Glossary III for the book Understanding the Global Economy

appendix c

Understanding the
Global Economy
Comprensión de
economía mundial

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Kaldor, Nicholas: Baron Kaldor (Budapest, 1908-1986 Cambridgeshire) a foremost Cambridge economist in the postwar period. He developed the famous compensation criteria called the Kaldor-Hicks efficiency for welfare comparisons (1939); he derived the famous cobweb model. Kaldor was educated in Budapest, Berlin and at the London School of Economics, where he became a lecturer. After service in WWII, he held a senior post with the Economic Commission for Europe. By 1963, he was also an advisor to Labor Party Governments of the UK and several other countries producing some of the earliest memoranda regarding the creation of value added tax. In 1966, he became Professor of Economics at the University of Cambridge. In 1974, Kaldor was made a life peer as Baron Kaldor, of Newnham in the City of Cambridge. Kaldor's facts are six statements about economic growth that Kaldor proposed in 1961:

  1. Output per worker grows at a rate that does not diminish.
  2. Capital per worker grows over time.
  3. The rate of return to capital is constant.
  4. The capital/output ratio is roughly constant.
  5. The share of capital and labor in net income are nearly constant.
  6. Growth rates differ across countries.
The technical progress function is a concept Nicholas Kaldor conceived to explain the rate of growth of labor productivity as a measure of technical progress. The function is described by the following statements:

Keynesian economics: in which levels of output and employment in the economy are by set by aggregate demand as its measure for economic functionality. In a reversal of Say's law, Keynes in essence argued that demand creates its own supply, up to the limit set by full employment. In classical economic theory (Keynes' term for the economics prior to his General Theory and that of Arthur Pigou) adjustments in prices would automatically make demand tend to the full employment level. Keynes, pointing to the sharp fall in employment and output in the early 1930s, argued that whatever the theory, this process of self-correction had not happened.

In neo-classical theory, the two main costs for business are labor and money (such as credit or finance). When there is more labor than demand for it, wages fall until hiring began again. If there is too much saving and not enough consumption, then interest rates fall until people either cut their savings or started borrowing money.

Labor: 1. Labor as manual, semi-skilled and skilled work is physical work done by people, in contrast to that done by machines and also to that done by working animals. It is, most literally, the work done with the hands: manual as work done with any of the muscles and bones of the body. Pay schemes include piecemeal, hour wage, per diem, salary and negotiable contract. 2. Labor as the employed and unemployed work-pool of workers as manual, semi-skilled and skilled labor.

Labor power: The central productive force of human beings as the ability to do work, which exists in all societies. The conditions in which labor power is traded or combined with the means of production to produce goods and services vary among cultures considerably.

Labor rights: workers' rights: a group of legal rights and claimed human rights that pertain to labor relations between workers and their employers, usually secured under labor and employment law. In general, these debates about rights have to do with negotiating workers' pay, benefits and safe working conditions. Central to these rights is the right to unionize. Unions take advantage of collective bargaining and industrial action to increase their members' wages and otherwise change their working situation. The labor movement at first focused on the right to unionize, but attention has since shifted beyond that first step.

Critics of the labor rights movement assert that regulation promoted by labor rights activists may limit opportunities for work. In the United States, critics objected to unions establishing closed shops, situations where employers could only hire union members. The Taft-Hartley Act banned the closed shop but allowed the less restrictive union shop. Taft-Hartley also allowed states to pass right-to-work laws, which require an open shop where a worker's employment is not affected by his union membership. Proponents of right to work legislation claim that workers have the right to work whether or not they join a union. Labor counters that the open shop leads to a free rider problem. Identified by the International Labor Organization: ILO in its Declaration of the Fundamental Principles and Rights at Work, core labor standards are widely recognized to be of particular importance. They are universally applicable, regardless of whether the relevant conventions have been ratified, the level of development of a country or cultural values. These standards are composed of qualitative, not quantitative standards and don’t establish a particular level of working conditions, wages or health and safety standards. They are not intended to undermine the comparative advantage that developing countries may hold. Core labor standards are important human rights and are recognized in widely ratified human rights instruments including the Convention on the Rights of the Child (CROC), the most widely ratified human rights treaty with 193 parties and the ICCPR with 160 parties. The core labor standards are the:

Due to domestic constraints, few ILO member countries have ratified all of these conventions. However, as these rights are also recognized in the UDHR and form a part of customary international law, they are committed to respect these rights. A significant question that remains: How does the incorporation of these core labor rights fit into the mechanisms of the World Trade Organization?

