers. Nevertheless,
there can be instances where local production is demolished and cannot be
restored on the old basis, but market-based remedies such as covenants could
protect the traditional arrangements if that is desired.

durable good. A major long-lasting good, providing services over a number

of years. Economically, it is an investment (1), although some are counted as
consumer goods. See consumer durable.

Dutch auction. An auction in which the starting price is above the normal
expected value.

Dutch disease. The example of The Netherlands, which has had natural gas
and used this wealth to pay high salaries and enact expensive welfare legisla¬
tion which the country can subsequently not afford. The Pacific island coun¬
try of Nauru is another example.

duty. 1 A moral or legal obligation or requirement, usually to do some¬

thing rather than avoid doing something. It is considered wrong if one does
not do it. 2 A tax, especially on sales and the customs duty on imports. Goods
not subject to the tax are then ‘duty-free.’

dynamic. Taking place over a duration of time, hence analysis of a process,

disequilibrium, and/or intertemporal phenomena. In contrast, a static analysis
examines a phenomenon at a moment in time.

dysfunctional. Of institutions, laws, and policies, which have harmful

consequences, unwelcomed by most in society, often unintended by the origi¬
nal policy makers. Government welfare programs, for example, are dysfunc¬
tional if they induce family break-up and keep the poor trapped in poverty.
See IATROGENIC.

dysnomy. Harmful legislation.

dystopia. A negative utopia, such as Orwell’s 1984.

 E

E-money. Electronic money.

earmarking. Raising revenues for particular expenditures rather than the

budget in general. A gasoline tax used for road maintenance is an often used
example. This is also called ‘hypothecation.’

earned income. Economically, income from labor and the products of

labor, including interest payments originating from wages and capital re¬
turns. Gifts deriving from earned income are not earned by the recipient but
are broadly earned since they are earned income whose title is transferred.
Monopoly profits are unearned, as are rents from natural resources. Legally
and in tax law, earned income is-usually confined to wages, and in some cases
is given preferential treatment, and in other cases, worse treatment, for exam¬
ple subjected to social security taxes.

earnings per share. The net profits of a corporation divided by the number
of shares. This is a key indicator of the performance of a corporation.

easement. A right to use property whose title is held by another person.

Access, preservation, and other aims often sought by legislation such as
zoning and land-use laws can be achieved by market processes through
covenants and easements.

easy money. The expansion of the money supply to lower interest rates
and provide more credit (1) than warranted (warrant) by current savings.
The term can also refer to the reduction in restrictions on lending.

economic. 1 Regarding economics and economies. 2 Indicating that the

term is used with a particular meaning in economics, as in economic rent. 3
Of minimal or low cost.

economic calculation. The market pricing of assets (1), reflecting subjec¬

tive values and scarcity (scarce). A key deficiency of central planning is its
inability to conduct economic calculation.

119
120 economic community

economic community. A union of countries without any tariffs among

them, and a common external tariff. See also common market, customs union,
FREE-TRADE AREA.

economic cost. See opportunity cost.

economic democracy. Control over economic decisions, micro as well as

macro, by voters who are not investors. Besides a taking of property from the
owners, this type of intervention would most likely result in inefficient out¬
comes, lacking the cost-benefit approach (cost-benefit analysis) of private
enterprise. The logical conclusion of unlimited economic democracy is so¬
cialized production. Limited forms of economic democracy exist when city
councils, state legislatures, and national officials determine and influence
which enterprises are set up and what and how they produce.

economic development. A change in the structure of an economy towards

more powerful technology, and the conversion of territory to more inten¬
sive use. This usually changes traditional societies into more commercial
cultures. Development raises average income, but whether it raises the stand¬
ard of living of the lowest-income people depends on the forces affecting the
inequality of the distribution (3) of income. Studies (Gwartney et al., 1996)
provide evidence for the theoretical proposition that economies with more
economic freedom experience more growth and development.

economic disturbances. Sudden shifts in aggregate supply and aggregate

demand, changing output or the price level. See shock.

economic freedom. The degree of legal freedom for economic agents (1).
See Gwartney et al. (1996).

economic good. A good that is scarce (1).

economic growth. An increase in output or per-capita output due to an

increase in inputs or to more productivity, that is, economic development.

economic history. The economic (1) aspects of the past, as a field of eco¬
nomics, as well as the application of theory to examine and understand past
economic phenomena. More broadly, economic history includes any empiri¬
cal information and study, including statistics and contemporary economies
and events. All historical facts are theory-laden; their understanding necessar¬
ily is via theory. Historical studies, in turn, can help improve and revise
theory.
 economic rent 121

economic justice. Economic policy consistent with an ethic. See distribu¬

tive justice.

economic land, land, hence natural resources.

economic liberalism. The theory that interventions reduce growth and

prosperity, therefore free markets will have the outcomes that most people
want. The state’s role is to provide the legal framework, the prohibition of
private intervention (force and fraud) and a court system for the ultimate
resolution of crime and disputes. This is a subset of the classical-liberal
view, with the question of public finance similarly left open.

economic man. See homo economicus, homo cupiditus.

economic means. Using voluntary, market-based methods of obtaining a

good, rather than the political means of taking it by legal force. The distinc¬
tion was made by Oppenheimer and Nock.

economic philosophy. Topics such as the relationship between ethics and

economics, the role of government in an economy, the meaning of ‘econom¬
ics,’ and the evaluation of well-being.

economic planning. Designing an economic process and estimating the

outcome before engaging in the process of achieving it. Private agents have
the feedback of profit and loss in measuring the success of their planning,
whereas government planners seldom have and usually do not need this
corrective. Government ‘imperative plans,’ or central planning, encompass
most economic activity, whereas ‘indicative planning’ leaves enterprise nomi¬
nally in private hands, but influences output via fiscal and monetary policy,
regulation, and industrial policy geared to centrally determined targets. The
Soviet Union attempted imperative planning, and France after World War II
is a major example of indicative planning.

economic policy. Government’s law, tax structure and tax rates, regula¬
tory processes, and conduct as it affects the economy under its jurisdiction.
Policy can be market enhancing or market hampering.

economic profit. Accounting profit above normal returns to factors. Eco¬

nomic profit can consist of monopoly profit or entrepreneurial profit.

economic rent A payment to a factor beyond what is needed to put that factor
into use. Land rent, beyond what is needed to maintain a market for land, is
122 economic rights

economic rent, and economic rents are also earned by movie, sports, and music
stars whose second best alternative would be a lower earning. Monopoly profit is
economic rent as well. Economic rent can be taxed without any excess burden.

economic rights. Moral or legal rights to receive property from others,

rights of possession, and rights to the yield of property possessed. Aside from
children, free-market thought generally holds that there is no rightful claim
on the property of others, although some classical liberals make exceptions
for welfare rights of the indigent or emergency cases. Rights of possession
stem from the right of self-ownership and voluntary exchange and transfer.
Allodial free-marketeers hold to a homesteading theory of rights to natural
resources, and to a default for status quo rights, whereas geoist (geoist
ethic) free-marketeers hold to the common ownership by humanity of re¬
sources not based on self-ownership. Some free-market theorists hold that
there are no objective moral or natural rights, rather basing their policy
views on utilitarian, consequentialist (consequentialism), contractarian
(contractarianism), and other philosophies.

economic sanctions. Restrictions and penalties on trading with certain par¬

ties, usually foreign countries which are enemies or that have policies that are
morally objected to.

economic system. The private and governmental structures of an economy.

Private structures include the relationship between banking and manufacturing,
the interconnections between major enterprises, and the types of ownership,
and land tenure. Governmental structures include planning and control of
industry (2), the degree of government ownership and redistribution, and
monetary and fiscal policy. Systems include primal economies, traditional
economies, market economies, socialism (command economies), and mixed
(mixed economy) systems, the latter now dominant. The two paradigms of pure
market systems are the allodial and the geoist (geoist ethic). The three major
mixed systems are the export-oriented East-Asian, with government direction
but moderate government sectors; the American, with regulation, income taxa¬
tion and redistribution; and the European, with large welfare programs, em¬
ployment restrictions, and value-added taxes. See also best economic system.

economic union. A customs union that to some degree has a unified fiscal
and monetary policy and institutions. The European Union has been moving
towards such a union.

economic welfare. Well-being due to the consumption of goods, studied by

welfare economics. It is usually measured by GDP, which many economists
 economist 123

recognize as incomplete, and more complete measurements have been pro¬

posed. Such alternatives are even more imprecise, hence there is a trade-off
between completeness and accuracy of measurement.

economics. There is no generally accepted definition of the field. The classi¬

cal definition is the science of wealth. A typical contemporary definition is the
allocation of scarce (1) resources among alternative uses. Other definitions
include the study of an economy, a particular view of human behavior, the
science of human action, the science of how people coordinate their wants, social
provisioning, and the science of exchange. The science of utility (utility, mar¬
ginal) is perhaps the most general definition which does not overlap other fields.

economics of law. See law and economics.

economies. Increasing per-unit output (or decreasing per-unit costs) due to

an increase in some variable such as size.

economies of agglomeration. Increased productivity due to density, such

as greater population per unit of-surface area, or enterprises locating near one
another, that is, a cluster of stores that make it attract more shoppers. Such
economies make feasible a greater division of labor and more efficient
transport and infrastructure. These economies induce a higher rent and
thus become capitalized in higher land value in that location, hence the
benefits may largely be shifted to the recipients of the site rents. See also
DISECONOMIES OF AGGLOMERATION.

economies of density. Increases of output and increased variety of prod¬

ucts due to greater density, saving on transportation costs, making available a
greater local market.

economies of scale. Economies due to more output. See also external

ECONOMIES OF SCALE.

economies of scope. Economies due to the expansion of the scope of activi¬

ties, such as the joint production of several related goods by a firm.

economies of size. Economies due to the size of a firm, farm, or factory.

economist. A specialist in the fields of economic (1) *theory and its appli¬
cations, economic history, and/or economic policy. Good economists usually
are also knowledgeable about philosophy, law, history, political science, and
mathematics.
124 economize

economize. To minimize costs given some output or benefit, or to maxi¬

mize benefits given some cost. A foundational ^axiomatic premise of eco¬
nomics is that all persons economize.
«

economizing man. Persons *qua economizers (economize).

economy. 1 The totality of production, exchange, and consumption within

some territorial domain. 2 Economizing (economize).

ecu. European Currency Unit, a unit of account created by the European

Union. It is based on a basket of European currencies. It is being replaced in
1999 by the euro currency.

education. The acquisition of knowledge, skills, and culture. Often the

term refers to the schooling of youths. The industry of educating children is
largely a government enterprise worldwide, except for some private, often
religious, schools, as well as much private supplementation. Private school¬
ing was common prior to the middle of the 1800s.
Free-market proposals for children’s education include voucher systems
or tax credits for tuition to provide.equal choice, and, ultimately, the privati¬
zation of the provision as well as the funding of education. A radically free-
market college could consist of students hiring instructors, who would then
contract with universities for classrooms and facilities. While there are exter¬
nal benefits to educating a child, it is not evident that these are necessarily
relevant external effects, and local communities could well provide the
desired supplement to parents’ provision.

effective demand. Desire plus cash. Notional demand and the resources
with which to obtain goods. Demand (1) is normally thought of as effective
demand.

efficiency. 1 Technical or productive efficiency: output per unit of input. 2

Economic efficiency: an economy in which no one can be made better off
without making a person worse off. Allocative efficiency concerns the mix of
resources used in production, and distributional efficiency concerns the mix
of consumer goods. Real-world economic efficiency needs to include trans¬
action costs.

efficient. Having more efficiency than other processes, or having the great¬
est possible efficiency. An economy is efficient when waste is minimized, that
is, when processes minimize costs and resources are allocated to where they
are most desired. Markets create efficiency (1) through competition, while
 electromagnetic spectrum 125

central planning and intervention create social waste due to the knowledge
problem, political influences, and lack of incentives.

efficient market. 1 In stock and commodity markets, the proposition that,

because of widespread information and competition, it is normally unlikely
for an individual to consistently outperform financial market averages. 2 In a
competitive industry (2), the proposition that firms in the long run will not
earn economic profits.

efficient portfolio. A portfolio that for a given level of volatility risk,

maximizes the return, or for a given level of return, minimizes the volatility
risk. This is accomplished by a diversification in relatively uncorrelated
investment types.

effluent fee. A charge (1) proportional to the amount of pollution created. It

has been implemented in Germany and some other countries. When it compen¬
sates for the damage caused, and the fee is not greater than the marginal costs
of pollution, the fee is market enhancing, since it internalizes the pollution
costs, avoiding the external effect. See also carbon tax, Coase theorem.

eftpos. Electronic funds transfer at point of sale.

egalitarianism. 1 The philosophy that human beings are of equal moral

worth, applied as the concept of equality before the law. This moral equality,
recognized by natural-law philosophers such as John Locke and inscribed in
the US Declaration of Independence, is a premise of classical liberalism (clas¬
sical liberal) and free-market thought. Geoist (geoist ethic) thought goes
further and ascribes to humanity an equal share of the natural endowment,
land. 2 The philosophy that people are entitled to equal well-being, a key
premise of redistribution as well as the ability-to-pay doctrine of taxation. See
distributive justice.

elastic. The percentage change of one variable such as quantity being rather
responsive to a percentage change in the price, the ratio being greater than one.

elasticity. The responsiveness of one variable to a change in another. Elas¬

ticity is measured by the percentage change in the responding variable di¬
vided by the percentage change in the other variable, for small changes.

electromagnetic spectrum. Radio, television, and other broadcast frequen¬

cies and wavelengths. As a natural resource, it is a type of economic land.
See also broadcast spectrum.
126 electronic funds

electronic funds. Money conveyed by wire, such as the US Fedwire or via

computer connections or at a point of sale. Most of the value of US payments
is conducted with electronic funds.

electronic money. See electronic funds.

elegant. Complete and correct, and with graceful simplicity. An elegant

theorem or derivation is strikingly efficient in its presentation.

elite. A small group of people who have most of the wealth and power,
such as due to government-protected privileges.

embodied knowledge. The concept that capital goods contain technologi¬

cal knowledge. Some capital goods such as computer software are pure
knowledge (Baetjer, 1993).

eminent domain. The ultimate ownership by government of land, giving

it the power to take it, with compensation, for uses beneficial to the public.
This principle, even if sound, is in practice violated by takings that benefit
special and private interests. Eminent domain has been regarded as proper by
some ethical philosophers, such as Grotius and Pufendorf, and is inscribed in
the US Constitution. Some libertarians (libertarianism) and other free-
marketeers oppose eminent domain, holding that rights of possession should
be totally private (1), without the state as co-owner. Lack of eminent domain
powers have not prevented large developments such as Walt Disney World
and many residential associations. See also domain.

emission charge. Effluent fee.

emphyteusis. In Roman and civil law, a long-term or perpetual contract for

land tenancy subject to maintaining it (for example not depleting its fertility)
and the payment of periodic rent.

empirical. Of observations, facts, and data. Empirical studies examine ac¬

tual, real-world phenomena, rather than hypothetical models or theory con¬
ditional on premises which have never taken place.

empirical policy. Policy implemented as an experiment to determine the

effect. If the policy is effective, then it is assumed that it was the appropriate
remedy for the problem. The concept is similar to empirical therapy in
medical science.
 English tort system 127

employee. A person who is employed (employment) under the direction of

another person or organization, which then pays the worker a wage. The term
has more legal than economic meaning, since the line between a contractor
and an employee is not sharp, which creates disputes for taxation.

Employee Stock Ownership Plan. Various methods in the USA and UK

whereby employees collectively (collective) obtain shares of stock in their
employers’ company. The most common plan is an ESOP, a trust with which
the pension plan borrows money and buys newly issued stock. The aim is to
increase employee ownership, hence increase the ownership in shares by the
population, giving the people as a whole a greater share in the returns on
corporations and a greater equity stake in the economy’s capital goods and
land. Payments by the company to support an ESOP are tax-deductible.

employment. The application of a factor, especially labor, in the produc¬

of wealth, See also full employment, self-employment.
tion

enclosures. Converting commons, or communally owned lands, into es¬

tates (1) owned by an aristocracy. This occurred in Great Britain after the
Middle Ages, reducing the availability of land for small farmers, reducing
incomes, and creating a class of landless workers who provided labor for
industrialization. The abundance of cheap labor induced low wages, long
hours, and harsh conditions, but critics misleadingly blamed private enter¬
prise rather than the state-protected enclosures.

endogenous. From within a system.

ends. What people ultimately want, rather than means to what they funda¬
mentally want. An axiomatic premise of economics is that persons have ends
which they can rank in ordinal order. The economizing (economize) premise
then states that they will pursue their highest ends first, relative to the costs.

energy. The generation of heat, light, and movement. Energy efficiency (1)
conserves and minimizes the use of materials such as oil, natural gas, and
coal, which generate energy.

English tort system. Having the loser of lawsuits pay the legal costs of the
winner, so that if one is wrongfully sued, one does not have to bear one’s
legal expense. In the American rule, the loser usually bears his legal costs,
thus imposing a tax on losers of lawsuits initiated by others. A free market
uses the English system.
128 Enlightenment

Enlightenment. The era in Europe and America during the 1700s when
thinkers valued reason in science, ethics, religion, and government, rather
than blindly obeying authority and tradition. Natural-rights and natural-
law philosophy flourished, and toleration was advocated for cultural and
religious differences. Key Enlightenment figures include John Locke, Voltaire,
and Immanuel Kant, along with economists such as the French Physiocrats
and Adam Smith. The Scottish Enlightenment was especially influential.
American figures include Benjamin Franklin, Thomas Jefferson, James Madi¬
son, George Mason, and Thomas Paine, In France, the Encyclopedic embod¬
ied the humanist thought of the era, which was regarded to have ended with
the French Revolution. In America, however, the US Constitution, despite its
imperfections, is a lasting legacy of the Enlightenment, and the philosophy
lives on in classical-liberal thought and institutions.

entail. To limit inheritance to a specific class of heirs.

enterprise. An undertaking or productive activity, or a firm (or a set of

firms under common ownership) that engages in it. See also free enterprise.

enterprise zones. Districts in which taxes and regulations are reduced.

The supply-side effect may be limited if site rents rise to equalize the normal
returns inside and outside the zones. But the fact that such zones are being
proposed and implemented shows the acceptance of supply-side policies, and
the existence of political barriers preventing their implementation economy¬
wide.

enthymeme. An argument in which some premises or conclusions are im¬

plied but not explicitly stated.

entrepreneur. The role or ideal type that organizes the factors of produc¬
tion to new uses, methods, and markets. Entrepreneurship is a type of labor,
but its earnings are not based on its marginal product, or contribution to the
value of output, as with ordinary labor, but on entrepreneurial profit due to
successfully anticipating and shaping the market demand for a product. Some
economists classify entrepreneurship as a fourth factor of production, in
effect splitting human exertion into two categories.
What an entrepreneur confronts is not ‘risk’ but uncertainty (see Frank
Knight), which cannot be insured against: an entrepreneur is ‘acting man
exclusively seen from the aspect of the uncertainty inherent in every action’
(Mises, 1944, 1966: 253). Entrepreneurs are not a set of specific persons but
persons who take on that role. Though entrepreneurial profit is based on
uncertainty, it is not a return on uncertainty, but on the human exertion (hence
 environment 129

labor) that attempts to exploit (exploitation) (1) perceived opportunities in

exchange for an uncertain gain.
Entrepreneurs are the ‘drivers’ of an economy, introducing innovations
and conducting arbitrage. Key economists who have written on entrepre¬
neurship include Cantillon, Casson, Kirzner, Knight, Mises, and Schumpeter.
Austrian economists (Austrian economics) have been in the forefront of
research on entrepreneurship.

entrepreneurial failure. The failure (fail) of entrepreneurs to take advan¬

tage of an available profitable opportunity. This contrasts with market fail¬
ure, which is a systematic, long-term failure of the market process to provide
demanded goods or to do so at marginal cost.

entrepreneurial profit Economic profits earned by entrepreneurs, consist¬

ing of revenues minus the costs of factor inputs, including the entrepreneur’s
opportunity costs. Such profits tend to become reduced over time as others
copy the products and methods of the innovating (innovations) entrepreneur.

entropy. The increasing disorder and unusable energy of a closed system.

A correct application to economics is that capital goods, including infrastruc¬
ture, are subject to entropy, wearing out unless investment is applied to
maintain them. The crackpot application is that entire economies wear out; it
is false because the earth obtains ever new energy from the sun, and there has
been no lack of innovation.

entry. Initiating affiliation in an organization, or starting operations in some

field such as an industry (2), or the option of doing so. In competitive
industry, barriers to entry (the formation of new firms) are low.

entry monopoly. A fixed amount of a resource, so that a new firm must

obtain some of the resource from an existing firm rather than expand the
supply. The fixed resource thus commands a monopoly price. An example is
taxi medallions that are fixed in number, or land within some economic
region. Classical economists often referred to such monopolies.

envalued. Having moral or other values, as with envalued theory that in¬
cludes a moral dimension. Syn. value free.

environment. The natural and produced surroundings and habitat. The natu¬
ral environment includes the atmosphere, oceans and other waters, soil, wild¬
life, and audial as well as visual effects. The environment is a collective
good, and many environmental amenities (1) have been destroyed due to a
130 environmental charge

lack of PROPERTY RIGHTS - a TRAGEDY OF THE UNMANAGED COMMONS. The assign¬

ment of enforced rights and charging users for the costs of use would lead to
the preservation of the environment. However, an open question is the rights
of future generations, who cannot vote or make purchases. It is generally
recognized that the preservation of renewable resources is a wise policy for
both the present day and for posterity.

environmental charge. Charges compensating for environmental destruc¬

tion, as with effluent fees. These are also referred to as ‘green taxes.5 See
also ENVIRONMENTALISM.

environmentalism. A movement and body of thought which places high

importance on maintaining the natural environment and ecology. Free-mar-
ket environmentalism maintains that markets offer the best protection. Much
of government environmental policy does not use cost-benefit analysis, and
many governments, especially in command economies such as the former
Soviet Union, have been among the worst polluters. Among many market-
oriented books are Panayotou (1993) and Anderson and Leal (1991).

epistemics. The study of knowledge, and emphasis on the role of knowl¬

edge, as with the Austrian school (Austrian economics).

equal opportunity. 1 The absence of legal privileges, a cornerstone of

classical liberalism (classical liberal). 2 Equality with respect to natural
opportunities, as claimed by geoism. 3 Legally mandated equal treatment of
persons in sexual, racial, and other categories, which free-marketeers hold
violates private property and the freedom of contracting (contract).

equal pay. See comparable worth.

equal sacrifice. The criterion for taxation that all taxpayers should suffer
the same loss of marginal or absolute utility, hence to base taxation on the
ability to pay. The alternative is the no-sacrifice approach of benefit taxation
or charges (benefit principle), which is a quid pro quo. The subjectivity and
unmeasurability of utility makes equal sacrifice dubious, and the benefit
principle makes such sacrifice redundant.

equality. The situation in which nobody is or has greater or less than the
others. There are various levels and types of equality, such as of opportunity,
wealth, and moral worth. The basis of classical-liberal and free-market
* ethics is equality before the law, based on equal moral worth. Equal liberty
provides equal legal opportunities. Equal outcomes, such as income or wealth.
 equity 131

is inconsistent with equal opportunity, since some will not have the opportu¬
nity to advance in wealth, and it contradicts equal liberty, since some are held
back by force. The most fundamental equality, of moral worth, thus endows
humanity with equal natural rights, but not of any claims to egalitarian
income or wealth. Georgist or geoist (geoist ethic) thought would go further
and endow human beings with an equal claim to the rent of economic land,
since equal self-ownership does not extend to natural resources. See also
INEQUALITY.

equation of exchange. The equation MV = PT, where M is the money

supply, V the velocity of money, P the price level, and T the amount of
transactions or output in real (3) terms. If V and T do not change, then an
increase in M leads to an increase in P. Some Austrian (Austrian economics)
economists such as Mises have considered the equation a holistic concept that
does not really explain the purchasing power of money (Greaves, 1974, p.
41). See Cantillon effect.

equation of inequality. Inequality equals concentration times number

(Foldvary, 1995): I = CN.

equilibration. Exhausting gains from trade (exhaustation of gains from

trade). An exchange reduces the marginal utility of the next item of a type,
thus as exchange proceeds, gains are reduced until they are exhausted. Mar¬
ket exchanges are thus equilibrating, but innovations provide new opportuni¬
ties to gain from trade, and shifting supply and demand also create ever new
opportunities.

equilibrium. The exhaustion of gains from trade, the result of equilibra¬

tion. At exhaustion the momentum of the relevant variables is constant, though
not necessarily zero (stationary). This implies market clearing, the harmony
of plans, and the cessation of economic action (price or quantity movements).
Markets equilibrate as gains from trade are exploited, hence markets move
towards equilibrium, but they do not reach equilibrium as the market agents
continuously shift their demands and supplies. See also the evenly rotating
economy, which has an equilibrium of constant momentum.

equity. 1 Moral (1) justice. An economic (1) process or outcome can be

judged for its efficiency (1) and for its equity. Judging equity presumes a
moral standard to judge by, which would be a universal ethic independent of
any particular culture or arbitrary personal view. It is generally agreed that
the basis of such an ethic and of equity is the moral equality of human
beings. 2 A firm’s assets minus its liabilities, which can be negative. Also
132 equity/efficiency trade-off

called ‘net worth.’ 3 Leg. Justice according to fairness rather than common or
statute law.

equity/efficiency trade-off. An alleged trade-off between equity (1) and

efficiency (1). The allegation is that an allodial *free market is efficient,
but intervention is required for a more egalitarian (egalitarianism) distribu¬
tion of income, which would reduce efficiency. But a third option is a geocratic
(geocracy) free market that is both efficient and more egalitarian than the
allodial case.

ERE. Evenly Rotating Economy.

ESOP. A common type of employee stock ownership plan.

Esperanto. The most popular international language, constructed by L.L.

Zamenhof in 1887, in use by several million persons. With its simple, con¬
sistent structure, its universal use would reduce language barriers and transla¬
tion costs. Nationalist control over education may be the main barrier to its
adoption. Adherents share an ideology of global peace and harmony. Other
constructed languages such as Interlingua have their advocates as well.

estate. 1A large landholding. 2 The assets of a deceased person.

estate tax. A death tax, on the value of estates (2). An inheritance tax is
levied on an inheritor, while an estate tax is on the estate after paying
liabilities and donations, before it is divided into inheritances.

estoppel. The prevention of a statement or claim contrary to a previous

statement or act.

etherialization of money. The tendency for money to become increasingly

intangible. Historically, purchasing media have been evolving from a com¬
modities to paper notes to electronic accounts.

ethic. A set of rules which apply to some sets of act and which result in
moral (1) values of good, evil, or neutral for each act. The market process
adheres to a universal ethic in which voluntary acts are good or neutral, and
invasions are morally wrong (evil). Business ethics deal with the treatment of
employees, the collection of debts, contracts, and other such matters.

etiology. The determination and assignment of causes.

 excess benefit 133

euro. The currency of the European Union, scheduled to replace the ecu in
1999 with the creation of the European Monetary Union, with coins and
paper notes to be issued in 2002. The currency was established by the
Maastricht Treaty of 1992 and the Madrid summit of 1995. According to the
plan, European Union national currencies will become denominations of the
Euro and will eventually be replaced by it. However, the harmonization of
monetary policies remains problematic. The UK obtained the option of not
joining the EMU European monetary union.

European Monetary Union. A common currency and monetary system

for the European Union, now in formation, to replace the European Monetary
System of coordinating exchange rates and monetary policy.

European Union. Formerly known as the European Economic Community

and the Common Market, it is a customs union in Europe, established in
1957, that has been moving towards economic union. This bloc has absorbed
members from the European Free Trade Area, with which the EEC now has
free trade.

evasion. Escaping a tax or regulation by illegal means.

evenly rotating economy. A model created by Ludwig von Mises of an

economy in which the same pattern repeats periodically, there being no entre¬
preneurship (entrepreneur). The model is utilized in Austrian economics to
examine the introduction of changes. Its equilibrium is one of constant mo¬
mentum.

evidence. Data derived from observations, which test a hypothesis, provide

facts for premises, and constitute knowledge for economic history.

evil. A person’s sentiment or the moral (1) value assigned by an ethic for
something coercively harmful or disagreeable.

evolution. See social evolution.

ex ante. Lat. Beforehand; intentions before an event. This and the ex post
concepts were developed by Gunnar Myrdal.

ex post. Lat. Afterwards; actuality after or due to an event.

excess benefit. The benefit of a tax or charge, besides the expenditure of

the funds. A charge for pollution, for example, provides the benefit of re-
134 excess burden

duced pollution, and geo-economists (geo-economics) argue that a charge or

tax on site rents can provide the benefit of inducing an efficient current use
of land and dampening business cycles.

excess burden. The deadweight loss or social cost (social costs and ben¬
efits) of a tax, beyond the private (1) costs of paying the tax, which is not an
ECONOMY-wide cost but a transfer of funds. A tax on exertion, whether it is
based on income, sales, goods, or value-added, shifts the supply curve to the
left, towards lower supplies for each price or higher after-tax prices for each
quantity. The demand curve cuts the higher supply curve at a higher price and
lower quantity. The reduced quantity, relative to what consumers would have
voluntarily (voluntary) wanted, is the excess burden (graphically, a triangle
below the demand curve). This is the social waste due to the tax. The excess
burden also consists of the time and resources devoted to complying with the
tax, the compliance cost. When the supply curve is fixed, hence graphically
vertical, then the supply does not shift, and there is no excess burden, the full
burden borne by the owner in keeping less of the yield.

exchange. The transfer of a good by one party to another party, and in

return, the other party transferring a different good to the first party. Both
parties deem themselves to be better off, because each transfers a good with
lesser marginal utility for one that has greater marginal utility, utility being
subjective. Market economies are based on the division of labor, with re¬
sources devoted to their most productive use, in accord with their compara¬
tive advantage, and the exchange of goods. The typical political process, in
contrast, is based on an imposed extraction of resources (taxes) and the
imposed provision of programs (1).

exchange control. Restrictions on importing (import), exporting (export),

or converting currency as well as precious metals.

exchange rate. The ratio at which currencies are exchanged, that is, the
price of a currency relative to another.

exchange value. The market value of a good, in contrast to its subjective

use value.

excise tax. A tax on a privilege or activity, or on sales, rather than directly

on wealth or income, though the amount of tax be measured by the amount of
activity. A sales tax can be considered to be a tax on the activity of the
transaction, the tax measured by the amount of the sales, for example a 6
percent sales tax is 6 percent of the sales. The US income tax is legally an
 expectation 135

excise tax on the activity of earning income, measured by the amount of

income. Some excise taxes have been paid using tax stamps. See also direct
taxes.

excludable. A collective good for which others can be prevented from

using and persons using it can be expelled from the set of users. Some
economists define collective goods as only non-excludable, but the more
comprehensive definition as simultaneous use would include excludable goods.
See also club goods.

exertion. The application of labor to the production of wealth.

exhaustion of gains from trade. The reduction in the marginal utility of

the next exchange of the same goods as a result of a voluntary exchange of
the goods. Using Menger’s example, if one rancher has cows but no horses,
and another rancher has horses but no cows, the first exchange of a cow for a
horse provides a great increase in marginal utility, the second exchange less
marginal utility, and so on until a further exchange will provide no increase,
hence gains from trade have been exhausted.

exhaustive voting. Voters choose their least favored option, which is then
removed from the selection pool, and the process loops until one is left. This
process avoids the paradox of voting.

existential good. A good that actually exists, rather than a potential or

hypothetical one. As an application, collective goods can be defined as exis¬
tential rather than potential. By that definition, producible collective goods
are not excludable through non-production.

exit. Terminating affiliation in an organization, or ending operations in some

field such as an industry (2), or the option of doing so. The ability to exit a
community, jurisdiction, or organization is a vital element of freedom. Internal
exit, or secession, is the ability to withdraw from a jurisdiction without leaving
its boundaries. As noted by Hirschman (1970), the other option for changing a
collective situation is voice (voting and persuading). See also entry.

exogenous. From outside the system.

expansion. The phase of a business cycle in which output is increasing.

expectation. The value that one estimates a future variable will have, or the
probability of the occurrence of a future event.
136 expenditure

expenditure. Funds spent for goods and services. Government expenditure

can be measured as money spent for inputs for physical services such as hours
of streetlights, or for benefits received such as some reduction in crime.
Government expenditures are usually measured by the cost of inputs in
producing physical services, since the output is difficult to evaluate.

expenditure tax. A comprehensive tax on spending, whether it is a sales

tax or a tax on all income not saved. Usually, only expenditure for consump¬
tion is intended, which then raises the difficulty of distinguishing between
them. An expenditure tax burdens borrowing (borrow), since an extra amount
must be spent to pay the tax and extra interest on borrowings, while an
income tax penalizes savings. But since overall, borrowings equals savings,
an income and an expenditure tax have similar excess burdens, although the
compliance cost might be less for an expenditure tax. Advocates of a
changeover to an expenditure tax also need to explain why an expenditure tax
is the best of all tax alternatives, not just that it is superior to the income tax,
since the alternative of taxing economic rent avoids the excess burdens
present in both income and expenditure taxes.

expense. A payment for a good or service, or for a loss.

expense ratio. Operating expenses divided by average net assets. For mu¬
tual funds, this ratio indicates the extent of the fees.

experiment. A test or trial in order to discover the outcome. Entrepre¬

neurs engage in experiments when they innovate (innovation), trying out new
products and methods in the market. A successful experiment generates an
ENTREPRENEURIAL profit.

‘experiments never fail.’ While a new enterprise or innovation can fail in

the market, the experiment itself does not fail, since failure provides the
knowledge that the particular product or process is not profitable.

explain. To eliminate a puzzle.

explanandum. That which is to be explained (explain), the explanation

being the ‘explanans.’

explicit. Having an observable manifestation, such as the exchange of money

for goods, a written or oral contract, or transactions that a bookkeeper
records. In contrast, implicit payments or contracts have no visible manifesta¬
tions, yet are just as real (4).
 external effects 137

exploitation. 1 Taking advantage of a resource by putting it to use or by

obtaining its benefit. 2 Extracting more work or paying the worker less than
what would be warranted (warrant) in a truly voluntary exchange. Exploi¬
tation is due to legal privileges that restrict one party’s options, thereby
enabling the exploiting party to extract as much gain as possible from the
victim.

export. A good that is sold to foreigners, whether they are located outside
or inside the exporting country.

expropriation. The confiscation of property by a government, particularly

without any compensation.

extended order. The spontaneous order of a market economy, thus called

by F.A. Hayek to indicate the society-wide nature of this order, in contrast to
organizational order.

extensive margin of production. The area where a new factor such as

land would be put to production. This area has the least productive land or
other factor in use, and the best land or factor not yet under production. For
labor, the extensive margin consists of the best workers not yet employed. In
the law of wages, the wage level is determined at the extensive land margin,
where land is still free. Abstracting from capital goods, if rent is zero, then
the whole product constitutes wages, and that wage determines the general
wage level due to competition among workers.

extent of the market. The scope of market processes, and the size of the
market. This determines the division of resources.

external economies of scale. Economies due to the expansion of an indus¬

try (2).

external effects. Uncompensated effects of economic (1) acts on third par¬

ties, those who are not party to the activity itself. An external effect alters the
utility (utility, marginal) of another person, without any compensation for
negative effects, and without the party having to pay for received benefits, or
positive effects. With compensation (1), the effects are internalized. Syno¬
nyms include external costs, neighborhood effects, externalities, spillovers,
and external economies and diseconomies.
A relevant (or Pareto-relevant) external effect is one which would be
altered if there were compensation, whereas a non-relevant effect is not
altered; for example parents’ expenditure for schooling that takes place whether
138 external orientation

or not they receive funding. In a relevant effect, gains from trade can take
place, since compensation can alter the situation to mutual benefit.
In inframarginal external effects, small changes in the situation do not
change the effect on others. In marginal external effects, small changes do
alter the effects.
The lack of compensation often exists because property rights are not
established and enforced for the resources affecting third parties, including
the public at large. If, for example, polluters have to compensate the affected
parties, the pollution is no longer a negative external effect, and there would
be less of it. If transaction costs are relatively small, then the Coase theorem
states that the parties will negotiate an efficient (2) solution.
Congestion occurs when an extra user of a route imposes a crowding cost
on the others; the users do not have a property right in the unobstructed usage
of the route. One remedy there is a congestion fee that makes the user pay for
the congestion cost, reducing congestion, protecting the right to unobstructed
usage.

external orientation. The degree to which foreign markets impact an in¬

dustry (2) or economy, including the share of revenues earned in foreign
markets and the cost of imported inputs. The external orientation of industry
(2) in the USA, UK, and other countries has increased substantially in recent
decades. See Campa and Goldberg (1997).

externality. Synonym for external effect.

extroversive labor. Labor engaged in for the wages rather than for the
satisfaction of the work itself, in contrast to introversive labor.
 F

factor. A resource category that is an input for the production of wealth.

See also factors of production.

factors of production. The three main classical categories of factors, land,

labor, and capital goods. See also entrepreneur.

fail. A business fails when it ceases operations after suffering losses. The
market process fails when actors systematically and over the long run do not
equilibrate potential gains from trade (real-world failure implies real-world
costs, hence when transaction costs are greater than gains, there is nothing
to equilibrate). Real-world failure only exists relative to real-world feasible
perfection (perfect). See also constitutional failure, entrepreneurial fail¬
ure, GOVERNMENT FAILURE, MARKET FAILURE.

Federal Reserve Notes. The money in current use in the USA, created by
the Federal Reserve System when it expands bank reserves, funds which are
then multiplied by bank loans. Federal law makes these notes legal tender.
Proposals for free banking would freeze the supply of notes (the monetary
base), future notes issued by private banks. See also banknote, open market
OPERATIONS.

Federal Reserve System. The central bank of the USA, referred to as the
FED. It regulates the banks, controls the money supply, and provides whole¬
sale banking services to the private banks. In a pure free market, the FED
would either cease to exist, or else membership would be voluntary, and
future money would be privately issued. See also Federal Reserve Notes.

federalism. In economics, federalism can refer either to the division of

fiscal and regulatory (regulation) authority between a central government
and subordinate administrative units, or it can refer to political federalism, in
which the governance of a territory is split among areas having parallel
governing sovereignty.
The USA, for example, has political federalism. The 50 states exert sover¬
eign governing authority parallel to that of the federal government; neither is
supreme or subordinate, but they have in some cases distinct roles under the
US Constitution. The Indian nations, with governments and territories in

139
140 fee

reservation lands, are a third parallel series of governments, although their

governing powers have been subject to federal authority.
«

fee. 1 Payment for services. See also deed fee, impact fee, user fee. 2
Property held without arbitrary restrictions. See fee simple.

fee simple. Absolute ownership of land and its rent; allodial title.

feminist economics. A school of economic thought that asserts that main¬

stream economic theory is male-centered in its premises and applications.
Economic development aid, for example, often ignores the property rights and
roles of women. Home production is underrated and not included in GDP. It is
not clear, however, how the foundations of economics would differ with a
feminist approach. Feminist thought intersects with many other schools, from
neoclassical (neoclassical economics) to postmodern. See Grapard (1996).

feud. Land held in exchange for service to a feudal lord.

feudalism. A land-tenure system in which one agent ultimately owns the

land within some jurisdiction, all others having to pay rent to occupy and
use land. In the Middle Ages, rent was paid to a lord, the lord being granted
the estate in exchange for military service. Some free-market theorists assert
that in modern times, the state is the feudal lord. The term ‘feudal’ often has a
pejorative connotation when applied to modern times.

fiat money. Money not backed by or defined as a commodity, hence having

value. It exists by fiat, the declaration by government that it is
no intrinsic
legal tender and the official national purchasing medium. As a government
monopoly (1) currency, fiat money can be inflated (inflation) without limit.

finance. The handling of funds.

financial. Regarding funds, accounts, and investments.

financial assets. Funds. These are claims (1) on wealth rather than real
(2) wealth. Such assets include money, bonds, shares of stock (2), and deriva¬
tives (2).

financial capital. Synonym for financial assets.

firm. An organization which transforms inputs into outputs. Internally, a

firm reduces transaction costs, uncertainty, and opportunism by maintaining
 fiscal policy 141

a hierarchical order. Economic theory typically models the firm as a profit -

maximizer. Ownership types include single proprietor, partnerships, associa¬
tions, and corporations. Government agencies and nonprofit organizations
also function as firms.

