The study of financial markets making use of the ideas of investor sentiment and limited arbitrage. Research of this kind examines irrationality in markets.
An indifference curve.
A report of US regional economic conditions published by the federal reserve eight times a year. It is based on anecdotal evidence collected by each of the twelve Federal District Banks. The economic state of different industries and of the labour market is described.
This asserts that the value of a state in a probability distribution equals the expected value of successor states. This equation is used in dynamic programming to establish the greatest return over the long run.
bell-wether of the economy
A sector that indicates the future of a whole national economy. The advertising industry is often in this role as changes in advertising expenditure precede an upturn or downturn in the economy.
A stock exchange security regarded as representative of the state of the stock market as a whole. It is usually the stock of one of the largest companies.
below the line
1 In the UK budgets of 1947-63 receipts and expenditure relating to borrowed funds or the servicing of the national debt.
2 For a firm, expenditure on sales promotion other than on direct advertising.
3 In the UK balance of payments, official financing.
benefit approach to taxation
The levying of taxation so that the burden of taxation matches the amount of public goods received by each taxpayer. The principle was first enunciated by Thomas Hobbes (1588-1679), Hugo Grotius (1583-1645) and John Locke (1632-1704). in essence taxpayers and a government exchange taxes for services. Since public goods are collectively provided and taxes are individually paid, a taxation system on this basis will always be criticized. For example, it would be difficult to allocate charges for the maintenance of external defence to individuals in proportion to their consumption. Until governments know more of the preferences of taxpayers it will be impossible to apply the principle exactly.
A tax linked to a service provided by government, e.g. a bridge toll, or a leisure centre admission charge. The principle followed is ‘he who benefits should pay’.
customs union of Belgium, the Netherlands and Luxembourg. In 1943, the three countries signed a monetary convention for controlling payments between them after the Second World War. In 1944, they agreed to a customs union to come into force in 1948: this abolished tariffs within Benelux and set a common external tariff. The aims of Benelux include the free movement of goods and factors of production, the co-ordination of economic, financial and social policies to attain a satisfactory employment level and the highest standard of living, and a joint trade policy.
Bentham, Jeremy, 1748-1832
Legal philosopher and writer on many economic, constitutional and prison reform issues; founder of the UK utilitarian school of philosophy. Educated at Westminster school, Queen’s college, oxford (which he hated, leading him to inspire the opening of university college London in 1828), and Lincoln’s Inn, London, where he read for the English Bar. He is most famous for his exposition of utilitarianism, the principle that there should be a ‘felicific calculus’, to see if a course of action promotes the greatest happiness for the greatest number. This inspired jevons in his subjective value theory of exchange. John Stuart mill, who was much under Bentham’s influence in his youth, rebelled against the cold rationality of utilitarianism.
Bentham studied political economy from 1786 to 1804, between the ages of 38 and 56, when he was at his intellectual peak. A reading of smith’s The Wealth of Nations was decisive for his economic thinking, although he had an earlier interest in unemployment, With an atomistic view of social life, it was not surprising that he used induction as his principal approach and only resorted to mathematics as a convenient method of expression. His first work on economics, Defence of Usury (1787), was inspired by a rumour that the legal maximum for interest was to fall from 5 per cent to 4 per cent: Bentham recommended that there should be free determination of interest rates. Although the work did not advance a theory of the rate of interest, it was nevertheless widely praised in the UK, France and the USA.