Labor theory of value: (LTV) explains how the values of commodities are related to the labor needed to produce them. The reports about labor value have a common element that unifies them; the value of an exchangeable good or service is, or tends to be, or can be considered as, or is to be measured as equal or proportional to the amount of labor required to produce it. That would include the labor required to extract raw resource material and produce machinery used in production.

Different labor theories of value split classical economists through to the mid 19th century. LTV played a major role in the research of Smith and Ricardo. Since that time, it most often relates to the tenets of Marxian economics. However, modern mainstream economics replaces it with the approach of marginal utility. Using mainstream assumptions, the marginal utility of a good or service is the established quantified increase in utility obtained by consuming or using one more unit of that good or service. These concepts emerged from economist's work to explain the establishment of price. The Austrian economic term grenznutzen: border use: marginal utility became part of the explanatory lexicon.

Under standard conceptions, an object may have different marginal utilities for different people; it may reflect different preferences or individual circumstances. The term marginal change refers to as large a change as the smallest relevant division. For ease of control, neoclassical analysis often assumes that goods and services are continuously divisible. In such context, a marginal change may be minute or have a limit; even the smallest relevant division may be quite large.

Laissez-faire: Nominal government intervention as transactions between private parties have the least monitoring, regulation, taxes, tariffs and monopoly restrictions. Laissez-faire capitalism is a system of minimal government and maximum economic individualism. Companies achieve the legal status of a person with the same rights, although not necessarily the same responsibilities, obligations and accountability.

language-games: The linguist Wittgenstein identified forms of language that are simpler than the entirety of a language itself, consisting of language and the actions into which it is woven and connected by a family-like resemblance. The concept was intended to bring into prominence the fact that the speaking of language is part of an activity, or a form of life. Language-game describes 1) fictional examples of language use that are simpler than our own everyday language, 2) simple uses of language with which children are first taught language as training in language, 3) specific regions of our language with their own grammars and relations to other language-games, 4) all of a natural language consists of a family of language-games.

The meanings are not separated from each other by sharp boundaries, but blend into one another, as a family-like resemblance. The concept is based on the following analogy: The rules of language (grammar) are analogous to the rules of games. Meaning something in language is thus analogous to making a move in a game. The analogy between a language and a game brings out the fact that only in the various and multiform activities of human life do words have meaning. The concept likens language to game with respect for both language and games as useful and vital human practice.

Liberation theology: a movement in Christian theology that interprets the teachings of Jesus Christ in terms of liberation from unjust economic, political, or social conditions. Liberation theology has been described by proponents as an interpretation of Christian faith through the poor's suffering, their struggle and hope and a critique of society and the Catholic faith and Christianity through the eyes of the poor. Its detractors view it as Christianity influenced by Marxism and communism.

Although liberation theology has grown into an international and inter-denominational movement, it began as a movement within the Catholic Church in Latin America in the 1950s–1960s. It arose as a moral reaction to the poverty caused by social injustice in that region. The term was conceived in 1971 by the Peruvian priest Gustavo Gutiérrez who wrote one of the movement's seminal books, A Theology of Liberation. Other noted exponents are Leonardo Boff of Brazil, Jon Sobrino of El Salvador and Juan Luis Segundo of Uruguay.

Its influence diminished after proponents using Marxist concepts were admonished by the Vatican's Congregation for the Doctrine of the Faith in 1984 and 1986. The Vatican criticized certain strains of it for focusing on institutional dimensions of sin to the exclusion of the individual and for describing the church hierarchy as members of the privileged class.

Macroeconomics: the branch of economics that deals with the performance, structure, behavior and decision-making of an entire economy as regional, national, or the global economy. Macroeconomics and microeconomics, are the two most general sub-fields of economics. Macroeconomists study aggregated indicators such as GDP, unemployment rates and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers and how their behavior determines prices and quantities in specific markets.

While macroeconomics is a broad field of study, there are two areas of research that are characteristic of the discipline: 1) the attempt to understand the causes and consequences of short-run fluctuations in national income as the business cycle and 2) the attempt to understand the determinants of long-run economic growth as increases in national income. Therefore, macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.