First Amendment. The first amendment to the US Constitution and first of

the 10 Bill of Rights, protecting the free exercise of religion, speech, assem¬
bly, and to petition the government for redress of grievances. Speech, reli¬
gion, and assembly are also economic (1) acts and rights.

first order. See goods of first order.

fisc. The treasury of a government agency.

fiscal. Regarding the government treasury, that is, revenues, borrowings

(borrow), investments, and expenditure.

fiscal drag. The increase in taxes with inflation when a graduated income
tax is not indexed to inflation; It drags economic activity by taxing it at a
higher effective rate.

fiscal equivalence. A situation in which government services are fully paid

for by the recipients of the benefits and no one else, and the payments equal
the perceived value of the benefits. Syn. benefit principle.

fiscal federalism. The division of public finances among levels of govern¬

ment and the relationships among the levels, including transfers between
levels. See also intergovernmental grants.

fiscal gap. The difference between government *expenditures and the

smaller tax revenue available due to political forces.

fiscal illusion. A lower public perception of tax *costs than is actually the
case, because of the multiplicity of taxes, hidden taxes, and ignorance. For
politicians who gain from expenditures, fiscal illusion induces greater spend¬
ing and an illusionary tax structure. Illusion can be minimized with a
single, direct, visible tax, constitutionally mandated.

fiscal neutrality. See neutral tax.

fiscal policy. Taxation and government spending, whether for government

operations or to influence the economy. The use of fiscal policy for macro-
142 fixed

economic effects includes i) geocratic (geocracy) policy which seeks an

efficient use of land and the avoidance of disincentives and speculative
(speculation) (3) land booms, ii) supply-side policies that stimulate growth by
reducing intervention, iii) demand-side policies that seek to increase output
with greater spending or lower taxes, or to decrease inflation with the
opposite. Demand-side policies only treat effects, thus leave the causes to
continue, may create long-term instability and waste, and may not be effec¬
tive if anticipated or if offset by crowding out.

fixed. Unchanging indefinitely, or for a certain period of time such as one

year.

fixed capital. that remain for a long time, such as real

Capital goods
estate, large machines, and infrastructure. Contrast: circulating capital.
Too much investment (1) in fixed capital can leave a firm short of funds for
circulating capital.

flat tax. A tax rate that is the same for all levels of value, income, or sales.
The term is usually used in reference to a flat rate income tax, but such
proposals often have several rates, including a zero rate for rental and
interest income.

floating exchange rate. Exchange rates between domestic and foreign

currencies that are set by supply and demand. Managed or dirty floats have
interventions to affect the rates.

flow. The movement of a variable such as funds during some time interval,
in contrast to a stock.

flying geese formation. The observed pattern of exports from East Asia, in
which Japan first produces and exports new goods, production then shifts to
the four tigers where costs are lower, and finally the exports shift to Malay¬
sia, Thailand, Indonesia, and China.

flypaper effect. The effect of government *grants to lower-level govern¬

ments to stick, that is, add to expenditures and not reduce the level of taxation.

follow. To go behind a person in the same direction, keeping the other in

1
sight. 2 To result from. 3 Adhere to. 4 Comprehend.

follower. 1 In the sense of follow (1), a member of the school of thought of

a preceding mentor, who looks to the mentor for inspiration, a world view,
 formal analysis 143

and some basic theory. 2 In the sense of follow (3), one who is a follower (1)
and also adheres closely to the thought of the mentor.

force. Physically, a force equals mass times acceleration, which is a change

in momentum, and so, economically, a force is any influence that changes the
behavior of an agent, changing the supply or demand for a good or the
quantities supplied or demanded. Legal force is a government mandate, crimi¬
nal force (as in ‘force and fraud’) is an invasion, and a market force is a
change in voluntary action. Momentum can consist of a stationary variable
or one moving at a constant velocity, hence a change in the former is any
movement, while a change in the latter is an acceleration or change in
direction.

forced riders. When government uses taxation to pay for collective goods,
the taxpayers are forced riders. Free riders use the good without paying.

forced savings. An unwanted reduction in consumption because of unavail¬

able goods or because an expansion of credit (1) beyond the available sav¬
ings has channeled more resources into capital goods.

foreign aid. Gifts by governments to other governments. These include

grants, low interest loans, loan guarantees, and technical assistance. Much of
such aid has been unproductive. Private aid such as the Soros Foundations
and the Civic Education Project, as well as funds sent by citizens to other
countries, has also been important.

foreign trade. Trade with agents who are not permanent residents of the
country. Besides the import and export of goods and services, foreign trade
includes tourism and other services exported within the country to foreign
visitors.

forfeiture. The loss of property, such as after committing a crime or from

CONFISCATION.

formal analysis. The use of mathematics or some other non-verbal lan¬

guage (such as formal logic) as the only language in the construction and
analysis of a model. Verbal text may provide incidental explanations and
illustrations, but the actual construct is the logical or mathematical expres¬
sion. Neoclassical economics is now centered on formalism, and this is
criticized by many in the Austrian (Austrian economics), geo-economic,
institutional (institutional economics), and some other schools (for example,
Boettke (1996)). See also rigor.
144 formal sector

formal sector. The sector of an economy which basically complies with

taxation, law, and regulation, and is counted in the GDP. For some goods
and services, restrictions and taxes make formal production unprofitable,
hence these are provided by the informal sector. In economics, compliance
with taxation, laws, and regulations.

foundation. 1A set of axiomatic *propositions, forming the base for theory

derived therefrom. 2 A nonprofit organization that provides funds for be¬
nevolent (benevolence) purposes.

Foundation for Economic Education (FEE). A nonprofit organization,

based in New York state, dedicated to the preservation of individual freedom
and the private property order. Founded in 1946 by Leonard E. Read and
given direction by its adviser, Ludwig von Mises, FEE publishes books and
The Freeman journal, conducts seminars, and has launched the Freeman
Society Discussion Clubs.

foundational. Regarding or based on a foundation (1).

four tigers. The rapidly growing East-Asian countries - Hong Kong, South
Korea, Singapore, and Taiwan.

fractional reserve banking. Maintaining a small fraction of bank deposits

(high-powered money) on reserve, while lending out the rest. The rationale is
that the reserve satisfies normal requirements for cash and liquidity, and a bank
can borrow emergency funds if needed. Fractional reserves enable the banking
system to multiply an increase in reserves into new money, since loaned funds
are typically redeposited, thus made available for new loans. Some critics
accuse fractional reserve banking as fraudulent, since only a fraction of depos¬
its are on hand, but if the practice is known, then the customer has a choice of
banking with fractional or full reserves. See also warehouse banking.

Francisco Marroquin. A private university in Guatemala with a market-

oriented economics program.

fraud. Deliberately making a false description about a product to induce a

sale. This is a type of theft, since a voluntary *exchange is based on a
desire for a good based on its known true qualities.

free. In terms of individual freedom, free means not subject to arbitrary

legal restrictions or imposed costs. A free person is legally able to do any¬
thing that does not coercively harm others. See also freedom.
 free-marketeer 145

free banking. A banking system free from the central bank and other
government controls. With free banking, banks have unrestricted branching,
they can issue private (1) banknotes, and there are no restrictions on interest
rates or the extension of credit (1). There is also no mandatory deposit
insurance. See Selgin (1988).
With free banking’s competitive note issuing, banknotes are money substi¬
tutes convertible into base money such as gold or a frozen base of govern¬
ment money. The money supply does not expand beyond what the public
demands (1) to hold, since private banknotes can be redeemed for other notes
or for the base money. Free banking was practiced in several countries,
notably in Scotland (White, 1984).

free capital. Circulating capital or loanable funds.

free enterprise. Enterprise which is legally free. Truly free enterprise is

unrestricted and untaxed so long as it is honest and peaceful. The term ‘free
enterprise’ is often applied to private enterprise, even when subject to inter¬
vention.

free good. A good whose quantity supplied is greater than the quantity
demanded at a zero market price. It is not economically free just because an
agent is giving it away, but because the market price set by supply and
demand is zero, or would be if property rights to it are assigned. A good with
a positive price is scarce (1), and one with a negative price is a bad.

free market. A market in which peaceful and honest enterprise and con¬
duct are unrestricted and not arbitrarily (arbitrary) taxed (tax), contracts
are enforced, and property rights specified and protected. The term ‘free
market’ is often applied to mean private enterprise, even when hampered by
government, but a pure free market has no intervention, hence no taxation of
profits, wages, sales, produced goods, or value-added, and no restriction on
voluntary action.

free-market economics. Theories of the market process as it would func¬

tion without intervention, or the theories of FREE-MARKET-oriented econo¬
mists and schools of thought. The principle free-market schools are geo¬
economics, Austrian economics, the Chicago school, the UCLA school, and
the Virginia School of political economy. Law and economics can also be
applied to show the inefficiency of much government policy.

free-marketeer. One who views genuinely free markets as the best eco¬
nomic system and, for some, also the morally proper system of property
146 free port

ownership. They are adherents or advocates of genuine free markets. Within

this group there is wide variation as to the best particular institutions and the
role Of GOVERNMENT.

free port. A port into which imports enter free of tariff. They can be taxed
(tax) if the goods are moved from the free port zone into the domestic
ECONOMY.

free rider. An agent who uses a scarce (1) good without having to pay for
it because the provider is not able to charge the user. For alleged free riding,
see PUBLIC GOODS.

free trade. Trade free of any tariffs, quotas, and arbitrary regulatory (regu¬
lation) restrictions or ‘non-tariff barriers.’ A free-trade policy might include
barriers based on considerations of national defense. The policy of trade
limitation is called protectionism. The benefits of free trade are based on
comparative advantage. Henry George stated that ‘true free trade’ includes
the abolition of domestic barriers, including taxes, as well as barriers to
foreign trade.

free-trade area. A trading bloc of countries which eliminates tariffs among

its members but retains country trade policies. An example is NAFTA. See
also CUSTOMS UNION.

free will. The ability of an organism to choose (choice) its action rather
than have action compelled by programmed responses to stimuli that effec¬
tively leave it without true choice. Determinism seems to be the opposite,
stating that actions are inevitably caused by stimuli and programming. Even
if determinism is true, the fact that human beings do not know the determina¬
tion of their acts, and that their own future acts seem uncertain (uncertainty),
is sufficient for them to have free will in effect, that is the feeling that one is
in control of one’s acts. Human morality and therefore human rights and
liberty are based on such free will.

freedom. An absence of arbitrary restrictions. Legal freedom is the ab¬

sence of legal restrictions on peaceful and honest action. Individual freedom
and liberty are synonyms for legal freedom. Physical freedom is an absence
of physical restrictions such as prison walls.

The Freeman. A journal devoted to free-market ideas, published by the

Foundation for Economic Education.
 fringe doctrine 147

freeze the base. The policy of a transition to free banking by not issuing
any more national currency. The national currency becomes the monetary
base, to which private banknotes are redeemable.

friction. In physics, resistance to motion, hence in economics, cost-resist¬

ance to transactions in the form of opportunity costs beyond the price of the
goods, such as travel and search time.

frictional unemployment. Workers not employed (employment) because

they have left one job and are searching for another one. Such unemployment
is disregarded for full employment.

Friedman, Milton (1912—). The most famous economist worldwide, he

won the Nobel economics prize in 1976 and was influential in shaping the
theories of the Chicago school, having been appointed Professor of Econom¬
ics there in 1948. His academic contributions include monetarist theory,
money and banking theory and history, the methodology of positive econom¬
ics, human capital, and the consumption function. His books and television
shows on economic freedom have had a large audience. Friedman also wrote
a textbook, Price Theory (1962). Besides his major status as a monetarist
(monetarism), Friedman originated the permanent income hypothesis, dem¬
onstrating the limitations if not ineffectiveness of Keynesian demand-side
policy. He co-authored A Monetary History of the United States 1867-1960
with Anna Schwartz, complementing his theoretical work on the quantity
theory of money. Friedman has remained a leading advocate of economic
freedom, having played a major role in the research on the ongoing book and
project, Economic Freedom of the World (Gwartney et al., 1996).

friendly society. A mutual insurance association. These provided health¬

care services prior to the socialization of medicine.

fringe benefits. Wages aside from the nominal money wage, usually paid
in kind, such as with insurance and pensions. These benefits are generally
tax-deductible to employers, but not taxable income to employees, hence the
incentive is not to pay money wages but to pay them in kind. In a pure free
market, without any income tax, the tendency would likely be to pay the
entire wage in money and then have the employee choose his mix of insur¬
ance and savings plans, which would provide portability, choice, and ac¬
countability.

fringe doctrine. Doctrines beyond the fringes of academic respectability,

such as in the newsletters of ideological (ideology) interests.
148 ‘From each... .

‘From each....’ See ability.

full employment. An economy in which the only unemployment is fric¬

tional (frictional unemployment).

full faith and credit. The pledge by government to pay the deposit insur¬
ance liabilities even if the insurance fund runs out.

full-spectrum economics. Economic theory and teaching that encompasses

and integrates warranted (warrant) theory from all schools of thought, rather
than only using the approach and theory of one or two schools.

functional distribution. Distribution (1).

fund turnover. The amount of buying and selling of securities in a mutual

fund per year. A high turnover generates more fees and capital gains taxes.

funds. See financial assets.

futures contract. A contract to buy or sell a certain quantity of a commod¬

ity by a certain date, typically purchased with a deposit of a small fraction of
the value of the contract. The contracts are used for hedging and for specula¬
tion (3), and there is a buy contract for each sell contract.
 G

Gaffney effect. The effect of the public collection of rent on equalizing

the discount rate (1) for land usage. People have differing credit (1) costs
and availability when buying land. If the land rent is publicly collected,
purchasers pay rent in lieu of a mortgage and hence in effect obtain land with
universally available credit and a common rate of discount. Coined by
Nicolaus Tideman, based on the work of Mason Gaffney.

Gaffney, Mason (1923-). Professor of Economics at the University of

California, Riverside. He founded the Institute for Economic Policy Analysis
in Victoria, Canada, the Committee on Taxation, Resources and Economic
Development (TRED), and was a co-founder of the Geo-economics Society,
and has been a consultant on natural resources and land rent. Gaffney’s
work on business cycles has integrated Austrian capital theory (Austrian
theory of business cycles) with geo-economic land theory.
Gaffney’s book The Corruption of Economics (1994) (with Fred Harrison)
reveals how neoclassical (neoclassical economics) theory has been altered to
obscure the role of land rent. His other books include Land as an Element of
Housing Costs (1968), and Containment Policies for Urban Sprawl (1964).
Among his many significant papers are ‘Adequacy of Land as a Tax Base’ in
The Assessment of Land Value (1970), ‘Toward Full Employment with Lim¬
ited Land and Capital’ in Property Taxation, Land Use, and Public Policy
(1976), ‘The Role of Ground Rent in Urban Decay and Revival,’ St. Johns
University (1989), and ‘Land as a Distinctive Factor of Production’ in Land
and Taxation (1994). Gaffney also wrote an unpublished translation of Stud¬
ies in Social Economics by L£on Walras (1896).

gains from trade. The increase in marginal utility for each party in a
voluntary * exchange. The goods of the other party have more marginal
utility (are preferred) to the goods of similar market value that one has.
Trading in a particular good will thus take place until the gains are exhausted,
that is, the marginal utility of the good relative to its price will be no more
than that of other goods. See also equilibration.

Galt’s Guich. The place in Ayn Rand’s * Atlas Shrugged where the people
of ideas have retreated to while ‘on strike’ from society. They create their
own voluntary *community, where all is obtained by voluntary exchange.

149
150 game

neither sacrificing nor requiring sacrifice. This term has remained as a meta¬
phor for such communities.

game. Interaction among persons, following specific rules, with specific

payoffs for winners and possible penalties for losers. A game can be non-
cooperative, with rivalry among the players, or cooperative, in which there is
a positive-sum outcome. In a zero-sum game, what one player gains, the
other loses. A famous game much used in public-choice theory is the prison¬
er’s DILEMMA.

game theory. A theory of decision making with incomplete information,

using games, usually with a mathematical methodology.

GATT. General Agreement on Tariffs and Trade.

GDP. Gross Domestic Product.

GDP deflator. A price index used to deflate inflated measures of GDP, to

compare real (3) GDP among years.

gender. Grammatically and now with regard also to human beings, sexual
identity as either male or female.

General Agreement on Tariffs and Trade. An international trade agree¬

ment adopted in 1947, now called the World Trade Organization (WTO).
Through various agreements or ‘rounds,’ the organization has lowered trade
barriers, stimulating international trade and the global economy. While pro¬
viding a forum for the settlement of trade disputes, the WTO also poses the
possibility of global regulations that would hamper markets and favor spe¬
cial interests.

general equilibrium. ‘General’ here means ECONOMY-wide, and the term

means the existence of equilibrium in the entire economy, the simultaneous
determination of all prices and quantities for all goods at some moment in
time. The economist who formulated this mathematically is LLon Walras,
while Debreu and Arrow confirmed its mathematical existence.
The concept of all markets being interrelated is broader than the general
equilibrium mathematical model. General disequilibrium and general eco¬
nomic process theory could be developed for a theory that is theoretically
general as well as economy-general.
 geo-economics 151

generalized system of preferences. Policy by which a country permits

certain goods to be imported (import) from developing countries without
tariffs or with preferential treatment.

geo. A prefix used by Georgists or geoists (geoism) for their philosophy and
economic theory of self-ownership for labor and common ownership for natu¬
ral land rent (natural rent). The possession of land is individualist, conditional
on the payment of rent to a relevant community (see Community Collection of
Rent). ‘Geo’ means earth or land, and is also the beginning of ‘George.’ While
‘Georgist’ remains the common label for the paradigm, geo is preferred by
many adherents to avoid a too tight connection to the thought of Henry George.
Geoist thought preceded George, was developed further after George, and not
all of George’s writings are accepted by most of his followers (2).

geo-anarchism. Anarchism that proposes a common ownership of natural

land rent (natural rent) but individualist possession of land, and individual¬
ist ownership of labor and goods. Civic goods are provided by voluntary
*associations funded by the rent in the community. Some of the rent is
passed on to higher-level associations that lower-level associations voluntar¬
ily belong to.

geo-Austrian synthesis. A merging of complementary Austrian (Austrian

economics) and geo-economic theory, particularly Austrian capital theory
and geo-economic land theory. The geo-Austrian business cycle combines
the Austrian interest-rate and capital-goods elements with the real-estate
cycle. Much of the Austrian-theory malinvested (malinvestments) capital
goods consist of real-estate construction, creating too much fixed capital,
leading to a deficiency of circulating capital. Geo-economics adds land
speculation, which adds to the cost of present investment, land being priced
for future uses, many of which do not become realized. Rising interest rates
and land costs reduce investments, leading to the downturn. When real-estate
prices collapse, borrowers default, contributing to bank failures (fail). The
remedy proposed by the synthesis is free banking plus the Community Col¬
lection of Rent.

geo-economics. A school of economic thought based on the classical three

FACTORS OF PRODUCTION and the GEOIST ETHIC of SELF-OWNERSHIP of LABOR and
common ownership of land rent. The school was founded by Henry George
and follows much of his thinking, though it has also adopted Austrian (Aus¬
trian economics) and neoclassical (neoclassical economics) concepts. Aca¬
demic members of the school founded the Geo-Economics Society in 1994.
The school has traditionally been known as the Georgist school, but now
152 geo-libertarian

prefers a more generic label to focus on the social philosophy and theory
rather than the historical person. Geo-economic policy consists of free trade,
the abolition of arbitrary restrictions and regulations, and the abolition of all
taxation falling on labor, capital goods, interest, and entrepreneurship
(entrepreneur). Geo-economic public finance is based on collecting the rents
from land, with all natural resources included, and rents generated by
public goods remaining with the agency generating them. Geo-econortiic
thought regards this system as the ultimate in supply-side economics, maxi¬
mizing efficiency, stability, and equity. See also Community Collection of
Rent. Feder (1996) presents a summary of geo-economic thought.

geo-libertarian. A libertarian (libertarianism) who holds that land rent is

the appropriate funding source for government and community expenditures,
or more strongly, adheres to the geoist ethic. The alternative is allodial
libertarianism. The term was coined by Fred Foldvary in 1983 in an article by
that title in Land and Liberty magazine, and has been adopted by geoist
(geoism) libertarians.

geoclassical. The Georgist variant of classical economics. To the classical

theory of land and rent, geoclassical economics adds a theory of the busi¬
ness cycle, a theory of the effect of land speculation on production, the law
of wages, and an analysis of the taxation of land rent that goes beyond
Ricardian theory.

geocracy. The implementation of geoism. A government or association that

practices geoism.

geoism. The social philosophy and economic theory based on self-owner-

ship of persons and common ownership of land rent. The label is used by
followers of Henry George, referring both to George and to land or the
earth. See also geo-economics, geoist ethic.

geoist ethic. The view that human beings properly own themselves, and
thus own their labor and the products of labor, and that self-ownership does
not extend to land rent, hence that land rent is properly common property.
The common ownership of the rent can be manifested in its collection by
governments and communities for public expenditures, or to distribute as an
equal per-capita citizen dividend. The ethic originated in the writings of
Henry George. See also geoism.

geonomics. An alternative name for geo-economics used by some geoists

(geoism), coined by Jeff Smith.
 gift tax 153

George, Henry (1839-97). American economist known for his defense of

free trade and his proposal to abolish all taxation except on land rent. His
books include Progress and Poverty (1879), Social Problems (1883), Protec¬
tion or Free Trade (1886), and The Science of Political Economy (1897,
posthumous). His contributions to economic theory include the law of wages;
the law of rent (extending Ricardian * differential rent to the capitaliza¬
tion (1) of commerce and public works); the effects of land speculation; a
theory of the business cycle based on the real-estate cycle; and the effects of
a shift of taxation from taxing production to taxing natural resources. His
proposal to tax only land rent became known as the ‘single tax.’ The school
based on his thought is now called ‘geo-economic.’ Several organizations
carry on his work in teaching, research, and publications, including the Robert
Schalkenbach Foundation, the Henry George School of Social Science, the
Henry George Foundation, Common Ground, the International Union for
Land-Value Taxation and Free Trade, and the Geo-economics Society.

George Mason University. The base of several market-oriented organiza¬

tions, including the Center for Study of Public Choice, Center for Market
Processes, Institute of Humane Studies, the Locke Institute, and the Atlas
Foundation. The Department of Economics has offered courses in Austrian
ECONOMICS.

Georgist. Referring to the thought and writings of Henry George, or to his

followers and adherents, who also call themselves geoists (geoist ethic).

gift. Goods transferred to another, with nothing directly expected in return.

An inheritance is thus a category of gifts. Normally, the motive is benevolent
(benevolence), although often firms provide gifts for publicity. In many
cultures, goods are given with the understanding that there will be reciproc¬
ity, or for prestige or from obligation, so that they are not pure gifts but part
of a tacit exchange system. A prime example is the potlatch custom among
the American Indians of the Pacific Northwest. See also grant.
A gift has a zero price to the recipient, but it is a different concept from a
free good, which has a zero cost of production. A gift, say to children, is
also apart from the goods that are normally provided out of parental obliga¬
tion or custom. Gifts are voluntary, hence government grants are not gifts
but forced transfer payments from taxpayers to the recipients.

gift tax. A tax on gifts, paid by the donor, normally for gifts above a
certain tax-free amount. If there is a death tax, it is consistent to also have a
gift tax so that transfers during the life of the donor do not entirely escape
taxation. However, both gift and death taxes violate property rights, espe-
154 Gini coefficient

daily when the owner paid taxes when the property was obtained. If the
property was properly earned by the giver, then it is earned property after
transfer, because the transfer does not alter the nature of the origin of the
property.

Gini coefficient. A method of measuring the inequality of a distribution

(3), it is the ratio of the area between the Lorenz curve and the diagonal
equality line, and the area of the triangle under the diagonal. It can also be
calculated with a formula. The values range from one for complete inequality
to zero for complete equality. The coefficient was formulated by the Italian
statistician Corrado Gini in 1912.
Since one criterion for evaluating economies is the inequality of income
and wealth, it is important to have a sound method of measuring it. One
problem with the Gini measurement (G) is that, given some concentration,
as the number of units in the distribution increases, G does not decrease
proportionally. Likewise, for a given number of elements, as the concentra¬
tion increases, G does not decrease in the same proportion. G places more
weight to transfers in the middle of a distribution than in the tails. These
deficiencies are overcome with the inverse-reverse function 1/(1-G). This
index is consistent with the Tideman-Hall concentration index (Hall and
Tideman, 1967).
The equation of inequality, I = CN, where C is a measurement of concen¬
tration and N the number of items, has inequality proportional to both con¬
centration and numbers. The Tideman-Hall-Foldvary index of inequality is
thus the product of N and the Tideman-Hall concentration index (Foldvary,
1995).

giro system. Payments made by transferring funds directly from one ac¬
count to another, reducing the amount in one account and increasing the
amount in the other. This avoids cash and checks. This system has long been
used in Europe, and is used in systems such as LETS, where when X sells
goods to Y, X receives a balance increase and Y a decrease, minus any
transfer fee.

global. Encompassing the whole earth, particularly economic activity that

spans many economies and countries. Global investment funds, for example,
invest worldwide.

global economy. Enterprise, finance, and institutions that are worldwide.

Multinational corporations operate in many countries, trade relationships
span many economies, and there are international institutions such as GATT/
WTO (World Trade Organization) that affect trade in many countries.
 good 155

Reduced trade barriers since World War II, the vast increase in communica¬
tions and the internet, and stock and commodity markets with global access
and listings have transformed much enterprise into an economy that is global
as well as national and local. The mobility of financial capital has gone so
far as to limit the effectiveness of monetary and fiscal policy that formerly
could be confined to the national economy. High taxes and unstable money
can still be implemented, but the result will be capital flight and low invest¬
ment (1) and growth. The global economy thus has had a liberalizing (liber¬
alization) effect as formerly restrictive countries in Eastern Europe, South
Asia, and Latin America have pursued deregulation, reduced barriers to
trade, and lowered marginal tax rates. See Gwartney et al. (1996).

glut. See surplus.

gold. A heavy, yellow, stable metal that has been in wide use for ornaments
as well as money in the form of coins. By the latter 19th century, most of the
world used gold as money. World War I, the Great Depression, and the
ascending ideology of central controls led to the replacement of gold with
fiat money issued by central banks. There are companies now that have gold
accounts against which one may make payments. Gold is used as a hedge
(hedging) against inflation, as over the very long run, it has maintained its
purchasing value.

gold standard. Money that is gold, with a unit of account measured as an

amount or weight of gold. Purchasing media then consist of both gold and
money substitutes, that is, banknotes convertible into gold. Private money
substitutes (competitive banknotes) make the amount of purchasing media
flexible. When the world is on a gold standard, there is in effect an international
currency, with each national currency or unit of account having a fixed relation
to gold and thus to one another. Trade surpluses and deficits are balanced via
the price-specie mechanism. Many free-market economists and adherents favor
a restoration of the gold standard instead of the inflation-prone fiat money
systems of today. Combined with free banking, a gold standard would elimi¬
nate monetary policy. The gold standard of the USA from the Civil War to the
establishment of the Federal Reserve (Federal Reserve System) was not a free-
market currency, but a national currency convertible into gold as well as using
silver for coins. The gold exchange standard exists where countries peg their
currencies to a country that is on the gold standard, but again the use of
monopoly national currencies is not a pure free market.

good. Ec. An item that impacts a person. Narrowly, tangible items of posi¬
tive value that are taken from nature or produced and then exchanged (ex-
156 good, morally

change) and consumed (consume). More broadly, the items include bads and
free goods. Even more broadly, services are included as goods simultane¬
ously produced and consumed. Thus, all items involved in the production and
consumption process are goods. See also private good, collective goods.

good, morally. Eth. Agreeable and/or beneficial.

goods of first order. Consumer goods, designated as ‘first order’ by Carl

Menger.

goods of higher order. Capital goods. Goods of higher order are more
roundabout (roundaboutness), in that they are used to produce lower-order
goods, with a longer period of payoff than goods of lower order.

goodwill. The market value of a company minus its book value. Reputa¬
tion, customer base, and favorable expectations are key elements of goodwill.
See also consumer goodwill.

governance. The adoption and enforcement of rules regarding property

and conduct. Government generally refers to imposed governance, while
associations generally refer to voluntary rules’ agreements. Human society
always has governance, hence the actual dichotomy is not market versus
government but voluntary versus imposed governance (Foldvary, 1997a).

government. An agency (1,2) that enacts and enforces rules within some
domain. Generally, the term refers to imposed * governance. Governments
also typically operate enterprises and provide services (not necessarily wel¬
comed by all). The rules imposed by government can be market-enhancing or
market-hampering, that is, interventions. Economic theory distinguishes be¬
tween the private sector and the government sector, the latter usually called
the ‘public’ sector. Classical liberals and free-market adherents hold that
government is best confined to the role of protection and the provision of a
few basic collective goods, while libertarians go further and require public
finance to be voluntary, and anarchists (anarchism) would have no imposed
government.

government failure. Government *fails when the public (1) would have
preferred to spend the funds privately rather than the way the government
did. Examples of failure include expenditures that benefit special interests,
wasteful (waste) expenditures, excessive expenditures, and violations of
liberty contrary to constitutional guarantees. See also constitutional failure.
 Great Depression 157

government intervention. See intervention.

government sector. The part of the economy consisting of government

programs, including the goods, bads, and services it provides. This sector is
usually labeled the ‘public sector.’ The other sector is the private sector,
notwithstanding its being regulated and taxed by the government. -

Gracchi. Roman statesmen and reformers, after Gaius Sempronius Gracchus

(1537-121 BC) and Tiberius Sempronius Gracchus (1637-133 BC), who
carried out the ‘Gracchic revolution.’ The Gracchi passed a law restricting the
right of Roman citizens to 500 yokes of the Roman common, but made a
concession to landowners, conferring upon them the entire ownership of land
which they had held in fee from the state. The restrictions were later re¬
pealed, but landowners kept their land rights (Oppenheimer, 1917, 1997).
These rights became extended throughout Western Europe, and then, through
colonization and influence, throughout the world, thus creating the contem¬
porary land tenure system.

graduated. With increasing tax rates as income increases.

grant. A transfer of assets, usually funds, usually to those meeting cer¬

tain requirements, but with no quid pro quo exchange. Grants are typically
given from a higher to a lower-level government or from governments and
foundations to institutions and individuals who do research. Many univer¬
sity departments place great emphasis on obtaining grants. While many
local governments seek and are glad to obtain grants, from a global per¬
spective grants are usually dysfunctional in skewing (skew) incentives and
wasting (waste) resources in bureaucracy and compliance with require¬
ments. A public finance system that sent funds from lower to higher-level
governments would most likely eliminate grants from higher to lower-level
governments.

Great Depression. Critics of markets point to the depression of 1929-41

as a prime example of market failure, while free-market economic thought
demonstrates the interventions which caused it. Rothbard (1975) deals with
the expansion of the money supply in the 1920s, while Hoyt (1933) depicts
the role of the real-estate boom and subsequent crash, synthesized with the
Austrian (Austrian economic) theory by Foldvary (1997b). Interventions
such as high tariffs and the failure of the Federal Reserve System to counter
the deflation, as well as controls on industry (2), helped make the depres¬
sion more severe. See also geo-Austrian synthesis.
158 greed

greed. Wanting and obtaining more than one morally deserves. Thieves are
greedy, and those who use government power to forcibly transfer resources
from others or to prevent others from freely using their property are greedy.
Greed is thus a root cause of social problems, along with the complementary
apathy, that prevents action against greed, and ignorance, which helps main¬
tain apathy.
Greed is sometimes used as a synonym for avarice. It is useful to draw a
clear moral distinction between them, since accusations of ‘corporate greed’
can confuse coercive *takings with the mere desire for wealth, which as a
motivator can have social benefit.

green revolution. The vast increase in agricultural output due to the devel¬
opment of superior seeds and other technology. To maintain a high productiv¬
ity, large amounts of fertilizer and water are often needed.

green taxes. Environmental (environment) user fees, and taxes related to

the abatement (abate) (1) of pollution and other environmental damage. If
they compensate for damage, then they are taxes in form but fees and penal¬
ties in substance.

Gresham’s law. The principle that bad money drives out good money when
the bad money is legal tender. It does not apply when the bad money lacks
the force of law. The law, named after Sir Thomas Gresham (1519-79),
predicts that when two currencies circulate, and one has a lower intrinsic
value (such as debased precious metals) than its legal value, then people will
hoard the one with more intrinsic value and spend the one with lower intrin¬
sic value.

Gross Domestic Product. The total value of goods and services produced
during a year by the residents in an economy. As measured, it omits home
production and also omits the depletion of natural resources as well as
environmental degradation.

gross income. Income before paying taxes.

gross national product. The total amount of output by a country’s citizens

(rather than residents) during a year.

Grossgrundeigentum. ‘Large land ownership’: the personal ownership of

unlimited land holdings.

growth. See economic growth.

 Gang YU 159

Gung Yu (124—44 BC). Chinese official who suggested a single tax on

land, the first historical figure to do so. This idea was rejected by the em¬
peror. Gung’s single-tax idea become known to Turgot (Chandler, 1983:
1075).
 H

Haberler, Gottfried (1900-). Austrian-born and Austrian-school Ameri¬

can economist (Austrian economics) who in the Theory of International
Trade (1936) presented the theory of gains from trade based on the opportu¬
nity costs of producing goods. Besides his work on international economics,
he wrote Prosperity and Depression (1935).

Haig—Simmons income. See income.

happiness. A feeling of well-being, ranging from transient pleasure to

long-term satisfaction.

hard assets. Tangible assets such as gold, gems, and real estate, which
hold their value during an inflation.

hard-core unemployment. See chronic unemployment.

hard currency. Currency which is convertible and readily accepted world¬

wide in exchange for currencies or goods.

harm. Morally (moral (1)), an injury not solely dependent on the views of
the party suffering a loss, but the result of an invasion into the domain of the
injured party.

Hayek, Friedrich A. von (1899-1992). A leading Austrian school econo¬

mist (Austrian economics), known for his work on the trade cycle, on the
role of decentralized knowledge, his arguments against socialism, and also
for his work on political theory and law. Born in Vienna, Hayek was a
professor at the London School of Economics and the University of Chicago
as well as in Freiburg and Salzburg. He won the Nobel prize in economics in
1974 along with G. Myrdal. The Austrian program at George Mason Univer¬
sity is strongly influenced by Hayekian thought, emphasizing the role of
knowledge and rules, although all Austrians regard Hayek as one of the two
giants of Austrian economics, along with Ludwig von Mises.
Hayek’s Prices and Production (1931) showed how the rate of interest
changes the structure of capital goods and thus how monetary expansion can
instigate a trade cycle. Hayek’s work on knowledge focused on how tacit,

161
162 Hayekian triangle

decentralized knowledge is unavailable to a central authority, hence central

planning * fails on that account, aside from the problems of incentives. His
best known book is The Road to Serfdom (1944), warning that intervention
can lead to totalitarian socialism (totalitarianism). His works on political
theory include The Constitution of Liberty (1960) and Law Legislation and
Liberty (1973, three volumes).

Hayekian triangle. A model of the capital structure (1), with goods of

lowest to highest order on one axis (see goods of higher order) and the
amount of capital goods on the other. A higher rate of interest battens the
triangle, making production less roundabout (roundaboutness), while a lower
rate does the opposite.

Hazlitt, Henry (1894-1993). Free-market economist, author of many books

including Hazlitt (1959). Among his titles are Economics in One Lesson
(1946), a classic in free-market texts. He wrote several works on inflation.
See also Henry Hazlitt Foundation.

head tax. Also called a poll tax, it is a lump-sum direct tax on a person,
rather than based on his property or activity. It is usually the same tax per
capita in a jurisdiction. As voluntary dues, clubs are typically funded by
equal per-capita payments, but when imposed by government, head taxes are
considered regressive (regressive tax) and unjust, because the benefits from
expenditures are not equal per capita. The head tax was imposed by colonial
governments in Africa to force the inhabitants to work for money wages. It
was also used in the US southern states for voting, which prevented poor
Blacks from voting. The British introduced a head tax in the 1980s, which
was unpopular and repealed.

hedging. The purchase of a financial asset that offsets another financial or

real (2) asset or some rate of change, such as a farmer hedging his crop by
selling the same amount of produce in a futures contract. Thus when the
asset changes in price, the hedger is in a neutral position. A hedge against
inflation consists of the purchase of hard assets or other assets that rise in
value at least at the same rate as inflation, or do not depend on the price level
of the currency; this hedge is in effect a futures instrument to buy the cur¬
rency at a future rate of exchange with the hard asset rather than the current
one.

hedonic price. A price set on a commodity or amenity that has no market

price, based on its characteristics and factors affecting its demand. This is
used in environmental (environment) economics.
 high-powered money 163

heir. One who inherits property; strictly, one who inherits when there is no
will. See also beneficiary.

Henry George Schools. A family of private schools of social science which

teach Georgist economics. The main school is in New York City, with
branches in major cities in the USA and in some other countries. The schools
also conduct research on land and rent, host conferences, and network with
other organizations.

Henry Hazlitt Foundation. A foundation based in Chicago and started in

1997 that is helping free-market advocates communicate online.

hereditary lease holder. The holder of a lease of property, particularly

land, who has perpetual rights of possession so long as the lease payment is
made, and who may bequeath the lease to his heirs. Such tenure is as secure
and thus has the same economic effects as outright ownership.

Herfindahl index. (Herfindahl-Hirschman index). An index of concentra¬

tion developed by Herfindahl. Given a distribution (3) with n elements, the
share of the total of each element (fraction from zero to one) is squared, and the
index H totals the sum of the squares. The values of H range from 1 for
monopossession to 1/n for equal shares. The index thus takes into account both
the number of elements and their relative sizes. The equation of inequality I =
CN can be rewritten as C = I/N, or concentration equals the inequality of the
elements divided by the number of elements. The Herfindahl index can thus be
used also for a measurement of inequality, using H for C. An alternative both
for concentration and inequality is the Tideman-Hall index (Hall and Tideman,
1967). In addition, since diversification is the inverse of concentration, 1/H
offers a measurement of diversification. See also concentration.

heterogeneous capital goods. While capital goods are treated as a homo¬

geneous asset in much of neoclassical theory (neoclassical economics),
Austrian (Austrian theory of business cycles) theory emphasizes the hetero¬
geneity of capital goods in a structure of goods of higher order and lower
order. Neoclassical economics, however, recognizes also specialized capital
goods that cannot be used to make different goods or moved to another
location; this asset specificity leads to such assets being owned within the
firm that requires them, or else to complex long-term contracts.

high-powered money. Circulating currency and bank reserves in excess

of required minimums, which can therefore be lent, increasing the money
supply by a multiple of these reserves.
164 higher order

higher order. See goods of higher order.

historic cost. A ‘historic cost’ is the price paid for an asset; this rather than
the current market value is usually reported on a balance sheet.