He was against artificial attempts to increase trade, e.g. by having colonies, because he believed that trade is limited by capital. His Manual of Political Economy (1793-5) dealt with international trade. He took to public finance in Supply without Burthen (1795) in which he combined a minimal view of the state with a new proposal to raise the small amount of taxation still necessary – the public auction of all properties in vacant possession because no relatives were alive to inherit. Further, in A Plan for Augmentation of the Revenue (1794-5), he proposed a reduction in the national debt by the use of government-run lotteries and government dealings in life annuities. His Proposal for the Circulation of a New Species of Paper Currency (1795-6) argued that a government monopoly on the issue of paper currency is a cheaper form of government borrowing than the issue of interest-bearing bills. Circulating Annuities (1800) also suggested a new type of paper currency, and in True Alarm (1801) he contributed to the raging bullionist controversy of the period by tracing the effects of excessive country bank issues on prices, as well as enunciating a theory of value based on utility. Of the Balance of Trade (1801) attacked mercantilism, Defence of a Maximum (1801) advocated price controls for grain and Institute of Political Economy (1801-4) set out his views on the role and limits of government policy, as well as discussing whether political economy is an art or a science.
Bergson, Abram, 1914
US economist educated at Johns Hopkins and Harvard Universities. After wartime experience from 1942 to 1945 as chief of the Russian Economic subdivision of the US Office of Strategic Services, he returned to academic life and has been a professor at Harvard since 1956. In 1938, he created the new welfare economics by asserting that a social welfare function can be established by attaching weights to each individual’s welfare function: this rejected the earlier cardinal utility approach. Also, he introduced the distinction between ‘efficiency’ and ‘equity’, applying it to an analysis of the individual income effects of economic change. He has applied his welfare analysis to many areas of economics, including market socialism and monopoly. Also, he became a leading US authority on the soviet economy.
Bergson social welfare function
The welfare of a community in a given time period expressed as a function of the amounts of consumer goods produced, the amounts of labour and non-labour factor inputs and the production unit for which the work is performed. bergson, in his approach, intended to challenge the view that a community’s welfare is the sum of individuals’ welfare.
The hypothesis, named after Daniel Bernoulli (1700-82), that in a gamble an individual will participate according to the personal utilities he or she attaches to the probabilities. This approach is prominent in the economics of risk and uncertainty.
Bertrand duopoly model
A development of cournot’s duopoly model which uses price adjustments to bring about an equilibrium. At equilibrium, neither firm would benefit from charging a different price so the price becomes zero.
best available technology
A technique of production which reduces pollution levels by using the cleanest available method.
The ratio of a change in the return on a security to a change in the returns on all securities of a particular stock market. Beta is unity if the changes in the individual share and in the whole of the market are the same. Betas are positive if the individual and market returns move in the same direction, and negative if they move in opposite directions.
Five hundred or so stocks and shares which are the most actively traded on the stock exchange automated quotation system after alpha stocks.
Beveridge, William Henry, 1879-1963
In many senses, the founder of the UK welfare state. After an education at Bal-liol College, Oxford, he was a law Fellow at University College, Oxford from 1902 to 1909, as well as Sub-warden of Toynbee Hall, London, from 1903 to 1905, where he investigated casual labour and unemployment in the London docks. As Director of Labour Exchanges at the UK Board of Trade in 1909-15 he created a national system of employment exchanges. In 1919 as Permanent Secretary of the Ministry of Food he devised a national food rationing scheme. From 1919 to 1937 as Director of the London School of Economics he expanded the range of its activities, attracting scholars such as hayek and hicks, as well as encouraging empirical studies. Subsequently he was master of University College, Oxford, from 1937 to 1944, and chairman of the committee which drew up the Beveridge Report on social security in 1942, which was expanded into the celebrated Full Employment in a Free Society (1944), a report which laid the intellectual foundations for many post-war UK welfare policies.
An offer of a price as in an auction or in a tender.
Estimation of consumers’ valuation of benefits using questionnaires.
The selling price for unit trust units or shares of companies.
The amount of money a household will offer a landowner for space to provide a particular level of utility.
A proposed means of payment based on surveys to make a contingent valuation, e.g. the amount of cash charged to obtain a permit to hunt wildlife.