Maquiladora: Spanish: work town, corprate plantation: The name for the harsh corporate factory towns in Mexico that import materials and equipment on a duty-free, tariff-free basis for assembly or manufacturing and then re-exports the assembled product usually back to the originating country. (The term in Spanish refers to the practice of millers charging a maquila: a miller's portion for processing other people's grain.) During the last half of the 1960s, maquiladora industries boomed and by 1985, had become Mexico's second largest source of income from foreign exports, behind oil. Since 1973, maquiladoras have accounted for half of Mexico's export assembly. Between 1995 and 2000, exports of assembled products in Mexico tripled: the rate of the industry's growth to one new factory per day.

By the late 20th century, the industry accounted for 25% of Mexico's GDP and 17% of total Mexican employment. But, profits generated from maquiladoras are sent back to the United States, or other investor-based countries. Thus, maquiladoras do not promote direct economic development within Mexico.

Globalization has contributed to the competition and advent of low-cost offshore assembly in places like Taiwan, China and other countries in Central America, so maquiladoras in Mexico have declined since 2000. According to federal sources, about 529 maquiladoras shut down and investment in assembly plants decreased by 8.2% in 2002. Despite the decline, over 3,000 maquiladoras along the 2,000 mile-long U.S. Mexico border still employ about one million workers and import more than $51 billion in supplies into Mexico. As of 2010, maquiladoras still account for 45% of Mexico's exports.

China's entrance into the WTO and offering much cheaper wages, better investment incentives and infrastructure, many multinational companies closed their maquiladora operations and moved to China. While the maquila industry has recovered to some extent, it still faces stiff competition from Chinese competitors. One of the main goals of the Border Industrialization Program was to attract foreign investment. To do that, Mexican labor has to remain cheap and competitive with other major export countries to keep the U.S. firms operating within the Mexican assembly plants. Therefore, to keep production high and costs low, maquiladoras use harsh working environments, which include low wages, forced overtime and violations of international child labor laws.

Mexican women earn roughly one-sixth of the U.S. hourly wage-rate, about one-third that of Mexican men. Thus, the income a worker makes in a maquiladora is rarely enough to support a family. Low wages are a main reason for foreign investment; however, some management personnel condone low wages in maquiladoras and argue that the cost of living in Mexico is lower than in other countries. Employee turnover goes up to 80% in some maquiladoras, due to stress and other threats to health. Mexico does have an advanced system of labor laws, but enforcement of the laws within the maquiladora industry is often lax. While most people who were employed in the original bracero: guest worker program were men, the majority of maquiladora employees are women, the preferred labor because women will work for cheaper wages and poor working conditions.

Some maquiladora operators admit a preference for women because women often display more patience and higher dexterity in performing the standardized and repetitive work of an assembly plant. Therefore, the maquila industry has, based on these conditions, been accused of the sexual exploitation of women. On the other hand, opponents of this allegation argue that women are paid higher wages working in a maquiladora than they commonly would in other forms of employment in northern Mexico. In addition, some contend that maquiladora employment allows women to make their own money and, thus, become more independent, while teaching them new skills and giving more opportunities that they may not otherwise acquire.

The maquiladora operators discriminate against child-bearing-aged women to keep costs down due to Mexico's labor laws, which have extensive maternity requirements. They often demand pregnancy tests as a prerequisite to employment or insist that female workers use birth control. If a woman is found to be pregnant, it will likely hinder her chances of being hired and if an existing worker becomes pregnant, she may be terminated. Visit: Coalition for Justice in the Maquiladora (links galore!)

Marginalism: the use of secondary concepts in economic theory. It is associated with arguments concerning changes in the quantitative consumption of a good or of a service, as opposed to some notion of the over-all significance of that class of good or service, or of some total quantity of it.The central concept of marginalism per se is that of marginal utility. However, marginalists following the lead of Alfred Marshall were further dependent upon the concept of marginal physical productivity in their explanation of cost. In addition, marginalists who relied on the neoclassical tradition that emerged from British marginalism often abandoned the concept of utility and gave marginal rates of substitution a more fundamental role in analysis. Marginalism is now an integral part of mainstream economic theory.

Market forcesp 31: The pressures such as contracts, competition/cooperation, supply/demand from buyers and sellers in a market, rather than those coming from a government planner or from regulation. Forces of demand and supply represent the aggregate influence of self-interested buyers and sellers on price and quantity of the goods and services offered in a market. In general, an excess demand causes the price and the quantity of a supply to rise. In general, excess demand causes prices and quantity of supply to rise and excess supply causes them to fall.