Historical School. A school of economic thought centered in 19th-century

Germany which studied economic history and rejected the axiomatic-deduc¬
tive approach of classical and Austrian economics. Their methodology,
historicism, as developed especially by Gustav Schmoller, the leader of the
school, sought to derive theory from economic history, emphasizing the ever-
changing nature of empirical phenomena. This methodology was criticized
by Carl Menger in a famous debate over methodology. The German econo¬
mists greatly influenced US economists during the late 1800s and early
1900s, especially institutionalists (institutional economics) who studied in
Germany.

historicism. An economic methodology rejecting the deduction of general

economic theory from a foundation (1) of premises, instead attempting to
derive explanations from detailed historical studies, emphasizing the chang¬
ing nature of economic life.

history of economic thought. The reporting and analysis of past writing

on economic theory, a field of economics. A study of past thought helps
explain present-day theory and may at times provide theoretical insights that
have been forgotten and overlooked. Austrian school economists (Austrian
economics) have been much interested in the history of Austrian economic
thought as well as similar schools and precursors such as Cantillon, Turgot,
and the early Spanish economists. The Virginian school looks to Wicksell
and the Italian public-finance economists, and geo-economists (geo-economics)
invoke Henry George and physiocratic (physiocracy) thought. Classical-
liberal economists still take inspiration from Adam Smith and John Locke.

home production. Goods and services produced in residences, for exam¬

ple, repairing, cleaning, cooking, child care, and gardening. This production
is not exchanged (exchange) with others outside the household, and does not
become part of the official GDP. As women work more outside the home and
then increase paid-for child care, the GDP shows the child care as an in¬
crease, even though in reality it is a replacement for at-home child care. Thus,
GDP is distorted. The measurement of the value of at-home production is
quite fuzzy, but perhaps a supplement GDP, a more complete domestic prod¬
uct, could be useful.
 horizontal equity 165

home rule. A high degree of authority by a municipality for its internal

policies, set forth in its charter. See also Dillon’s rule.

home schooling. Educating (education) a child (children) at home rather

than in a private or government school.

homesteading. Taking title to virgin or vacated goods or territory by

‘mixing one’s labor with the land.’ Natural-law and natural-rights theory
includes the homesteading principle. While titles to products such as fruit and
fish are clearly obtainable by homesteading, the question of title to the land
itself is more complex and problematical, that is, the Lockean proviso may
apply. If one goes to the ocean and catches fish, one clearly has proper title to
the fish, but has one also obtained title to the sea?
Land titles can be allodial (absolute), or conditional, for example of
payment of rents or taxes to an authority as well as being subject to land-use
law and eminent domain. The homesteading of land can confer rights only to
possession, as with geoism, or also to the rents, as with allodialism. In
allodialist (allodial) libertarian (libertarianism) theory, the morally proper
creation of land titles is either allodial homesteading or the transfer of allo¬
dial rights to the current title holders. However, taking legal title implies a
legal authority to grant title, hence having jurisdiction over the territory, and
thus being the primary landowner. The question then remains as to whether
such authority is proper, and if the state has jurisdiction and thus ownership
prior to the homesteader, why allodial homesteading is morally proper; that is
why the Lockean proviso should not apply.

homo cupiditus. Lat. A narrowly self-seeking, self-centered, but not mor¬

ally criminal person, the behavioral premise of most neoclassical economic
theory, an assumption for the sake of theory conditional to it, not a proposi¬
tion about how human beings always act. See also benevolence.

homo economicus. Lat. Economic man, sometimes referring to economiz¬

ing man who maximizes utility (utility, marginal), and other times to homo
cupiditus, who is confined to narrow self-interest.

homo sympaticus. Lat. Sympathetic (sympathy) man, who is community-

conscious and who sympathizes with others, as a counter to self-seeking
HOMO ECONOMICUS.

horizontal equity. Equal treatment of individuals in similar circumstances.

While as such it is compatible with classical liberalism (classical liberal),
when applied to taxation, the proposal that equal incomes pay equal taxes
166 Hospers, John

overlooks the fact that different sources of income make the circumstances
unequal. A thief’s income, for example, should not be treated the same as that
of an honest worker. Different sources can have different ethical (ethic)
values. Proper horizontal equity applies the same standard to the same source
of income, hence the marriage penalty, higher taxes for married than single
people on the same income, is unjust.

Hospers, John (1918-). Libertarian (libertarianism) philosopher emeritus at

the University of Southern California and editor of The Personalist journal.
His book Libertarianism (1971) laid out its basic principles and applications.
Other books of his include Human Conduct (1961) and Meaning and Truth in
the Arts (1967). He was the presidential candidate of the Libertarian Party in
1972, and the Party also adopted his Statement of Principles that year.

human action. Purposeful and willful activities performed by persons,

consisting of means to achieve ends. Action (1) involves gain and cost. The
actor imagines options that remove uneasiness or improve his condition, and
chooses that option that in his judgment has the greatest expected net gain.
Human action is the basis of the theory of praxeology by Ludwig von Mises.

Human Action. The title of a large treatise on economics by Ludwig von

Mises (1949), which lays out the method and content of praxeology. It is a
landmark, definitive text of Austrian economics, much referred to by Aus¬
trian school economists. Originally published in 1949, revised editions were
published in 1963 and 1966.

human capital. Neither a financial asset nor a capital good, ‘human

capital’ is a metaphor for the investment in knowledge and skills that makes
labor more productive. Like capital goods, human capital can depreciate
(depreciation (1)) over time.

human failure. The failure (fail) of human beings to adhere to their com¬
mitments and to successfully complete projects. Reasons for failure include
unanticipated incompetence, negligence, greed, avoidable ignorance and per¬
sonality defects. Contractual protections are thus needed not just to guard
against opportunism, but human failure of all sorts. The failure of particular
enterprises is thus not a market failure but a human failure, since one
function of the market process is to discard from the field those who fail and
reward the winners.

human rights. See natural rights.

 hysteresis 167

humanism. A philosophy and body of theory centered on human beings,

with a consciously normative (normative economics) element. Humanist
thought is based on reason and seeks to promote human flourishing.

humanist economics. An approach to economic theory critical of self-

seeking homo economicus or homo cupiditus, as well as excessive consump¬
tion. See Smith (1996). While many of its criticisms of neoclassical economics
have merit, the humanist school may be overlooking the subjective nature of
value, as well as geo-economic policies that would lead to the ends sought by
members of this school.

Hume, David (1711-76). Scottish philosopher who is also known for ex¬
plaining the price-specie mechanism. His writings on economics are mainly in
Political Discourses (1752). He also wrote on money, interest, and other
topics, influencing Adam Smith.

hyperinflation. Inflation which accelerates until the unit of account has

almost no value, and prices rise daily. The most famous example was that of
Germany in 1923.

hypothecation. Earmarking.

hypothesis. A proposition that is abducted (abduction (2)) and partially

warranted (warrant) using theory but remains to be fully tested by evidence.
In loose language, a ‘theory’ often refers to a hypothesis.

hypothetical. Possible but not necessarily actual.

hysteresis. A system with systemic non-linearities (as coined by physicist

James Ewing). For example, two shocks equal in magnitude but in opposite
directions result in an outcome different from the original state. When a
shock moves a variable and has no tendency to move back to the initial value
even though all other variables have resumed their initial values, it exhibits
hysteresis. Some models of unemployment attempt to explain it with hyster¬
esis: unemployment depends on past unemployment. Prices may also exhibit
hysteresis; if the price level moves up and then back down, relative prices
may no longer be in the previous state.
 .
'

'

.
 I

iatrogenic. A disease caused by the doctor, hence an economic woe caused

by policy or the bad advice of policy advisors.

ideal type. A concept with a role and particular characteristics, in con¬

trast to a category of person or institution. For example, an entrepreneur is
an ideal type, a typical role rather than a category of persons. Ideal types are
an important element of Misesian praxeology.

ideology. The social philosophy, social doctrines, and policy believed to be

the best, and promoted by a school of thought, a social movement, or political
party.

ignorance. A lack of knowledge. Superficial ignorance is a mere absence

of knowledge, while a deeper ignorance is the ignoring of the knowledge,
disregarding its acquisition because of apathy or antipathy. Ignorance is one
of the ultimate causes of social problems, as both an ignorance of the prob¬
lems and an ignorance of the solution.

ignoratio elenchi. Lat. Beside the point. In logic, the fallacy of an appeal to
emotion.

IMF. International Monetary Fund.

impact fee. A charge paid by property developers to finance public works

associated with the project. A sounder approach would be an annual assess¬
ment for the public works rather than imposing an upfront cost, since the
developer passes the cost to the buyers, who then pay higher mortgage
interest. However, the impact fee is closer to the benefit principle than the
financing of the works by general taxation.

imperfect competition. A market structure in which there is more than one

firm in an industry (2), and they have some control over price. It is called
‘imperfect’ in contrast to ‘perfect’ competition because the market price is
above marginal cost, thus hypothetically (hypothetical) the seller could sell
another unit by offering it at a lower price, but if transaction costs and other

169
170 imperium

market realities preclude this, then there is no real-world imperfection. See

also MONOPOLISTIC COMPETITION, OLIGOPOLY.
«

imperium. 1 The right to command, including the right to use the force of
the state, an attribute held by the executive branch of government, but also by
private persons given such right. 2 Supreme and absolute power, authority,
and rule.

implementation lag. The time between a decision to pursue a policy and

when it is actually started.

implicit. Occurring in reality and in effect, but without any overt exchange,
agreement, or sign. For example, a self-employed (self-employment) owner
of a firm implicitly pays himself a wage from his accounting profit; the profit
above that wage is an economic profit. One who occupies his land implicitly
pays himself rent, since that is the opportunity cost of the use of the land by
the owner.

implicit contract. A tacit agreement, where the terms are understood due
to widely known custom or law. ‘Implicit contract theory’ also refers to
incomplete labor contracts.
Implicit general agreements save on transaction costs. Some theorists assert
that one implicitly agrees with the rules of a government by living in its
jurisdiction, but even if one moves into the area, if the entire country and world
are divided into country cartels, there is no true voluntary agreement. Since
attempts to establish new countries have not been successful, there is no liber¬
tarian (libertarianism) option, hence no truly free choice in government.

implicit cost. The opportunity cost of an owner’s labor and resources,

since these could be sold or rented, or the owner could have invested the
funds in alternatives.

import. A foreign good or service purchased, including tourists purchasing

them abroad. If a country has a trade deficit, then imports may be financed by
selling assets or exporting currency.

imposed. Arbitrary *Rules that are enforced regardless of whether the

subjects agree to them or not. The two main agencies which do this are
government and family rules for children (or in some cases, an unwilling
spouse or other family member). The proper imposition on immature chil¬
dren can become an inappropriate prototype for the morally improper impo¬
sition of rules by government on adults.
 incidence of taxation 171

impossibility theorem. The theorem by Kenneth Arrow states that it is

impossible for a voting system to simultaneously satisfy a certain set of fair
criteria, that is, a complete and consistent ranking of alternative options in
accord with individual preferences. The basic concept was discovered much
earlier by Condorcet.

impot unique. Fr. ‘Single tax,’ a tax on the ‘net product’ of land, or its
economic rent, proposed by the physiocratic economists (physiocrats) as
having no negative impact on production, unlike other taxes. The concept is
similar to the ‘single tax’ proposed by the followers of Henry George, but
without the Georgist moral dimension.

improvements. Capital goods that make land more usable and productive.
Foundations, buildings, gardens, and fences are improvements. Leveling a
site, clearing it of plants, and draining water are also improvements to land.

imputation of value. The determination of the value of higher-order goods

(factors of production) from the goods they produce, a concept developed
by Carl Menger.

imputed income. A benefit received from an asset that is not an explicit

transaction, such as the rent from owner-occupied land or the wages from
the profits of a proprietor.

incentive. The desire of a person to better his condition. Intervention

reduces incentives by cutting or cutting off the gains from an activity.

incentive taxation. Taxation, such as on rent, which preserves incentives,

but without any privileged (privilege) subsidies.

incidence. Bearing the ultimate burden of a cost, such as a tax.

incidence of taxation. The change in the distribution of income after the

imposition of taxation. The incidence tells who ultimately bears the burden
of a tax. Indirect taxes are to some degree passed on to others, such as
customers bearing a sales tax. The incidence of a factor with an entirely
inelastic supply, that is with a fixed supply, is that the tax burden falls entirely
on the owner of the factor. The incidence of items in current production falls
partly on the factor owners and partly on consumers. The ultimate incidence
is on the owners of land and labor, since these are the original factors of
production. Hence, taxes borne by consumers are also borne by them as
owners of factors from which the income is derived. For example, a person
172 income

whose only source of income is wages pays a consumption tax out of his
wage. See also absolute tax incidence.

income. The Haig-Simmons definition of income is consumption plus the

change in net real (3) wealth during some time interval. Income consists of
funds and goods and other flows of value received, net of costs. Income
taxation (income tax) as practiced also taxes some of the principal. See also
PSYCHIC INCOME.

income statement. An accounting and reporting of the flow of income and

EXPENDITURES.

income tax. A tax on ‘income’ as determined by a tax code, which in

reality mainly taps cash receipts and sales of assets, typically leaving some
income untaxed while also taxing assets. After a Civil War income tax and an
attempt in 1894 that was declared unconstitutional, the US federal personal
income tax now has Constitutional authority under the 16th Amendment,
although its application is disputed by some. The US personal and also the
corporate income tax are legally excise taxes on the activity (1) of obtaining
income, measured by the amount of income, rather than direct taxes on
income (as economists would hold), since under the Constitution the latter
would have to be apportioned by population. Income taxation is based on
ability to pay rather than the benefit principle.
To avoid taxing assets, an income tax needs to be entirely indexed for
inflation, including interest, dividends, capital gains, and depreciation (1).
By taxing gains not indexed to inflation, the income tax also taxes some
CAPITAL.
Libertarians (libertarianism) consider the income tax an intervention be¬
cause it takes funds that properly belong to the owners and also because it
intrudes into privacy, and enforcement can be harsh. See also flat tax.

incomes policy. Government control over wages and other income. The
UK implemented such a policy during the 1960s and 1970s to reduce infla¬
tion. This treats effects rather than the monetary cause of the inflation, while
creating inflexibility and postponing the effects of monetary inflation.

indexed. A price, tax, or other variable that is periodically adjusted to

account for price inflation, so that the real (3) variable is not changed or
only a real gain or loss is accounted for. For example, if a minimum amount
of a gain or transfer is not taxed, then that minimum would be raised each
year to account for the increase in the price level.
 inequality 173

indicative planning. See economic planning.

indirect taxes. Taxes which are not direct taxes. These are usually taxes
on sales, value-added, or on an activity (1) rather than directly on a person,
property, or income. Legally, the US federal income tax is indirect, being on
the privilege of operating as a corporation or on the activity of earning
income.

individualism. Basing policy on the rights of individuals, rather than plac¬

ing priority on collectives, since without unanimity, collective superiority
implies the rule by those with power. Individualism is distinct from atomism.

induction. Reasoning (reason) from the specific to the general. This in¬
volves some rule for obtaining a conclusion from the specifics, and the data.
Hence, the inductive conclusion is actually a deduction (2) from the rule and
the data.

industrial organization. A branch of economics studying market struc¬

ture and the conduct and performance of firms. Anti-trust policy is a major
subfield. See also atomistic competition, monopoly.

industrialization. The transformation of an economy from agriculture to

manufacturing, and from simpler technology to more complex, sophisti¬
cated, and powerful technology. Traditional culture is also transformed into a
more commercial culture, and the society becomes more mobile. The former
Soviet Union and its satellites, and many developing countries after World
War II, attempted to industrialize via government planning and controls,
while East-Asian countries were more market-oriented. More recently, there
has been a trend towards liberalization. See also economic development.

industry. 1 Production and enterprise. 2 The enterprises producing a class

of PRODUCT.

inelastic. The percentage change of one variable such as quantity being

rather unresponsive to a percentage change in the price, the ratio being less
than one.

inequality. Having or being greater or less than others. See also equation
of inequality, Gini coefficient. An unequal distribution of income can be due
to market-compatible differences in the quality of labor and effort, or it can
be due to non-market gains due to privileges and coercion, including endow¬
ments of natural resources.
174 infant industry

infant industry. A new industry (2) that requires investments until it ma¬
tures into profitability by achieving sufficient economies of scale. This is
often invoked as an argument in favor of protectionism, the counterarguments
being that it is up to investors to nurture a firm or industry’s start-up costs;
that once an industry receives protection, it creates a vested interest that
continues to seek it; that the power to protect will attract special interests,
including aging rather than infant industries; and that if an industry is to be
assisted, an outright subsidy is less distorting and the cost is made explicit.

infeudation. Making allodial *real (1) property feudal (feudalism), that

is subject to a superior such as the state, placing it in possession subject to
payment of fees or taxes and regulatory obligations, usually by force but
possibly by contract.

inflation. Price inflation or monetary inflation. Usually, the former is

meant when the term is not qualified, although price inflation usually follows
monetary inflation. Cost-push inflation is price inflation due to rising costs of
inputs, such as oil or labor. However, price inflation implies that monetary
inflation is accommodating the rising price of the inputs, otherwise the de¬
mand for other goods falls, their price drops, and the price level does not
rise. Demand-pull inflation means that an increase in aggregate demand
raises the price level; this again implies that there is monetary inflation
driving up aggregate demand or else funds flowing in from abroad, which is
also an increase in the money supply. It is possible for there to be a temporary
increase in some wages that drives up some prices, but on an economy-wide
basis this is unsustainable without monetary inflation.

inflation tax. 1 An implicit tax on money holdings due to price inflation.

The purchasing power of money decreases, effectively taxing the financial
asset. A non-iNDEXED tax on interest is a further inflation tax, since the
nominal interest is taxed, even though there is no real gain. 2 An explicit tax
on wage increases above some government-set rate.

informal sector. (Also, ‘informal economy.’) Economic activity which evades

regulation and taxation, but is otherwise not illegal. It also includes the
occupation of government lands without permits. Many less developed econo¬
mies have large informal sectors. Hernando de Soto (1989) shows how the
costs of formality make legal production prohibitively expensive. Syn. ‘un¬
derground economy.’

infrastructure. Capital goods that facilitate trade, including communica¬

tions, transportation routes, utilities, airports, and harbors. Often they are
 instability 175

provided by government, but private enterprise has provided these as well.

By extension, there is also the legal infrastructure which also facilitates the
operation of a market.

inheritance tax. A tax on an inheritance, either as an estate tax or an

ACCESSIONS TAX.

injection. Governmental action to increase aggregate demand, especially

an increase in the money supply by a monetary authority. If the injection is
greater than the increase in the demand for money, then not only is the price
level raised, but there will be Cantillon effects.

innovations. New products and marketing methods, changes in technol¬

ogy, and new ways of organizing enterprise. Entrepreneurs introduce inno¬
vations, hoping to profit, and these changes result in creative destruction as
successful innovations push out the less successful methods and products.

input. A factor of production, a resource that enters a firm and is trans¬

formed into products as the output.

inside lag. The duration of time between desiring a policy and implement¬
ing it.

inside money. If gold is money, gold is outside money and the money
substitutes created by banks are inside money, inside the banking system,
arising from debt. With rat money, bank deposits matched by private lending
are inside money, and the government or central bank (for example paper
dollars) currency as well as bank deposits based on government debt and
foreign exchange reserves are outside money.

insider-outsider. A model (used for example by New Keynesians) of un¬

employment in which employed insiders, such as unions, maintain above-
market-clearing wages due to their bargaining power with a firm. Neither the
firm nor the insiders are atomistic competitors (atomistic competition), hence
they have market power. Outsiders are unemployed even though they would
willingly work at a lower wage. This, however, is not a cause of unemploy¬
ment, but only of insider privilege.

instability. Having a large continuous variation or being vulnerable to a

downfall or termination. Interest rates which continuously rise and fall are
unstable, and a job is unstable if the employee continuously fears being laid
off.
176 institution

institution. A shared mental construct. Examples include money, organi¬

zations, marriage, income taxation, law, property rights, and customs. An
institution can also be considered to include the property owned by an organi¬
zation.

institutional economics. A school of economic thought that emphasizes

the importance of institutions, social evolution, and the structure of econo¬
mies, as well as also a branch of economics that examines the role of institu¬
tions. Major institutionalists include T. Veblen, W. Mitchell, and G. Myrdal,
J. Commons, and C. Ayres. See Whalen (1996) and ‘Dialogues in economics’
in Foldvary (1996).
Institutionalists criticize neoclassical theory (neoclassical economics) for
attempting to explain economic phenomena without regard to institutions.
However, Austrian (Austrian economics), geo-economic, Virginian (Virginia
School of Political Economy) and other schools do include institutional
structures and analysis. Many in the institutional school do not favor free
markets, which may be the result of not distinguishing pure free markets
from markets hampered by intervention, but the approach per se is neutral
with respect to policy, and it is possible to have a free-market institutionalist
approach, showing that market-enhancing institutions such as property rights
and efficient dispute resolution lead to better outcomes.

institutional failure. An outcome whereby the intention of the founders or

directors of an institution is not achieved. The structures of an institution may
not be suitable to the achievement of the desired outcomes. Mass democracy
suffers from institutional failure when special interests exploit the structure
and thwart the intentions of the supporters of democracy to have the people
rule.

insurance. The substitution of a relatively small known cost for a risk of a

large loss. Hedging might also be considered insurance.

intended consequences. Outcomes of a policy which were those sought by

the initiators, in contrast to the unintended consequences.

intensive margin. The productivity of the next unit of a variable input in

the same domain of a fixed resource, which in equilibrium is equal to the
productivity of a unit at the extensive margin, where the variable input is
extended into a new domain of the other resource. For example, when the
margin of cultivation of land for growing corn is extended to new land,
which is less productive than the previous margin, the marginal productivity
of labor falls, hence wage falls, and new workers can be added to the more
 intergenerational equity 177

productive lands until the productivities at those intensive margins equal

those of the extensive margin.

intentional community. A community which is deliberately founded to

achieve certain goals, such as the implementation of a theory or ideology, the
ability to express a culture and pass it to posterity, and/or the provision of
specialized services. In contrast, a condominium or typical residential asso¬
ciation has no such intentions, but are within the mainstream in ideology and
culture, although there can be specialized services which make it intentional.

interest. A premium paid to obtain goods at the present time rather than in
the future. As stated by Austrian (Austrian economics) theory, the positive
rate of interest is due to time preference and to capitalization. As the rate of
interest approaches zero, the present value of future yields rises and becomes
infinite at a zero rate of interest, which is impossible, hence the long-term
real rate of interest will not become zero or go negative. Interest is a return on
financial assets lent, and it can be a return from any factor of production. The
productivity of investments has been alleged to affect interest rates, but a
highly productive asset will command a high present-day price rather than
increase the rate of interest. If people choose not to invest in such assets, the
short time preference will make interest rates high. The supply and demand
for loanable funds sets interest rates, but these are in turn determined by time
preference. See also compound interest.

interest rate. The discount rate (1) of future goods relative to present day
goods, the conventional time interval for measuring the rate being one year.
See also compound interest, interest. Short-term rates differ from long-term
rates, the long-term rates usually being higher to offset the risk of inflation.
Premiums for the risk of loan losses are included in nominal interest rates,
but are not part of pure interest. The interest income received by an account
holder is the gross interest paid by borrowers less the overheads, taxes, and
risk premiums. Interest paid on tax-free bonds such as municipal bonds has a
lower rate than taxable interest, since the latter has a tax premium. The real
(3) interest rate equals the nominal interest rate minus the inflation rate.
Interest paid by borrowers on unsecured loans has an extra risk premium due
to bankruptcy laws making it easy to void one’s debts. Free-market interest
rates would be much simpler due to an absence of taxes on interest, tax
deductions of interest paid, an absence of inflation, and bankruptcy laws that
retain responsibility. See also agio theory of interest.

intergenerational equity. Policy that is just for all age levels, rather than
forcing one age bracket to subsidize (subsidy) another, as is now the case
178 intergovernmental grants

with transfer payments from taxpayers to recipients of social security and

transfers of medical aid. Equity to future generations may also involve con¬
serving natural opportunities rather than excessively mining renewable re-
sources and polluting (pollution) the planet.

intergovernmental grants. Funds transferred from one level of govern¬

ment to another, usually from higher to lower levels, and often with condi¬
tions. Such grants typically have a high compliance cost, reduce the power of
local voters, and often skew expenditure into projects which have a high
carrying cost.

internalization. The elimination of external effects by making private

costs equal social costs (social costs and benefits), thus making all costs
internal to the purchaser. The delineation and enforcement of property rights
achieves this, as does the payment of damage fees, and also the inclusion of
activities under one owner.

international economics. The branch of economics dealing with interna¬

tional trade or foreign trade, exchange rates, and international institutions
such as trade blocs and the WTO (World Trade Organization). The field or
courses in it are also called the global economy. A major principle of interna¬
tional economics is the theory of comparative advantage.

International Monetary Fund. An agency which makes short-term loans

to governments. It was established as an outcome of the Bretton Woods
conference of 1944, under which currencies had fixed exchange rates. Defi¬
cits in international trade as well as government budgets can be financed by
loans from the IMF. In some cases, borrowing has been due to changed
circumstances, such as the Baltic countries needing to finance oil previously
obtained at low prices. The IMF makes loans dependent on meeting certain
conditions. Some of these, such as balancing a budget, are sound, but often
the means, such as higher taxes on productive effort, impose austerity and
hardship on much of the population, and make a recovery more difficult. The
IMF obtains funds from the industrialized member countries and extends
much of its lending to less developed countries. The IMF thus international¬
izes intervention, obtaining revenues from taxpayers and imposing austerity
and loan repayments from the recipient countries. The alternative of a shift in
taxation to rents and pollution charges would provide revenues without
austerity, but this is not an IMF-favored option, since it would reduce the
availability of land value as a loan collateral.

International Society for Individual Liberty. See ISIL.

 investment 179

international trade. The exchange of goods and financial assets among

agents (1) in different countries. This differs from domestic exchanges in
usually having different currencies and in having greater barriers. See inter¬
national ECONOMICS.

International Union for Land Value Taxation and Free Trade. A global
Georgist or geo-economic society based in London. It hosts international
conferences every few years, and publishes Land and Liberty magazine.

interpersonal. Regarding relationships and comparisons among persons,

such as comparing utilities (utilitarianism), or the impossibility thereof.

interstate commerce. In the USA, goods which are used on one state, but
which originate in another state or are transported between states. The USA
Constitution provides the federal government with authority over such com¬
merce, but this was intended to promote free trade among the states. The
interstate commerce clause became stretched to encompass all goods that
cross state borders, hence intervention into almost all production and trade.

intersubjective values. A community having the same subjective value

regarding some item.

intertemporal. Across time (2). Exchanges between one moment in time

and another. See also interest rate.

intervention. Government policy which imposes (imposed) costs and arbi¬

trary * restrictions on peaceful and honest action. Intervention hampers the
market process by skewing (skew) prices and profits, thereby misallocating
resources. See also regulation.

intrinsic value. See value.

invasion. A penetration into a domain without the agreement of the do¬

main’s owner (ownership).

inventory. Goods ready to be sold. These are capital goods as well as

circulating capital. Investment in inventory has been reduced by ‘just in
time’ processing that tracks the amounts sold and is able to deliver goods for
sale as needed.

investment. 1 Ec. An increase in the stock of capital goods, or funds spent

on enterprises which produce capital goods, or funds spent to increase human
180 invisible foot

capital. If expenditure is considered to be divided into consumer goods and

capital goods, and income is either spent for consumer goods or saved, then
over the long run, investment equals and comes from savings. 2 Fin. Funds
used to purchase productive assets that provide a yield or increase in value.
See also speculation.

invisible foot. A term coined by Stephen Magee for the political forces
that shape outcomes in addition to the invisible hand.
Intervention is often a visible fist, but much transfer-seeking is opaque to
consumers and taxpayers, who indeed foot the bill.

invisible hand. A famous metaphor used by Adam Smith in the Wealth of

Nations (1776, 1976) for the coordination of economic activity by the spon¬
taneous market process as if it were deliberately directed. One who pursues
his own interest is led by the invisible hand to provide for the social interest
by providing wanted services. The metaphor has spin-offs such as the visible
fist (coercion), the invisible foot (political and legal forces) and the invisible
handshake (custom and social forces), but these are not nearly as widely
used.

invisible handshake. 1 A term coined by Arthur Okun for historical and

social forces that shape outcomes in addition to the invisible hand. 2 An
implicit contract between a firm and its employees or customers.

iron law of wages. The proposition that in the long run, the wage level
tends to subsistence if there is population growth, since if there is no change
in technology, then an increase in the labor supply decreases labor produc¬
tivity. In some classical or Malthusian presentations, it is asserted that
population growth will continue and productivity will not keep pace.

IS-LM. A Keynesian model which has been widely used, but has now
fallen out of favor, with two curves, the is being investment savings or the
goods market, and the lm being the liquidity and money-market curve. The
axes are the rate of interest and national output. Both curves indicate equilibria
in the respective markets, the intersection being a common equilibrium.
Keynesians have debated the shapes of the curves with monetarists.

ISIL. The International Society for Individual Liberty, an organization which

publishes literature, hosts conferences, and promotes and coordinates liber¬
tarian global activity, especially helping free-market proponents in less
wealthy countries.
 J

Jefferson, Thomas (1743-1826). Third president of the USA and author of

the US Declaration of Independence, which, echoing Locke, proclaimed the
right to life, liberty, and the pursuit of happiness, and the equality of man.
Jefferson was responsible for the US decimal coinage (Chandler, 1983).
Jefferson stated that ‘government should not take from the mouth of labor the
bread it has earned’ (first inaugural, 1801). That evidently implies that Jefferson
opposed taxes on wages. It would also imply no consumer taxes. In a letter to
Isaac McPherson on August 13, 1813, Jefferson wrote ‘no individual has, of
natural right, a separate property in an acre of land,’ implying that rights of
possession were subject to an equality criterion.

joint. 1 Connected, as in joint'production or joint account. 2 A place where

two items are connected. A prime example is the financial and real sides of
the economy, joined by money; see also broken joint, loose joint, tight joint.

joint stock company. A corporation.

joint ventures. Cooperation between firms or between a firm and a govern¬

ment, harnessing comparative advantage. For example, a firm from an industri¬
alized economy provides funding and technology, while the local firm has a
knowledge of the local governance, customs, language, resources, and markets.

jus possessionis. Lat. The right to possess (possession) land.

just price. A morally justified or fair price, usually regarded as the normal
market price. During an emergency when there are temporary shortages and a
firm can obtain a higher price, there may be no violation of market ethics, but
customers may resent it as exploitative, and the firm may suffer a loss of
goodwill. The concept of a just price was developed during medieval times,
and the ethical questions are still relevant for issues such as prison and child
labor.

justice. Providing each person with his due. The main premise of justice is
moral equality among persons. Those who violate equality are criminals,
and their due is to pay restitution and be penalized. See also economic
JUSTICE, SOCIAL JUSTICE.

181
182 justification

justification. Log. Answering the question, how do you know? Proposi¬

tions are justified by removing the puzzle. See also warrant.
 K

kakistocracy. Government by the worst persons.

Kaldor-Hicks test. The proposition that a shift from state A to B is preferred

if those who lose by it are compensated (compensation) by those who gain. The
test was proposed by Kaldor and Hicks in 1939. The criterion proposes that A
is preferred to B even if the compensation does not take place, whereas by
natural moral law such a change is immoral without the compensation, and
thus is not preferred. If the losers do not agree to the compensation, the
problem of comparing utility makes the criterion problematic.

Keynes, John Maynard (1883-1946). Author of the General Theory of

Employment, Interest and Money (1936), which rejected classical *supply-
side analysis and policy and was influential in restoring Mercantile demand-
side thinking, based on the premise that various prices (especially wages and
interest rates) are not downwards-flexible. Among the enormous literature
criticizing Keynesian demand-side economics, a notable refutation specifi¬
cally of the General Theory is Hazlitt (1959). Keynes was also a major
contributor to the Bretton Woods conference.

Keynesian economics. A school of demand-side macroeconomics based on

the analysis of Keynes. Key features include the determination of income
from autonomous expenditures and the marginal propensity to save, hence
policy which increases output by increasing autonomous government spend¬
ing. However, if the consumption function has a zero intercept, this analysis
collapses. Inflexibilities in a market economy may be real, but if they are due
to intervention, then Keynesian policy only treats effects, which may then
cause further maladies requiring ever further intervention. In response to
classical criticism, especially rational expectations, the New Keynesian school
has arisen which continues with sticky-price explanations that persist despite
such expectations.

Khaldun. See Abu Said ibn Khaldun.

Kirzner, Israel (1930—). British-born Austrian-school (Austrian econom¬

ics)Professor of Economics at New York University. He has been a leading
theorist of entrepreneurship, institutions, and distributive justice. Among his

183
184 kleptocracy

major books are The Economic Point of View (1960), Competition and Entre¬
preneurship (1973), Discovery, Capitalism and Distributive Justice (1989),
and The Meaning of Market Process (1992). He heads the Austrian program
at NYU.

kleptocracy. Government by organised criminals.

Knight, Frank (1895-1973). Professor of Economics at Chicago, a founder

of the Chicago school, and a major influence on economics and free-market
economists (free-market economics). He wrote on methodology, ethics, social
cost, and a landmark work, Risk, Uncertainty and Profit (1921), in which he
differentiated risk, which has a known probability, from uncertainty, which
does not. Entrepreneurs obtain their economic profits from facing uncertain
market conditions.

knowledge. Data and propositions, in minds and in texts, that persons

believe and which correspond to reality. Knowledge can be an intangible
capital good, and can also be embodied in tangible goods. As Hayek pointed
out, much of the knowledge about production is tacit and decentralized and
dependent on time and place, hence there is a knowledge problem in central¬
ized controls. Wise corporations and governments thus decentralize their
operations. See also true.

knowledge problem. The problem inherent in any large organization or the

control by central government over an economy, that much relevant knowl¬
edge is decentralized, and therefore, central planning fails to be effective.

Kondratieff, Nikolai (1892-1930?). Russian economist who in The Long

Waves of Economic Life (1925) posited the existence of long business cycles
spanning many decades. He died in prison at an unknown date.

kratos. Gk. Governmental rule.

 L

labor. The factor of production consisting of human exertion engaged in

the production of wealth. Labor includes human capital and entrepreneurial
exertion (entrepreneur). The yield of labor is wages, which can take the form
of opportunity-cost and entrepreneurial profits. See also wages.

labor theory of value. An explanation for the value of goods: the value of
the labor input determines the value of the product. This doctrine was used
by classical economists (classical economics) and then Marxists (Karl Marx).
The contribution of capital goods is accounted for by its labor input. Land
does not co-determine the price of goods, since its rent is derived from the
value of the goods in accord with the theory of differential rent. Since the
ultimate factors are land and labor, it follows that labor creates the value of
goods in current production. (The doctrine does not apply to goods with a
fixed supply, such as antiques and natural resources.) The rate of interest also
needs to be taken into account for different periods of production and differ¬
ent intensities of capital goods.
The marginalist and subjectivist revolutions overturned the labor theory of
value and replaced it with subjective values. As Carl Menger pointed out,
the classicals had it backwards: the value of factors is imputed (imputation of
value) from the subjective value of goods. However, the classical labor
theory of value has some explanatory power for goods in current production.
Abstracting from capital goods, given a demand curve, the labor supply curve
determines the price. If labor becomes more expensive, the price of the
products will rise, given the demand. And if there is only one consumer good,
then at the rent-free margin, the wage equals the goods. What subjectivism
does is differentiate the demand among various goods. Moreover, the supply
of labor itself is also subjective, the worker valuing wages and the psychic
satisfaction of labor versus leisure or an investment in human capital.
Karl Marx turned the labor theory of value into a doctrine of exploitation
(2), arguing that all value is created by labor, hence value above wages paid is
exploitative profit, or surplus value. The counterargument is that in a com¬
petitive industry (2), economic profits tend to be reduced to zero, hence if
there is any surplus, it is what the physiocrats identified as the net product, or
rent. But rent goes to the landlord, not the capitalist or entrepreneur. Marx
would have had a sounder case if he had become a Georgist rather than a
Marxist.

185
186 labor unions

labor unions. See unions, labor.

Laffer Curve. Tax revenues as a function of tax rates, named by Jude

Wanniski (1978) after Laffer (1979), but see also Abu Said ibn Khaldun.
There is a tax rate that maximizes revenues. For a tax on economic rent, the
revenue maximizing rate is 100 percent.

lag. A time interval between the initiation of an activity and its taking
effect. An example is the time it takes for an increase in the money supply to
become fully manifested in changes in output and price. See action lag,
ADJUSTMENT LAG, ADMINISTRATIVE LAG, APPLICATION LAG, DECISION LAG, IMPLEMEN¬
TATION LAG, INSIDE LAG, OUTSIDE LAG, RECOGNITION LAG. All these lags make
policy less effective.

laissez-faire. Fr. The policy of having a free market, with no interven¬

tions. In French, it means ‘let it be made.’ The theory of laissez-faire is that a
pure free market provides both liberty and prosperity, efficiently (efficient)
allocating resources to meet effective demand. Government’s role is mainly
to provide protection and enforce property rights. The term originated in
France and was espoused by the physiocrats and classical economists (clas¬
sical economics).
There has been no modern laissez-faire economy, yet critics of markets
allege that industrial economies have practiced laissez-faire, which is to
blame for poverty, unemployment, and pollution. In contrast, free-market
analysis has pointed to countless interventions and taxes that have hampered
markets and caused the distortions that lead to social problems. See Gwartney
et al. (1996).

land. The factor of production consisting of natural resources and op¬

portunities prior to being altered by human action. This economic (2) mean¬
ing of land, as economic land, includes all usable three-dimensional space,
and thus includes lands with a water as well as solid surface.
Economic land includes surface sites, naturally occurring materials (water,
oil, minerals), the atmosphere, the electromagnetic spectrum, airline routes,
satellite orbits, wildlife, and the genetic stock of all living beings. The in¬
come or yield of land is land rent, which is an economic rent. Natural
materials are altered by human effort to produce real wealth, but space is not
altered and remains land even when used. The quantity of surface land is
fixed, hence its supply curve is vertical. Land is also immobile and its supply
independent of human effort. Therefore, the economic rent of land can be
collected without affecting its supply, activity using it, or the prices of goods
produced with it.
 land trust 187

Neoclassical theory (neoclassical economics) has merged land into capital

goods. Geo-economists (geo-economics) consider this reduction of the three
classical factors into two to be a theoretical defect, with major policy impli¬
cations. See Gaffney (1994).