The deregulation of the London Stock Exchange on 27 october 1986 which involved the ending of minimum dealing commissions and the distinction between dealers and jobbers. Under the fierce gale of competition, smaller firms found it difficult to survive and even the larger firms withdrew from market-making by 1990. Firms anxious to be ahead of their rivals offered grossly inflated salaries to prospective staff and the best of existing staff, making the volume of consequent redundancies greater.
The seeds of the recent changes were sown in the early 1970s when UK competition policy was extended to cover the provision of services as well as goods. The present changes were forced on the London Stock Exchange when, to avoid investigation under the restrictive trade practices legislation, it agreed in 1983 to abolish minimum commissions within three years. The abolition of UK exchange controls in 1979 made internationalization of the London market inevitable. The first stage of these changes was on 1 March 1986 when financial institutions such as banks and insurance companies were allowed to acquire holdings in firms of stockbrokers and stockjobbers. In the USA the equivalent set of changes took place on 1 May 1975 and the consequences of those were the formation of many new financial conglomerates.
Three years of preparation enabled London to adjust quickly to the new regime. The high volume of trading in the early months made it easier for firms to adjust to lower commissions and to cope with the huge costs of setting up new dealing systems. Instead of the old practice of charging clients on the basis of price plus commission, the majority of deals are quoted at prices net of commission. The next step will be to use the London system to enable brokers throughout the world to quote prices to each other. In the period 1986-9, the volume of stocks traded in London fell by a third and the number of jobs fell by 35,000, but much of this decline was the consequence of the black monday stock market crash.
The nickname for the New York Stock Exchange situated at 11 Wall Street and established in 1792. It dominates world securities markets by conducting 60 percent of world trading and 85 per cent of US trades.
A measure of the purchasing power of different currencies using the prices of hamburgers sold by the international food chain McDonald’s. This was devised by The Economist of London and has been calculated since 1986. This index, based on the theory of purchasing power parity, is calculated by dividing the price of a hamburger in the local currency by its price in US dollars. This ratio, the implied PPP, is compared with the actual exchange rate to determine the extent of a currency’s over- or undervaluation relative to the US dollar. The BigMac was chosen for comparative purposes as it is a popular fast food item produced everywhere to the same recipe.
A theory of simultaneous economic development in several sectors. Rosenstein-Rodan asserted that for economic development to succeed there should be, as a minimum, several large investment projects in different industries in order to secure increasing returns to scale from indivisibilities in production. It was hoped that the scale of such development would reduce divergences between private and social products. However, the lack of resources of many Third World countries made it unlikely that so ambitious a scheme would be implemented.
Aid flowing between a particular donor country and a particular recipient; often tied aid.
A market consisting of a monopolist and a monopsonist. In many national economies there are examples of this form of monopoly in the public sector, e.g. when a state education employer faces a single teachers’ union in the labour market. To analyse bilateral monopoly, as is the case with duopoly, the interaction of both sides, buyer and seller, has to be considered.
1 A short-term monetary asset.
2 An invoice stating the amount owed for the supply of goods or services.
bill of exchange
A short-term financial instrument, usually with a life of ninety days, which is used to finance foreign trade; in the nineteenth century it was widely used for short-term domestic borrowing. The Bills of Exchange Act (UK) 1882 defined it as ‘an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer’.
The use of two metals, usually gold and silver, in a fixed ratio as the standard of value and ultimate means of payment. This currency system met with the approval of Adam smith. The arguments for bimetallism were that each metal would be more stable in value if connected with the other, that the low production levels of gold caused falling prices and trade recession, and that fixed exchange rates between countries on a pure gold standard and those on a pure silver standard would be possible. The system was practised in the nineteenth century in the USA and in Europe in the Latin Union (a monetary alliance of France, Belgium, switzerland, italy, Greece and Romania formed in 1865 and abandoned in 1873 as a consequence of the large amount of Nevada silver and Germany’s conversion from a silver to a gold standard).
bimodal frequency curve
A frequency curve with two maxima.