Some economists argue that 1) resources are allocated most efficiently when producers are able to respond to consumer demand without intervention from so-called distortions such as governments and trade unions and 2) the search for profits as competition between firms and individuals provide sufficient incentives for efficient production: monetarism. Critics of this view suggest that market forces alone may not be efficient because they fail to consider social costs and benefits and may also fail to provide for the needs of the less well off, since private firms aiming to make a profit respond to the ability to pay.

Marshall Plan: the U.S. and allied scheme to rebuild Europe and make a strong basis for the allied countries of Europe to out-compete communism after WWII. The reconstruction plan formed at a meeting of the participating European states in July 1947. The Plan offered the same aid to Japan and its allies if they would make political reform and accept certain external controls. The Soviet Union denounced this proposal with Vyacheslav Molotov describing the plan as dollar imperialism.

The Plan was in operation for four years beginning in July 1947. During that period, the United States gave 13 billion dollars in economic and technical assistance to help the post-war European countries that had joined in the Organization for European Economic Cooperation: OEEC. By the time the Plan was complete, the economy of every participant state, except of Germany, had grown well past pre-war levels. Over the next two decades, many regions of Western Europe would enjoy unprecedented growth and prosperity.

The Marshall Plan has long been seen as one of the first elements of European integration; it erased tariff trade barriers and set up institutions to coordinate the economy on a continental level. An intended consequence was the systematic adoption of U.S. managerial techniques. In recent years, however, there has been a shift toward hiring more male workers due to labor shortages and the use of the U.S. managerial techniques.

Mass production: (MP) the repetitive flow production, or a series of production of large amounts of standardized products on a line. MP was popularized by Henry Ford in the early 20th century, in Ford's Model T. MP uses moving tracks or conveyor belts to move product parts to workers, who perform simple repetitive tasks to permit high rates of per worker production, which yields a high-volume manufacture of low-priced finished goods. MP is capital intensive using a high proportion of machinery in relation to workers. With a lower labor cost and a faster rate of production, revenue increases as expenditure decreases.

However, the machinery needed to set up an MP line has a high R&D and start-up cost. Thus, the assurance of a successful product must exist so that the company will recoup its investment. Thus, MP is ideal for large, homogenous populations of consumers whose demand would satisfy the long production runs, which MP requires. Given a few other factors, MP prevailed first in the United States and, then escalated elsewhere.

Mass production versus craftsmanship: The artisan-ship of MP is in the workbench itself, not the training of the worker. Jigs and gauge blocks ensure that the part is made to fit, in place of a skilled worker measuring every dimension of each part of the product to the plans or the other parts, as it is being formed. Thus, the finished part will meet specifications to fit all the other finished parts, in less time. This is the specialized capital required for MP. Thus, each workbench is different and each set of tools at each workbench limited to those required for making one part. Each of part has a consistent construction. Yet, another feature of mass produced goods is the interchangeable upgrade component.

Economies based on MP have occurred for several reasons. The main one is the enhanced efficiency, in nearly all steps in the process. By contrast, craft production requires that a craftsman make each part, assemble all the parts and access and use many tools for the many various tasks. In MP, each worker repeats one or a few related tasks that use the same tool to perform identical operations on a stream of products. The exact tool and parts are always at hand, having been moved down the assembly line in sequence. The worker spends less time retrieving and preparing materials and tools, so the time taken to manufacture a product using MP is shorter than the use of traditional methods. The advantages of mass production include:

Materialism: in philosophy it is a form of physicalism, which holds that the only premise that can be proven to exist is matter. All things are composed of material and all phenomena are the result of material interactions, therefore matter is the only substance. As a theory, materialism belongs to the class of monist ontology. As such, it is different from ontological theories based on dualism or pluralism. For singular explanations of the phenomenal reality, materialism would be in contrast to idealism. The view is perhaps best understood in its opposition to the doctrines of immaterial substance applied to the mind by Descartes. However, by itself, materialism says nothing about how material substance should be characterized. In practice, it is often assimilated as a variety of physicalism.

Not to be confused with materialistic, materialism is often associated with the methodological principle of reductionism. The objects or phenomena are made distinctive at one level of description. If they are genuine,they must be explainable in terms of the objects or phenomena at some other level of description as a more general level than the reduced one. Non-reductive materialism rejects this notion, however, taking the material constitution of all particulars to be consistent with the existence of real objects, properties, or phenomena not explicable in the terms used for the basic material constituents. Another view is that empirical laws and explanations in sciences such as psychology or geology are invisible from the perspective of basic physics. A vigorous literature has emerged around the relation between these views. See also dialectical materialism.