Land and Liberty. An international magazine published from London, with

news and analysis of economics from a Georgist or geo-economic perspective.

land reform. A change in land tenure towards a more equal (equality)

distribution (3) of the land area or the land value, or to consolidate inefficient
smallholdings, or to privatize titles to lands owned by the state. Land reform is
often sought by farmers where a small proportion of the people own much of
the land. Two methods of land reform include a physical redivision of land and
titles, or a tax on the land rent, which either compensates society for the use of
land or turns over land that was inefficiently used to new owners who can pay
the rent tax by putting the land to its most productive use. The rent-tax method
is more market-compatibly efficient. Countries that enacted successful land
reforms with a rent tax include Taiwan in 1950 and Japan in the 19th century;
both subsequently industrialized rapidly (Harrison, 1983).

land rent. The rent (1) of economic land.

land-rent tax. See land-value tax.

land speculation. The purchase and holding of land in the expectation that
its value will appreciate, sometimes postponing development until a time
when it will be more profitable. A tax on land rent reduces land speculation
(3) by taking the future rents. Harry Gunnison Brown pointed out that
market agents have different expectations. Because land markets are incom¬
plete, with no futures market, a tax on rent reduces the offer prices of those
who have the most extreme beliefs about high future land rent, making the lot
more attractive to those who wish to develop it immediately. The charge on
rent thus increases efficiency, since those who believe that site rents will be
higher are more likely to be incorrect. Land speculation fueled by easy
money helps cause the boom and bust cycle. See also Brown effect, winner’s
curse, geo-Austrian synthesis, land-value tax.

land tenure. The pattern and concentration of land ownership and pos¬
session. See LAND REFORM.

land trust. A trust (2) which owns land, usually for wildlife or farmland
conservation or for leasing. Some land trusts such as Arden, Delaware, have
188 land-value tax

been set up by Georgists to implement and demonstrate the principles of

funding collective goods from land rent and to eliminate the disincentive of
property taxes on real-estate improvements by having the trust rather than
the leaseholders pay those taxes (Foldvary, 1994b).

land-value tax. A tax proportionate to the market value of land, often

referred to as LVT. It is equivalent to a tax on rent: given a tax rate f as a
percentage of the land value, the percentage of the rent taxed is t/(i+t), where
i is the real (3) interest rate. Land-value taxation or the equivalent in land
trusts and other organizations (the Community Collection of Rent) is advo¬
cated by Georgists or geoists (geoism) as a single tax or charge, all other
taxes to be abolished (abolish), along with abolishing arbitrary regulations.
The effect of LVT is to induce an efficient use of land, since its possession
then has a carrying cost. LVT also eliminates market-hampering land specu¬
lation, since future rents are collected. Advocates state that this elimination
is beneficial, since such speculation prices land for future uses, sometimes
locking out present-day uses, and often speculative booms result in
malinvestments and busts. (With LVT, land speculation is market-enhancing.)
The taxation of rent enables government to shift taxes away from productive
exertion, and is thus a market-enhancing policy. LVT also avoids intruding on
private finances and is less costly to implement than taxes on income and
sales.
LVT has been estimated to collect about half the revenues that govern¬
ments currently obtain by taxation. The other half of the revenues could be
eliminated by reducing expenditures or be obtained with user fees and pollu¬
tion charges.

land-value tax options. Option (2) markets on land value that may arise
with land-value taxation (land-value tax). A landholder could purchase an
option for all future increases in LVT to be paid by the option seller. This
would leave the land-titleholder with only the opportunity-cost of developing
the land as rents rose. These are also called rent-collection options.

landholder. A person who has title to land.

landowner. One who has either the rights of possession to land or also the
rights to obtain the rent.

larcenous. Taking the property that rightfully belongs to others without

their consent. A larcenous market includes legalized larceny. For example, a
slave (1) market is not free, but larcenous, because the slaves are human
beings who have a right to their own labor and wages, which are instead
 law of demand 189

legally stolen by the slave owner. When a government allows pollution

without compensation, or protects some firms from the competition of other
firms, these all transfer wealth and constitute a larcenous market.

large cap. See cap.

law. 1 Sci. A theorem about a fundamental phenomenon, expressing a major

regularity, such as the law of gravity. In economics, the law of demand or the
law of diminishing returns are key regularities. A synonym is a ‘principle,’
although the ‘law’ label is used for specific laws. 2 Leg. A command issued
by a government, or a rules agreement by an association. 3 Phil. A universal
ethic, derived from human nature, thus a law of nature or natural moral law.
True legal law is based on such moral law rather than the arbitrary commands
of the rulers.
Among the key classical-liberal works on law are works by Bastiat, Benson
(1990), Berman (1983), and Spooner. Berman’s Law and Revolution (1983)
shows how in the development of Western-European law, competition among
jurisdictions and sources of law led to the emergence of greater liberty.

law and economics. The positive and normative application of economic

theory to law, the effects of legal decisions, property rights, contracts, regula¬
tion and monopoly, and public-choice decisions regarding law. Ronald Coase
spurred much of this analysis, and R. Posner is another key theorist.

law, Director’s. See Director’s law.

‘the law is an ass’. A phrase used colloquially to refer to absurd govern¬

ment law, by Charles Dickens in Oliver Twist. Mr. Bumble, manager on site
of the orphanage, expresses this when informed that ‘The law presumes that a
man controls his wife,’ to which he replies, ‘If the law presumes that, sir, then
the law is a ass!’ (sic ‘a ass’).

law of demand. An inverse relationship between the price and the quantity
demanded of a good, when all other elements are held constant. The law is
based on the substitution effect: as the price of a good drops, consumers buy
more because they substitute this good for others they would have bought.
The law also depends on the diminishing marginal utility of goods: with
more items, the utility of the next one falls, so consumers are willing to
obtain more only at a lower price. The law is fundamentally based on the
economizing principle (economize). There is also an income effect as lower
prices create more purchasing power, but this does not necessarily and uni¬
versally lead to a greater amount purchased of any particular good, since
190 law of diminishing returns

some goods are inferior. The law of demand is a fundamental principle of

economics.

law of diminishing returns. Given a fixed input and a variable input,

eventually the marginal product of the variable input declines, extra inputs
yielding ever less extra output. This is an axiomatic, foundational (founda¬
tion) proposition of economics. The law was known by Turgot in the 1700s.

law of reflux. The proposition in banking theory that there cannot be a

permanent overissue of competitive private banknotes, since any issued ex¬
ceeding the demand will be returned for redemption (redeem).

law of rent. ‘The rent of land is determined by the excess of its produce
over that which the same application can secure from the least productive
land in use.’ Henry George (1879; 1975, p. 168). The ‘same application’
means the same quality of labor and capital goods, and that quantity at which
the intensive margin produces the same marginal yield as the extensive
margin (extensive margin of production).

law of supply. A direct relationship between price and the quantity sup¬
plied of a good in current production, when all other variables are held
constant. As the price rises, a greater quantity is produced and offered be¬
cause of substitution, as production shifts to that good from other goods.
With greater quantity, resources that are less suitable are obtained, at a lower
productivity and higher price, hence these are only warranted at a greater
price of the product. Downward-sloping supply curves due to economies of
scale do not violate the law of supply because the production methods are
not held constant as the quantity increases.

law of variable proportions. Syn. law of diminishing returns.

law of wages. A law in geo-economic theory that states that the wage level is
determined at the extensive margin of production, where land has a zero rent.
Abstracting from capital goods, the entire product at the rent-free margin
constitutes wages, and competition among labor makes the wage level equal in
an economy. The law of wages is related to the law of rent, since output above
the wage level in the more productive lands is distributed as rent. When capital
goods are added to the model, productivity increases, but the relationship
between wages and rent remains the same. The law of wages was developed by
Henry George in Progress and Poverty (1879), and was an improvement over
Ricardo’s subsistence theory of wages. For a recent examination of the law of
wages, see Foldvary (1994a). See also Wakefield.
 libertarianism 191

legal tender. Money which by law must be accepted for the tender or
payment of debt, although one may refuse small denominations for large
debts.

lex non cogit ad impossibilia. Lat. Law does not recognize impossibilities:
impossible acts should not be legislated.

lex non curat de minimis. Lat. Law does not concern trifles. Trivial inva¬
sions should not be actionable.

liability. A debt or other obligation, reducing net worth.

liberal. 1 Classical liberal. 2 Favoring egalitarian, redistributionist, and

welfare-state policies and also some civil liberties, an ideology descended
from classical liberalism, which opposed privilege, but then taking on social¬
ist (socialism) overtones as the unwarranted conclusion was reached that
social problems derived from markets rather than intervention.
In Europe, ‘liberal’ still means classical liberal, while in the USA, it has
for the most part become liberal (2). US liberals tend to favor greater civil
liberties than conservatives (conservativism), though not to a full extent,
while favoring more intervention to treat the symptoms of poverty, unemploy¬
ment, discrimination, and other economic and social maladies, policies which
reduce liberty and are classically illiberal.

liberalism. Liberal (1,2) doctrine and philosophy.

liberalization. The reduction of interventions, such as price controls, on

ENTERPRISE.

libertarianism. The ethical and political philosophy that voluntary *acts

(1, 2) should be free of any legal restrictions or imposed costs. Libertarians
oppose interventions, including arbitrary taxation and any restriction on the
activities of consenting adults. Libertarians are more radically and consist¬
ently pro-liberty than classical liberals, who might give way to some taxa¬
tion and minimal intervention in order to provide security and the rule of law.
In foreign policy, libertarians tend to be non-interventionist and do not sup¬
port paying for the defense of other countries; some favor a strong military
for domestic defense.
Libertarians are divided into several factions: i) those who espouse natural
rights, versus utilitarians and pragmatists who reject natural law or natural
rights; ii) anarchists (anarchism) versus minarchists (minarchism); iii) geo¬
libertarians versus allodial libertarians; iv) supporters of political participa-
192 libertopia

tion versus those who shun any politics or even voting; of those who favor
political participation, there are those who favor libertarian political parties
versus those who favor joining the major parties to influence them.
«

libertopia. A libertarian (libertarianism) version of utopia.

liberty. Political freedom, the absence of any restrictions or imposed costs

on acts which do not coercively harm others and the presence of restraints
and penalties on coercively harmful acts. The delineation of harm is deter¬
mined by an ethic, and if liberty has a universal meaning, then it derives from
a UNIVERSAL ETHIC.

license. 1An official document permitting one to do certain activities, such

as practice a profession. Such licensing can be a barrier to entry, creating a
privilege. 2 Acts which violate the rights of others.

life. Beings with internal, autonomous activity that they can change. The
right to life is the right not to have life forcibly taken; that is, the right not to
be murdered.

life-cycle hypothesis of consumption. The hypothesis that people tend to

plan consumption over their expected lifetime, and so consumption is spread
over that lifespan. Thus people borrow when young, save (savings) in middle
age, and then consume savings when old.

lifespan. The expected length of a human life. This has profound economic
applications, unappreciated for its being familiar. For example, time prefer¬
ence would most likely differ if the human lifespan were multiplied by 10;
time would be less valuable.

limited government. Government confined to a few functions, such as

national defense, courts, and foreign affairs, or government effectively con¬
strained by a constitution. Some libertarians (libertarianism) and classical
liberals favor a limited government, while others regard proper governance
as based on the consent of all the governed, thus whatever is voluntarily
(voluntary) agreed to is consistent with liberty.

limited liability. Limiting the loss of a shareholder to his investment in the

shares. The board of directors of a corporation of the general partners of a
limited partnership do not have limited liability. Some free-marketeers ques¬
tion the concept, alleging that it is a privilege granted by the state. However,
it can also be regarded as an extension of limited partnerships.
 Locke, John 193

limited partnership. See partnership.

line item reduction. The ability of a government executive to reduce the

expenditure of a budget item. This greater authority than a veto can reduce
government expenditures.

local government finance. A synonym of local public finance.

local public finance. The public finances of local governing agencies.

local public good. A good which is collective within some territorial (ter¬
ritory) neighborhood, which can be as large as a metropolis. From the
perspective of the greater economy, such as a country, the total amount of
local collective goods is the sum of the community goods, hence they func¬
tion as private goods, that is they are summable and separately consumable,
with consumers revealing their preference by choosing a community. There is
a market among the goods, as the communities compete for residents and
enterprise, as in the Tiebout model. The theory of clubs applies to such local
collective goods.

location. The geographical coordinates of a territory, often described in

relationship to its neighbors. Location is said to be the key to real-estate
values, but it is actually location and timing.

location theory. The determination of geographic positioning or placing of

economic activity (1). Location theory intersects with the theory of rent.
The field was pioneered by von Thtinnen in 1826.

Locke Institute. An educational and research organization based in Vir¬

ginia, founded in 1989. Named after John Locke, the Institute seeks to
engender a greater understanding of natural rights and their implication for
democracy and the economy. Its research includes rights theory, public choice,
law and economics, and the new institutional economics.

Locke, John (1632-1705). A foremost classical-liberal *natural-law phi¬

losopher, Locke highly influenced the American Revolution and the US Con¬
stitution. His Two Treatises on Government (1690, 1947), especially his
‘Second Treatise of Civil Government,’ had a major impact on the subse¬
quent philosophy and theory of property rights, government, and natural
rights. Locke’s political philosophy has been regarded also as a defense of
the British ‘Glorious Revolution’ of 1688, which shifted power from the
194 locked-in effect

monarchy to parliament. Locke also wrote on economics (Vaughn, 1980). For

a dictionary explaining Locke’s terms, see Yolton (1993). See also proviso.

locked-in effect. The effect of inhibiting sales of property or other eco¬

nomic activity because of having to pay taxes. The taxation of realized gains
locks in property ownership, while the taxation of gains even if unrealized
does not lock in. Some investors may feel locked in also when the price of the
asset falls, even though the unrealized loss is actual.

logic. A relationship between two propositions A and B such that if A is

true, then B must be true. The truth is intuitive. For example, if A is a subset
of B, then if A exists, B must exist. Propositions A and B may each consist of
sets of propositions; for example A might be a set of premises and B a set of
conclusions. Theorems are warranted by logic and evidence.

logrolling. Vote trading. Representative A offers to vote for B’s program if

B votes for A’s. This is how special interests are able to get a majority vote
for their subsidy. The term derives from logging, where logs are rolled down
a mountain, one log bumping another and making it roll down too.

long cycle. A business cycle spanning several decades, such as the

Kondratieff, overlapping shorter trade cycles. The evidence for long cycles
is considered to be inconclusive. See also real-estate cycle.

long purchase. The purchase of an asset prior to its sale, the usual prac¬
tice, in contrast to the opposite, short sales.

long run. The length of time (2) in which all resources are variable, or the
time in which fundamentals take effect.

long run labor supply. The labor supply curve is horizontal until all house¬
holds seeking employment are employed, and then it becomes upward-sloping,
and possibly vertical or backward-sloping at higher wages. At the horizontal
level, it is possible to have unemployment at market wages, since some of the
labor force is unemployed at the same market wage that workers earn.

loose joint. Hayek’s term for the role of money, loosely tied to the real
economy, rather than tightly as in classical models or in a broken way as
with demand-side theory.

Lorenz curve. A graph, devised by the US statistician Max Otto Lorenz in

1905, that measures inequality, with the vertical axis measuring cumulative
 LVTO 195

income or wealth, and the horizontal axis measuring cumulative population,

both starting at the lower left corner. Complete equality is a 45° degree line,
and progressively more unequal distributions get ever closer to the axes. The
Gini coefficient provides a numerical summary measure of the curve.

Lucas critique. A criticism made by Lucas about the application of

econometrics for policy. Policy changes the parameters of the model, thus
placing the previous results in question.

Lucas, Robert E. (1937-). American economist at Chicago University, he

is a major new-classical theorist. The Lucas supply function puts output as a
function of errors in the expectation of the price level, based on rational
expectations. See also the Lucas critique.

Ludwig von Mises Institute. A charitable and educational organization

dedicated to scholarship and teaching in the Austrian school of economics
(Austrian economics). It is based in Auburn University, Alabama. In the
tradition of Ludwig von Mises and Murray N. Rothbard, the institute op¬
poses statism, welfarism, and central banking, and defends the free market,
private property, and sound money. The Institute hosts conferences and pub¬
lishes books and periodicals, including The Review of Austrian Economics.

lump-sum tax. A fixed tax regardless of overall activity or ability. As a

one-time charge, the marginal tax rate is zero and the lump-sum tax preserves
incentives or even stimulates them. This amounts to forced labor for those
with only wage income. A land-value tax or Community Collection of Rent
is lump-sum for the period of the tax. If a periodic lump sum exceeds the
market land rent paid by an enterprise, it taxes its returns to capital goods and
labors, which has a disincentive effect.

luxury tax. Economically, a luxury is a good with an income elasticity

greater than one, hence when income rises, proportionally more is consumed.
Politically, luxuries are goods bought only by the rich, such as yachts and
expensive cars. Attempts to tax luxuries are often futile, since consumption is
often shifted to other goods (including travel and purchase abroad) or the tax
is evaded. Usually, poorer countries attempt to tax luxuries, especially as
imports, but the USA also has attempted it, with poor results.

LVT. Land-value tax.

LVTO. Land-value tax options.

196 Lycurgus

Lycurgus. Spartan lawgiver, perhaps legendary, of the 9th century BC.

Some of the alleged socialism of the Lycurgian system may be a wishful
reading by socialists into the Spartan past.

Lydia. An ancient country in Asia Minor, now Turkey. Around 600 BC it

originated coins as money. Lydia was later conquered by Persia.
 M

M. Commonly an abbreviation for the money supply or demand.

macroeconomics. The branch of economics that deals with theory and

policy applying to an entire economy. Because of competition, rates of inter¬
est are economy-wide. Policy provides an economy with one currency, hence
the money supply is macroeconomic. Aggregates such as national output or
income and their fluctuations in business cycles are key variables in macro-
economic analysis, and a key concept is the production function for the
entire economy, with output as a function of economy-wide inputs (usually
labor, with other factors constant). Some concepts such as labor have both
microeconomic and macroeconomic applications. Economy-wide unemploy¬
ment, for example, is a major macroeconomic topic. Some economists ques¬
tion some aspects of conventional macroeconomic theory, such as a macro-
economic production function.
Mercantilist (mercantilism) and classical theory were concerned with mac¬
roeconomic issues, such as the wealth of a nation and its growth. The physiocrats
originated a model of a national economy, and there were theories of cycles
and other macroeconomic phenomena by Karl Marx, Henry George, and
others. John Maynard Keynes overturned classical supply-side theory and es¬
tablished demand-side theory as the new orthodoxy. The tide turned again
during the 1970s as concurrent inflation and high unemployment, along with
rational-expectations theory and criticism by monetarists (monetarism), Austrians
(Austrian economics), and others, restored supply-side theory to the mainstream.
Macroeconomics for the past half century has been a tug-of-war between
the ‘classical’ and the Keynesian, that is supply- versus demand-side theory,
and textbooks typically present both sides of the argument. Austrian, geo-
economic, and other approaches to macroeconomics provide alternatives to
this debate, such as free banking as an alternative to both fixed-rule and
discretionary monetary policy, and the public collection of rent (Community
Collection of Rent) as a remedy to the usual trade-off between efficiency
and equity. For a view of Austrian macroeconomics, see Garrison (1978,
1984, 1997). See also geo-economics.

majority rule. The most common voting system in which the candidate or
proposal getting more than half the votes wins. The method is subject to the
paradox of voting and inconsistent results.

197
198 malinvestments

malinvestments. A term used in Austrian economics for investments that

turn out to be unprofitable. In the Austrian business cycle theory, this is due
to artificially low interest rates in a policy of credit expansion, which
induces too much investment in higher-order goods, distorting the structure
of capital goods. Geo-economic theory also posits locational malinvestments,
as land speculation holds land closer to city centers out of current use,
making development move to lands further from the city as urban sprawl.
The public collection of rent (community collection of rent) would reverse
this by inducing infilling.

management. The administration and control of an enterprise. A principal-

agent problem arises when the managers are hired by the owners. One remedy
for large corporations is to make the top executives owners with stocks and
options, but this then leads to enormous compensation. Managers have to
possess people skills as well as competency over the operations of the enterprise.

managerial socialism. The type of socialism in which the government

plans and controls the economy, that is dirigisme, as distinct from socialist
redistribution and the socialist concept of workers owning their capital goods.

Manchester School. A 19th-century British group of manufacturers and

politicians favoring laissez-faire and free trade, so named by Disraeli.

manipulative policy. Policy by the monetary authority which seeks to

manipulate the money supply to exploit (exploitation (1)) wage rigidities and
lower real wages, to increase employment. See (Foldvary and Selgin, 1995).

margin. 1 ec. The next unit of input used in production or a good in

consumption. The marginal cost, for example, is the cost of one more unit. In
the case of land, see margin of cultivation. See also extensive margin of
production, intensive margin, margin of production. ‘At the margin’ means
the boundary between the last unit used and the next one to be used. 2 Fin.
Revenue minus cost, as in a profit margin.

margin of cultivation. The borderline where the least productive land is

being cultivated. Worse lands are submarginal. In a model with just one crop,
land at the margin is free and has no rent, and so the whole produce goes to
labor, either directly or as payments for capital goods. With many products,
land at the margin of cultivation for a particular product is not free, but is
priced according to the next best use, with a cascade of margins reaching to
the one that is rent free. Land more productive than at the margin commands
a rent. See differential rent, law of rent, law of wages.
 marginal rate of tax 199

margin of production. By extension from the margin of cultivation, the

extensive margin of production is the least productive land in use for a
particular product, worse lands being submarginal. The wage level is deter¬
mined by the extensive margin of production.

marginal. 1 Extra, of one more unit. 2 Small and slight.

marginal analysis. Economic analysis using marginal (1) rather than total
quantities, since the margin (1) determines the price. Profits or benefits are
maximized at quantities where marginal cost equals marginal revenue. The
price a consumer is willing to pay for a good depends on its marginal utility.
A wage is equal to the marginal product of labor, and rent equals the marginal
product of land. In economics, the tail wags the dog.

marginal-cost pricing. Setting the price of a good at its marginal (1) cost,
done by markets in atomistic competition, and advocated for regulated utili¬
ties and transportation by economists as efficient. For territorial services, the
remaining expenses can be covered from the collection of the rent generated
by the services. However, as a price fixing for monopolist or oligopolist
firms, the policy faces the problems of subjective costs, the issue of short and
long-term marginal costs, problems in measuring marginal cost, and the
question of intervention in general. William Vickers was a key analyst of
marginal-cost pricing.

marginal product. The additional output obtained by using one more unit
of an input or factor.

marginal propensity to consume. The percentage of extra income a typi¬

cal person consumes. In Keynesian economics, the premise is that this per¬
centage decreases with increasing income, resulting in crossed expenditure
and income curves, upon which investment and government spending piggy¬
back to determine output. However, studies show that in the long run, the
percentage is constant, thus the curves do not cross and national income is
not economically determined by the marginal propensity to save.

marginal propensity to save. One minus the marginal propensity to con¬

sume.

marginal rate of tax. The tax rate on one more unit of the item taxed, such
as income or wealth. For income taxes, it is also called the tax bracket.
200 marginal utility

marginal utility. In neoclassical economics, the utility (utility, marginal)

generated by obtaining one more unit of a good. In Austrian economics, a
good serves various ends, and marginal utility diminishes as a good is used
for ever less important ends, such as water used for bathing after there is
enough for drinking.

market. Exchange which is voluntary among the parties, within a certain

context. A market is a process encompassing the totality of voluntary eco¬
nomic acts (2) within some context. Regarding third parties and external
effects, markets can be free, skewed, or larcenous. See also free market,
LARCENOUS * SKEWED MARKET.

market clearing. A price of a good, determined by the market process,

where there is neither a glut nor a shortage. Therefore, the market clears (1)
the good from inventory.

market distortion. A skewed (skew) market, with waste and inefficiency,

resources not being allocated to where people most want them.

market economy. An economy in which most goods are produced via the
market process. Contemporary economies are market economies with inter¬
vention superimposed.

market enhancing. Law and policy which make markets work better, by
delineating and protecting property rights. The enforcement of laws prohib¬
iting and punishing force and fraud are market-enhancing.

market ethics. The ethic on which a market is based, as it determines which

acts (1) are market-compatible. Theft, for example, violates market ethics.

market failure. The inability of the market process to provide an optimal.

amount of goods. The proposition that the market for collective goods
systematically fails due to free riders is unwarranted, since in practice most
civic goods are territorial, generating an economic rent that is always paid.
For non-excludable goods, sympathy does in fact generate a benevolent
(benevolence) provision of goods, so the presumption of market failure begs
the question of why sympathy would be lacking. See Foldvary (1994b).
Many alleged market failures such as pollution are actually due to interven¬
tions or the absence of enforced property rights.

market for legislation. The political process of seekers of privileges,

protections, and transfers (transfer payments) contributing funds to politi-
 market process analysis 201

cians and campaigns in an attempt to buy such favors. This is a political

market for legislation, a public-choice concept.

market forces. Voluntary forces such as a change in tastes, plans, or ends,

which shift supply and demand, or else the reaction of market agents to data,
such as a surplus or shortage, altering their plans. For example, a surplus of
a good at some price indicates to the seller that the price is higher than
market clearing (clear). He lowers the price to move the inventory. Such
changes in prices and quantities are changes in the momentum of these vari¬
ables, hence forces of the market process.

market hampering. Legislation and policy which intervenes (interven¬

tion) in the market process, stopping activity or making it more costly.
Income and sales taxes are market-hampering, for example.

market mechanism. The operation of market forces. ‘Mechanism’ is a

term Austrian economists (Austrian economics) do not care for, since it
implies that the market is mechanical rather than being a human, all too
human, process.

market power. The ability of a firm to set a price for a product (1), or to
influence the demand for the product.

market price. The price of a good or factor as determined by supply and

demand. Given intervention, this is a skewed (skewed market) or larcenous
market price rather than a free-market price.

market process. Ideally, production, distribution, exchange, and consump¬

tion by voluntary means. Consumption is freely chosen by individuals and
families. Entrepreneurs are unhampered in deciding which products (1) and
methods to engage in. Producers are free to supply goods of their choice,
without any imposed costs. Contracts govern the relationships between
workers, tenants, owners, and customers. The governing agency pursues,
tries, and penalizes those who transgress on the property of others, as well as
providing services as determined by mutual agreement. Market processes
occur over time; its study emphasizes change, uncertainty and knowledge.

market process analysis. An analytical framework used by the Center for

Market Processes emphasizing three aspects: incentives as affected by rules,
knowledge as it is discovered and affects markets, and values as reflected in
the market process and are affected by it.
202 market socialism

market socialism. 1 An economic system in which enterprises are owned

by the government, but operate in a decentralized, competitive fashion. The
separation of ownership and control, and the lack of capital and land markets
still precludes efficient economic calculation. 2 A geocracy if the common
ownership of rent is considered socialist; here, rents are determined by the
market process, since the possession of land is still individual. Geocratic
market socialism, if so labeled, is efficient. 3 A market made up of worker-
owned, worker-managed firms.

market structure. The concentration of firms in an industry (2).

marketable discharge permits. Permits to pollute, which have a fixed

supply and are traded in exchanges. In some applications, firms are
grandfathered, so they may continue to pollute without penalty. While the
permits make new polluters pay a cost, the gains from increasing permit
prices go to the seller rather than the victims of the pollution.

marketing. Activities that promote the sale of goods, such as advertising

(advertise) and packaging. Entrepreneurs innovate with better marketing as
well as with new products (1).
ft

marketing boards. Government bureaus that purchase goods from produc¬

ers, usually farmers, and sell them in international markets. In some less-
developed countries, farmers are paid less than the market price, a tax that
creates a disincentive to produce. In other cases, the boards subsidize (sub¬
sidy) farming, imposing costs on the taxpayers while skewing (skew) the
market.

marketization. The creation and enforcement of the legal preconditions of

rules and rights of the market, and the transfer of enterprise from govern¬
ment controls to the market process.

Markowitz, Harry (1927-). American economist, sharing the 1990 Nobel

prize with M. Miller and W.F. Sharpe. He helped develop modern portfolio
theory, showing how the optimal investment choice balances the expected
return with the variance of a portfolio. See also efficient portfolio.

marriage penalty. A tax rate on the income of married people which is

higher than the tax rate on single people for the same income. In the USA, the
penalty can be substantial if both spouses have a significant income. The
opposite is a ‘marriage allowance.’
 median voter theorem 203

Marx, Karl (1818-83). One of the foremost anti-market theorists, he was a

German philosopher and economist who settled in Great Britain. Though he
derived his basic ideas from classical economics, Marx conflated land with
capital goods, and thus misidentified capital as producing a surplus value.
Marx’s triumph was in propaganda, including the adoption of the term ‘capi¬
talism’ by both his followers and his critics.

Marxism, nondeterminist. Also called ‘postmodern Marxism,’ this branch

of Marxism does not reduce prices to labor inputs, but sees them as simulta¬
neously causing one another, which the adherents claim is not vulnerable to
BOhm-Bawerk’s critique of Marx. See Amariglio et al. (1996).

Marxist economics. A now diverse school of economic thought based on

the thought of Marx, retaining key concepts such as class (2) struggle and
the exploitation (2) of labor.

mass democracy. Voting by groups so large that the typical voter has no
personal knowledge of the candidate and little personal access to his repre¬
sentative. To win elections, candidates need publicity in the media, and to
pay for it, they receive funds from special interests, who then expect favors
in return. Transfer-seeking is thus an endemic disease of mass democracy no
matter what the voting method. See also communitarian democracy.

matter. One of the rudiments of the universe, along with time and space,
matter consisting of mass and energy. In economics, matter manifests itself
as labor, tangible capital goods, and material types of land. Some capital
goods such as knowledge are intangible and not strictly matter, but consist of
mental constructs, or social programming (program (2)).

means of production. The factors of production.

measurement The determination of the extent of an item, which with a

complex item such as an index also involves making distinctions regarding
inclusion and weighing among the subcategories.

median voter. A voter at the center of a political spectrum for a particular

issue. The concept originated with Duncan Black, Scottish economist, in
1942.

median voter theorem. In an election, candidates seeking to win will tend

to claim to represent the views of the median voter. There are exceptions
where ideology is important to a candidate. Where there are two dominant
204 mediation

political parties, as in the USA, the parties’ positions on issues will often tend
to converge to the median.

mediation. A resolution of a dispute by a neutral third party, which the

parties may accept or reject.

medium of exchange. A commodity or mental construct with standard

units, which is readily accepted in exchange for goods, and is therefore
MONEY.

meme. An idea, which like biological genes, propagates across the genera¬
tions.

Menger, Carl (1840-1921). Founder of the Austrian school of economics

(Austrian economics) and one of the pioneers of marginal-utility and sub¬
jective-value theory. He became a professor at the University of Vienna in
1879. His landmark book Principles of Economics (1871, 1976) established
the main themes of Austrian theory, including deductive-theory methodology
(deductive method). Menger originated the theory of price imputation (impu¬
tation of value), that factors derive their value from the value of consumer
goods, rather than the classical doctrine that goods derive value from the
costs of production. His theory of exchange is based on gains from trade due
to the greater marginal utility of the goods of others. Menger engaged in a
famous methodological debate with the German historicists (historicism),
initiating the tradition of Austrian economists debating with other schools
such as Marxists (Marxist economics), Keynesians (Keynesian economics),
and determinist neoclassical (neoclassical economics).

mental construct. A concept created by one’s mind, in contrast to a con¬

crete existent. Institutions and culture are shared mental constructs. For
example, government, the dollar, and a police officer are mental constructs.

menu costs. The cost of changing prices, as with a restaurant menu. It is

one of the costs of an inflationary policy (inflation).

mercantilism. The economic system as well as thought from the 1500s

through the 1700s, the most famous doctrine being that of having a trade
surplus in order to import precious metals. Mercantilism is a demand-side
policy, with government control over the economy, on the premise that eco¬
nomic interests diverge from those of the country’s leaders. The colonial
policy associated with mercantilism restricted the economies of the colonies,
which were to provide raw materials. The mercantilist doctrine was under-
 microeconomics 205

mined by Hume, who showed that bullion imports raised the price level and
restored a balance of trade, by the physiocrats who opposed intervention,
and by Adam Smith’s * Wealth of Nations (1776,1976). The American Revo¬
lution was to a large degree a rebellion against mercantilist policy. Mercantil¬
ism lives on in demand-side policy as well as the terminology and viewpoint
of a ‘favorable’ balance of trade consisting of an export surplus.

merit goods and bads. The notion that certain goods are intrinsically
socially desirable or, for bads, undesirable. Unless the criterion is an objec¬
tive universal ethic, the criterion for merit goods is arbitrary and implies that
individuals cannot best judge their own welfare, or that the culture of the
majority is to dominate by sheer force. Such notions are contrary to the
principle of subjective values and to consumer sovereignty.

Merton, Robert. See Myron Scholes.

methodological individualism. Placing the individual person at the foun¬

dation of economic theory. The rationale is that all action is individual. A
person is influenced by and socially dependent on others, but people’s minds
are distinct and independent. A person’s subjective values are the basis for all
human action and thus of economics. In contrast, holism posits an independ¬
ent status for society or culture. Culture does have its own existence, but it is
a result of an evolutionary process in which each contribution was individual.
See METHODOLOGY.

methodology. An approach and method of deriving theory. Methods include

i) axiomatic deduction (axiomatic deductive), using deduction to derive propo¬
sitions, ii) induction, iii) hypothesis testing. Axiomatic deduction is used to
derive pure theory, universal to the field. Specific theory, regarding particular
phenomena dependent on time, place, circumstance, and culture, are observed
and examined with hypothesis testing. Various methodological alternatives
include methodological individualism versus holism, envalued versus non-
valued, foundational versus anti-foundational, and mathematical versus ver¬
bal. Free-market thought usually rejects holism and uses methodological
individualism. Austrian (Austrian economics) and geo-economics are both
foundational, the former being non-valued and the latter envalued. See Boettke
(1996) for a critique of neoclassical methodology (neoclassical economics).

MFN. Most favored nation.

microeconomics. The branch of economics dealing with the units of an

economy, such as consumers, workers, firms, and government, rather than
206 microfoundations

aggregates. The field also deals with the interaction of the units, as with
market structures with various types of competition and general equilibrium.
International trade is often included in a microeconomics course, the units
in this case being countries in a global economy. Much of the field consists of
price theory, using partial equilibrium analysis. Austrian economics has an
alternative microeconomic theory, such as a different theory of utility (util¬
ity, marginal) and an emphasis on process and disequilibrium, as well as a
different approach to welfare economics. Some economic concepts such as
the factors of production are neither exclusively microeconomic nor macro-
economic, but what could be called ‘mezoeconomic,’ having aspects of
both.

microfoundations. The proposition that macroeconomics has a foundation

in microeconomics, that is in the actions of individuals and firms.

militarization ratio. The number of full-time military per 1000 popula¬

tion.

milker bills. New or increased taxes or regulations introduced in a legis¬

lature to ‘milk’ the potential tax victims. The subjects are expected to contrib¬
ute funds in order to prevent the milking, at which point the legislation is
withdrawn.

Mill, John Stuart (1806-73). British philosopher and classical econo¬

mist. Mill expanded the theory of international trade with the concept of
reciprocal demand, which determined the terms of trade. His treatise, Princi¬
ples of Political Economy (1848), was the standard economics text until the
end of the 19th century. In his essay ‘On Liberty’, a classic of liberal (1)
ethical philosophy, Mill expressed the free-society prescription that law should
only prohibit harm to others, and leave all other action unrestricted. Yet in
economic policy. Mill thought that there was a role for government in provid¬
ing education and programs to further social welfare, which from a free-
market viewpoint is a result of not delving deeply enough into the root
causes of the problems for which J.S. Mill sought the treatment of the effects.

minarchism. The political philosophy and theory of minarchy.

minarchy. A government limited to the defense of the country and of the

persons and property within the country against invasions (for example force,
theft, and fraud) and the provision of a court system for the ultimate resolu¬
tion of disputes. Some minarchists would add a few collective goods. The
government is still imposed, disallowing at-will secession. Syn. minimal gov-
 mixed goods 207

emment, limited government, nightwatchman state. (See Burris, 1983, pp.

394-5.) If at-will secession is permitted, then the system is anarchist (anar¬
chism).

mind. That which consciously thinks, feels, wills, and perceives, and causes
the body to act as a result. A brain is the biological tissue whose functioning
produces a mind. Methodological individualism presumes that minds are
independent.

minimal government. Minarchy.

minimum wage. A legislated wage, below which employers may not pay.
While some workers receive a higher wage due to this floor, others become
unemployed because the cost of labor becomes too high. If policy makers
truly wish to increase the income and employment of the poor and least
skilled, the effective remedy is to deregulate and untax labor and enterprise,
increasing the demand for all labor. The minimum wage is thus a prime
example of an intervention to treat the problems caused by other interven¬
tions.

Mises, Ludwig von (1881-1973). A great economist of the Austrian school

(Austrian economics) as well as a major contributor to economic theory and
methodology. He taught in Vienna, Geneva, and New York University, his
seminars having influenced key economists such as Hayek and Rothbard.
His Theory of Money and Credit (1924, 1980) is a major work in theory of
money, interest, and banking. In Socialism (1922, 1937), he showed how
efficient economic calculation was not possible under a command socialist
economy. Human Action (1949, 1966) was his grand treatise of economics,
based on praxeology, using the Austrian subjectivist, deductive, marginalist
methodology. He wrote many other works on methodology, theory, and appli¬
cations to policy. The Ludwig von Mises Institute provides a base for Misesian
thought.

Misesian. Regarding the work and thought of Ludwig von Mises.

mixed economy. A skewed market *economy with government controls as

well as government enterprises. All contemporary economies are a mixture of
markets, intervention, and government production. A key work is Littlechild
(1978).

mixed goods. Club goods, also called ‘impure public goods,’ so designated
because they are excludable, according to a definition of collective goods
208 model

by which they are non-excludable, though this does not follow the landmark
Samuelson (1954) definition. The term is also applied to collective goods
which become crowded, so that another user reduces the benefits enjoyed by
others. If collective goods are defined as characteristics of physical goods,
then the ‘mixed’ nature disappears, since some characteristics remain collec¬
tive and others do not. If ‘mixed goods’ refers to the characteristics of physi¬
cal goods, then almost all goods are mixed, that is they have severable
(severable goods) and collective characteristics.

model. A scientific model is a set of concepts and propositions which

demonstrate the main features of the phenomenon or theory being analyzed.

modern portfolio theory. See efficient portfolio.

Moiinari, Gustave de (1819-1912). A Belgian, editor of Journal des

Economistes, and perhaps the first anarcho-capitalist. His book The Society of
Tomorrow (1904, 1972) is a visionary program for peace, liberty, and pros¬
perity. He advocated a non-monopolistic legal system.

momentum. Physically, mass times velocity, thus economically, the move¬

ment of a price or quantity or other variable. With zero velocity, a price does
not move, while with a constant velocity, a price is moving at a constant rate
either up or down. The evenly rotating economy, an Austrian (Austrian
economics) model developed by Ludwig von Mises, economic activity repeats
at a constant rate, and thus has an equilibrium of constant momentum. Equi¬
librium exists when a set of variables are in constant momentum, even when
the velocity is non-zero.

moneta abatuda. Lat. Money diminished in value.

monetarism. A school of economic thought that espouses the quantity

theory of money, the term ‘monetarist’ introduced by Karl Brunner in 1968.
The school argues that instability in the money supply is the main cause of
instability of output. Milton Friedman has been central in the rise of the
monetarist school.
Monetarism has challenged Keynesian (Keynes) doctrines, but in many
respects it differs more in degree than in substance from it. Monetarists
advocate a fixed monetary rule (increase in the money supply) and Keynesians
advocate a flexible discretionary policy, while many Austrians (Austrian
economics) argue that the paradigm of central banking (central bank) is
dysfunctional altogether.
 money and banking 209

monetary. In connection with money supply and the banking system. The
‘monetary authority’ is usually the central bank.

monetary base. See base money.

monetary inflation. An increase in the money supply greater than war¬

ranted by the demand for money. This normally results in price inflation.

monetary policy. Control over the rate of expansion of the monetary base,
interest rates for funds lent to banks, required bank reserves, and other
variables that determine the money supply, and thus, at least in the short run,
interest rates. These variables, especially the money supply, are manipulated
to achieve ends such as stability, growth, the exchange rate, and inflation, not
always all compatible. With a completely free market in money and banking,
there is no monetary policy other than letting the market process operate.

monetization of debt. The purchase of debt by the central bank, increas¬

ing the MONEY SUPPLY.

money. A medium of exchange and the final means of payment. It can be a

commodity, such as gold, or a mental construct, such as hat money. A
desirable quality of money is that it should be a store of value, maintaining its
purchasing power, but, contrary to some textbooks, this is not part of the
definition of money. Money has a unit of account, the unit in which it is
counted, such as the dollar, but this is not part of its definition, but an
implication of its being a medium of exchange. Purchasing media include
both money and money substitutes; true money includes only the final means
of payment. The dynamic money supply includes both the quantity of money
and its velocity, that is the money supply times the velocity. (See the equa¬
tion of exchange.) The demand for money is the quantity that people wish to
hold at some price level, usually for transactions.
The purchasing power of money is based on its historical value, in accord
with the regression theorem of Ludwig von Mises. As in the scenario by Carl
Menger (1871, 1976), money evolved from readily exchangeable commodi¬
ties, and then became usurped by governments as a monopoly, and now is fiat.
The tendency has been for money to become increasingly etherialized
(etherialization of money), going from a physical commodity to a paper
symbol to electronic accounts and transactions. See also inside money, money
SUPPLY, OUTSIDE MONEY.

money and banking. The branch of macroeconomics dealing with an

ECONOMY-wide money supply and banking system, both in monetary theory
210 money market

and in the actual institutions and economic history (history of economic

thought).

money market. The market for short-term, liquid loans. Money-market

accounts usually provide checks, but with restrictions.

money substitute. An item, usually a banknote, which is used as a substi¬

tute for true money, for convenience, such as the use of banknotes convert¬
ible into gold coins. It is readily accepted as money, thus travellers’ checks
are quasi-money substitutes.

money supply. The quantity of money and money substitutes in an economy.