An economy with many personal incomes arising from both labour and capital. This occurs because of widespread ownership of financial capital. Despite economies becoming capital intensive, this form of organization enables a high proportion of a population to share in rising incomes. Wider dispersion of wealth could promote social justice, democracy, efficiency and economic growth.
A two-part tariff consisting of a fixed payment that allows a consumer access to the service and variable payments related to the use made of the service, e.g. a telephone rental and telephone call charges.
1 The application of sociobiology to economics, first suggested by becker in 1979. It is argued that competitiveness and self-interest, not selfishness and collectivism, when built into human genes produce an effective economic system of the capitalist type.
2 A study of economic behaviour in its natural environment. Herbert Spencer, 1820-1903, an inspiration for Charles Darwin, 1809-82, produced an evolutionary account of society. Marshall stated that in the early stages of tackling an economic problem a mechanical approach should be used but later a biological form of analysis. This branch of economics has flourished because of an increased awareness of environmental economics.
3 The economics of renewable natural resources.
A method of trading in small quantities which involves buyers writing their bids on one side of the blackboard and sellers their offers on the other side. When a deal is agreed, it is recorded on the sales panel as a binding future contract. The Chicago Mercantile Exchange deals this way in agricultural commodities. Under heavy trading, this method is abandoned.
A security issued by a black-dominated company quoted on the Johannesburg Stock Exchange.
The unofficial, and often illegal, part of a national economy. In it are tax evaders and illegal producers of goods and services.
Companies participating in this sector falsify their accounts by omissions or inaccurate entries. Rich and poor, capitalist and socialist, economies all have black sectors. These sectors are prominent in India, Portugal, Italy, as well as the USA and the UK. The large black economy in Italy could amount to 25 per cent of gross domestic product. Methods of measuring the black economy include a comparison of national income with national expenditure (a method flawed through errors in both of these aggregates) and the use of household expenditure surveys to calculate undisclosed incomes through discrepancies between household income and spending. Also, changes in the ratio of cash transactions to total transactions indicate that many prefer the less detectable form of trading central to the black economy. If tax authorities succeeded in discovering these activities, they would risk stopping this form of work altogether.
Land virtually destroyed by heavy industrial use.
1 Coal (originally).
2 Oil when it became a more important source of energy than coal.
A company which makes a hostile takeover bid for another firm.
A worker who reduces the effectiveness of a strike by continuing to work during a period of an industrial dispute. Police protection has often been needed for such dissenters.
An unauthorized market with transactions contrary to governmental regulations. Markets of this kind are often found when there are price or exchange controls or the restriction of trading to a list of authorized dealers. Soviet-type economies were characterized by these markets.
Stock market crash in New York and London of 19 October 1987. In London the FTSE index dropped by 500 points.
Black-Scholes option pricing model
A formula for calculating the value of a call or put european option. This form of pricing takes into account the stock price, exercise price, risk-free interest rate, time to expiry and the standard deviation of the stock return.
The creed of the UK government led by Tony Blair from May 1997. It continued the public expenditure, education, privatization and trade union policies of the previous conservative governments but also adopted a socialist ‘tax and spend’ policy with increased spending delayed until the national debt was reduced. Other aspects of this doctrine are the excessive targeting of most government-funded activities, economic regulation and government centralization characteristic of previous socialist regimes. Also called New Labour and the Third Way.
Blaug, Mark, 1927
Leading historian of economic thought, education economist and biographer of the economics profession. Born in the Netherlands and educated at columbia University. After working as a statistician at the US Department of Labor, he was assistant professor of economics at Yale University (1954-62) before becoming professor of the Economics of Education at the University of London Institute of Education; since 1984 he has held chairs in England at Buckingham and Exeter and in the Netherlands at Rotterdam. He has written extensively on both human capital theory and labour forecasting and moved from an early interest in the poor Laws and Ricardian economics to wide-ranging writing and editing of major works on the history of economic thought.