Means test: determines whether an individual or family is eligible for help from the government. Means testing refers to the eligibility for relief for debtors who have sufficient financial means to pay a portion of their debts. The most common means test in the United States is the test used by courts to determine eligibility for Title 11 of the United States Code Chapter 7 or Chapter 13 bankruptcy.

During the Great Depression, a means test was used to screen applicants for such programs as Home Relief in the United States and starting in the 1960s, for benefits such as those provided by the Food Stamp Program. In 1992, third-party Presidential candidate Ross Perot proposed that future Social Security benefits be subjected to a means test. Though this was hailed by some as a potential solution to an impending crisis in funding the program, few other political candidates since Perot have publicly made the same suggestion, which would require costly investigations and might associate accepting those benefits with social stigma.

Mercantilism: an economic theory that contends 1) the prosperity of a nation depends upon its supply of capital and 2) the global volume of trade is fixed. Economic assets, or capital, are represented as bullion (gold, silver and trade value) held by the state, which is best increased through a positive balance of trade with other nations, measured as exports minus imports. Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy, by encouraging exports and discouraging imports, often by way of tariff. The policy based on these ideas is a mercantile system.

The repudiation of mercantilism by Adam Smith was accepted as policy in Britain and the U.S., though at first it was rejected in the U.S. by such figures as Hamilton, Clay and Lincoln and in Britain by Thomas Malthus. When Britain passed its Corn Laws in 1815, Malthus thought such restrictions were a good idea, but Ricardo disagreed. In 1849, they were repealed based largely on free market arguments as made by Sir Richard Peel, though this was contested. Others, such as Disraeli, felt that the real reason was to keep grain prices low and, thus, empower commercial interests.

Most economists in the U.S. and Europe now accept that, in some areas, mercantilism had been correct. The economist Keynes supported some of the tenets of mercantilism that Smith had rejected focusing on the money supply, arguing that goods, population and institutions were the real causes of prosperity. Keynes argued that the money supply, balance of trade and interest rates were of great importance to an economy. These views later became the basis of monetarism, whose proponents actually reject much of Keynesian monetary theory and, thus, developed monetarism as a major modern school of economics.

Metanarrative: an abstract idea supposed as a comprehensive explanation of historical experience or knowledge. It is part of the critical theory of postmodernism. Universalism sees it as a global or totalizing cultural narrative schema that orders and explains knowledge and experience. Here the prefix meta means beyond, though used here as about and a narrative is a story; thus, a metanarrative is a story about a story, which encompasses and explains other smaller stories within totalizing schemas. Some examples of metanarrative include

Metaphysics: the branch of philosophy that investigates the principles of reality that transcend those of any particular science. Metaphysics is based upon and built on by cosmology and ontology. It explains the ultimate nature of being and the world. It derives from the Greek words metá: after and physics, which refers to the works about matter by Aristotle.

The prefix meta was attached to the chapters in Aristotle's work that followed the chapters about physics, in collections edited posthumously. Aristotle called some of the subjects treated therein as the first philosophy, which later became metaphysics. Meta has shifted in English to mean before, beyond, above, and transcending, so that metaphysics is the study of what transcends physics. Philosophers such as Kant would argue that certain questions of metaphysics, notably those about the existence of God, soul and freedom, are inherent to human reason and have always intrigued us. Some examples include:

A central branch of metaphysics is ontology, the investigation into what types of things there are in the world and what relations these things bear to one another. The metaphysician also attempts to clarify the ideas by which people understand the world. This includes the ideas of existence · objecthood · property · space · time · causality and possibility.

Before the development of modern science, scientific questions were addressed as a part of metaphysics known as natural philosophy. The term science meant knowledge. The scientific revolution, however, made natural philosophy an empirical and experimental activity unlike the rest of philosophy. By the end of the 18th century, it had begun to be called science so to distinguish it from philosophy. Thereafter, metaphysics became the philosophical enquiry of a non-empirical character into the nature of existence.