With free banking, the supply consists of the monetary base (outside money
or true money) plus banknotes and deposits (inside money, or money substi¬
tutes.) With the current fiat money, there are various measurements of the
money supply, with labels such as Ml, M2, M3, MZM, and so on, for ever
broader measurements. The broader the money supply, the slower the veloc¬
ity, hence MV is not affected by the measurement. See also divisia money
INDEX.

monopolistic. Regarding a firm’s * ability to set the price of its product

(1).

monopolistic competition. The market structure in which there are many

firms in an industry (2) with differentiated products (1), such as having
different brand names or minor variations in ingredients and quality. This is
monopolistic in that a firm has some control over the price - a price maker
rather than price taker. Firms compete with advertising (advertise) as well as
with quality and price. Critics argue that this market structure is wasteful, but
advertising conveys information and reputation, and many consumers value
the variety.

monopoly. 1 Absolute monopoly. 2 Entry monopoly.

monopoly capitalism. A derogatory term for contemporary economic sys¬

tems, the monopoly being an entry monopoly for land or a high concentra¬
tion of industry or wealth in a few firms or owners.

monopoly profit. The economic profit obtained by a monopoly of either

type. The profit is due to barriers to entry, and can be taxed without affecting
the quantity of the output if it is a lump-sum tax rather than based on output.
 most favored nation 211

monopossession. A distribution in which one unit owns the entire amount,

the others owning nothing. See inequality.

monopsony. A market in which there is one buyer, whether of goods or of a

resource such as labor.

Mont Pelerin Society. One of the foremost group of classical-liberal

scholars and leaders in business and government, with about 500 members,
founded in 1947 by liberals (1) who met at Mont Pelerin in Switzerland.
They sought to reassert the ideas of private enterprise and civil liberties.
The original members included Hayek, Popper, Polanyi, Robbins, and von
Mises. Friedman and Stigler joined later.

moral. 1 Referring to an act done by a person, that is the rightness (good),

wrongness (evil), or neutrality of an act done by a person. 2 Morally good.

moral hazard. The tendency of insured persons to take more risks or use
more of the service, raising the cost for others, an example of institutional
failure. Increasing the user’s co-payments reduces this hazard, as does ob¬
taining more information on the user.

morality. The assignment of moral (1) values to acts (1) by an ethic.

morally criminal. Committing moral (1) evil. Using the moral standard of
natural law, a morally criminal act is one that coercively harms others.
Morally criminal acts thus violate the ethical basis of a free market.

morally good. See good, morally.

Moses. The leader of the Israelites who took them on an Exodus from
slavery in Egypt. He also is said to have brought the Ten Commandments to
the Israelites. According to Chandler (1986), Moses’s influence ranged far
beyond the Middle East, Moses being instrumental in spreading the concept
of democracy and the ideal of peace to the world. Religious conservatives
who seek to implement restrictive laws based on Mosaic Biblical prescrip¬
tions miss the point that these rules were a Covenant voluntarily adopted by
the Israelites; those not party to the covenant are not bound by them.

most favored nation. Countries whose imports have the lowest tariffs,
aside from trading blocs and special cases. A most favored nation clause in
trade agreements requires each party to extend tariff reductions to all coun¬
tries having MFN status.
212 multilateral governance

multilateral governance. Governance that is a mutual agreement among

the parties, rather than unilaterally imposed.

multinational corporation. A corporation with operations and subsidiar¬

ies in several countries.

multiplier. The effect of increasing the final amount of a good or of output

by a multiple of the initial input. For example, a money or credit multiplier
expands an increase in base money into a much larger money supply. A new
factory employing 100 workers will induce enterprises to serve them. How¬
ever, the Keynesian income multiplier based on the marginal propensity to
consume is a mathematical manipulation that only applies economically when
idle resources are stuck, if at all, since if all income not consumed is invested,
the marginal propensity to save is irrelevant.

municipality. An incorporated town or city.

mutual fund. A company which owns shares of other companies and does
not directly engage in production. Owners of shares of the mutual fund are
thus able to diversify (diversification) their investments and assets.

MZM. A measure of the money supply, equal to M2 plus institutional

money-market funds minus small time deposits.
 N

NAFTA. North American Free Trade Agreement.

national debt. The debt of the central government, such as the US federal
government. Besides the official debt, manifested in government bonds, there
are unfunded liabilities not usually included in the government budget. Both
are liabilities of the taxpayers. See also budget. National debts are built up
especially during war, and more recently, because of a lack of constitutional
and cultural/ethical restraints on spending, since spending generates votes
and taxing is unpopular.

national income. An official measure of the income (or output) of a coun¬

try, such as Gross Domestic Product. Critics say that much economic activity,
such as home production, is not included, and that the consumption of envi¬
ronmental capital is also not accounted for.

nationalization. The expropriation of the firms in an industry (2) by a

government, making government the owner. Recently the tendency is the
reverse, to privatize (privatization). Nevertheless, in many countries, confis¬
cation remains a risk.

natural. 1 Referring to everything that is prior to human action. 2 Society

and an economy without government intervention. 3 Products (1) produced
without chemical treatments. See also natural law, natural moral law,
NATURAL OPPORTUNITY, NATURAL RIGHT.

natural law. Propositions universal to a subject matter. In science, natural

law consists of theory describing and explaining regularities. In ethics,
natural moral law consists of propositions applying universally to all hu¬
manity, thus independent of cultural or personal views.

natural law rent. See natural rent.

natural monopoly. A product (1) whose production involves a large fixed

cost and a small marginal (1) cost, with no close substitutes, for which a
duplication of the fixed cost would not be profitable. Technology has reduced
the scope of territorial monopolies, such as telephone service, if it ever was

213
214 natural moral law

natural (2). Competition can be achieved in many cases by having competi¬

tors supply the service over the same infrastructure. Other market remedies
include bidding for the franchise and the horizontal integration of utilities
into privately organized communities, providing competition among commu¬
nities.

natural moral law. Propositions about ethics which have universal appli¬
cation and are logically derived from empirical premises about human na¬
ture, hence natural (1). Their formulation into moral rules is the universal
ethic. It is often referred to more briefly as ‘natural law’ or, as John Locke
called it, the ‘law of nature.’

natural opportunity. An unhampered opportunity provided by nature or

natural resources. Geo-economists (geo-economics) include equal access to
land, made possible by the equalization of the benefits as manifested by
RENT.

natural rate of interest. A concept used by Knut Wicksell., essentially the

rate of interest that would exist if there were a pure free market, due to time
preference. The actual market rate of interest may be a skewed (skew) rate
affected by the rate of money issuing by a central bank, along with other
interventions. More narrowly, the market rate can be compared to the quasi¬
natural rate that would exist if the money supply matched the money demand.

natural rate of unemployment. 1 The level of unemployment consistent

with a lack of price inflation or with ah absence of wage increases, as related
to the Phillips curve. This rate cannot be increased in the long run just by
increasing aggregate demand. 2 The amount of unemployment that would
occur in a pure market economy, that is only frictional unemployment. 3 The
level of unemployment that would be the hypothetical outcome of Walrasian
GENERAL EQUILIBRIUM (MlLTON FRIEDMAN).

natural rent. The rent of economic land due to value provided by nature
rather than human-made improvements.

natural resources, land.

natural right. A moral (1) right, the correlative of a moral wrong. Given a
universal ethic as the formulation of natural moral law, since the one
moral wrong is coercive *harm to others, there is one basic natural right, the
right to be free of coercive harm, which also endows a person with the right
to do whatever is not coercively harmful. The right is natural (1) because the
 neoclassical economics 215

moral law derives from human nature. A society which has liberty is one in
which people may legally freely exercise their natural rights.

nature. Everything that is natural (1); that is, everything prior to being
altered by human action.

naturism. The philosophy of living in harmony with nature, which in its

widest sense includes living in accord with natural moral law, avoiding
harming one’s body with toxic substances, accepting the natural body’s ap¬
pearance as wholesome, and having respect and appreciation of the natural
ENVIRONMENT.

needs. Goods considered a necessity, with an income elasticity of demand

of less than unity, so that as income rises, its consumption does not rise
proportionately. The term also refers to merit goods (merit goods and bads).

negative rights. See protective rights.

neighborhood effects. See external effects.

neo-Austrian. As indicated by Israel Kirzner (1987), the post-1970 re¬

vival of the ideas of the early Austrian school (Austrian economics), espe¬
cially the work of Mises and Hayek, emphasizing market process rather than
equilibrium analysis. The ‘neo’ indicates the modern time frame rather than
any substantial difference in theory from the early Austrians.

neoclassical economics. Also spelt neo-classical. The contemporary main¬

stream of economic theory, probably coined by Veblen. The school has sev¬
eral aspects. First, the neoclassical revolution of the latter 1800s replaced
cost of production and labor theories of value with subjective values and
marginal analysis, Menger, Walras, and Jevons being the main pioneers.
Second, neoclassical theory merged land with capital goods, making it a
two-factor school, in contrast to the classical three-factor analysis. Third, the
formalist revolution (formal analysis) of the mid 1900s brought determinist
partial and general equilibrium mathematical modeling into the mainstream.
See Boettke (1996) and Gaffney (1994) for critical views of the development
of neoclassical theory.
The Austrian school (Austrian economics) is neoclassical in the first sense,
is split in the second, but is not neoclassical in the third. For the most part,
‘neoclassical’ theory includes all three aspects. Some schools of thought with
a more focused domain of study use neoclassical analysis or combine it with
other methods (for example the Virginia School, which uses neoclassical as
216 neoclassical synthesis

well as Austrian theory), while others, such as the Marxists (Karl Marx),
institutionalists (institutional economics), and post-Keynesians, fundamen¬
tally reject the theory and approach. Keynes’s macroeconomics did not at
first have neoclassical microeconomic foundations, but the neoclassical syn¬
thesis integrated it into the neoclassical paradigm.

neoclassical synthesis. The merging of Keynesian demand-side macroeco¬

nomics with neoclassical (neoclassical economics) utility-maximizing theory.
Don Patinkin in the 1940s was instrumental in this synthesis, saying that
unemployment is a disequilibrium phenomenon. Unlike Keynes’s assertion of
presenting a general theory with classical theory a special case, the synthesis
reverses the relationship.

net domestic product. Gross Domestic Product minus depreciation (1).

net investment. Investment (1) net of depreciation (1).

net profits. Profits less depreciation (1) and taxes.

neutral tax. No tax is completely neutral in having no effect on the behavior

of persons. However, taxes on fixed natural resources have the least excess
burden. The more elastic the supply of a resource, the less neutral the tax. A
tax can also be neutral among different classes of the targeted source, such as
an income tax treating all income alike, rather than, say, having a marriage
PENALTY.

new classical. A school of macroeconomics, not really classical in the

‘classical-classical’ sense, but supply-side neoclassical (neoclassical eco¬
nomics). It uses rational expectations theory and the premise of flexible
prices to demonstrate the futility of expected demand-side policy, especially
an attempt to reduce unemployment with monetary expansion. The school
argues that the aggregate supply curve is always vertical, so that changes in
aggregate demand only change the price level even in the short run. In
contrast, monetarists (monetarism) and Austrians (Austrian economics) be¬
lieve that demand policy can have effects in the short run, often with adverse
long-term consequences.

new Keynesian. A branch of the Keynesian school of macroeconomics

(Keynesian economics) which embraces rational expectations theory and
argues that macroeconomic variables such as wages can nevertheless be
stuck, because of long-term fixed-wage labor contracts. However, if expecta¬
tions are rational, then long-term fixed-wage contracts would only exist if the
 non-valued science 217

monetary authority did not pursue a demand-side manipulative monetary

policy (Foldvary and Selgin, 1995).

New Right. Advocates of privatization and less intervention, who became

influential during the 1980s in the USA and Western Europe.

Ninth Amendment. This amendment in the US Constitution recognizes

rights even if not enumerated in the Constitution. These would be natural or
common-law rights, which would protect liberties and lead to a free market
if recognized as such by the legal community and the courts. The constitution
of the Commonwealth of Virginia has a similar clause.

Nock, Albert Jay (1870-1945). Geo-libertarian author of Our Enemy the

State (1935), influenced by Franz Oppenheimer’s The State (1914, 1975).
Both distinguished between the economic means and the political means.

nominal. In name, or as set in the numbers rather than in economic reality.

Nominal income over the years is income in current prices, rather than
purchasing power adjusted for inflation, and nominal interest rates are the
quoted rates rather than the real (3) returns after subtracting inflation.

non-excludable. Of a collective good, the inability to exclude persons

from using it or being impacted by it once provided. See also collective
GOODS, EXCLUDABLE.

non-rival consumption. A feature of collective goods, where each person

uses the entire good, and so there is no rivalry among the users. Some
characteristics of a collective good can be non-rival while others of the
same physical good are rival, so no conclusion can be drawn regarding the
pricing or provision of a good just from non-rivalness. Also, the use of a
territorial good can be non-rival while the occupation of space to access the
good is rival. See also congestion.

non-tariff barriers. Trade barriers such as quality regulations, inspec¬

tions, and quotas.

non-valued science. Science whose methodology excludes ethical values.

Whether social science, such as economics, can be ‘value-free’ is debated.
The interests of the scholar influence his choice of topics, at the least. Some
economic topics are non-valued, but others, such as policy, may be unavoid¬
ably ENVALUED.
218 non-wage labor costs

non-wage labor costs. The overheads associated with hiring employees,

fringe benefits, plus costs imposed by government such as social security,
unemployment, and disability taxes as well as the costs induced by govern¬
ment policy such as litigation.

nondeterminist. Theory not having any determined result, unlike neoclas¬

sical (neoclassical economics) or orthodox Marxist theory.

nonmoral. Lacking morality. Physical and biological science are nonmoral,

but economics is moral (1), since its behavioral concepts implicitly recog¬
nize moral rules, for example consumer behavior rather than misbehavior, the
choice being between paying for A or B, rather than stealing both.

nonprofit organizations. Organizations whose intention is to serve their

members, the public, or charitable purposes. If not subsidized, these are part
of the MARKET PROCESS. See CHARITY.

normal. 1 Typical, hence not extraordinary. 2 A type of bell-shaped fre¬

quency distribution commonly used in regressions. 3 A good whose demand
is positively related to income, for example rising with increasing income.

normal profits. Revenues that just cover all costs, including implicit costs,
hence accounting profits but not economic profits.

normative economics. Theory passing moral judgment on phenomena (phe¬

nomenon), or proposing ideal situations, or evaluating how an economy or
policy should be.

North American Free Trade Agreement. An agreement between several

countries of the Americas (currently Canada, the USA, and Mexico) to elimi¬
nate tariffs on most trade as well as liberalize capital transactions. The
agreement contains many complexities, hence it is a movement towards more
free trade rather than establishing true free trade. Some free-marketeers
think the net result is less freedom of trade or loss of US sovereignty.

notional demand. The desire for a good, whether or not one has the re¬
sources with which to obtain them.

Nozick, Robert (193 8-). American philosopher known for his Anarchy,
State and Utopia (1974) in which he presented a scenario of the development
of a minimal state (minarchy) arising from anarchist (anarchism) protection
agencies.
 nulle terre sans seigneur 219

NSPIC. Neuro-Semantic Political Illusion Complex. These are words, meta¬

phors, and expressions which help maintain coercive institutions by setting a
linguistic agenda.

nudity. Being without any significant clothing. Nude or naturist (naturism)

clubs and resorts are an example of an activity which is in most places legally
not permitted, yet can be practiced in a private community.

nulle terre sans seigneur. Fr. No land without a lord. If land is within
human control, someone effectively owns it.
 o

objective. Independent of persons’ values, beliefs, and culture.

Objectivism. The philosophy and movement founded by Ayn Rand, which

regards life as the standard of value, and derives an objective ethic. Its key
prescription is that it is wrong to initiate force. While free-market oriented,
many Objectivists do not favor libertarianism.

obligation. A debt, duty, promise, it being morally or legally wrong if one

does not do it.

obligational rights. Moral (1) rights to goods which others are morally
obligated (obligation) to provide to the recipient. Parents, for example, have
obligational rights to care for their children. In contrast, takings rights are
legal rights to takings not morally warranted (warrant).

occupational licensing. A restriction on practicing a craft or profession

unless one obtains a certificate, usually after passing some requirement. Once
government has the power to license, it can be used by the industry (2) to
limit entry, and licensing also violates consumer sovereignty. Private certifi¬
cates can assure quality without restricting consumer choice.

ochlocracy. Government of mobs, or mob rule.

oligopoly. An industry (2) with only a few firms. The firms are affected by
the actions of others. There is no one type of behavior in this case, since the
outcomes can range from cartels to price wars and strategic games. Except
for cartels, which generally do not last long, there is still competition, since
there is rivalry among the firms. If the firms are cooperatives, however, they
may try to coexist in harmonious competition.

one hundred percent reserve banking. See warehouse banking.

opacity. The characteristic of not letting light pass through, hence by

extension, not visible to the public (1). When one buys an appliance, the
benefits are visible but the faults may be opaque. The public bads in an area
may also be opaque to a prospective resident. Transfer-seeking and corrup-

221
222 open access

tion can also be opaque unless there is a systematic method of making

government processes and acts transparent.

open access. Of a resource that is owned by government or in common,

without any entry restriction or payment requirement. This unmanaged com¬
mon tends to be overly exploited. With assigned property rights, the owner
will charge admission.

open economy. An economy engaged in international trade.

open market operations. In the USA, the purchase or sale of government

securities (bonds) by the Federal Open Market Committee of the Federal
Reserve System, or in other countries, the equivalent action by the central
bank. The FED increases the money supply by purchasing government bonds
and paying for them by increasing bank reserves, thus creating money by fiat
(hat money).

open society. A society which permits immigration and respects basic civil
liberties, particularly freedom of speech and association. The term was coined
by Henri Bergson in The Two Sources of Morality and Religion (1932), and
was used by Karl Popper in his book The Open Society and Its Enemies
(1945). Totalitarian (totalitarianism) countries are closed societies. Finan¬
cier and philanthropist George Soros adopted the term for his Open Society
foundations.

Oppenheimer, Franz (1864-1943). German historian and sociologist; as

author of The State (1914, 1975), he held that states originate in conquest
and involve domination. He originated the concept of distinguishing the
economic means (voluntary production and exchange) and the political
means (using force), a theme elaborated upon later by Albert Jay Nock. A
‘liberal socialist,’ Oppenheimer also held that land was originally owned
collectively by nations, tribes or villages, and that the exploitation of workers
is made possible by the usurpation of the land by government-enforced titles
to landowners who are not user/occupants. See Foldvary (1997c).

opportunism. Originally a French political term, economic opportunistic

behavior is the exploitation (1) of an informational or physical advantage
(such as due to asset specificty), thus taking all or most of the gains from
trade. Communists used the term for those willing to compromise with
bourgeois parties.
 ordinal utility 223

opportunity. A chance to achieve some outcome. The chance consists of

the possible availability of the means and an absence of barriers, such as
legal or physical barriers. See also natural opportunity.

opportunity cost. The true economic cost of something, consisting of the

best foregone opportunity. When one buys an item, the true cost is not the
cash, since one is exchanging it for something one prefers. The true cost is
what one could have otherwise obtained, but did not. For example, the op¬
portunity cost of self-employment is the best employment one could have
working for another. The concept was developed by Friedrich von Wieser, but
also recognized earlier, for example by Henry George (1871).

oppress. To severely control another in a harsh or painful way, as some

governments do to their subjects, especially dissidents and minorities.

optimal. The best possible, given the constraints and criteria. Opposite
term: pessimal. In mathematical economics, the optimal is usually a maxi¬
mum or minimum of some function. In free-market economics, what is
optimal is regarded as what is voluntarily chosen, given the constraints of
morality. Optimizing is equivalent to economizing, and the general rule is
that one optimizes when marginal (1) benefits equal marginal costs, and
when the marginal benefits of items compared to (divided by) costs are equal.
For example, the socially optimal level of pollution is the level where the
marginal costs of additional pollution equal the marginal costs of reducing
pollution.

option. 1 Opportunity or alternative. 2 A contract to buy or sell an asset at

a certain price within some time interval, a call (call option) being the buy
and a put (put option) the sell option. One can hedge (hedging) the ownership
of stocks with a put option if one fears a decline.

order. An environment in which a person can learn to form reliable expec¬

tations as to the elements of the system and their rates of change. As Hayek
noted, the two types of order are organizational orders and spontaneous
orders, the latter being the order of the market process, which Hayek also
called the extended order.

ordinal utility. Utility (marginal utility) defined as a ranking from most

to least important, so that one can only have preferences rather than utility
directly from a single item, and it is not possible to evaluate the degree of
ranking, that is by how much A and B differ compared to B and C. Austrian
economics uses ordinal marginal utility. Some theorists argue that a quanti-
224 orthogonal

fied though not measurable utility is also meaningful and real world, as when
one says that one likes mangoes a great deal more than papayas, and papayas
just a bit more than oranges.

orthogonal. At right angles, with zero correlation. Two variables are

orthogonal if they have nothing to do with one another, or one does not affect
the other.

output. The goods and services that firms produce, including bads as by¬
products.

outside lag. The time interval between the implementation of a policy and
the completion of its effect.

outside money. Under a gold standard, outside money is gold (its quan¬
tity determined outside the banks) and the inside money is substitutes for
gold, that is banknotes and deposits. With fiat government money (fiat money),
outside money consists of coins and paper currency as well as bank reserves
and foreign exchange reserves.

overdetermined. Psychologically, it means having several factors affecting

some condition. Economically, it means that all aspects of a system mutually
cause and affect one another. See, for example, Amariglio et al. (1996).

ownership. A bundle of rights.

 p

P. A symbol for price or the price level.

Paine, Thomas (1737-1809). British classical-liberal political philoso¬

pher, Thomas Paine emigrated to America and advocated independence in
Common Sense (1776). Back in Europe, he wrote the Rights of Man (1791).
After publishing The Age of Reason (1794, 1796) on his desist belief, he
returned to America. His more economic work is Agrarian Justice Opposed
to Agrarian Law, and to Agrarian Monopoly; Being a Plan for Meliorating
the Condition of Man (1797), where he argued for equality in the right to the
benefits of land.

panarchy. A system with multiple and overlapping jurisdictions of volun¬

tary, contractual associations. It is a type of anarchism, but with local gov¬
erning agencies that provide a variety of economic and social systems, hence
‘pan’ meaning embracing all. The term has been propagated by John Zube.

panic. A widespread sudden fear of the collapse of the economy, especially

the banking system, leading depositors to withdraw their deposits, which
leads to delays and bank failures, furthering the panic. With deposit insur¬
ance and fiat money, panics no longer occur. They would also not normally
occur with free banking, since the banks would have agreements to provide
one another with base money, and there could also be private insurance as
well as super-safe banks.

paradox of voting. Simple majority-rule voting may give inconsistent re¬

sults, giving power to those who set the agenda of the sequence of the voting.
See IMPOSSIBILITY THEOREM.

paratransit. Small private transportation services such as jitneys (vans and

small busses), shared-ride cabs, and car pooling. These are often restricted by
municipalities such as New York City to limit competition with the city
transit system.

Paretian liberal. The label by A.K. Sen in a theorem that states that no social
decision rule can be Pareto optimal yet allow individual liberty without
regard to the effects on others. Sen’s example is A reading a book to which B

225
226 Pareto improvement

objects, when both would prefer that B read it and A not read it (B would rather
suffer the book in order to prevent A from reading it). If they are not able to
meet to agree on the latter outcome, the Pareto improvement and Paretian
liberal is impossible. Sen prefers liberty to the Pareto rule. The example seems
bizarre, since most persons who enjoy some activity derive more utility (mar¬
ginal utility) from doing it than from having others who don’t like it do it, and
those who dislike something would rather not experience it themselves.

Pareto improvement, unanimous improvement.

Pareto optimal. The situation where it is impossible to make a unanimous

improvement in the allocation of resources, since any change would make
someone worse off.

Pareto relevant. See external effects.

partnership. A firm which is owned and controlled by several people, and

which itself is not a legal person. In a limited partnership, the limited partners
are not liable for more than their investment, and control is held by the
general partners. Partners may have differing shares of the firm. In the US,
profits and expenses flow through to the partners for income taxes, while
corporations as legal persons have their own income.

patent. A property right to the design of an invention, prohibiting others

from copying it for a number of years. It can be considered an extension of
contracting, where purchase is conditional on not copying. The utilitarian
argument is that without patents, many inventions would not be developed. A
moral argument is that the creator has a right to his invented design as well as
physical implementations. Those opposing patent rights argue that these are a
privilege granted by the state, and that there are other ways of protecting
inventions.

path. The historical sequence of events. An outcome is path dependent if it

depended on a particular sequence which was arbitrary in the sense that some
other sequence could have occurred; the path is an accident of history, that is,
of the persons and natural events (earthquakes, and so on). An outcome is
path independent if the outcome is independent of other alternatives. If vot¬
ing on A, B, and then C leads to a different outcome than voting on C, B, and
then A, the result is path dependent. Pure economic theory is path independ¬
ent, but as practiced, it is path dependent because it develops within schools
of thought that resist challenges from other schools, and the thought of key
individuals can alter the path.
 perfect complement 227

payroll tax. A tax on money wages, such as for social security or, in the
UK, national insurance. The tax induces a skew to non-taxed fringe benefits,
as well as imposing a burden on both labor and employment, inducing a
preference for non-labor substitutes.

peak-load pricing. Pricing a flow according to its congestion, thus charg¬

ing users for inflicting a social cost (social costs and benefits). Examples of
such congestion fees include bridge tolls and rapid transit during rush hours,
electricity during peak use, and discounts by movie theaters for non-peak
hours.

pensience. The capability of a volitional purposive being to direct its

actions using reason; it includes awareness and implies the ability to choose
actions and know the effects of acts on others. Related but not identical terms
include intelligence, sentience, and volitional consciousness.

pensient. Having pensience.

perestroika . Russ. The economic reforms initiated in the former Soviet

Union by Mikhail Gorbachev. Initial attempts to decentralize operations and
allow some private market initiatives such as cooperatives and land leasing
were often reversed and restricted, and had little overall effect, because the
basic structure was unchanged. After 1988, central commands were loosened,
but the preconditions (preconditions for market) for coordination by a
market process were not in place, and prices remained fixed, and the economy
began to disintegrate. After the breakup of the Soviet Union in 1991, more
fundamental reforms transformed Russia and other former Soviet republics
into mixed economies. See Boetkke (1993) on why perestroika failed.

perfect. Complete and pure. See also fail.

perfect competition. An absence of long-run market power by firms in an

industry (2), an outcome of atomistic competition. It is more accurate to call
the market structure atomistic competition, and to use the term ‘perfect non¬
monopoly’ for that outcome. The term ‘perfect competition’ conflates rivalry
and non-monopoly, and misleadingly implies that there is something imper¬
fect about market structures that are not atomistic, when real-world realities
necessitate such structures.

perfect complement. A good without which another good will not be used,
such as left shoes and right shoes, completely complementing (complement)
one another. The goods are always bought in the same ratio.
228 perfect information

perfect information. Complete relevant information, known to all relevant

parties. This is typically a premise of models, such as for perfect competi¬
tion, and then critics of markets cite informational imperfection as a flaw of
real-world markets because they don’t conform to the model. Since govern¬
ment officials also lack perfect information, there is no policy implication in
not being omniscient. See lex non cogit ad impossibiua, fail.

perfect substitute. A good which can completely substitute for another,

such as blue and red pencils if one does not care about the color. If a good is
priced higher than its perfect substitute, it will not be bought.

period of production. The payback time, or duration between an invest¬

ment and the time that the cost plus profit are recovered. This is an important
element of the Austrian theory (Austrian economics) of capital goods.

permanent income. Average lifetime income that does not reduce one’s
WEALTH.

permanent income hypothesis of consumption. The hypothesis by Milton

Friedman that one’s consumption depends on one’s permanent income, in
contrast to the life-cycle hypothesis of planning to consume all lifetime
income and wealth. This contradicts the Keynesian consumption function
that posits more savings with more income.

perpetuity bond. A consol.

person. A living being which exists on the pensient level. A person has a
functioning mind and the actual or potential ability to make choices based on
reason and awareness. Such choices rather than reflexes (genetically pro¬
grammed (program (2)) responses) dominate the behavior of a person. Natu¬
ral moral law applies to persons. Persons are the subjects of social science,
including economics.

personal evil. A person’s sentiment that something is harmful or disagree¬

able to him.

personal good. A person’s sentiment that something is beneficial or agree¬

able to him.

personal neutral. A person’s sentiment which is neither personal good

nor PERSONAL EVIL.
 Pigovian tax 229

personification. The depictions of a non-human or collective entity as

though it were a human being, such as saying ‘France favors European
integration’ or ‘the market does not like uncertainty,’ when in fact it is real
human beings who do such things.

pessimal. The worst possible, given constraints and criteria. Opposite of

OPTIMAL.

phenomenon. An object or event.

Phillips curve. Originally, as presented by A.W. Phillips in 1958, a rela¬

tionship between wage increases and unemployment. This became extended
to a relationship between price inflation and unemployment, with the impli¬
cation that policy could reduce unemployment at the expense of higher
inflation. However, the Phillips curve is not stable, and in the long run it is
considered by supply-side economists to be vertical, as expected inflationary
policy will only raise prices.

physiocracy. The rule of natural law, thus named by the physiocrats for a
laissez-faire economic system with policy in accord with natural moral law.

physiocrats. A French school of political economy during the 1700s whose

policy was laissez-faire, with free trade and an impot unique, a single tax on
the net product, or land rent. They also developed the first dynamic *macro-
economic model, the tableau economique. The physiocrats had the first theory
of economic development, based on a tax only on land rent, which would be
used for ‘advances’ or investments in capital goods, especially to create infra¬
structure, which would generate more rent, leading to an upward spiral of
development, with private enterprise unshackled by regulation and taxation.
This model was applied successfully by 19th-century Japan and post-1950
Taiwan (Harrison, 1983), and no better model has been developed by develop¬
ment theory. Adam Smith wrote that it could do no harm. Henry George one
century later expanded on these themes, with an added moral dimension, and
some Spanish-speaking Georgists refer to themselves as neo-physiocrats. The
physiocratic emphasis on agriculture has been misunderstood, since by ‘pro¬
ductive’ the physiocrats meant productive of rent. Their error was to not recog¬
nize the rental productivity of urban commerce, an error rectified in Georgist
or geoclassical thought. Key physiocrats were Quesnay and Turgot. Adam
Smith visited them in France and was influenced by their thought.

Pigovian tax. Named after Arthur Pigou, a tax on a negative external

effect equal to the cost it imposes on others, making the private cost equal
230 planned economy

the social cost (social costs and benefits). The Coase theorem shows that if
the transaction costs are low enough, the parties can negotiate a settlement
that is the smaller of the cost of avoiding the effect or of paying for the
damage. If transaction costs are too high for direct negotiations, then an
institutional method (institutional economics) can be sought to achieve such
a result.

planned economy. See central planning.

plunder. To take by force, and the goods so taken. Oppenheimer and Nock
identified the two means of obtaining goods as the political way, through
plunder, and the economic means, through voluntary exchange. Given the
premise of self-ownership, the taxation of wages and the products (2) of
labor is a wrongful taking.
Governmental means of raising revenue does not need to be plunderous,
since voluntary user fees are consistent with the economic means, as is the
community collection of rent, which Nock (1935) himself regarded as prop¬
erly economic.

Pohlmann, Robert von. In his Geschichte des antiken kommunismus und

Sozialismus im klassischen Altertum (1893), he discredited the view that
communism arose with the agricultural stage of development. Communism
instead arose when war compelled common ownership in military camps and
fortresses. See also Oppenheimer, Foldvary (1997c).

point of inflection (Br. inflexion). The point on a curve, such as the repre¬
sentation of a business cycle, where the rate of change of the slope changes
sign, thus the rate of expansion or decline slows, foreshadowing the change
in the slope, that is the peak or bottom.

policy. See economic policy.

political. Relating to power and agreements concerning rules, especially

regarding government.

political business cycle. Macroeconomic cycles caused by increased gov¬

ernment expenditures prior to elections.

political economy. The classical name for economics, the term now mean¬
ing the theory of governmental economic policy, including public choice and
CONSTITUTIONAL ECONOMICS.
 positivism 231

political means. See plunder.

politicization. The process by which private (1) choice is altered by the

political process and overridden by social choice.

politics. The pursuit of power, and also of rules * agreements.

poll tax. A HEAD TAX.

polluter pays. The policy of pollution charges to compensate for dam¬

ages. See also effluent fee, larcenous, optimal, pollution charge.

pollution. A substance that reduces the utility (marginal utility) of an

ENVIRONMENT.

pollution charge. An effluent fee. See polluter pays.

pollution rights. Legal permits to pollute (polluter pays), which trade in a

market. With the supply fixed, the price of a permit has some of the effect of
an effluent fee, inducing a reduction of pollution. If some firms are
grandfathered, granted original rights to pollute, it is in effect a subsidy to
those firms. Pollution rights avoid the problem of estimating the pollution
damage, but they do not generate continuous revenues, and they do not
necessarily compensate the victims for the damages.

polycentric law. Bell (1991) defines it as overlapping private jurisdictions

in free and open competition.

polycentricity. The degree of polycentric or decentralized governance,

measurable by the diversification index.

portfolio. A collection of assets held for gain. In modern portfolio theory,

the assets are grouped into relatively uncorrelated categories. See diversification.

positive economics. The analysis of economic phenomena (phenomenon),

in contrast to normative economics that evaluates systems and policy.

positive rights. Takings rights or obligational rights.

positivism. The philosophy and methodology originating in the work of

Saint-Simone and Compte, dealing with what are considered to be objective
facts, observed and measured, and purports to be non-valued (non-valued
232 possession

science). It has been adopted by neoclassical economics in hypothesis test¬

ing, where the assumptions need not be realistic, so long as they are falsifiable
and the results are sufficiently predictive. Critics say that the allegedly objec¬
tive facts are actually theory-laden, so the factual objectivity is problematic.
Austrian (Austrian economics) and geo-economics use axiomatic-deductive
methodology, where the assumptions are intended to be realistic, which does
not preclude testing specific propositions.

possession. 1 Title to property giving the owner rights of control and

transfer so long as usage is peaceful and honest. 2 The physical holding of
property.
Rights of possession can be separated from the rights to the yield (return or
income) from property.