Methodenstreit: strife over methods: an intellectual controversy or debate about epistemology, research methodology, or the way in which academic inquiry is framed or pursued. More specifically, it refers to a particular controversy over the method and epistemological character of economics carried on in the late 1880s, early 1890s between the Austrian School of Economics and the German Historical School. To distinguish it from other similar disputes, German speakers sometimes specify it as the methodenstreit der nationalökonomie: methodenstreit of economics. On an intellectual level, the methodenstreit was a question of whether a science exists, apart from history, which could explain the dynamics of human action. Politically, an air of a conflict existed between the classical liberalism of the Austrian School and the welfare state as advocated by the Historical School.

The Historical School contended that economists could develop new and better social laws from the collection and study of statistics and historical materials. It distrusted theories apart from the experience that is history. Thus, the German Historical School focused on specific dynamic institutions as the largest variable in changes in political economy. The Historical School reacted against materialist determinism, which is the idea that human action would be explained as physical and chemical reactions, once science advanced enough. The Austrian School, by contrast, believed that economics was the work of philosophical logic and could only ever be about developing rules from the first principles that is seeing human motives and social interaction as far too complex to be amenable to statistical analysis. This position would, thus, purport their theories of human action to be universally valid.

Military metaphysics: the world view, mindset or mentality that defines reality in terms of the military, including the military approach and solution as the exclusive solution to most, if not all, problems, which includes economic stagnation.The power elite, in political and sociological theory, is a small group of people who control a disproportionate amount of wealth, privilege and access to decision-making of global consequence. Charles Wright Mills conceived the term in his 1956 book, The Power Elite. It describes the relationship between the political, military and economic elite as the people at the top of these three institutions. It notes that these people

hold interlocking directorates and co-optation and socialization of prospective new members based on how well they clone themselves socially after such elite. Further, these elite in the three institutional orders have an uneasy alliance based upon their community of interests driven by the military metaphysics, which has transformed the economy into a permanent war economy.

Modernity: The condition brought by of modern values, ethics and structures with the goal of market growth in an array of periods from circa the Middle Ages through the present. The modern era includes a wide range of periods and modernity is understood in its context, the Industrial Age of the 19th century and its role in sociology. Since its beginning in that era, sociology examined the leap from a pre-industrial to an industrial society, sometimes considering events of the 18th century, too. The modern era names the period since the Middle Ages. Modern can mean all of post-medieval European history, in the context of dividing history into three large epochs ancient history the Middle Ages and the Modern era. In the context of contemporary history, politics and other subjects, modern also applies to the period beginning between 1870 and 1910, through the present and in general, to the early 20th century, though the late modern era is marked by the late 18th century Industrial revolution and the revolutions in the United States and France.

Modernity differs from modern era as it derives from modernism, which is a movement in art. Modernism is based on the awareness that, through the mechanical age of industrialism, humankind has evolved into something new: a matter best explored by art and all previous concepts questioned. Darwin's Origin of Species and Lyell's Principles of Geology both revolutionized perceptions of time and race and in particular, humankind. The post-medieval is European history since the mid-15th century, circa the advent of moveable-type printing in Europe. The key events and advances that mark this period include the:

In these contexts, modern society developed over many periods; major events influenced modern society all of which signify breaks in continuity, a historical discontinuity. Particular ways of framing the period of modernity include the

Monetarism: the economic perspective and policy approach that sets a nation's income and monetary economics. It focuses on the supply of and demand of money as the primary means by which economic activity is regulated. Monetary theory focuses on money supply and on inflation as an effect of the supply of money being larger than the demand for money.

Monetarism links to the work of Milton Friedman, among the economists to accept Keynesian economics and then analyze it on its own terms. Friedman wrote an influential book, Monetary History of the U.S. 1867-1960, which argues that—Inflation is always a fact of and about money. Friedman advocated a central bank policy aimed at keeping the supply and demand for money in balance, as measured by growth in production and demand. The monetarist argument that the demand for money is a stable function gained much support during the late 1960s and 1970s. Former U.S. Federal Reserve Chair, Alan Greenspan is a monetarist in his policy orientation. The European Central Bank bases its monetary policy on money supply targets.

Critics of monetarism include both neo-Keynesians who argue that demand for money is intrinsic to supply and some conservative economists who argue that demand for money cannot be predicted. Economist Joseph Stiglitz has argued that the relationship between inflation and money supply growth is weak when the inflation is low.

Monopoly: 1. a persistent situation of only one provider of a product or service in a particular market; monopolies are characterized by a lack of competition for the good or service that they provide and a lack of viable substitute goods. 2. monopoly may occur as an adjective as the process situation that persists for only one provider of a product or service in a particular market, though views on the appropriate ways to address the issue of anti-trust vary widely.

Some economists address this ambiguity by referring to the standard definition of monopoly as pure monopoly. The four main market structures are best understood as theoretical abstractions rather than absolutes.Thus, the term does not bear any intrinsic expectation that there will ever be a single firm with total control anymore than the theory of perfect competition requires that competition be perfect to exist. To show the definitions by example, Microsoft is a monopoly (MS market power). However, while this term often occurs in political discourse about Microsoft, it does not in fact bear the economic definition of a monopoly as a firm in an industry with only one seller.

Nation state: a state that exists to provide a sovereign territory for a nation of people and derives its legitimacy from that function. The state is a political and geopolitical entity, while the nation is a cultural and/or ethnic entity. The term nation state implies that the nation and the state coincide geographically. This distinguishes the nation state from the other types of states that preceded it. If implemented, this implies that the citizens share a common language, culture and values, which was not the case in many historical states. A world of nation states implements the claim to self-determination and to autonomy for every nation, as a central theme of the ideology of nationalism.

Ambiguities in the usage include the terms such as nation • international • state and • country. Political science describes most existing sovereign states as nation state, even if their political boundaries do not coincide with ethnic boundaries. In some cases, the geographic boundaries of an ethnic population and a political state largely coincide. Thus, there is little immigration or emigration, few members of ethnic minorities and few members of the native ethnicity living in other countries.

Conflicts arise where political boundaries do not correspond with ethnic or cultural boundaries; e.g., the Hatay Province was transferred to Turkey from Syria after the majority-Turk population complained of mistreatment. The traditional homeland of the Kurdish people extends between northern Iraq, eastern Turkey and western Iran. Some of its people call for an independent Kurdistan, citing mistreatment by the Turkish and Iraqi governments. An armed conflict between the Kurdistan Workers Party and the Turkish government has shed blood about this, since 1984. Historical theorist Benedict Anderson claims that nations are imagined communities—not all the members can possibly know each other. The main causes of nationalism and the creation of an imagined community are the:

The idea of a nation state is linked to the rise of the modern system of states. The Westphalian System refers to the Treaty of Westphalia, in 1648. The balance of power, which characterizes that system, depends on clearly defined, centrally controlled, independent entities, whether empires or nation states, which recognize each other's sovereignty and territory. The Westphalian System did not create the nation state, though the nation state meets the criteria for its component states, if no lands lie in dispute.

The nation state acquired its philosophical basis in the era of Romanticism, at first as the natural expression of the individual peoples (romantic nationalism). The increasing emphasis during the 19th century on the ethnic origins of the nation led to a redefinition of the nation state in this basis. Racism joined itself with global colonial imperialism and continental imperialism, most notably in pan-Germanic and pan-Slavic movements. This relation between racism and nationalism reached its height in the fascist movements of the 20th century. The specific combination of nation as people and the state was expressed in terms such as the Völkische Staat and implemented in laws such as the 1935 Nuremberg laws made fascist states such as early Nazi Germany different from non-fascist nation states. Minorities were not part of the Volk and, thus, had no authentic or legitimate role in such a state. In Germany, neither Jews nor the Roma were considered part of the Volk and, thus were targets for persecution. However, German nationality law defined German based on German ancestry, as it still does, excluding all non-Germans from the Volk.

Recently, the nation state's claim to full sovereignty within its borders has faced challenge. A global political system based on international agreements and supra-national blocs characterized the post-war era. Non-state actors such as international corporations and NGOs are widely seen as eroding the economic and political power of nation states, leading to their eventual disappearance.

In Europe, in the 18th century, the classic non-national states were the multi-ethnic empires: the Austro-Hungarian, the Russian, the Ottoman, the British and smaller states at what would now be called sub-national. The multi-ethnic empire was a monarchy ruled by a king, emperor, or sultan. The population belonged to many ethnic groups and they spoke many languages. The empire was dominated by one ethnic group; their language was usually the language of the public administration; the ruling dynasty usually emerged from that group. This type of state is not specifically European: such empires existed on all continents.

Some of the smaller European states had less ethnic diversity, yet were dynastic states ruled by a royal house. Their territory could expand by royal marriage, or merge with another state when the dynasty merged. In some parts of Europe, notably Germany, very small territorial units existed; they were recognized by their neighbors as independent and had their own government and laws. Some were ruled by princes or other hereditary rulers; some were governed by bishops or abbots. They were very small and, thus, had no separate language or culture; therefore, the people acquired the language of the surrounding region.