‘possession is nine points of the law.’ Thomas Fuller in The Historie of

the Holy Warre (1639).

post-Keynesian. A demand-side school of economics drawing from Keynes,

Marx, and Ricardo. Some elements in common with Austrian economics
include an emphasis on the dynamic nature of the economy, uncertainty, and
the importance of institutions. However, as an outgrowth of Keynesianism,
post-Keynesians believe that markets do not function well, and they favor
indicative planning (planned economy).

postage money. Postage stamps used as money, as during the US Civil War,
or the possibility of a money unit based on postage, such as first class mail,
which would be commodity money based on a service rather than a stock of
physical commodity.

postmodern. A paradigm that rejects universal (universe) and objective

*truth and determinism (determinist).

poverty. Absolute poverty is a family income too low to obtain sufficient

food, shelter, and medical services to maintain normal health. Relative pov¬
erty is some bottom percentage of a distribution of income or wealth. One
also needs to distinguish pre-assistance and post-assistance poverty. A soci¬
ety with poverty means that it has a non-trivial number of persons who are in
absolute pre-assistance poverty.
Pre-assistance absolute poverty is due to a low marginal product (2) of
labor in a local economy, which persists due to several factors: the taxation
and restriction of labor and enterprise that reduce opportunity and wages,
poor government schooling, a welfare (2) trap that penalizes those who
 preference revelation 233

attempt to escape with high marginal tax rates, and a culture of poverty with
poor work attitudes.

power. Kinetic power is the exertion of one’s own or others’ energy over
time; potential power is the ability to act and make things happen. A power¬
ful theory has great explanatory effect. Political power commands the en¬
ergy and resources of others.

praxeology. The general theory of human action, derived deductively (de¬

ductive method) from the concept of human action. Praxeology is closely
associated with Ludwig von Mises, who developed the concept in works such
as Human Action (1949, 1966). Mises states in that work that the term was
first used in 1890 by Espinas. Economics is a subset of praxeology.

precious metals. Metals of very high value per ounce, mainly gold, silver,
and platinum, the first two commonly used for coins until the establishment
of hat money. These metals, commonly as coins, appreciate (appreciation) in
nominal value during periods of high inflation, and are therefore held as
inflation hedges (hedging). Gold is an especially good store of value because
it does not corrode and is easily molded.

preconditions for markets. A free market presumes an ethic that deter¬

mines which acts are market-compatible and which ones are outside the
market, for example theft. Moral property rights are a function of the ethic.
The ethic is implemented in law, which delineates and protects property
rights, including the enforcement of contracts and the resolution of disputes.
A cadastre (cadastral survey) of land titles is useful for the registration of
titles as well as the assessment of value and charges on the rent.

preference. A foundational premise of economics is the ability of a person

to rank ends. Goods then have preferences, or a ranking relative to price, as
instrumental in achieving the ends. If A is preferred to B, it means the actor
chooses A, given some budget constraint that does not enable him to have
both A and B.

preference demonstration. See demonstrated preference.

preference revelation. The determination of preferences before a choice is

actually made. This is alleged to be a problem for public goods, since one
may use the good as a free rider, once provided, and if asked, people may not
reveal their true preference in order to avoid paying. However, the demand-
revealing tax (demand revelation) method has been developed to accomplish
234 present value

this (Tideman and Tullock, 1976). Also, most civic goods are territorial
(territorial goods), and the rent paid reveals the preference for the public
goods located in that territory (Foldvary, 1994b).

present value. The value at present of future yields during some time
interval (or infinite time). The stream of yields is discounted (divided) by the
interest rate. The net present value uses gross yields minus costs.

price. The amount of money a good exchanges for. Price theory is about the
determination of prices and quantities of goods by markets, and the resultant
allocation of resources, that is microeconomics. Prices convey signals regard¬
ing profits, gluts, and shortages; prices distorted by intervention provide
skewed signals.

price ceiling. A price control setting a maximum price, as with rent

control. This results in a shortage and a black market.

price control. The fixing of prices or price ceilings or price floors by

government.

price discrimination. Charging different prices for different customers pur¬

chasing the same good or for different quantities of the good. This enables a
monopolist to sell more product (1) without diminishing profits, reducing
the deadweight loss of monopoly, but in practice, such discrimination is
limited to youth and the aged, and special situations.

price-earnings ratio. The price of a stock divided by the earnings per

share, an indication of the profitability of a company and the prospects for a
rising price of the stock. The P/E of a stock-market index is used to evaluate
the market as a whole.

price elasticity of demand. The responsiveness of the quantity purchased

to a change in price, calculated as the percentage change in quantity divided
by the percentage change in price.

price fixing. Collusion among firms to sell at a certain price or to limit output
rather than compete. This is illegal under US anti-trust law. Some view price
fixing as market-compatible and others view it as market-violating.

price floor. A price control setting a minimum price, such as a minimum

wage. The result is a surplus (such as unemployment), and a black market
for the good or resource.
 primitive accumulation 235

price index. The sum of the prices times quantities of a list of goods sold.
Various years are compared using past prices and/or quantities.

price inflation. A continuing increase in the price level. See also mon¬
etary INFLATION.

price level. The general purchasing power of a unit of currency, usually

measured by a price index. Real prices are indicated by dividing the nominal
price by the price level, hence w/p is the real wage when w is the nominal
wage and p the price level.

price-specie mechanism. The automatic long-term balance of trade un¬

der a gold standard. When there is a trade surplus, trade is balanced with
imports of gold that raise prices, reducing exports and increasing imports
until trade balances. Trade deficits become balanced with the opposite move¬
ment, gold being exported. This process, described by David Hume, occurs
with any global currency.

price support. A subsidy to agriculture by government purchasing the crop

to prop up the price and warehousing the surplus.

price taker. A firm that has to take the prevailing market price, being
unable to set its own price, due to atomistic competition.

price theory. See price.

primacy of the abstract. A term used by Hayek to indicate that in observ¬

ing phenomena (phenomenon), one already has an abstract theory about it
with which to make sense of it, human beings being genetically programmed
to create abstract generalizations.

primal economy. The economy of primal or ‘primitive’ people who derive

much of their materials directly from hunting and gathering. Many such
societies do not have an imposed *government. The few remaining primal
groups are threatened with extinction, since governments usually do not
recognize their property rights.

primary products. Raw materials such as minerals, oil, water, crops, fish,
and lumber.

primitive accumulation. An original store of wealth, provided by natural

resources.
236 primogeniture

primogeniture. The exclusive right of a first-born son to inherit his fa¬

ther’s estate.

principal and agent. A principal hires an agent to do something, but the

agent has his own agenda. Examples include shareholders and the manage¬
ment of a corporation and elected representatives. Methods of dealing with
the principal-agent problem include monitoring, providing incentives, and
shaping the culture.

principle. A scientific law. ‘Principle’ also means the basic subject matter.

prior right. The right to possess some land, a right inherent in being a
member of a community or nation, and with the community or nation having
the right to exclude outsiders. From Oppenheimer (1917,1997).

prisoner’s dilemma. A zero-sum game in which two prisoners have the

choice of informing on the other or not. Each gains most if he informs but the
other does not, and they lose more by informing on each other than if they
both do not inform. The ‘dilemma’ is that the player’s rational self-interest is
to inform, but then they are both worse off than if neither informed.
But it is not really a dilemma, since the payoffs are pre-assigned by the
designer of the game. There is, in fact, no choice to be made, but only the
inevitable conclusion inherent in the assignment of the payoffs. In reality,
true dilemmas are caused by subjective utilities which are not known before¬
hand, often to the player, and where genuine choices are difficult to make.
If the model shows how rational individual decisions lead to irrational
social outcomes, it is only under the restrictions of the model where there is
no communication.

private. 1 Not part of government. 2 Of a person and his property when

not part of a collective. 3 A firm that is not a corporation.

private community. See contractual community.

private cost. A cost which is private (2). Social costs equal private costs
plus EXTERNAL EFFECTS.

private enterprise. Enterprise which is private (1).

private good. A good which is not collective. This meaning of private (2) is
orthogonal to private (1). Private goods are rival (rivalry) in that given a pie, a
slice that one consumes is not consumable by another. See severable good.
 production possibility frontier 237

private sector. The section of an economy not owned or operated by gov¬

ernment, hence private (1), and unrelated to private (2). This is also the
voluntary, contractual sector (contractual community).

privatization. The transfer of property or operations from government to

private (1) owners.

privilege. Legislation providing special subsidies protection, or exemptions

to a group or persons rather than benefitting (benefit) the public as a whole.

process. A pattern of activity (1) over time.

product. 1 A particular good, being the output of a firm. 2 Output in

general, such as the produced goods of a firm, or the totality of goods
produced in an economy during some time interval, as in Gross Domestic
Product.

product differentiation. Minor but subjectively significant variations in

the characteristics of products that are very close substitutes, such as differ¬
ent brands of laundry detergent. Monopolistic competition is characterized
by brand names that carry such differences. In some cases, the brand reputa¬
tion may be the main differentiation. Much of the competition is then carried
out by advertising (advertise). This has been accused of being wasteful, but
variety is a good that many people like, and the advertisements pay for media
that people want to consume.

production. The transformation of inputs into products.

production function. A relationship between inputs and outputs of pro¬

duction, the function encompassing technology, organization, and interven¬
tion. Microeconomic production functions are of firms, while a macroeco¬
nomic production function is of the whole economy, where, for example,
output is a function of labor. Some economists question whether a macroeco¬
nomic production function is meaningful. It is used in macroeconomic mod¬
els to generate an aggregate supply curve, which is vertical in supply-side
models. See also Cobb-Douglas production function.

production possibility frontier. A model with two goods, showing the

transformation of one to another as resources are so shifted, the curve indi¬
cating maximum production. The curve is concave to the origin, since as
resources are shifted, they become less productive, as the most productive
inputs are used first.
238 productivity

productivity. Output per designated set of inputs, a function of efficiency,

natural resources, technology, and labor skills.

profit. Revenue minus costs. See accounting profit, economic profit. See
also normal profit.

profit maximization. In microeconomics, firms are usually assumed io

attempt to maximize profits, which are maximized at the quantity where
marginal revenue equals marginal cost.

profit motive. The typical motivation for firms is to make profits, but some
owners and entrepreneurs may have other goals.

program. 1A service or policy such as one imposed on society by govern¬

ment. 2 A sequence of instructions.

progress. An improvement in the well-being of a group of persons as

judged by their own evaluations. Also, advancement towards some goal.

Progress and Poverty. Book published in 1879 by Henry George which

inquired into why poverty persists in the midst of progress. Based on classi¬
cal economics while criticizing and extending it, George traced poverty to
land tenure and taxation. Wages could be increased and barriers to employ¬
ment eliminated by eliminating taxes and arbitrary restrictions on labor and
enterprise, and placing all taxation on land value or land rent, which has no
EXCESS BURDEN.

progressive. 1Favoring progress and change, hence in opposition to

conservativism. 2 Favoring welfare state and redistributionist (redistribu¬
tion) liberalism (2), or socialism. 3 One measure increasing as another does,
such as with a progressive tax.

progressive tax. A tax that is progressive (3), the proportion of income or

wealth taxed increasing with increasing income or wealth. This is often
accomplished with graduated tax rates, but it can also be done simply by
exempting income under a certain amount and then taxing the rest at a flat
rate. A completely flat tax is not progressive, but has one rate for all amounts
of the item taxed. Free-market public revenues are based on the benefit
principle, normally at flat rates.

proletariat. An of person who owns no capital goods or land

ideal type
and only gets income from wages. Sismondi originated the term, from the
 protectionism 239

Roman lowest class, and also the concept of a surplus value and class
warfare, which Karl Marx would later amplify on. Had Sismondi been care¬
ful to distinguish land from capital goods, he may have identified the surplus
with land, sparing the world the specter of Marxist digirisme.

property. Anything subject to human control. See also ownership.

property rights. Rights. All rights are property rights, since one’s body
and life are also one’s property. The three aspects of property rights are rights
of transfer, rights of use, and rights to the yield. Rights of transfer and use are
rights of possession, which can be separated from the right to the yield. See
DROIT-DROIT, NATURAL RIGHTS.

property tax. A tax on property, the term often applying to the taxation of
real estate. The tax is typically ad valorem. A tax on produced property is an
intervention into production.

proportional tax. A flat tax, the marginal and average tax rates being
equal for all amounts of the item taxed.

proposition. A statement asserting some general truth.

proprietary. Having a private (1) owner.

proprietary community. 1 A community with unitary ownership by one

firm, including multiple-tenant income property, leaseholds, cooperatives,
and land trusts. The term was coined by Spencer Heath. 2 A privately
owned subdivision community (civic association), with democratic govern¬
ance by the proprietors or co-owners. See also contractual community.

prosperity. Widely shared wealth and employment, flourishing with little

or no poverty and unemployment. Good times.

protection agency. A private firm that provides police and security serv¬
ices, protecting its customers from theft and violence. Some libertarians
(libertarianism) and anarcho-capitalists (anarcho-capitalism) envision such
services as a voluntary substitute for that governmental role. It is also
likely that private communities would provide such services for their mem¬
bers.

protectionism. Trade limitation. The use of trade barriers to protect a

domestic industry from foreign competition. This raises prices for consumers
240 protective rights

and reduces the efficiency of the economy, since it cannot take advantage of
global COMPARATIVE ADVANTAGES.

protective rights. So-called ‘negative rights,’ rights to be free from coercive

harm. Rights to life, liberty, and property are not claims on others’ property but
the right to not have one’s life, liberty, and property taken or restricted. They
thus morally protect the right to do whatever does not harm others.

provision. The selection of goods, funding, and arrangement for produc¬

tion. When government provides a service, it is responsible for making it
available to the public.

proviso. A condition that has to be satisfied, the famous one in economic

philosophy being John Locke’s (1690,1947) proviso for claiming land in the
Second Treatise. One may homestead (homesteading) unclaimed land so long
as enough of that quality is left for others. This implies that if land of the
quality is all appropriated, then one should compensate the others with a
payment of rent.

psychic income. The joy and satisfaction from working, beyond the wage
income.

public. 1 Any group of more than one person. 2 The government sector of
the ECONOMY.
In the term public goods, ‘public’ refers to the first meaning, although in
many texts the two meanings become merged.

public choice. A branch of economics consisting of theory applied to col¬

lective decisions and their processes and outcomes. It is also called the
‘economic theory of politics.’ In its typical models, all agents, including
government officials, are motivated by their narrow self-interest. Voters
maximize utility, and policy makers seek to satisfy the median voter, but this
raises the question of why homo cupiditus bothers to vote. Other players
include politicians who seek election, political parties, bureaucracies, and
special interests which finance campaigns and politicians in order to obtain
transfers of wealth and privilege. A key principle in transfer seeking is
concentrated interests and spread-out costs, making it feasible for special
interests to organize, while the public at large has little incentive to resist
imposed cost. See also constitutional economics.

public economics. The economics of the government or public sector.

Fields include public choice (collective decisions), social choice (the deci-
 put option 241

sions of voters), public finance and public goods. In a free-market world of

private communities, the same theory would apply to the economics of con¬
tractual communities.

public finance. The branch of public economics dealing with the revenue,
budgeting, and expenditures of governing agencies.

public goods. Collective goods. The term public (1) in ‘public goods’ has
a different meaning than public (2) in ‘public sector.’

public sector. The government sector, that is public (2).

purchasing media. Money and money substitutes.

pure. Not mixed with anything else.

pure free market. A market with no intervention at all. The qualifier

‘pure’ would be redundant, except that in some literature, ‘free market’ is
used to refer to mixed economies. See also pure market economy.

pure interest. Interest as such, excluding risk and inflation.

pure market economy. A market economy with no intervention. It could

take various forms, but there would be no taxation or restriction of produc¬
tive exertion. Theory indicates that such an economy would have full em¬
ployment, since there would be no barriers between labor and non-labor
resources, and there would be no poverty, since prosperity would induce a
high demand for labor, and without any tax wedge.

pure theory. Theory not mixed with any particulars of time, place, or
culture, thus universal to the subject matter.

purposeful. Using reason to choose (choice) an action aimed at achieving

some end. A premise of economics is purposeful behavior.

put option. The right to sell an asset at a certain price within some time
interval. The opposite is a call option.
 -

'

'
 Q

Q. A symbol for the quantity of output.

qua. Lat. In the capacity as, or to the extent that one is. A homeowner qua
homeowner is one strictly in that capacity, and not also as a worker, citizen,
or consumer; he is a homeowner as an ideal type.

quango. Br. A quasi-nongovemmental organization, such as an independ¬

ent central bank linked to a government.

quantity theory of money. A theory based on the equation of exchange,

MV = PT. The price level P is determined by MV/T. The modern version by
Milton Friedman, the demand for money is a function of several variables,
including interest rates. The point remains that if velocity is stable, then
nominal output (PT) is a function of the supply of money, M.

quasi-rent. The economic rent of a good in temporary fixed supply.

Quesnay, Francois (1694-1774). Founder and key economist of the

physiocrats. His writings include the Tableau Economique (1758), a circular
flow of an economy. He espoused free trade, in opposition to Mercantilist
trade barriers, and the impOt unique, a single tax on the produit net or rent of
land. He believed that there was a natural law that would let the economy
run itself with laissez-faire policy.

quiritarian. Having rights to the rent as well as rights of possession of

land. From Latin ‘quiris,’ citizen, originally a spear carrier, hence the right of
conquest with the spear (Oppenheimer, 1917, 1997).

243
 .
■

'

,
.

• • ’

'
 R

rack-rent. A rental payment higher than the free-market rate because the
landlord exploits (exploitation (2)) the lack of mobility of the tenant.

radical. Going to the roots of a subject matter. By association, the term

also means extreme relative to the mainstream, since radical thought can
challenge a system down to its foundations (1).

radical economics. A school of thought based on Marxism and other so¬

cialist sources, critical of both mainstream economics and market economies.
Main themes include inequality, labor conditions, and the problems of market
economies and less-developed countries.

Raffles, Sir Thomas Stamford (1781-1826). British governor of Java 1811—

16 and founder of Singapore in 1819. In Java he made chattel slavery a
felony, abolished (abolish) torture, and instituted trial by jury. Favoring free
trade, he abolished transit duties and other taxes except on land rent. He
based Singapore’s public finance on land rent and made the city a free port,
with no taxes on trade or industries. Although taxes were introduced after
Raffles left, Singapore has retained much of Raffles’s policy and has had one
of the world’s most successful economies (Hodgkiss, 1942).

Ramsey taxes. Taxes on inelastic *supply or demand.

Rand, Ayn (1905-1982). Russian-born American novelist, philosopher, and

founder of the philosophy and movement, Objectivism. Her novels, influen¬
tial among libertarians, include Atlas Shrugged (1957), We the Living (1936),
and The Fountainhead (1943). Her key philosophical works include For the
New Intellectual, The Virtue of Selfishness, and Capitalism: The Unknown
Ideal.

rate of interest. See interest rate.

rate of return. The yield of an asset divided by the principal,

rates. In the UK, a tax on non-agricultural real estate.

245
246 rational

rational. See rationality.

rational expectations. Unbiased logical expectations based on all available

data, including a model of the behavior of the expected phenomenon. This
implies that actors do not make systematic errors. It does not imply that the
expectations are correct. In contrast, adaptive expectations are based on projec¬
tions from the recent past, not taking into account a model of the phenomenon.
However, if the model is foggy, then rational expectations become adaptive:
given no knowledge about the behavior of a monetary authority or the eco¬
nomic environment, the best estimate of the future is the present, since for
example, it would be equally likely for interest rates to rise as to fall.
Rational expectations are applied by new-classical and new-Keynesian econo¬
mists to government policy, new-classical theory arguing that expected de¬
mand-side policy is ineffective, if market prices are flexible, a premise denied
by the new Keynesians. The expression ‘rational expectations’ goes back at
least to Nassau Senior, the modern concept developed by Muth in 1961.

rational ignorance. The proposition that it is rational (1) for voters not to
bother to invest resources in information and voting, since one vote is quite
unlikely to change an outcome. This is so for instrumental motives, but most
voters cast ballots out of sympathy for issues, candidates, political parties,
and the democratic system.

rationality. 1 The use of logic in making decisions. This includes being

consistent and making use of available information, so long as the marginal
cost of gathering it does not exceed the marginal benefit. Consistency in¬
cludes harmony between long and short-term goals. In applying rationality to
decision making, it is assumed that a person is able to rank his ends, and thus
his goods relative to the ends, but the ends themselves are non-rational.
Transitivity is also assumed as an element of consistency. Economic theory
presumes rationality (1). 2 Social efficiency in achieving social ends. Hence,
policy can be socially irrational, although it is rational for the policy-maker’s
ends. 3 Cultural conformity; having ends which conform to cultural norms,
and time preferences near the cultural norm. Those with different desires are
considered irrational, if not insane or wicked. Those with very short time
preferences who do things for short-run gains at the expense of long-term
utility are considered irrational.

rationing. A method of allocating scarce (1) resources, the one common to

market economies being price. Within families, rationing is usually by equity
and benevolence. Governmental rationing is based on political * power as
well as rules agreement.
 realism of assumptions 247

Reaganomics. The economic policies of the administration of Ronald

Reagan, the US president from 1981 to 1989, which included tax reforms, an
increase in military spending, and some relative reduction in non-military
spending, but not enough to prevent a great increase in the national debt.
Reaganomics did accomplish a turn from increasingly greater government
and intervention to at least the rhetoric of decreasing government and recog¬
nizing the limitations of government policy.

real. 1 Referring to real estate. 2 Physical rather than financial. 3 Based

on purchasing power rather than nominal numbers. 4 Genuine, actual, and
true, rather than a mere label or appearance.

real assets. Physical assets rather than funds.

real business cycle. Theories of business cycles based on real (2) causes,
such as clusters of inventions, or the real-estate cycle.

real capital, capital goods.

real estate. Land and improvements tied to land.

real-estate cycle. A cycle of a period of about 15-20 years (18 years in the
USA) in which real-estate prices and construction rise and fall. The troughs
have coincided with major depressions. The geo-economic theory of business
cycles is based on the real-estate cycle, which was first analyzed by Henry
George.

real GDP. GDP adjusted for inflation by a price index, when comparing
different years.

real interest. The nominal *interest rate less the inflation rate.

real wage. The nominal wage divided by the price level.

real wealth. Wealth other than financial assets. Some geo-economists (geo¬
economics) exclude land, including only produced wealth.

realism of assumptions. Having premises which are in accord with reality

rather than simply assumed for the sake of argument. Conclusions derived are
true if the premises are.
248 reason

reason. Basing beliefs on logic and evidence, and basing decisions on

rational (rationality (1)) methods. Vertical reasoning deduces conclusions
from premises, while lateral reasoning evaluates the premises and investi¬
gates alternative or additional premises. Abduction (2) creatively synthesizes
hypotheses from facts and logic.

recession. Falling national output. Officially, in the USA, national output

falling in two consecutive quarters. Colloquially, a recession is often used to
mean a minor depression.

reciprocal demand. The demand by a country for the goods of another

country, offering its own goods in exchange. The concept originates with J.S.
Mill in determining the terms of trade.

recognition lag. The time between the occurrence of some event and the
recognition by policy makers that they should react to it.

recursive auction market. An auction in which a buyer may resell the

item at the same auction market.

redeem. Exchange a money substitute (banknote) for money (for example

gold coins) at a fixed rate, or turn in a security for money at its face value.

redemption. The act of redeeming (redeem).

redistribution. The taxation of market-determined income and the reallo¬

cation of these revenues according to some normative goal such as equaliza¬
tion or aid to the poor. Redistribution can occur across income classes and
across geographic regions.
If certain sources of revenue are considered to already belong equally to
the members of a community, then when a higher-level agency collects them
and distributes them to a lower-level agency or provides services that benefit
the residents, this would be egalitarian without being redistributive. Pollu¬
tion charges, for example, can be interpreted as compensation to a commu¬
nity for damages, hence the use of such charges for egalitarian purposes
would not really be redistributive. Rental income from natural resources
could also be in this class. Therefore, anti-poverty or egalitarian goals do not
necessarily require redistribution.

reductio ad absurdum. Lat. A type of argument in which a concept is taken

to an absurd extreme, whereby the conclusion is obviously false, in contra¬
diction with the premises, implying that at least one of the premises is false.
 renewable resource 249

reflexivity. A feedback mechanism between thinking and events; coined by

financier George Soros.

reflux, law of. The proposition put forth by the banking school that holders
of private convertible banknotes will redeem those notes that are in excess of
market demand, as determined by the needs of trade.

regression theorem. A theorem by Ludwig von Mises (1924) that the cur¬
rent purchasing power of money derives from that of the recent past. It is thus
difficult to introduce an entirely new currency.

regressive tax. A tax which takes an increasingly smaller proportion of

income or wealth with increasing amounts of either. Sales taxes on goods are
considered to be regressive, because the rich spend a greater proportion of
their income on non-taxed services. Head taxes are also regressive.

regularity. A pattern that typically responds in the same way to the same
changes in variables, making it predictable. The laws of science, such as the
law of gravity, describe these regularities. Examples of economic regularities
include the law of demand and the law of diminishing returns.

regulation. Laws and administrative rules that persons and enterprises are
legally obliged to follow. These can be market-enhancing or market-hamper¬
ing, but when economists and business persons speak of regulations, they
typically mean excessive, market-hampering ones. Regulation is a substitute
for taxation, since government can mandate an activity rather than taxing
and providing the activity.
There is no official measurement of the costs of regulation in the USA
Regulatory costs are estimated to be more than $500,000,000,000 (half a US
trillion), or $6830 (19 percent) per average household. Costs imposed on
small firms are proportionally greater than on large ones. See Crews (1996).

regulatory capture. The control of a government regulatory agency by the

industry (2) it is supposed to regulate.

relatively absolute absolutes. A term coined by James Buchanan to indi¬

cate rules and concepts that are fixed relative to some cultural standard.

renewable resource. A resource whose yield can be harvested while main¬

taining its principal and source. Examples include wildlife, soil, timber, fish,
and water.
250 rent

rent. 1 land rent. 2 economic rent. 3 rental. To rent property other than
land means to obtain a rental. Land rent is also an economic rent. See also
RACK-RENT.

rent control. A price ceiling on the rental of housing. This creates a

shortage of housing for prospective tenants, and can also lead to a deteriora¬
tion of the housing stock as owners cease making sufficient investments.

rent seeking. See transfer seeking.

rental. The payment to the owner for hiring or renting property. In terms of
factors, a rental paid for housing includes rent (1) for the land, a yield on the
capital goods (buildings and other improvements), and a wage to the owner
for his services.

rentiers. Those who obtain income from land rent and returns from in¬
vestments, without exerting any labor.

representative democracy. Delegating decision making to elected repre¬

sentatives. With mass democracy, this becomes dysfunctional, since it in¬
duces TRANSFER-SEEKING. In a VOLUNTARY club Or with COMMUNITARIAN DEMOC¬
RACY, the members retain more control, but there is always a principal-agent
problem when one delegates.

reputation capital. The value of a firm due to its reputation and goodwill.
This value is an intangible capital good. For example, firms invest in adver¬
tising brand names as a signal of quality. One benefit of product differentia¬
tion is having such brand capital.

reserves. Bank reserves, money held by banks which may not be lent, held
as a reserve for depositor withdrawals as well as to regulate the supply of
credit expansion.

residential association. A civic association whose members are owners of

residences. Such associations own and provide civic goods, collective goods
similar to those provided by local governments, but based on contract and
funded from assessments usually based on property value, rather than an
arbitrary multitude of taxes. Such associations typically also have architec¬
tural covenants.

resource. A source of supply.

 Ricardian equivalence theorem 251

restriction. A rule that keeps an activity within specified limits. At the

extreme, the limit is the null set, a prohibition. An arbitrary restriction is
based on whim, culture, or special interests and gains. An arbitrary legal
restriction is an intervention, a violation of liberty. Generally, the use of the
term ‘restriction’ implies arbitrary restriction.

return. Income from an asset.

return, total. See total return.

revealed preference. Observations of how consumers react to changes in

price and income. As theorized by Paul Samuelson, given certain premises,
one can derive a demand curve from this. See also demonstrated preference.

revenue neutral. A shift in the items taxed (tax), which does not alter total
government revenue.

revenue sharing. True revenue sharing is the generation of revenue by

some agency, and then allocating the revenue to two or more receiving
agencies, such as governments. As practiced by central governments, ‘rev¬
enue sharing’ is taxation by the central government, which then transfers
some of the funds to lower-level governments conditional on fulfilling certain
policies.

rhetoric. The study of the conversations (arguments and metaphors) as

well as the actual methods of economists in contrast to their claimed meth¬
ods, pioneered by A. Klamer and D. McCloskey.

Ricardian. Relating to or derived from the theories of David Ricardo, a

central figure in classical economics. Among the major themes are differen¬
tial rent, comparative advantage, deductive methodology, and the value of
goods deriving mostly from labor. Several theorems have been labeled
‘Ricardian,’ since they draw from Ricardo even if the modern version differs
from his.

Ricardian equivalence theorem. The proposition by Robert Barro that

government debt is equivalent to taxation in economic effect, since the debt
is eventually financed with taxes. The theorem depends on premises contrary
to actuality, such as that taxes are lump sum. However, with land-value
taxation (land-value tax), the theorem becomes realistic, since the debt is a
liability against future land rent, and is capitalized into lower land values.
252 Ricardo, David

Ricardo, David (1772-1823). British classical economist whose contri¬

butions to the theory of differential rent, comparative advantage, and the
distribution of income among the factors of production were highly influen¬
tial. Ricardo theorized that rent is a surplus to the owner of land superior to
that at the margin of production, hence that price determines rent rather than
rent determining price. His major work is Principles of Political Economy
and Taxation (1817). Ricardo’s axiomatic-deductive methodology, using ab¬
stract models, and his analysis of factors, and focus on the long run, became
the heart of classical economic theory. His theory of wages was deficient,
since he posited a long-run subsistence wage rather than, as later corrected by
Henry George, whatever the productivity was at the margin of production.

right to work. Law in some US states prohibiting a union shop. This ‘right
to work’ is the right not to have to join a union (unions, labor) as a condition
of employment.

rights. A right is the correlative of a wrong. The right to have X or to do X

means that it is wrong or evil to negate (take away) X. The right to own
property, for example, means that it is wrong to steal another’s property.
Rights can be moral, legal, or contractual.
Natural rights are those determined by natural moral law (some theo¬
rists consider natural rights to be distinct from or prior to natural law). See
OBLIGATIONAL RIGHTS, PROTECTIVE RIGHTS, TAKINGS RIGHTS.

rightsizing. Reducing assets and operations to an efficient size relative to

output, rather than reduction for the sake of cutting expenses.

rigor. In analysis, precision, accuracy, and thoroughness. Rigorous analy¬

sis is considered by some to be necessarily mathematical, but this is only one
language, and one with limits. Verbal logic can be precise, accurate, and
thorough. Both Austrian (Austrian economics) and geo-economists (geo¬
economics) use verbal rigor in their analysis.

risk. 1 A possible loss. When the probability is known, the risk can be
insured or hedged against. 2 The volatility of a stock or mutual fund, that is
the short-run risk (1). Investments with greater volatility warrant a higher
return. See also uncertainty.

rivalry. Gain at the expense of another; the attempt by more than one party
to obtain the same gain, such as sales. With quantity rivalry, the quantity
consumed by one person cannot be consumed by another. With quality ri¬
valry, the utility obtained from a good decreases when others use it. With
 Rothbard, Murray 253

marginal rivalry, the utility from a physical good diminishes with the addition
of another user, even when there is no existing quality rivalry; marginal
rivalry is potential rather than actual.

Robert Schalkenbach Foundation. Based in New York City, an educa¬

tional organization incorporated in 1925 under the will of Robert Schalkenbach,
a printer. The foundation publishes and provides books and other literature
based on the thought of Henry George. It makes grants and sponsors studies
on free trade, land economics, property tax reform, and economic justice.
The foundation also sponsors the American Journal of Economics and Soci¬
ology.

Robinson Crusoe. A novel by Daniel Defoe written in 1719, based on a

true story about Alexander Selkirk, a Scottish sailor. In the novel, Robinson
Crusoe spends 26 years on an isolated tropical island and learns how to live
from the resources of the island, but also takes goods from the shipwreck. He
rescues a man from a tribe on the island, whom he names Friday, and the man
becomes Crusoe’s slave. Economists have adopted Crusoe as a metaphor in
models with one person, which can then become extended to a second per¬
son.

Rothbard, Murray (1926-95). Austrian school economist (Austrian eco¬

nomics), historian, philosopher, and founder of the modern libertarian move¬
ment (libertarianism). An adherent of natural rights, his expositions on liber¬
tarian thought include For a New Liberty (1973) and Ethics of Liberty (1982).
He was a professor of economics at the University of Nevada at Las Vegas
after teaching at the New York Polytechnic Institute in Brooklyn. He was also
vice-president for academic affairs of the Ludwig von Mises Institute and
editor of the Review of Austrian Economics, and frequent contributor to The
Free Market. Rothbard’s Man, Economy, and State (1962) remains a key
Austrian treatise on economics. His Power and Market (1970) presented the
case for a free market and the ill effects of intervention. In America’s Great
Depression (1963, 1975), Rothbard focused on the role of the FED and the
money supply growth. Rothbard favored a gold standard and one hundred
percent reserve banking; among his theoretical monetary works is Method,
Money, and the Austrian School (1997). His historical works include Con¬
ceived in Liberty (1974-79), a four-volume history of colonial America. He
also wrote An Austrian Perspective on the History of Economic Thought
(1995-96). In his academic writing, Rothbard upheld Misesian praxeology,
and he wrote a multitude of articles on policy and economic issues for many
publications.
254 roundaboutness

roundaboutness. Indirect production, which rather than directly producing

a consumer good, first produces capital goods that then increase the produc¬
tivity of making the consumer goods. The concept was developed by the
Austrian school (Austrian economics), especially by BOhm-Bawerk. See
CAPITAL STRUCTURE.

royalty. A dividend paid to the owner or tax paid to government by mining

and oil extraction operations, based on output. It is one way of obtaining
some of the economic rent of a natural resource, but to better obtain the
rent (1), it should be flexibly combined with fees paid to obtain the franchise
and a charge on the net profits. For high-cost operations, there may be no
economic rent, and the royalty as a tax would make the operation uneco¬
nomical. See also severance tax.

Riickenrecht. Ger. In Germanic law, the right of usufruct, occupation and

active use, of land. One who possesses land may not be evicted so long as he
has his Riicken (back) on it.

rule. A statement specifying certain actions (1) or inactions which are to

be penalized. Rules prohibiting action penalize their performance, and rules
commanding an action penalize those who do not so act. Rules can be
agreements, or they can be commands by an authority. Government rules are
called laws, statutes, or ordinances; non-profit organizational rules are often
called bylaws; and business rules are often called policies and procedures.
Often, rules are just called ‘rules.’

rule of law. Government policy which follows known, usually written,

rules, ultimately based on its constitution, including specified ways of seek¬
ing remedies for incorrectly applied rules. The opposite is the rule of man,
where rules are applied according to the whim of the authority, and there is
no effective remedy.

rules agreement. A contract among the members of an organization speci¬

fying the rules of the organization. Consensual community rules are based
on voluntary membership, while governmental rules are usually imposed on
the residents of some territory.

ruling class. The set of persons who wield ruling (rule) authority, in some
cases a distinct group, such as a monarch, dictator, oligarchy, or aristocracy.
In modern mass democracies, the ruling class depends on the particular
policy, so that there can be one ruling class for economic policy and another
 ruling class 255

for civil liberties, the rulers being a combination of voters, political parties,
pressure groups, and government officials.
 s

sacrifice. Giving up something of significant value without receiving any

tangible good or service in return, but rather for the sake of others or for
some perceived moral, spiritual, religious, or legal value or duty.

sacrifice argument for taxation. The notion that those with ability to pay
should be forced to sacrifice their income and wealth allegedly for the public
welfare, but actually to maintain privileges, since the benefit principle makes
sacrifice redundant.

sales tax. A tax imposed on the transfer of property at the point of sale,
usually an ad valorem tax. Usually, each transfer of an item is taxed, so that
the sale of a second-hand item becomes taxed again, unlike a value added tax
which does not tax transfers as such but only gains in value. The sales tax is
called a transfer tax in the case of real estate, for which general sales taxes
usually do not apply. See also amusement tax, consumption tax, expenditure
tax, turnover tax.

satisficing. Achieving some goal, which then satisfies one’s ends, even if
profits are not being maximized. But if this approach saves on transaction
costs to achieve some goal rather than the brute attempt to maximize profits,
then that is in practice also maximizing, that is economizing (economize).

savings. Income not used for consumption. Savings are the source of invest¬
ment (1), and tend to equal investment as the interest rate equilibrates
(equilibration) the supply and demand for loanable funds. But see also
FORCED SAVINGS.

Say, Jean Baptiste (1767-1832). French classical economist famous for

his theory of markets, especially Say’s law of markets. Unlike other classicals,
Say theorized subjective values. One of Say’s key contributions to classical
thought was to delineate the three factors of production (three-factor eco¬
nomics) and their shares of produced wealth. His key work is Trait d’Economie
Politique (1803).

Say’s law of markets. The proposition first proposed by Say that in the
production of wealth, the payment to factors equals the value of the prod-

257
258 scarce

ucts, so the aggregate quantities of supply and demand (2) are equal. This
normally precludes any general glut or excess of goods. Say’s law is often
incorrectly defined as ‘supply creates its own demand.’ Rather, the resources
with which demand is effective are created by the quantity supplied. The law
has been challenged by assertions such as that price changes can leave a
surplus of goods even when factors have spent their resources, but then one
may inquire as to why the price level is not equilibrating the market for
goods. Say’s law does not preclude depressions, when there are both gluts of
goods and idle workers, but this implies that market coordination has broken
down, usually due to interventions which preclude coordination or that pre¬
cipitate the breakdown (see business cycle).

scarce. 1 A good is scarce (1) if the quantity available at a zero price is

insufficient to provide the quantity demanded. 2 A low quantity supplied rela¬
tive to notional demand, so that only a small proportion of those who want it
can have it. For example, a postage stamp is said to be scarce (2) if only a few
hundred copies exist, while thousands of collectors would like to have a copy.

Schalkenbach. See Robert Schalkenbach Foundation.

Scholes, Myron. (1941-) Professor emeritus of Economics at Stanford Uni¬

versity, he together with Robert Merton of Harvard University won the 1997
Nobel prize in economics for developing the methodology of valuing financial
derivatives (2) such as options (2). Fischer Black of MIT, who died in 1995,
also worked with Scholes. Their work helped create the global market in
derivatives that hedge (hedging) against risk as well as provide speculation
media, and contributed significantly to the understanding of markets.

Schumpeter, Joseph A. (1883-1950). Austrian-born and school economist at

Harvard, famous for the concept of ‘creative destruction’ as well as his History
of Economic Analysis (1954). He was a leading theorist of entrepreneurs, who
play key roles in his theories of trade cycles and economic development.
Innovations by entrepreneurs upset the status quo, but then other producers
copy the new products and methods. Schumpeter theorized that clusters of
innovations create a boom and bust. He also argued that the success of market
economies would lead to large bureaucratic corporations that would be taken
over by government, leading to socialism; he underestimated the vitality of
rivalry and technological change. He died leaving his manuscript on the history
of economic thought, published posthumously by his wife.

science. An organized body of knowledge. The term usually refers to knowl¬

edge having an imprimatur by credentialed practitioners.
 self-esteem 259

scientism. The misapplication of scientific methods to fields that are inap¬

propriate or in a rigid way that excludes other useful methods. The term was
used by Hayek for the inappropriate application of the methods of physical
sciences to social science.

Scottish Enlightenment. The era in Scotland during the 1700s, when writ¬
ers such as Adam Ferguson, David Hume, Francis Hutcheson, and Adam
Smith were influential. Their writing on natural law, governance, and eco¬
nomics sought to use reason to elucidate principles of social harmony, and
Austrian (Austrian economics) as well as classical-liberal thought continues
to reflect ideas developed by this school of thought.

secession. Withdrawal of territory from a jurisdiction. Legalized secession

would enable people to create new governments and even new countries, an
exit option that would help reduce wasteful and oppressive government. The
legal inability to secede creates a governmental absolute monopoly power
over the territory under its jurisdiction and, globally, entry monopoly among
countries.

seeing the cat. See cat.

seignorage. The net revenue derived from creating new money or money
substitutes. As the demand for money increases, the issuer exchanges notes
for real goods. The issuer can also obtain seignorage from inflating the
money supply beyond demand.

seizure and forfeiture. The arbitrary confiscation of assets by government,

often without any criminal conviction. It is alleged to be a civil action, the
property committing the offense, even when the owner has no knowledge or
control of it. The practice in the USA originated with English common law.
See also civil asset forfeiture, deodand.

self-employment. The ownership of an enterprise, employing oneself as

manager. The option of self-employment in a market economy prevents work¬
ers from being exploited by employers. A proprietor of an enterprise pays his
wage, the opportunity cost of not working for others, out of his accounting
profit, any extra profit being an economic profit.

self-esteem. The disposition to experience oneself as competent and wor¬

thy. Nathaniel Branden is a key author on this concept, which relates to
individualism and the competency to make effective choices, and thus im¬
pacts the acceptance of liberty.
260 self-evident

self-evident. 1 Evident without the need for further proof, evidence, or

analysis. 2 Evident because reflection reveals that the denial of the proposi¬
tion leads to a contradiction, hence a subset of (1).

self-interest. Narrowly, obtaining utility (utility, marginal) only from goals

that exclude the well-being of others (except for one’s immediate family) or
any interest in others. Broadly, the utility one gains from the well-being of
others is included. The invisible-hand principle of self-interest is that the
pursuit of narrow self-interest leads to social well-being, since producers
satisfy the desires of consumers.

self-ownership. Ownership being a bundle of rights, self-ownership means

having the rights to fully control one’s own body and time. Hence it is the
right to be free of any coercive harm imposed by others, including any
invasion of one’s body and any restriction of peaceful and honest action (1).
This implies that one has the right to one’s own labor, its income as wages,
and the products of labor.
Despite its invocation by libertarians (libertarianism) and the seemingly
useful application to policy, the concept of self-ownership is criticized by some
philosophers as lacking coherence in the identification of subject and object.
What does it mean to own oneself? The answer is that ‘self-ownership’ is just a
metaphor, not to be taken that literally. Since rights are a correlative of moral
wrongs, to have rights over my body means that it is morally wrong for others
to invade my body. So self-ownership basically is a metaphor for the proposi¬
tion that people have no rights to own others’ bodies.

selfish. Concerned only with one’s narrow self-interest, doing no harm to

others but not aiding others even when they would fall into harm without
assistance. Objectivist (Objectivism) followers of Ayn Rand, regarding ‘selfish¬
ness’ as a virtue, may mean the absence of any feeling of obligation to others,
and the absence of sacrifice.

Senior, William Nassau (1790-1864). British classical economist at Ox¬

ford who held to a subjective theory of value rather than the labor theory. His
theory of interest as a return to capital funds was based on abstinence from
consumption, almost but not quite a theory of time preference. Senior regarded
economic theory as universal to humanity, and he explicitly used axiomatic-
deductive methodology. His key work is An Outline of the Science of Political
Economy (1836), the last chapter entitled ‘Of Our Rational Expectations.’

service. A good that is immediately consumed (consume). Services are

provided directly by human beings or by goods that are useful over a period
 shock therapy 261

of time. Services are regarded by some as intangible, but they are provided
by tangible persons and goods. The distinction between a tangible good and a
service is quite fuzzy and of little economic significance. The term ‘goods’
broadly includes services, though they are distinguished in the term ‘goods
and services.’

severable good. Goods which are not collective, whose quantity can be
severed or divided among users; a synonym for private goods.

severance tax. A tax on oil, minerals, or timber, proportional to output,

taken when the resource is severed or separated from its natural state, similar
in effect to a royalty paid to government.

shadow economy. Underground economy, or informal economy (informal

sector).

Sharpe, William F. (1934-). Professor at Stanford University and winner

of the 1990 Nobel prize in Economics (shared with Miller and Markowitz)
for his pioneering study of the capital asset pricing model, the relationship
between risk and return in investment (2) theory. The Selection Sharpe Ratio
compares a fund’s return to that of a benchmark, dividing the average differ¬
ence between them by the standard deviation of the differences, higher ratios
providing better risk-adjusted returns.

shirking. Not working as hard and fully as the employer expects. Neoclas¬
sical (neoclassical economics) labor theory typically presumes that workers
want to shirk, and so need to be monitored or paid extra ‘efficiency’ wages.
However, in actuality, workers can take pride in their work and want to
perform well if the work environment is conducive, that is, if their voice is
heard, if they have some control over their operations, and if they sympathize
(sympathy) with the firm.

shock. An event affecting aggregate demand (for demand shocks) or ag¬

gregate supply (for supply shocks) that quickly changes the level of output. A
prime example is a sudden increase in the price of oil, which causes a supply
shock, decreasing aggregate nominal output. In a flexible market economy,
production can adjust to such shocks without causing a depression or unem¬
ployment, but if imported raw materials are more expensive, there is no way
to avoid the decreased purchasing power of income.

shock therapy. The psychiatric term applied to the transition from a com¬
mand (command economy) to a market economy, where both liberalization
262 short run

and privatization are sudden. The result is an immediate depression, followed

by an expansion that one hopes is more rapid than would be the case with
gradual marketization. Shocks could have been avoided with a physiocratic
(physiocracy) elimination of restrictions and taxes on productive effort, giv¬
ing full reign to incentives, while pushing land to productive use by assessing
a charge on the rent (1), but such was not the advice proffered by most
Western experts.

short run. As defined by Alfred Marshall, the time interval during which
some assets are fixed.

short sale. The sale of an asset, followed by its purchase, the expectation
being that one will profit by the fall in price.

shortage. The quantity demanded being greater than the quantity supplied
at the prevailing price, leaving the inventory bare, most likely because of a
price ceiling, such as rent control. A temporary shortage also occurs when a
producer underestimates the demand (1).

shut down cost. The cost incurred in the closing of an enterprise. If the
shut down is permanent, then it is an abandonment cost.

silver. A bright whitish precious metal lighter than gold, which is easily
shaped and conducts electricity well. Cheaper than gold for the past few
centuries, it has been commonly used for lower-denomination coins, as well
as for jewelry and industrial uses.

silver certificate. Until the 1960s, the US dollar was a silver certificate
convertible into silver. After silver coins went out of circulation, the $1 bill
became fiat money like the rest of the currency.

silver dollar. A US coin with almost $1 of silver value when coins were
made of silver. Dollar coins then become tokens made with metal of little
intrinsic value.

sin tax. See sumptuary tax.

single tax. A tax system with only one basic tax or family of taxes. The
most famous one is the single tax on land rent advocated by followers of
Henry George. This became the ‘single-tax movement,’ but later Georgists
preferred to call it ‘land-value taxation,’ (land-value tax) and recently, in
rejection of the ‘tax’ label, the term ‘public (or community) collection of
 slave 263

rent,’ ‘deed fee,’ and ‘rent assessment,’ and ‘community rent’ are in use as
alternatives. The geocratic single tax is actually a family of charges on the
rent of sites, natural materials, and pollution dumps. Having one or a family
of direct taxes has less fiscal illusion than having a multitude of taxes.

Sismondi, Jean (Jean Charles Leonard Simonde) (1773-1842). Swiss-born

French economist from an Italian family, he was responsible for splitting
liberalism into two camps, the classical liberals and, following Sismondi,
the welfare-state redistributionist economic-interventionist liberals. Having
become a critic of markets and Say’s law (Say’s law of markets), he was a
forerunner of Marx and Keynes, originating the terms and concepts of the
proletariat and class struggle. He was not a socialist, but paved the way for
Marxism as well as the welfare state. Here too originated the statist-liberal
failure to distinguish between the skewed markets causing the social prob¬
lems and truly free markets.

site. A plot of surface land with a particular location. Site value is a

synonym for land value, and site revenue consists of rent generated by a site
and paid to some community.

skeptic. One who neither naively believes nor cynically disbelieves on face
value, but warrants his belief with logic and evidence, the proper scientific
attitude. A skeptic is a doubter, but when presented with warrants, the cynic
rather than the true skeptic continues to doubt.

skew. To twist, bias, distort, or slant. Starting with free-market prices and
profits, intervention skews them, rasing taxed prices, reducing subsidized
prices, truncating profits and opportunities, shifting gains, eliminating incen¬
tives, confusing the knowledge conveyed by market signals. Outcomes are
distorted and twisted from what they would be in an unhampered market.

skewed market. A market economy with intervention superimposed,

skewing (skew) prices, reducing profits, and truncating opportunity, resulting
in more unemployment and poverty and less growth. Critics of markets fail to
see the skewing caused by intervention, blaming social problems on non¬
existing ‘free markets.’ See also free market, larcenous.

slave. 1 Chattel slavery, a person being explicitly under the total control
of another. 2 Implicit slavery or peonage, an adult being in effect under
control of other persons or institutions, especially the government, that is, to
the degree that one’s wage is taxed, one is a slave to the government, being
forced to work for the government rather than being able to work on behalf of
264 slump

one’s self and family. 3 Slave (2) by feeling, though not in fact or law, as
when one refers to oneself as a ‘wage slave’ or a ‘debt slave’ because one
feels trapped in a job one does not like or by debt servicing.
«

Slump. A DEPRESSION,

small cap. See cap.

smart card. A card containing a microchip which operates like a ledger.

Money value can be transferred to and from the card. Some smart cards may
be bearer claims against the issuer, similar to private bank notes. Smart cards
are money substitutes.

Smith, Adam (1723-90). Premier classical free-trade Scottish economist,

moral philosopher, and legal theorist. He opposed slavery and imperialism,
and said war should be financed by taxes so people realize the burden. His
famous book Wealth of Nations (1776, 1976), the first full treatise of politi¬
cal economy, popularized the metaphor of the invisible hand and helped
bring down the curtain on the mercantilist (mercantilism) era. The book also
presented the canons of taxation, discussed the division of labor, theorized
on rent, wages, profits, and prices, and spoke well of the physiocrats. If these
concepts were not original with Smith, he accomplished a great synthesis.
In addition to self-interest as a motive in the Wealth of Nations, Smith
presented the other great motivator, sympathy, in his book The Theory of
Moral Sentiments (1790, 1982). There he wrote that there is an element of
human nature by which a person is interested in the well-being of others,
calling this sentiment ‘sympathy.’ His writing on law appears in Smith (1978,
1982).

Smith Center for Private Enterprise Studies. Based in the California

State University at Hayward, the privately funded organization sponsors lec¬
tures, research, and courses on the principles and practice of free enterprise.

social. Referring to all the effects of an action (1) on all the people in an
economy, and to the common welfare (1). As Hayek noted, the term can be
turned into a governmental meaning, as with ‘socialization,’ hence can be a
weasel word taking out the original meaning.

social auditing. An analysis of the impact of a company’s operations and

products on those other than shareholders, that is, communities, the environ¬
ment and employees, a term coined during the 1970s as a social cost-benefit
analysis. Ben & Jerry’s Homemade, a prime example of a corporation that
 social problems 265

does this, hires the London-based New Economics Foundation to conduct the
audit.

social choice. The analysis of voting. Fiscal policy is often linked to social
choice, as with the Clarke tax and the Tebout model of choosing among
communites. The Arrow impossibility theorem shows the difficulty of mak¬
ing collective decisions by simple voting methods. A different approach is
that of consensus, in which large groups break up into smaller groups and
discussion proceeds until some general agreement is reached. Voluntary asso¬
ciations, whether choosing among communities or seceding and forming new
communities, are complementary to the internal choice methods.

social contract. A unanimous (unanimity) agreement by members of a

socety (2) on the constitutional rules. This concept is used in political
philosophy and theory.

social costs and benefits. The private costs, to the purchaser, plus the
external effects, or likewise, the private benefits plus the externalities.

social evolution. The change in culture over time. Hayek emphasized that
the economic institutions we have now were not designed, but are the prod¬
uct of social evolution. The institutionalist school has emphasized economic
evolution. Just as with biological evolution, organisms which are not fit do
not survive, with social evolution, rules and practices which work better than
others may tend to be adopted. The equivalent of biological genes are ‘memes,’
units of ideas, which get carried across generations. However, much histori¬
cal change has also taken place through conquest and violence, so peaceful
peoples without adequate defenses have often not been survivors.

social justice. The implementation of natural moral law by a governing

agency. In essence, social justice is the absence of government-granted privi¬
lege. Individual justice is justice applied by one individual to another, giving
the other his moral due. The key principle in social justice is the equal self¬
ownership of each person. The concept of social justice is on one hand
expanded by welfare statists to include welfare (2) and on the other hand
denied by critics of natural moral law who claim there is no such thing as
social justice. If there is no universal ethic, then there is no universal concept
of justice, nor of liberty. See also economic justice.

social problems. Woes and maladies of society (1), including poverty,

unemployment, pollution, crime, and government intervention. The two ways
of dealing with them is to treat the effects and to treat the causes. Most policy
266 social science

does the former, because it is visible, popular, and easy, though it is costly
and does not solve the problem.

social science. Science about human beings, including anthropology, psy¬

chology, psychiatry, history, sociology, economics, political science, and lin¬
guistics. The other two branches of science are the physical sciences and the
biological sciences. Biology blends with social science in physical anthropol¬
ogy and the health sciences.

social security. A combined national pension plan plus welfare (2) assist¬
ance to the old, sick, and poor. These are typically pay-as-you-go, taxing
workers to fund the transfers. Large payroll taxes reduce savings available for
investment, resulting in a smaller capital stock and lower national income. As
the population ages, there is an ever larger ratio of recipients to providers.
Various proposed reforms include a more realistically smaller inflation index,
partial replacement with private investment plans, and the phase-out of the
system.

social welfare function. The well-being of society as a whole as a function

of variables such as income, liberty, and culture. This raises the problem and
possibility of aggregating individual welfare (1) into aggregate welfare, since
individual utility cannot be measured. One way to resolve this is by the
proposition that social welfare is maximized when individuals are free to
each pursue his own well-being, in accord with subjective values and natu¬
ral rights. Several organizations have devised indices of liberty and other
variables, but none of these are definitive. Intuitively, most people can tell
that some societies are better off than others; slave labor camps are worse
places than free societies.

socialism. A family of related concepts, the basic one being the ownership
of the means of production by workers. In worker socialism, workers own
their capital goods in worker cooperatives, unions (syndicalism), communes,
tribes, ESOPs, and self-employment with no employees. In state socialism,
the state controls the means of production, ideally as the agent of the work¬
ers. In practice, in the Soviet Union and other countries calling themselves
socialist, the Communist Party was the ruling class, and the workers were its
employees, a situation some called ‘state capitalism.’ Aspects of state social¬
ism include redistribution, administrative socialism (government ownership
and control, or a command economy), and various types of substantial inter¬
vention, including social democracy (policy by vote) and industrial policy.
See also economic calculation, market socialism.
 special assessments 267

socialization. Conversion to common or governmental property.

society. 1 All the people in an economy or jurisdiction. 2 A nonprofit club

or association,

socionomy. The theory and forniulation of the basic or ‘organic’ laws of the
organization and development society. Used by Spencer Heath.

Socrates (c. 470-399 BC). Greek philosopher who questioned the basic
premises of his society, and was put to death for it. He showed that when
people are questioned about concepts such as justice which they think they
understand, they realize that they don’t really know it. His philosophy and
methods were recorded by Plato in dialogues, which makes it unclear what is
Socrates’s and what is Plato’s. The Socratic method of teaching is to ask
pointed questions and let the students find the answers or else admit they
don’t truly know.

Socratic questions. ‘What do you mean?’ and ‘How do you know?’

Answers to these two questions clarify and warrant *propositions.

solidarism. The belief that each person should defend and promote the
dignity of others. The term was coined by the leading French anti-liberal
economist Charles Gide in 1889.

space. 1 One of the three rudiments of the universe, encompassing distance

in three dimensions. 2 The area beyond the surface and atmosphere of the
earth and other cosmic bodies.
In economics, space (1) is manifested as the sites in which economic
activity (1) takes place. Space is a type of land or natural resource. Space
is also involved in location theory. The economics of space thus involve
both area (territory) and location.
Besides three-dimensional space, there are spaces in the electromagnetic
spectrum, satellite orbits, and other natural phenomena by which matter
exists in space (1).
Space (1) is one type of land which is not itself altered by use. Use does
not use up, diminish, transport, or alter space. Usage only alters the material
contents within a site. Hence, space remains land even in use, while material
land such as minerals cease being land after alteration by human action.

special assessments. Districts in which real estate is assessed for charges

that finance public works within the district. Ideally, the increase in rent
induced by the improvements is not less than the assessments.
268 special interests

special interests. Groups with some common interest such as an industry

(2), who organize to fund political campaigns and to lobby for favors, and
also to prevent intervention. Successful special interests have concentrated
benefits, making it feasible to organize, while the costs are thinly spread
among the taxpayers and consumers, who thus have less incentive to resist.
Special interests also engage in propaganda to persuade voters that the spe¬
cial interest is also the general interest.

specie. Precious metals used as money in the form of coins.

specie flow mechanism. First formulated by David Hume, it is the process

by which trade balances with a gold standard. Export surpluses are offset by
gold imports, which raise prices and reduce net exports until trade in goods is
balanced.

specific theory. Theory that is specific to some event, place, culture, or

particular phenomenon, rather than applying universally. An example is an
explanation of the Great Depression.

speculation. 1 A guess as to the explanation of some phenomenon. 2 A

prediction or expectation about some future outcome, especially a price
change. 3 The purchase or sale of an asset on the expectation that the price
will change favorably, resulting in a gain. See also land speculation.

spillover. An external effect.

spontaneous order. The created by the market process, which coor¬

order
dinates supply and demand with the price system and profit and losses. When
profits are higher than normal, supply increases and the profit and price goes
down; when firms make losses, they reduce supply, and profits and prices
increase. The process, however, is not automatic or a mechanism, since
human entrepreneurs drive the process by seeking out profitable opportuni¬
ties, which are not always evident. Hayek also called it the ‘extended order.’

Spooner, Lysander (1808-87). American postal entrepreneur, anarchist,

and libertarian political theorist. He is called the ‘father of the three-cent
stamp’ for setting up the American Letter Mail Company in competition with
the US Post Office, which in response, lowered postage to 3 cents, and then
forced him out of business. Spooner’s No Treason: The Constitution of No
Authority (1870) attacked imposed government, arguing for voluntary asso¬
ciation. In An Essay on the Trial by Jury (1852), Spooner presented the
history of the English jury system, showing how jurors had the right to judge
 state of being 269

both fact and law, and that independent jurors are a key protection against
tyranny. He also wrote a treatise on Natural Law (1882), on A new banking
system (1873), A new system of paper currency (1861), on Poverty: its illegal
causes and legal cure (1846), The unconstitutionality of slavery (1847) and
the Unconstitutionality of prohibiting private mail (1844). In Vices are Not
Crimes: A Vindication of Moral Liberty (1875), Spooner argued that only
harm to another is a true crime.

sprawl. See urban sprawl.

stable. Having a low variance, or an economy with mild or no business

cycles. Money which maintains its purchasing power. See also turbulence,
VOLATILITY.

stagflation. The presence of both price inflation and high unemployment

or economic stagnation, a phenomenon that challenged the notion of a stable
Phillips curve.

stamp duty. A tax on goods, paid using a stamp attached to the good,
common during the 1700s and 1800s, and into the 1900s with cigarettes and
liquor. These revenue stamps are collectibles.

standard of living. The amount of consumer goods a typical household

can obtain during some time interval. Other factors that affect the quality of
life can be added, such as crime, pollution, and persecution.

state. A government with supreme power over some territory and popula¬
tion. Oppenheimer (1914, 1975) held that the state necessarily involves a
dominant class, originating in conquest, extracting tribute from a subordinate
class, though the constitutional state offers protective services as well. Hence,
Oppenheimer (1927) held the state to be ‘the bastard offspring of might and
right, of ethos and kratos.' Nock (1935, p. 60) regarded the state as the
organization of the political means.

state capitalism. The ownership and operation of an economy by govern¬

ment, which becomes a monopoly firm. Some have called the Soviet economy
‘state capitalism’ rather than socialism, since to the worker, the state was the
employer who exploited him, and the worker did not truly control the means
OF PRODUCTION.

state of being. An attribute of a person not based on any action (1). For
example, the natural color of one’s skin is part of one’s state of being, as is
270 static

one’s race and the appearance of one’s natural body. The laws of a free
society neither discriminate against (or for) nor criminalize a state of being.

static. Analysis of a system, usually in equilibrium, at a moment in time, in

contrast to dynamic analysis that examines a process over time. See also
COMPARATIVE STATICS.

statistic. A measure of data, such as a sum, a mean, or a variance.

status. One’s prestige, standing, and ranking in a social setting. Status is

one motivator of action (1).

status quo. Lat. The currently existing situation.

step up of basis. The exemption of unrealized gains, which steps up the

taxable value to the current market value, for example on inherited prop¬
erty.

sticky. Resistant to change, as a wage which is sticky downwards because

workers will refuse to accept a. lower wage. In Keynesian theory, wages,
interest rates, and other prices are sticky, and with the market stuck, interven¬
tion is needed to push the market towards full employment. This raises the
question of why a price would be sticky in the absence of intervention.

Stigler, George Joseph (1911-91). Professor of Economics at the Univer¬

sity of Chicago and winner of the 1982 Economics Nobel prize for his studies
of markets and regulations. A leading microeconomist, he contributed to the
topics of information and searching in labor markets.

stock. 1 A quantity of physical things at a moment in time. 2 A share of a

corporation.

stock exchange. An organization which facilitates exchanges among buy¬

ers and sellers of stocks (2) and other securities. Its key function is to provide
a secondary market for shares as well as to facilitate raising funds in the
primary market.

strategic behavior. Non-cooperative action which attempts to exploit the

ignorance or lack of power of another party. For example, one might attempt
to deceive the other to gain an advantage. Game theory deals with such
strategies. See also opportunism.
 suborn 271

strike. A union’s (unions, labor) refusal to work until its demands are met.
If the employer refuses to let the union members work, it is called a ‘lockout.’
From a social viewpoint, a strike is wasteful, since other parties can suffer
losses that greatly exceed the gains that either side receive when the labor
dispute is settled. Strikes occur in part because of legal privileges enjoyed by
labor unions, but the greater reason is that without a union, workers in some
industries have poor bargaining power due to job insecurity and unemploy¬
ment. The poor relative position of labor is due to interventions which take
much of the wage and make it costly for labor to pursue the alternative of
self-employment. The ultimate remedy for strikes is the elimination both of
the taxation of wages and of the arbitrary regulation of enterprise. Then
individual workers would have a more equal bargaining power with manage¬
ment, with greater opportunities for self-employment.

structure of taxes. See tax structure.

structures of government. Rules of government that determine the institu¬

tions. Representative government, division of power, method of voting, and
ability to exit a jurisdiction are examples of structures.

style. The different categories or types of investments owned by a fund, the

style return being that of indexes for these types. The selection return is the
return from the particular stocks owned for those types.

subjective. Stemming from the mind of the subject person.

subjective cost. James Buchanan distinguished between choice-influencing

and choice-influenced cost. Choice-influencing cost is subjective. Market
prices are objective, but one’s opportunity costs depend on one’s values.

subjective values. The proposition that values are subjective is foundational

to economics. The economic value of a good depends on the interests of the
person affected, relative to that of other goods. It is not just that persons
subjectively have interests, but more radically that there are no values other
than those of personal interests. Moral values are also subjective. The very
subjectivity of values is itself an objective proposition from which an objec¬
tive economic science and morality can be derived.

suborn. Obtain through one’s own or another’s bribery, perjury, or other

crime.
272 subsidiarity

subsidiarity. Decentralization that limits the scope of higher-level govern¬

ment, devolving policy to the lowest government levels in which it is effi¬
cient. This has been discussed as a policy goal for the European Union.

subsidy. A negative tax. A transfer of funds to an agent which is an economic

rent, not warranted (warrant) by economic performance, hence an intervention.

subsistence. A household income that just barely enables it to obtain mini¬

mal food, shelter, and medicine. If income is below this level in the long run,
the population dies off.

substitute. A good with a positive cross-elasticity of demand for another

good. For example, if blue pencils are a substitute for red pencils, then if the
price of red ones rises, the demand for the blue ones will increase. The
presence of substitutes, close alternatives, prevents the exploitation of con¬
sumers and workers. See also perfect substitute.

sumptuary tax. A tax imposed on ethical grounds on a good which the

government or the culture disfavors. Syn. sin tax.

supererogatory duties. Acts that are a moral obligation, but which may
not be compelled.

supply. 1 The quantities of a good produced or in existence at a range of

prices during some time interval. 2 The quantities of a good offered to the
market at a range of prices at a moment in time.
‘Supply’ refers to either or both (1) or (2) unless it is specified that it is a
supply of total quantity (1) or a supply of offers (2). ‘Supply’ in either case
refers to the whole range of quantities, while ‘quantity supplied’ refers to a
particular quantity at some price. A supply schedule is a list of prices and the
quantity supplied at each price. A supply curve is a graph with a line drawn
through the points of a supply schedule.
For goods in current production, where all the product is offered to the
market and none is hoarded, supplies (1) and (2) coincide. This is the supply
curve typically implied in textbooks. Where there is some existing stock of
goods, some of which are offered to the market, such as the market for shares
of stock (excluding any new issues), supplies (1) and (2) differ.
For shares of stock with no new issues, supply (1) is the number of shares in
existence; this supply curve is vertical. Supply (2) is the quantities of shares
offered for sale to the market at various prices. Supply (2) depends on supply
(1), since if supply (1) doubles (the stock splits in two), the market price would
be cut in half, and this would be reflected in supply (2).
 sympathy 273

The land market operates the same way. Supply (1) is fixed, the supply
curve being vertical (the total quantity of land within some jurisdiction at
various market rents). Supply (2) is upward-sloping, the quantity being lots
offered to the market for sale. The confusion of those who deny that the
supply of land fixed usually stems from the lack of recognition of the two
different meanings of supply.

supply-side. Macroeconomic theory in which output is determined by the

supply of factors and the productivity of production, hence by the supply-
side of the economy. Aggregate demand therefore plays no role in determin¬
ing output, or no long-term role; an increase in the money supply only drives
up prices. Supply-side policy thus seeks to either increase the amount of
factor inputs (such as labor and capital goods) or to increase productivity by
reducing the wasteful costs imposed by government on production, namely
taxes and regulations. The ultimate supply-side policy is geo-economic: the
complete elimination of taxes and restrictions on wages, interest, capital
goods, output, and transactions.

surplus. Having more goods than clear (1) the market during a normal
inventory cycle, as the quantity supplied is greater than the quantity de¬
manded at that price.

surplus value. The price of goods minus wages, including the wage com¬
ponent of capital goods. Marxists considered this properly belonging to labor,
but with the ultimate factors being land and labor, and with labor paid its
marginal product, the surplus, as glimpsed by Quesnay, is actually economic
rent, mostly land rent. Thus did Marx misidentify the surplus factor.

sustainable development. Economic development that sustains renewable

resources. The current practice often is to subsidize the destruction of forests
and wildlife with government-paid infrastructure.

sympathy. As analyzed by Adam Smith in the Theory of Moral Sentiments

(1790, 1982), sympathy is ‘our fellow-feeling with any passion whatever’ (p.
10). As a complement to the invisible hand, Smith presented what could be
called a ‘visible hand-out’ theory of benevolent provision. Smithian sympa¬
thy is a feeling of affinity, accord, and empathy with a person, group, culture,
organization, or other entity. ‘Nature, therefore, exhorts mankind to acts of
beneficence, by the pleasing consciousness of deserved reward’ (p. 86). Sym¬
pathy differs from altruism in being part of the utility (utility, marginal) of
the donor rather than some sense of duty or obligation.
274 synergy

synergy. A situation with increasing returns, economies of scale, positive

externalities, a positive-sum game, or where individual goals promote the
group’s goals, as they do in markets.
*

synthesis. 1A merging of two or more bodies of theory into one systematic

theory, perhaps discarding some incompatible and unwarranted elements. 2
An artificial creation.

synthesized demand. Demand that is artificially created by advertising

(advertise) that unduly influences consumers’ preferences, an allegation of
some institutionalist economics (institutional economics), particularly
Galbraith (1958); see affluent society. The concept is countered by the
existence of subjective values and unlimited desires. The concept of creating
wants is sound enough, but it goes deeper than the mere advertising of
consumer goods; cultures inculcate values and wants in childhood which then
carry over to adulthood, where they seem natural and universal, hence un¬
questioned and unexamined, and often inscribed into law, to the detriment of
minorities with other values.

system. A set of interrelated elements. Economically, a system is a way of

coordinating (coordination) production and distribution.
 T

tableau economique . Fr.The first macroeconomic model, developed by the

PHYSIOCRATS.

takings. The confiscation of property by government or a reduction in the

value or use of property because of government law and policy. The 5th
Amendment to the US Constitution requires just compensation for private
property taken for public (2) use.

takings rights. So-called ‘positive’ rights to others’ property, giving recipi¬

ents the legal right to have government take others’ property to redistribute
(redistribution) it to the recipients.

tariff. A tax on imports. See protectionism.

tatonnement .
Fr. The process of moving or ‘groping’ towards a Walrasian
general equilibrium as though an auctioneer were calling out prices to equili¬
brate (equilibration) markets in all goods.

tax. A liability *imposed by government, other than penalties. A pure free

market has no arbitrary taxation, but may have levies in accord with the
benefit principle or rent (1) charges for resources considered to be com¬
monly owned.
See also absolute tax incidence, accessions tax, ad valorem tax, amuse¬
ment TAX, ASSET TAX, AVOIDABLE TAX, BENEFIT PRINCIPLE, CAPITAL GAINS TAX,
CARBON TAX, CLARKE TAX, CONSUMPTION TAX, CORPORATE INCOME TAX, DEATH TAX,
DIRECT TAXES, ESTATE TAX, EXCESS BENEFIT, EXCESS BURDEN, EXCISE TAX, EXPENDI¬
TURE TAX, FISCAL DRAG, FLAT TAX, GIFT TAX, HEAD TAX, INCIDENCE OF TAXATION,
INCOME TAX, INDIRECT TAXES, INFLATION TAX, INHERITANCE TAX, LAND-VALUE TAX,
LUMP-SUM TAX, LUXURY TAX, NEUTRAL TAX, PAYROLL TAX, PlGOVIAN TAX, PROGRES¬
SIVE TAX, PROPERTY TAX, PROPORTIONAL TAX, REGRESSIVE TAX, SALES TAX, SEVER¬
ANCE TAX, SINGLE TAX, STAMP DUTY, SUMPTUARY TAX, TARIFF, TRANSFER TAX, TURNO¬
VER TAX, USE TAX, VALUE ADDED TAX, WEALTH TAX.

tax base. The item being taxed, such as income, sales, and property. When
productive activity and mobile assets are taxed, there is usually some reduc-

275
276 tax burden

tion in the tax base, while when fixed assets are taxed, the tax base is not
reduced so long as the tax is not greater than the rent (2) of the assets.

tax burden. The negative effect of taxation on economic activity. The main
effect of taxes on productive exertion is to shift supply curves upward to
higher prices and lower quantities. See also excess burden. The more inelas¬
tic the supply of a taxed resource, the lower the social tax burden.

tax capacity. The maximum amount of taxes a jurisdiction can pay, given
the TAX STRUCTURE.

tax credit. A reduction in the tax liability. Credits are typically provided
for activities the government favors or does not wish to burden. Tax credits
are also provided to avoid double taxation. If the tax credit is greater than the
tax liability, the extra amount can be paid to the filer as a subsidy. In contrast,
see TAX DEDUCTION.

tax deduction. A reduction in taxable income or other tax basis.

tax disincentive. A reduction in the expected net gain from an activity

because of a tax or regulation, reducing current exertion as well as invest¬
ment.

tax efficiency. The degree to which a portfolio has a low tax liability
relative to the return of a taxable account. A high fund turnover generates
high taxes in short-term capital gains. Index funds tend to be tax efficient
because there is relatively little buying and selling.

tax evasion. Illegal escape of taxation.

tax expenditure. A tax deduction or tax credit for an activity which

substitutes for what government would have paid for, and thus is regarded by
government as equivalent to an expenditure. It is analogous to a thief who
steals money and then donates it to the poor; if the victim instead agrees to
donate the money himself, the thief considers this to really be his donation.

tax incidence. See incidence of taxation.

tax-push price inflation. The situation in which workers demand and ob¬
tain higher wages because of higher taxes on wages. The higher wages then
cause goods to have higher prices.
 taxonomy 277

tax reform. An improvement in the tax system, such as to reduce the

excess burden or to reduce some element of injustice. Fundamental tax
reforms alters the tax structure rather than merely reducing tax rates or
changing the deductions and credits.

tax shifting. Transferring the ultimate tax burden to other parties, as when
an enterprise pays a sales tax to the government, but adds it to the price of the
goods, shifting the tax in part to the consumer. The seller still bears some
burden, because the increased after-tax price reduces the quantity demanded.

tax structure. The types of taxes in a jurisdiction, the revenues of each

type, and analysis of the impact of these taxes. Some tax structures induce
greater expenditure than others, or have a greater excess burden for a given
amount of revenues.

tax substitution. The policy of allowing people to substitute private (1)

services for government-provided services, and deduct the cost (or an aver¬
age cost) from the user’s tax liability. Some cities, for example, permit
condominiums to hire a private garbage service and deduct the cost from
property taxes. Tax credits for private tuition is another application.

tax wedge. The difference between gross-of-tax and net-of-tax prices. For
example, the tax wedge on wages is the difference between the cost of labor
to an employer, which includes taxes paid by the employer as well as indi¬
rectly imposed costs such as excessive litigation, and the net wage or take-
home pay of the worker, after all taxes on the wage. In some cases, the wedge
can greatly exceed the net wage. The effect of the tax wedge is to reduce the
quantity demanded, which for the labor market, decreases employment. Taxes
on fixed resources have no tax wedge.

taxation. The theory and practice of levying taxes.

This slogan was the title of the pamphlet by David Walter,

‘taxation is theft.’
published by the Society for Individual Liberty around 1969.

taxing everything that moves. The principle of taxation of tapping all

explicit flows. It skews production and exchange towards implicit returns.

taxonomy. The classification of the parts of some phenomenon or field of

study. Examples in economics are the factors of production (land, labor, and
capital goods) and the division of national expenditure into private consump¬
tion, private investment, and government (Y = C +1 + G).
278 technological unemployment

technological unemployment. The increase in unemployment due to a labor-

saving technological improvement. In a pure market economy, this would be
local and temporary, since there would be a demand for labor elsewhere.
Policy that favors capital goods relative to labor induces such technology,
which can increase unemployment if policy then subsidizes unemployment
and erects barriers to self-employment.

technology. The knowledge embedded in human capital and capital goods.

A change in the knowledge and its application which increases productivity
is a technological improvement, and the ongoing improvements constitute
technological progress. Technology includes methods of organizing produc¬
tion.

teleological. Directed to some ultimate end, goal, purpose, or outcome. In

ethics, teleology evaluates acts in relation to such ends. In subjective ethics,
however, each person has his own end.

Ten Commandments. Ten moral laws inscribed in Exodus 20, presented

by Moses and at the core of Judaism and Christianity. The sixth forbids
murder, the eighth forbids theft, and the ninth forbids fraud. The tenth warns
against envy of the property of others. These form the basic tenets of a
market * economy, which is thus not only compatible with, but some would
say, mandated by, Biblical authority.

tender. To offer as payment or present for acceptance. To tender money

means to exchange it for goods. Money is backed when it is redeemed for
some commodity at a fixed rate. Money is thus not backed by the general
productivity of an economy, but is tendered by the economy in being readily
exchanged for goods. See legal tender.

territorial gangsters. A term used by some anarchists (anarchism) for the

domination of territory by coercive *agents (1).

territorial goods. Collective goods which impact a territory in which one

must be located to use the goods. Territorial goods tend to generate land
rent, and can thus be self-financing if the rent is not less than the cost.
Territorial goods preclude free riding (free rider), since users pay rent in
order to be located there. (If a guest rides for free, his host pays for him.)

territory. An area of land surface and the usable space above and below
the surface.
 Tideman, Nicolaus 279

theft. The taking of what properly belongs to another, thus a morally

wrong or evil taking.

theonomy. ‘God’s law’: a legal system based on theological, especially

biblical, beliefs. Some theonomists favor shrinking the economic functions of
the state to what they consider to be a limited God-ordained role. See also
Ten Commandments.

theorem. A proposition fully warranted (warrant) by logic and evidence.

Warrants imply justified belief but not certainty.

theory. An organized set of related theorems. Sometimes, colloquially or

loosely, ‘theory’ is used to mean conjecture or hypothesis. In economics,
theory is divided into positive (positive economics) and normative (normative
economics) branches. Positive theory in turn is divided into pure or universal
theory and specific theory. The study of past theory is called the history of
economic thought. Two major fields of economic theory are microeconomics
and macroeconomics, although there are phenomena and concepts which
intersect the two, such as the factors of production.

third parties. 1 Persons affected by market action, other than those who
are party to an exchange. Third parties are thus those affected by external
effects. 2 A generic term for minor political parties.

threat. A statement that someone will hurt the recipient of the statement,
usually conditional on the victim not obeying a command of the perpetrator.
A threat is itself a coercively harmful (harm) act, like a bomb set now to
explode in the future.

three-factor economics. Economic analysis based on the classical factors -

land, labor, and capital goods. Geo-economics emphasizes three-factor analy¬
sis. Neoclassical (neoclassical economics) and some Austrians’ analysis (Aus¬
trian economics) use two factors, labor and ‘capital’ to which land is merged.

Thunen, Johann Heinrich von (1783-1850). German pioneer of location

theory who also developed a theory of rent (1), the distribution of income,
and diminishing returns.

Tideman, Nicolaus (1943-). Geo-economic * public-choice economist at

Virginia Polytechnic Institute. He served as Senior Staff Economist, Presi¬
dent’s Council of Economic Advisers, 1970-71. He has written on land-value
taxation, economic justice, the measurement of concentration, and the de-
280 Tiebout model

mand-revealing (demand revelation) process. He has also been a consultant

on economic reforms in the former Soviet republics and organized an open
letter to Mikhail Gorbachev signed by 30 economists urging that land rent
be used as a source of government revenue rather than ‘make unnecessarily
great use of taxes that impede’ the economy (Appendix in Noyes, 1991).

Tiebout model. A model of the provision of local public goods among

multiple communities which residents may choose from, based on a land¬
mark paper by Charles Tiebout (1956).

tight joint. Money whose expansion beyond the demand for money imme¬
diately increases the price level, having no effect on output, as in some
classical models. See also, broken joint, loose joint.

time. 1 A moment. 2 A duration. 3 A historical process or event.

Time (2) is one of the three rudiments of the universe, along with space
and matter/energy. Time (2) is thus not a factor of production but an ele¬
ment of all factors and processes. An analysis that examines a phenomenon
over a duration is called dynamic, versus a static analysis of a moment.

time preference. The preference for goods at the present time relative to
those at future times. This preference is based on the limited human lifespan,
the uncertainty of the future, economizing (economize), and unlimited
desires. The premium for present-day goods over future foods constitutes a
rate of discount of future goods, or the rate of interest paid on loans to
those who wish to use present-day goods and have no savings to fund them.
The Austrian theory of interest (Austrian economics) is based on time
preference.

title. A right to the ownership of an item, possibly including a document

demonstrating the right.

title fee. A fee paid to maintain titles conditional on such payments.

token. Money or a money substitute without intrinsic value.

tool. A non-human instrument used in production. Capital goods can briefly

be described as tools.

total return. The total percentage change in the value of an investment (2),
including capital gains and reinvested income.
 transfer payment 281

totalitarianism. The system in which the central government attempts to

control the entire economy and all significant aspects of human life.

tradable permits. See marketable discharge permits.

trade. Exchange.

trade creation. The increase in net international trade caused by the forma¬
tion of a free-trade area. There is a net increase in efficiency (2).

trade cycle. An alternative name for business cycle.

trade diversion. A decrease in international trade (international economics)

caused by the formation of a free-trade area due to a shift in trade from
countries outside the bloc, which may be more efficient, to those inside the
bloc due to the elimination of tariffs within the bloc. Diverting trade from
lower-cost to higher-cost producers reduces world efficiency (2).

trade union. See unions, labor.

tragedy of the unmanaged commons. Garret Hardin’s (1968) widely used

phrase the ‘tragedy of the commons,’ refers to the overuse and destruction of
common-access resources. When the resources are managed and access is
controlled, such as by charging rent (1), then the tragedy does not arise.

training for performance. Investing in human capital geared to specific

business needs.

transaction. An economic act (2). The cost of the act includes both the
resources directly exchanged for an item and the transaction cost, the oppor¬
tunity cost of attaining the transaction. For example, the transaction cost of
food is the time and resources expended in obtaining the food, aside from the
price of the food. These resources have alternative uses which constitute the
opportunity cost. Since transaction costs are real-world costs, any real-world
market failure to perform transactions would need to take these costs into
account.

transaction cost. See transaction.

transfer payment. A transfer of resources, usually funds to recipients of

assistance or subsidies, not in exchange for any service. Voluntary transfers
are gifts; the term is usually used for redistribution transfers mandated by
282 transfer-seeking

government. In the case of social security, there is some link between the
tax payment and the eventual receipt of the transfer, but the link is weak and
often non-existent.

transfer-seeking. Financing political campaigns and making other pay¬

ments to office holders and political parties in the attempt to obtain transfers
of resources, protection from competition, laws suppressing cultural prac¬
tices they disfavor, and seeking other privileges. It is often called ‘rent-
seeking’ because the transfer is an economic rent; it is also land-rent-
seeking when real-estate developers and owners seek public works that in¬
crease their rents, paid for by taxes on labor and enterprise. When farm
interests obtain transfers and price supports, the public pays for it both as
consumers and as taxpayers. Besides the loss due to taxes and higher prices,
the seeking of transfers is itself costly, and a social waste. See also public
choice.

transfer tax. A special sales tax on the transfer of certain assets, such as
REAL ESTATE.

transitivity. Consistency of rank ordering, so that if A is preferred to B and

B to C, A is preferred to C. If in experiments transitivity seems to be violated,
then one could inquire as to the nature of the questions and procedure before
concluding that the behavior is irrational.

triangle. See Hayekian triangle.

trickle down. The proposition that wealth and growth mainly benefit the
rich, from which trickle a few jobs. The expression is a favorite epithet of
critics of markets, which may well be so in skewed markets with barriers to
employment. In a market economy, the high productivity and absence of
barriers to employment would quite likely create a gusher of opportunity
rather than a trickle.

TRIM. Trade-related investment measure. A law requiring a multinational

corporation to export a minimum proportion of their production and/or re¬
fraining from importing certain goods. Such barriers to trade are to be
phased out under the Uruguay round of GATT/World Trade Organization.

true. A proposition in accord with perceived reality. Some deny that we can
know what is true, while others believe that we can have an adequate
inter subjective understanding of observed reality, that is adequate enough to
be useful.
 turnover tax 283

trust. 1 An amalgamated company. 2 A legal entity having title to property,

managed by trustees for the designated beneficiaries.

truth. A proposition which is true.

Ttallock, Gordon (1922-). A public-choice economist, Tullock has. written

on a wide variety of topics in public economics, including bureaucracy, war,
voting, law, and property rights. He co-authored with James Buchanan the
famous book The Calculus of Consent (Buchanan and Tullock, 1962). For¬
merly at Virginia Polytechnic Institute and State University and then at George
Mason University, Tullock now teaches at the University of Arizona in Tucson.

turbulence. Complex, swift, ever-changing movements, so that they are

difficult to track, predict, and follow. Tornadoes and stock-market crashes are
examples. Seemingly disordered, such events have causes and structure and
follow scientific laws. The field that studies turbulence is misleadingly called
‘chaos theory.’ See chaos. Markets may sometimes be turbulent, but seldom
chaotic.

turbulence theory. Better known as ‘chaos theory,’ it analyzes turbulent

behavior such as the weather or stock markets, which are not really chaotic.
One concept is the butterfly effect, which states that small changes in inputs
can create major changes in the outputs. An implication for policy is that
regulators will be unable to predict or control such outcomes.

Turgot, Anne-Robert Jacques (1727-81). French economist associated

with the physiocrats. As controller general of finance (1774-76), he abol¬
ished (abolish) the corv£e, eliminated sales taxes on grain, attempted to
remove barriers to trade, and enacted other reforms; he was removed due to
opposition to his policies, including his advocacy of the impOt unique on land
rent. In his Reflexions sur la Formation et la Distribution des Richesses
(1766), Turgot presented a theory of free trade and laissez-faire, as well as
concepts such as diminishing returns.

turnover tax. A sales tax on the transfer of an asset. It is more inefficient

than a value added tax, since the price paid for the item is not deducted from
the tax base, and is thus a greater barrier to the transfer of assets.
 . .

,
.

'
 u

unanimity. Voluntary participation by all members of a group, and gov¬

ernance by the consent of each member. It can most feasibly be implemented
at the constitutional level of forming an organization or joining it. At this
high level, the members agree to operational decision making by majority
voting or some other rule. The unanimity principle is associated with Knut
Wicksell.

unanimous improvement. A change in circumstances which makes at least

one person better off, without any objections from others, that is without
making them worse off by their judgment.
In a free market, unanimity is only a limit for acts which are morally
wrong by the universal ethic.- Acts which merely offend others or inciden¬
tally injure them (for example financially, through competition), making
them less well off but not invading their domains, are not unanimously agreed
to, but are not legally restricted.

uncertainty. Lack of certainty, especially about the future. The future is not
only unknown, but the probability of an uncertain event is unknown, so it is not
feasible to insure against. Uncertainty is a fundamental axiomatic proposition
in economics, one emphasized especially by the Austrian school (Austrian
economics). As Frank Knight theorized, entrepreneurial profits arise out of
the uncertain future, as those who best discern the demand for a product, as
well as costs and other variables, are rewarded with an economic profit.

underclass. The class of people living in poverty who persist in it genera¬

tion after generation, since most cannot overcome the barriers to improve
their condition.

underground economy. See informal sector.

undesigned order. Another name for the spontaneous order.

unearned income. See earned income.

uneasiness. The term used by Ludwig von Mises, who stated (1949, 1966,
p. 92) that the relief from a felt uneasiness is the goal of an action. Uneasi-

285
286 unemployment

ness is the feeling or sentiment of having less utility (such as having discom¬
fort or feeling a longing) than one would if goals were achieved, such as
obtaining some item.
«

unemployment. The workers who are willing and able to work at prevail¬
ing wages, but cannot find employment. Actual unemployment rates are af¬
fected by unemployment insurance as well as not counting those who are too
discouraged to seek work, but would be willing to work. In free-market
thought, unemployment is caused by barriers such as the tax wedge on
wages and regulations making it difficult to fire workers or imposing restric¬
tions on employment. See also natural rate of unemployment.

unintended consequences. Results of a policy that were not intended and

often not foreseen by the decision makers. Intervention typically has unin¬
tended consequences, as people react to circumvent and avoid restrictions
and imposed costs.

union shop. A legal requirement that a worker in a firm must join a union
after beginning employment. US states with right-to-work laws prohibit the
enforcement of union shops.

unions, labor. Organizations of workers which bargain with the owners

and managers of firms. In many countries, labor unions are exempt from anti¬
trust laws and have various legal privileges. The strike is the prime weapon
of a union. If the labor market is divided into a union and non-union sector,
the outcome is typically a higher-than-market wage level in the union sector
and a lower-than-market wage level in the non-union sector, as the higher
union wage reduces employment in that sector, shifting the workers to the
non-union sector. High-paid unions in manufacturing, however, run the risk
of pricing themselves out of a global market. See also labor.

unit of account. The unit of a currency, such as dollar or franc. With a

gold standard, the unit is a weight of gold. With fiat money, the unit has a
historical basis.

universal. Applying to an entire field, hence universe (2). A universal princi¬

ple or theorem in economics applies to all people, places, cultures, and times. A
universal ethic applies to all human beings. See also general (general equilib¬
rium), pure. Contrasts: cultural (culture), specific (specific theory).

universal economics. Economic theory that synthesizes warranted (war¬

rant) theory from all known schools of thought into an integrated whole.
 urban sprawl 287

universal ethic. The formulation of natural moral law into a set of ethical
rules for good, evil, and neutral acts, derived from two aspects of human
nature: the moral equality of persons, and the independence (or separateness
of mind) of persons. The principle ethical rule for evil, as recognized by John
Locke, John Stuart Mill, and others, is that it is morally wrong to invasively
harm others. Morally good acts are those which are welcomed benefits to
others. All other acts, including those which only affect oneself, are morally
neutral.
The universal ethic determines which acts are voluntary, namely those
which are not evil. Liberty then consists of law in accord with the universal
ethic, prohibiting coercive harm and not prohibiting any other acts. Natural
rights are then defined as the correlative of moral wrong as designated by the
universal ethic: a right to do X means that the negation of the act is morally
wrong. Thus, the right to own property means that it is morally wrong to take
or destroy the property of others (Foldvary, 1980).

universe. 1 Everything that exists. The rudiments of the physical universe

are time, space, and substance (mass and energy). 2 The set of all elements
within a particular field, such as .economics. Hence, a universally valid propo¬
sition of economics is universal within economics, but not necessarily in
other fields, just as a universal terrestrial biological principle may apply only
to life on earth.

urban economics. A branch of applied economics dealing with cities. Ur¬

ban economics applies economic theory to topics concerning cities and towns,
such as location theory, land use, housing, the growth of cities, and urban
problems such as slums and crime. It overlaps with regional economics.
Free-market urban policy would abolish the local taxation of labor, enter¬
prise, sales, and buildings; eliminate arbitrary permits, zoning, building
codes, restrictions on jitneys, and other regulations. Geo-economic policy
would finance the government with the assessment and collection of the site
rents (1), which would limit both urban sprawl and blight. Covenants would
replace zoning, while many of the neighborhood collective goods would be
provided by contractual and consensual private communities.

urban sprawl. Urban development that spreads out unevenly, using up

excessive space, relative to the benchmark of a pure free market with the
community collection of rent. When people voluntarily choose to live in
low-density communities, this is a market-warranted use of space, but when
development skips over undeveloped land or does not fully develop land
due to zoning restrictions and land speculation due to rental gains from
anticipated public works not funded by the landowner beneficiaries, then it
288 use tax

creates infrastructure and land costs not warranted by the pure market
process.

use tax. A tax on goods brought into a state which would be subject to
sales tax if sold within the state. This tax attempts to limit the avoidance of
sales tax by purchasing from out of state.

user fee. A price which one voluntarily (vountary) pays for a service
provided by government, the payment being directly related to the service
and its cost. An example is a charge for obtaining a passport. If the charge is
compulsory, then it is not a genuine user fee, but an earmarked (earmarking)
or excise tax (Wagner, 1991). A user fee may, however, be a requirement in
order to use some service or property.

usufruct. The right to use the property of another so long as its value is
not diminished.

utilitarianism. The ethical (ethic) philosophy of judging acts according to

the consequences, that is their effect on the utility (utility, marginal) of
persons. Rule-utilitarianism consists of ethical rules which are then judged
for consequences, rather than judging types of act.
Natural moral law (or natural rights, or the universal ethic) has a
different basis, but can also be complementary (complement) to utilitarian¬
ism. The universal ethic’s rule that evil is what coercively harms others
provides the utilitarian harm rule. Hence, natural moral law is needed by
rule-utilitarianism to provide the rules, and also to preclude the utilitarian
problem of having some rule that pleases a majority but severely harms a
minority.

utility, marginal. 1 In neoclassical (neoclassical economics) theory, the

satisfaction obtained by an extra unit of a good; or more precisely, the
preference for a good relative to other goods. More broadly, the utility of a
person or group is its well-being or welfare. Neoclassical utility is often
mathematized into a function of goods variables. 2 In Carl Menger’s (1871,
1976) definition, marginal utility is the importance of a good in achieving an
end. 3 In modern Austrian theory (Austrian economics), the marginal utility
of a good is its ordinal (ordinal utility) preference relative to other goods as
they help achieve a ranking of ends.
Both neoclassical and modern Austrian utility theory are ordinal, a matter
of relative preference. However, some economists believe that utility is fun¬
damentally cardinal, not in being measurable, but in its being a quantity.
Intuitively, for example, one can feel that A is a bit preferred to B, while B is
 Utopia 289

much preferred to C. Utility is also cardinal in having a sign: one cannot

measure utility as a number, but one can determine whether the utility is
positive, negative (an unwanted good), or neutral.
There is also theory, not well developed so far, on the dynamics of utility as
people learn and grow. See also diminishing marginal utility.

Utopia. A visionary ideal of a society with the best possible policies and <
other desired elements.
 V

valence. The capacity of an element to combine with another. By exten¬

sion, the capacity of a factor of production to combine with, hence comple¬
ment, other factors, high valence being high complementarity. For example,
cattle have a high valence for land and a low valence for labor. (Gaffney,
1996).

value. Economic values are the relative importance that a person assigns to
his various ends. Goods acquire value in achieving those ends. The value of
goods is thus determined subjectively (see subjective values). The use value
of a good is its subjective value to a person.
The intrinsic value of an item is not any objective value but the market
value of the substance a good is made of rather than the good itself, as the
intrinsic value of a gold coin is the market value of the gold.
A market value is the equilibration of bids and offers based on the values
persons place on goods. Goods exchange at prices where a bid and offer are
matched at a price. Higher offers and lower bids do not trade. The exchange
value of a good is its market value.
There have also been labor and labor-saved theories of value, which at best
are explanations for the market price of goods in current production. See
LABOR THEORY OF VALUE.
As theorized by Carl Menger, the value of factors of production are
imputed from the value of the goods they produce.
A moral (1) value is also subjective, according to the subjective theory of
values. Objectivists (Objectivism) and others posit objective values from
teleologies (teleological) such as human flourishing or life. Subjective moral
values do not preclude an objective ethic, just as subjective economic values
do not preclude an objective theory of economics. From independent subjec¬
tive values and their equal position, premises which John Locke presented,
one can derive a rational, culturally objective, universal ethic (Foldvary,
1980).

value-added tax. A tax on the value added to a product by a firm, the value
consisting of the factor payments (wages, rent, and return on capital goods,
including interest) and economic profit. The tax is broader and more efficient
than turnover and other sales taxes, and does not burden individual worker-
taxpayers with compliance costs. The cost of inputs is subtracted from the

291
292 value-free science

cost of outputs in determining the tax basis. The VAT is widely used in
Europe. One advantage relative to income taxes is that exports can be exempt
from the tax. Usually, as implemented, there are exceptions and complica¬
tions, government is exempt, and there are compliance costs for the firms.
Some of the tax is passed on to consumers, and some borne by labor and
landowners. There is an excess burden to VAT, unlike taxes or charges on
LAND RENT.

value-free science. See non-valued science.

VAT. Value added tax.

velocity. The number of times the money supply turns over per year, that is
the speed of the circulation. The measure of the velocity depends on the
measure of the money supply, because the narrower the measure of money,
the greater its velocity. The effect of money on the price level depends on the
velocity multiplied by the money stock. See also the equation of exchange.

Virginia school of political economy. A school that has been based at the
Center for Study of Public Choice at three universities in Virginia, now at
George Mason University. The Center was established by James Buchanan
and G. Warren Nutter in 1957 at the University of Virginia. The members
sought to revive the classical emphasis on political economy. A key work of
the school was The Calculus of Consent (1962) by James Buchanan and
Gordon Tullock. Ronald Coase was associated with the school and there
wrote his paper on social cost. Mancur Olson gave the program the above
title in 1985. Charles Rowley (1996) has contrasted the public-choice ap¬
proach of the Virginia school with that of the Chicago school. The Virginia
school places greater emphasis on institutions and focuses more specifically
on government failure (or political market failure). But the school also
investigates political reforms, institutions that are less conducive to failure.
See also Mueller (1985).

volatility. The amount of fluctuation in the price of an asset, usually meas¬

ured per year. Often, what is called the ‘risk’ of an investment is the volatility,
as opposed to the possibility of the complete collapse of the value of the
asset.

volenti non fit injuria. Lat. To the willing, no injury is committed.

volitional. Having and exercising free will, a defining characteristic of

PERSONS.
 voucher 293

voluntary. Performed completely from one’s own volition. In the context

of a market, voluntary means that acts are uncoerced not just among the
actors in a transaction but also for third parties. The meaning of ‘voluntary’
is determined by an ethic; see universal ethic.

voting. See agenda, approval voting, Borda count, bottom-up voting,

COMMUNITARIAN DEMOCRACY, IMPOSSIBILITY THEOREM, MASS DEMOCRACY, PARADOX
OF VOTING.

voucher. Tickets that are valid for the purchase of a particular good or
service or shares of stock. Vouchers have been suggested for education,
where parents use them to choose a school, making an even financial choice
among government and private schools.
 •

'

'
 w

wage level. The prevailing wage paid to unskilled workers in an economy,

the more productive workers being paid a premium over the basic wage level.
In classical economics, the wage level is determined by the productivity of
labor at the extensive margin of production. Neoclassical (neoclassical
economics) wage theory has an economy-wide supply and demand curve for
labor determining the wage, but the demand comes from the aggregate
production function which shows productivity at the margin where the last
worker is employed, and the supply is a short-run function, whereas the
classical supply of labor is horizontal at subsistence until all households are
employed, after which it slopes up or becomes vertical. The two theories are
thus complementary (complement). See also law of wages, Wakefield.

wages. The earnings of labor. Wages take many forms, including hourly
payments, monthly salaries, commissions, profits from self-employment, and
in-kind wages such as home-grown produce.

Wakefield, Edward Gibbon (1796-1862). He organized and promoted the

colonization of Australia and New Zealand. In his book England and America
(1833), Wakefield examined the Swan River Colony in Western Australia,
inquiring as to why wages there were high. The reason was that immigrants
had the option of obtaining their own land for farming. The government there
later fixed the price of land at a pound per acre in order to reduce wages. This
thus provides empirical evidence for the classical relationship between wages
and rent.

Walras, Leon (1834-1910). One of the three major pioneers of marginal

utility theory, Walras also developed a mathematical model of general equi¬
librium. Walras (1896) also proposed that land rent provide the means for
funding government. In a more modern form, Walras thus continued two
French physiocratic themes, the tableau economique (model of the entire
economy) and the impOt unique.

‘War is the health of the state.’ See Randolph Bourne.

warehouse banking. Also called ‘100 per cent reserve banking,’ it is the
banking practice of maintaining deposits equal to reserve assets, so deposit

295
296 warrant

accounts are safeguarded from possible loss due to default. Some advocates
of 100-percent reserve banking argue that fractional-reserve banking is
fraudulent, but it seems that so long as the practice is disclosed, fractional-
reserve banks could freely and honestly compete with warehouse banks in a
free-market banking system, paying higher interest to depositors than ware¬
house banks.

warrant. To justify, prove, or provide sufficient grounds for belief. A theo¬

rem is warranted by logic and evidence.

waste. The reduction in utility (utility, marginal) from a loss of resources

which could have served more desired uses. Some waste results from acci¬
dents and the inability to predict demand, while other waste results from the
excess burden of taxation and regulation, which directly wastes resources
from compliance costs, and also inserts a tax wedge between the marginal
social cost and the marginal social benefit (social costs and benefits), a
distortion that wastes resources. ‘Waste’ is also a term for pollution.

wealth. Anything with positive market value. Human beings are excluded,
since in the absence of chattel slavery, human beings are not purchased in a
market, but hired. However, some theorists include human capital. Some
geo-economists (Geo-economics) also exclude natural resources, including
as wealth only produced goods.

Wealth of Nations. The first full treatise on economics, written by Adam

Smith (1776, 1976), and a major influence on economic theory, policy, and
CLASSICAL LIBERAL thought.

wealth tax. A tax on the value of one’s wealth or assets. See asset tax.

weasel word. Hayek’s term for words that are used in a way that sucks the
original meaning from them. ‘Social,’ for example, can refer to the people or
to governmental agencies, and the term is used in ways that seem to merge
the two, as though they were not distinct.

weighted average maturity. The average time until the securities in a

portfolio mature, weighted by the dollar amounts.

welfare. 1 Social well-being. 2 Governmental assistance and transfer

payments. Transfers to corporate interests are called ‘corporate welfare.’
 winner’s curse 297

welfare economics. The economics of welfare (1), which evaluates the

effects of various policies. In free-market welfare thought, welfare is consid¬
ered to be greatest when individuals are free to peruse their own conception
of well-being and when there is a minimum of excess burden imposed on the
ECONOMY.

welfare state. Government assistance to the poor as well as to others in the

provision of schooling, housing, food, medicine, pensions, senior centers,
and other services. For social security and, in some countries, nationalized
medicine, participation in programs is mandatory. In effect it is a redistribu¬
tion program from taxpayers to various classes of recipients, with a major
overhead burden. The free-market approach to welfare, in contrast, is to
leave income with those who earned it, while having no barriers to entrepre¬
neurial (entrepreneur) opportunity, which would then leave households with
the means to obtain their own services more suitably to their individual
wants.

well-being. The amount and degree to which individuals in an economy are

able to pursue and attain their ends.

Wicksell, Knut (1851-1926). Swedish economist who was perhaps the first
geo-Austrian (geo-Austrian synthesis) and universalist economist (universal
economics), synthesizing synthesis (1) classical, Austrian (Austrian econom¬
ics), public-choice and neoclassical (neoclassical economics) concepts into an
integrated theory of interest, land and rent, capital goods, labor and wages,
monetary theory, and public finance. He originated the distinction between the
natural and the market rate of interest. In public finance, Wicksell’s (1958)
benchmark was unanimity, and with regard to taxation, Wicksell recognized
land rents as an efficient and equitable source of revenue.

widget Either cylindrical containers for carrying messages or, in the UK,
bulbs containing carbon dioxide in canned beer, which when pierced, releases
the gas. The word is used in hypothetical examples of a manufactured good.

Wieser, Friedrich von (1851-1926). Austrian-nation, Austrian-school

economist (Austrian economics) who originated the concept of opportunity
cost and furthered the theory of imputation (imputation of value). He also
analyzed urban rent (1).

winner’s curse. When people have different beliefs about the value of
some item, the highest bidder is the person who makes the greatest upward
error in valuation.
298 workable competition

workable competition. The name given to real-world competition, which

cannot feasibly satisfy the criteria for perfect competition. However, criteria
proposed for competition policy have been criticized for not having a sound
theoretical basis. See anti-trust.

World Trade Organization. Successor name to GATT.

 X, Y, Z

X goods. Physical goods, in contrast to Y goods and Z goods.

Y. Symbol used for national income.

Y goods. The characteristics of physical goods (X goods). See Z goods.

yield. The return on an asset, usually computed on an annual basis as a

percentage of the asset value. Generally, the yield is some interest rate times
the price of the asset. The real yield is the nominal yield after subtracting
INFLATION.

yield curve. A graph depicting the maturity of a fixed-income security

versus its yield. The curve normally slopes up as a higher yield is paid for a
longer maturity with higher risk.

Z goods. An abstract good such as music, proposed by Gary Becker (1965).

Stigler and Becker (1977) define Z goods as the ultimate items entering a
utility (utility, marginal) function. For example, the physical X good of an
orchestra produces the ultimate Z good of music. The Lancastrian charac¬
teristics of X goods can then be labeled Y goods, and these properties make
up the Z goods.

zero coupon bonds. Bonds that, instead of paying cash interest, are sold
at a discount and then redeemed for face value. Though the return is not paid
until maturity, the implicit interest is taxed annually by the US government.

zoo effect. An upward bias in measuring congestion versus population

(Oates, 1988). Large cities have zoos, so such services increase with popula¬
tion.

Zube, John. Australian libertarian (libertarianism) panarchist (panarchy)

entrepreneur of microfiche publishing, holding peace plans, ‘social inven¬
tions,’ and free-market, *classical-liberal texts.

299
,

7 I

'
BIBLIOGRAPHY

Amariglio, Jack, Antonio Callari, Stephen Resnick, David Ruccio, and Rich¬
ard Wolff (1996), ‘Nondeterminist Marxism: the birth of a postmodern
tradition in economics,’ in Fred E. Foldvary (ed.), Beyond Neoclassical
Economics, Cheltenham, UK: Edward Elgar, pp. 134-47.
Anderson, Terry L., and Donald R. Leal (1991), Free Market Environmental¬
ism, San Francisco: Pacific Research Institute for Public Policy.
Arrow, Kenneth (1951, 1966), Social Choice and Individual Values, New
York: Wiley.
August, Eugene R. (ed.) (1971), The Negro Question [by] John Stuart Mill,
New York, Appleton-Century-Crofts.
Auld, D.A.L., and Lorraine Eden (1990), ‘Public Characteristics of Non¬
public Goods,’ Public Finance, 45 (3), 378-91.
Baetjer, Howard (1993), Software as Capital, Doctoral dissertation, George
Mason University.
Becker, Gary (1965), ‘A Theory of the Allocation of Time,’ The Economic
Journal (September), 493-517.
Becker, Gary (1971), The Economics of Discrimination, 2nd edn., Chicago:
University of Chicago Press.
Becker, Gary, and Guity Nashat Becker (1996), The Economics of Life: From
Baseball to Affirmative Action to Immigration, How Real-world Issues
Affect our Everyday Life, New York: McGraw-Hill.
Bell, Tom W. (1991), ‘Polycentric Law,’ Humane Studies Review, 7(1) (Win¬
ter 1991/2) (http://mason.gmu.edu/~ihs/w91issues.html).
Benson, Bruce (1990), The Enterprise of Law, San Francisco: Pacific Re¬
search Institute.
Berman, Harold J. (1983), Law and Revolution: The Formation of the West¬
ern Legal Tradition, Cambridge, MA: Harvard University Press.
Blaug, Mark (1985), Great Economists since Keynes, Cambridge: Cambridge
University Press.
Blaug, Mark (1986), Great Economists before Keynes, Cambridge: Cam¬
bridge University Press.
Block, Walter, and Michael Walker (1989), Lexicon of Economic Thought,
Vancouver: Fraser Institute.
Boettke, Peter (1993), Why Perestroika Failed: The Politics and Economics of
Socialist Transformation, New York: Routledge.
Boettke, Peter (1996), ‘What is wrong with neoclassical economics (and

301
302 Dictionary of free-market economics

what is still wrong with Austrian economics)?’ in Fred E. Foldvary (ed.),

Beyond Neoclassical Economics, Cheltenham, UK: Edward Elgar, pp. 22-
40.
Bohm-Bawerk, Eugen von (1898), Karl Marx and the Close of his System: A
Criticism, Alice M. Macdonald (trans.), London: T. F. Unwin.
Bohm-Bawerk, Eugen von (1921, 1959), Capital and Interest (three vol¬
umes), George Huncke, and Hans Sennholz (trans.), South Holland, IL:
Libertarian Press.
Brown, Harry Gunnison (1942), Basic Principles of Economics, Columbia,
MO: Lucas Brothers.
Brown, Harry Gunnison (1924, 1979), The Economics of Taxation, reprinted,
Chicago: University of Chicago.
Buber, Martin (1983), A Land of Two Peoples, Paul R. Mendes-Flohr (ed.),
Oxford: Oxford University Press.
Buchanan, James (1965), ‘An Economic Theory of Clubs,’ Economica, 32
(February), 1-14.
Buchanan, James (1990), ‘The Domain of Constitutional Economics,’ Con¬
stitutional Political Economy, 1 (1) (Winter), 1-18.
Buchanan, James M., Charles K. Rowley, and Robert D. Tollison (eds) (1986),
Deficits, New York: Basil Blackwell.
Buchanan, James M., and Tullock, Gordon (1962, 1965), The Calculus of
Consent, Ann Arbor: University of Michigan Press.
Burris, Alan (1983), A Liberty Primer, Rochester, NY: Society for Individual
Liberty.
Campa, Jose, and Linda Goldberg (1997), ‘The Evolving External Orienta¬
tion of Manufacturing: A Profile of Four Countries’, Economic Policy
Review, 3 (2).
Carlson, Benny (1994), The State as Monster: Gustav Cassel and Eli Heckscher
on the Role and Growth of the State, Lanham, MD; New York; London:
University Press of America.
Chandler, Tertius (1983), Chandler’s Half-Encyclopedia, 2nd edn, San Fran¬
cisco: Gutenberg Press.
Chandler, Tertius (1986), Moses and the Golden Age, Bryn Mawr, PA:
Dorrance and Company.
Clarke, Edward (1971), ‘Multi-part Pricing of Public Goods,’ Public Choice,
11 (Fall), 17-33.
Coase, Ronald H. (1937), ‘The Nature of the Firm’, Economic, 4: 386-405.
Coase, Ronald H. (1960), ‘The Problem of Social Cost’, Journal of Law and
Economics 3 (October): 1-44.
Coase, Ronald H. (1974), ‘The Lighthouse in Economics’, Journal of Law
and Economics, 17 (October): 357-76.
 Bibliography 303

Cobb, Charles W., and Paul Douglas (1928), ‘A Theory of Production,’

American Economic Review, 18 (March), 165.
Crews, Clyde Wayne, Jr. (1996), Ten Thousand Commandments, Washington,
DC: Competitive Enterprise Institute.
Davenport, Herbert J. (1908), Value and Distribution, Chicago: University of
Chicago Press.
Davenport, Herbert J. (1914), Economics of Enterprise, New York: Macmillan.
De Soto, Hernando (1989), The Other Path, New York: Harper & Row.
Demsetz, Harold (1964), ‘The Exchange and Enforcement of Property Rights,’
Journal of Law and Economics, 7 (October), 11-26.
Demsetz, Harold (1967), ‘Towards a Theory of Property Rights’, American
Economic Review, 57 (May), 347-73.
Demsetz, Harold (1970), ‘The Private Production of Public Goods’, Journal
of Law and Economics, 13 (October), 293-306.
Dos Passos, John (1932), 1919, New York: Harcourt, Brace & Co.
Feder, Kris (1996), ‘Geo-economics,’ in Fred E. Foldvary (ed.), Beyond
Neoclassical Economics, Cheltenham, UK: Edward Elgar Publishing, pp.
41-60.
Feenstra, Robert C., and Andrew K. Rose (1997), ‘Putting Things in Order:
Patterns of Trade Dynamics and Growth,’ NBER Working Paper 5975.
Finneran, John P. (1996), ‘A Tale of Two Dictionaries,’ in Wilson Mixon, Jr.
(ed.). Private Means, Public Ends: Voluntarism vs. Coercion, Irvington-
on-Hudson: Foundation for Economic Education, pp. 21-4.
Foldvary, Fred (1980), The Soul of Liberty, San Francisco: Gutenberg Press.
Foldvary, Fred (1994a), ‘Poverty and the theory of wages: a “geoclassical”
analysis’, in Nicolaus Tideman (ed.). Land and Taxation, London:
Shepheard-Walwyn, pp. 141-56.
Foldvary, Fred (1994b), Public Goods and Private Communities, Aldershot,
UK: Edward Elgar Publishing.
Foldvary, Fred (1995), ‘The Measurement of Inequality, Concentration, and
Diversification’, Working paper E95-09, Virginia Polytechnic Institute and
State University, Blacksburg, Virginia.
Foldvary, Fred (ed.) (1996), Beyond Neoclassical Economics, Cheltenham,
UK: Edward Elgar Publishing.
Foldvary, Fred (1997a), ‘Government and Governance’, The Freeman 47 (1)
(January), 33-7.
Foldvary, Fred (1997b), ‘The Business Cycle: A Georgist-Austrian Synthe¬
sis’, American Journal of Economics and Sociology 56 (4) (October), 521—
41.
Foldvary, Fred (1997c), ‘Franz Oppenheimer, the state, and land’, in Kenneth
C. Wenzer (ed.), An Anthology of Single Land Tax Thought, Rochester,
NY: University of Rochester Press, pp. 403-38.
304 Dictionary of free-market economics

Foldvary, Fred, and George Selgin (1995), ‘The Dependency of Wage Con¬
tracts on Monetary Policy’, Journal of Institutional and Theoretical Eco¬
nomics, 151 (4) (December), 658-72.
Gaffney, Mason (1994), ‘Neo-classical Economics as a Stratagem against
Henry George,’ in Mason Gaffney and Fred Harrison (eds), The Corruption
of Economics, London: Shepheard-Walwyn, pp. 29-163.
Gaffney, Mason (1996), ‘Taxes, Capital, and Jobs,’ Manuscript.
Galbraith, John Kenneth (1958), The Affluent Society, Boston: Houghton
Mifflin.
Garrison, Roger W. (1978), Austrian Macroeconomics, Menlo Park: Institute
for Humane Studies.
Garrison, Roger W. (1984), ‘Time and Money: The Universals of Macroeco¬
nomic Theorizing,’ Journal of Macroeconomics, 6 (2) (spring), 197-213.
Garrison, Roger W. (1997), ‘Time and Money,’ Core chapter in Time and
Money: the Macroeconomics of Capital Structure, Work in progress.
George, Henry (1871), Our Land and Land Policy, National and State, San
Francisco: White & Hauer.
George, Henry (1879, 1975), Progress and Poverty, New York: Robert
Schalkenbach Foundation.
George, Henry (1883), Social Problems, New York: Robert Schalkenbach
Foundation.
Grapard, Ulla (1996), ‘Feminist Economics: Let me Count the Ways,’ in Fred
E. Foldvary (ed.), Beyond Neoclassical Economics, Cheltenham, UK:
Edward Elgar Publishing, pp. 100-14.
Greaves, Percy L., Jr. (1974), Mises Made Easier, New York: Free Market
Books.
Gunning, J. (1997a), ‘Herbert J. Davenport’s Transformation of the Austrian
Theory of Value and Cost,’ Perspectives on the History of Economic Thought,
14, London: Routledge.
Gunning, J. (1997b), ‘H. J. Davenport’s Loan Fund Theory of Capital,’ Manu¬
script.
Gwartney, James, Robert Lawson, and Walter Block (1996), Economic Free¬
dom of the World 1775-1995, Vancouver: Fraser Institute.
Hall, Marshall, and Nicolaus Tideman (1967), ‘Measures of Concentration,’
Journal of the American Statistical Association, 62 (March), 162-8.
Hardin, Garrett (1968), ‘Tragedy of the Commons’, Science, 162, 1243-8.
Harrison, Fred (1983), The Power in the Land, New York: Universe Books.
Hayek, Friedrich A. (1960), The Constitution of Liberty, South Bend: Gate¬
way Editions.
Hayek, Friedrich A. (1973), Law, Legislation, and Liberty, vol. I, Chicago:
University of Chicago Press.
 Bibliography 305

Hayek, Friedrich A. (1990), Denationalisation of Money: The Argument Re¬

fined, 3rd edn, London: Institute of Economic Affairs.
Hazlitt, Henry (1959), The Failure of the ‘New Economics’: An Analysis of
the Keynesian Fallacies, Princeton: Van Nostrand.
Hirschman, Albert O. (1970), Exit, Voice, and Loyalty, Cambridge: Harvard
University Press.
Hodgkiss, F. T. (1942), ‘Raffles of Singapore,’ The Freeman, 5 (5) (March),
106-7.
Hoyt, Homer (1933), One Hundred Years of Land Value in Chicago, reprinted
NY: Arno Press and The New York Times, 1970.
Kirzner, Israel M. (1987), ‘Austrian School of Economics,’ in John Eatwell,
Murray Milgate, and Peter Newman (eds), The New Palgrave: A Diction¬
ary of Economics, London: Macmillan Press, pp. 145-51.
Laffer, Arthur B. (1979), ‘Statement Prepared for the Joint Economic Com¬
mittee, May 20,’ reprinted in Arthur B. Laffer and Jan P. Seymour (eds),
The Economics of the Tax Revolt, New York: Harcourt Brace Jovanovich,
pp. 75-9.
Littlechild, Stephen (1978), The Fallacy of the Mixed Economy, London:
Institute of Economic Affairs.
Locke, John (1690, 1947), Two Treatises of Government, Thomas I. Cook
(ed.), New York: Hafner Press. Includes ‘First Treatise of Government’,
pp. 3-118, and ‘Second Treatise of Civil Government’, pp. 119-247.
McClelland, David (1976), The Achieving Society, New York: Irvington Pub¬
lishers.
Menger, Carl (1871, 1976), Principles of Economics, James Dingwall and
Bert Hoselitz (trans.), New York: New York University Press.
Mises, Ludwig von (1924, 1980), The Theory of Money and Credit, 2nd
edition. H.E. Batson, (trans.). Indianapolis: Liberty Classics.
Mises, Ludwig von (1949, 1966), Human Action, New Haven: Yale Univer¬
sity Press and Henry Regnery Company.
Mixon, Wilson, Jr. (1996), Private Means, Public Ends: Voluntarism vs.
Coercion, Irvington-on-Hudson: Foundation for Economic Education.
Mueller, D. (1985), The ‘Virginia School’and Public Choice, Fairfax: Center
for Study of Public Choice.
Neill, A.S. (1960), Summerhill: A Radical Approach to Child Rearing, New
York: Hart Publishing.
Nock, Albert J. (1935), Our Enemy the State, reprinted, Caldwell, ID: Caxton
Printers.
Noyes, Richard (ed.) (1991), Now the Synthesis: Capitalism, Socialism, and
the New Social Contract, New York: Holmes & Meier.
Oates, Wallace E. (1988), ‘On the Measurement of Congestion in the Provi-
306 Dictionary offree-market economics

sion of Local Public Goods,’ Journal of Urban Economics, 24 (July), 85-

94.
Oppenheimer, Franz (1914, 1975), The State, New York: Free Life Editions.
Oppenheimer, Franz (1917, 1997), ‘Collective and Private Ownership of
Land,’ in Land Tenure in Palestine, The Hague: Jewish National Fund, pp.
5-18. Reprinted in Foldvary, Fred (1997), ‘Franz Oppenheimer, the state,
and land’, in Kenneth C. Wenzer (ed.), An Anthology of Single Land Tax
Thought, Rochester, NY: University of Rochester Press, pp. 414—34.
Oppenheimer, Franz (1927), ‘The Idolatry of the State,’ Review of Nations, 2
(February), 13-26.
O’Quinn, Robert P. (1991), ‘The Americans with Disabilities Act: Time for
Amendments,’ CATO policy analysis no. 158.
Panayotou, Theodore (1993), Green Markets, San Francisco: Institute for
Contemporary Studies.
Reed, Terrance G. (1992), ‘American Forfeiture Law: Property Owners Meet
the Prosecutor,’ CATO policy analysis no. 179.
Rothbard, Murray N. (1963, 1975), America’s Great Depression, Kansas
City: Sheed and Ward.
Rowley, Charles, and Michelle Vachris (1996), ‘The Virginia school of politi¬
cal economy,’ in Fred E. Foldvary (ed.), Beyond Neoclassical Economics,
Cheltenham, UK: Edward Elgar, pp. 61-82.
Ryan, Christopher K. (1987), Harry Gunnison Brown: Economist, Boulder:
Westview Press.
Samuelson, Paul A. (1954), ‘The Pure Theory of Public Expenditure,’ Review
of Economics and Statistics, 36 (4) (November), 387-9.
Schumpeter, Joseph A. (1954, 1986), History of Economic Analysis, Eliza¬
beth B. Schumpeter (ed.), New York: Oxford University Press.
Schumpeter, Joseph A. (1976), Capitalism, Socialism and Democracy, 5th
edn, New York: Harper.
Selgin, George A. (1988), The Theory of Free Banking, Totowa, NJ: Rowman
& Littlefield, and Washington, DC: CATO Institute.
Smith, Adam (1790, 1982), The Theory of Moral Sentiments, Indianapolis:
Liberty Classics.
Smith, Adam (1978, 1982), Lectures on Jurisprudence, Indianapolis: Liberty
Classics.
Smith, Adam (1776, 1976), The Wealth of Nations, Vols 1 and 2, Edwin
Canaan (ed.). Chicago: University of Chicago Press.
Smith, Gerald Alonzo (1996), ‘Humanist economics: from homo economicus
to homo sapiens,’ in Fred E. Foldvary (ed.), Beyond Neoclassical Econom¬
ics, Cheltenham, UK: Edward Elgar, pp. 83-99.
Sowell, Thomas (1974), Classical Economics Reconsidered, Princeton:
Princeton University Press.
 Bibliography 307

Stigler, George, and Becker, Gary (1977), ‘De Gustibus Non Est Disputandum,’
American Economic Review, 67 (March), 76-90.
Tiebout, Charles M. (1956), ‘A Pure Theory of Local Expenditure,’ Journal
of Political Economy, 64,416-24.
Tideman, T. Nicolaus, and Tullock, Gordon (1976), ‘A New and Superior
Process for Making Social Choices,’ Journal of Political Economy, 84 (6)
(December), 1145-59.
Vaughn, Karen I. (1980), John Locke, Economist and Social Scientist, Chi¬
cago: University of Chicago Press.
Wagner, Richard (ed.) (1991), Charging for Government, London: Routledge.
Walras, Leon (1896), Studies in Social Economics, Mason Gaffney, Lausanne:
F. Rouge and Co. (unpublished trans., 1967).
Wanniski, Jude (1978), The Way the World Works: How Economies Fail and
Succeed, New York: Basic Books.
Whalen, Charles (1996), ‘The institutional approach to political economy,’ in
Fred E. Foldvary (ed.). Beyond Neoclassical Economics, Cheltenham, UK:
Edward Elgar, pp. 83-99.
White, Lawrence (1984), Free Banking in Britain: Theory, Experience and
Debate, 1800-1845, New York: Cambridge University Press.
Wicksell, Knut (1958), ‘A New Principle of Just Taxation,’ in R.A. Musgrave
and Alan T. Peacock (eds), Classics in the Theory of Public Finance,
London: Macmillan & Co., pp. 72-116.
Yolton, John W. (1993), A Locke Dictionary, Cambridge, USA, and Oxford,
UK: Blackwell.
 Fred E. Foldvary is Adjunct Professor of
Business at the School of Management, John F.
Kennedy University, California, USA.

LEARNING CENTRE
hVERsrry of Gloucestershire

703 5 66 153
S0.1Z203
Pol
DovvaJTcv. |6£
 Also from Edward Elgar

Public Goods and Private Communities

The Market Provision of Social Services
Fred E. Foldvary, John F. Kennedy University, California, USA

‘Foldvary has written an admirably substantive work. It conveys much

fresh and enthusiastic thinking, and it reports solid research on
specific projects. His work stands in admirable contrast with several
“Austrian” writings that paw away, abstractly and ineffectually, at the
very concepts of public goods and market failure and even of
externalities.’
- Leland B. Yeager, Auburn University, Alabama, USA

Beyond Neoclassical Economics

Heterodox Approaches to Economic Theory
Edited by Fred E. Foldvary, John F. Kennedy University, California, USA

‘... should be required reading for graduate students. A welcome

addition to the ongoing debate on the future development of
economics.’
- Douglas Mair, The Economicfournal

Post-Socialist Political Economy

Selected Essays
James M. Buchanan, George Mason University, Virginia, USA
This book, by the 1986 Nobel Prize winner, presents a critical
assessment of the political and social order in the post-revolutionary
decade of the 1990s in both the transitional economies and Western
welfare states confronting fiscal crises. As we enter the new post¬
socialist century, James M. Buchanan argues that we need to think and
act on the premise that the future is uncertain.

EDWARD ELGAR PUBLISHING

Glensanda House, Montpellier Parade ISBN 1-85898-432-7

Cheltenham, Glos, GL50 1UA, UK
Tel: +44 (0)1242 226934 Fax: +44 (0)1242 262111
Email: [email protected]

6 Market Street, Northampton, MA 01060, USA

Tel: +1 413 584 5551 Fax: +1 413 584 9933
Email: [email protected]

http://www.e-elgar.co.uk 9 781858 984322