Natural law: the law of nature: a body of law with its content set by nature that is universally valid. In the classical sense, natural law refers to the use of reason to analyze human nature and deduce binding rules of moral behavior. Natural law contrasts positive law: man-made law, which is the modified law to suit a given political community, society, or nation state. It may function as a standard by which to criticize positive law. On the other hand, in jurisprudence of natural law, the content of positive law cannot be known without some reference to the natural law, or something like it. Used in this way, it can be invoked to criticize decisions about the statutes, but less so to criticize the law itself. Some use natural law as synonymous with natural justice or natural right, although most contemporary political and legal theorists separate the two.

Although it is often conflated with common law, the two are distinct in that natural law is a view that certain rights or values are inherent in or universal by virtue of human reason or human nature, while common law is the legal tradition whereby certain rights or values are recognizable by virtue of judicial recognition or articulation. Theories of natural law have, however, exercised a profound influence on the development of English common law and are prominent in the philosophies of Aquinas, Hobbes, Locke, among several others. Natural law intersects with natural rights and, thus, became a cited component in the U.S. Declaration of Independence and the Constitution of the U.S. Due to this, the founding of the United States as based on natural law forms the essence of declarationism.

Natural philosophy: The study of nature and the physical universe as dominant prior to modern science and the precursor of natural sciences such as physics. Forms of science grew out of NP at older universities, long-standing Chairs of NP are today occupied by physics professors. Modern notions of science and scientists date to the 19th C as the OED dates the origin of the idea and title of scientist to 1834. Prior, the word science meant knowledge and the label of scientist had yet to arrive. Isaac Newton's 1687 scientific treatise is known as The Mathematical Principles of Natural Philosophy.

Neoliberalism: a movement ideology of political economy that

Nonprofit: a nonprofit organization (NPO) does not issue stock shares or distribute its surplus funds to owners or shareholders, but instead uses the funds to help achieve its goals. Types of NPOs include charitable orgs, trade unions, trade associations and public arts organizations. Most governments and governmental agencies work on this basis, but in most countries they are considered a public org rather than an NPO.

Nonviolence: a philosophy and strategy for social change that rejects the use of violence and, thus, serves as an alternative to passive acceptance of oppression or of an armed struggle against oppression. Practitioners of nonviolence use diverse methods in their campaigns for social change, including critical forms of education and persuasion, civil disobedience and nonviolent direct action and targeted communication through the mass media.

In the modern era, nonviolence has proven to be an effective tool for social protest. The prime examples in recent history of successful nonviolent resistance and nonviolent revolution, include 1) Gandhi leading a decades-long nonviolent struggle against British rule in India, which helped India win its independence in 1947, 2) Martin Luther King's adoption of Gandhi's nonviolent methods in the struggle to win civil rights for African Americans and 3) César Chávez's campaigns of nonviolence in the 1960s to protest the treatment of farm workers in California. The 1989 Velvet Revolution in Czechoslovakia that created the overthrow of a dictatorship is one of the most important of the largely nonviolent revolutions of 1989. Most recently the nonviolent campaigns of Leymah Gbowee and the women of Liberia were able to achieve peace after a fourteen years of civil war.

The term nonviolence is often linked with or even used as a synonym for pacifism, although the two concepts are different. Pacifism rejects the use of violence as a personal decision on moral or spiritual grounds, but does not imply an inclination toward change in the sociopolitical sphere. Nonviolence, however, presupposes the intent of but does not limit it to social or political change as a reason for the rejection of violence. A practitioner of nonviolence may advocate nonviolence in a specific context while advocating violence in other contexts, namely self-preservation and the defense of those under direct violent assault.

Oligopoly: a market form in which a market or industry consists of a few sellers as oligopolists. The few participants as oligopolists in this type of market must be aware of the actions of the others. The decisions of all firms influence the decisions of the other firms. Strategic planning by oligopolists always involves accounting for the likely responses of the others as market participants; thus, oligopolistic markets and industries have the highest risk for collusion. In the UK, the concentration of four firms in the supermarket industry is 74%; their brewing industry has an 85% ratio. U.S. oligopolistic industries include, beer, tobacco, accounting and audit services, aircraft, military products, motor vehicles, film, music recording and wireless telephone transmission.

Industrialized countries form oligopolies in many sectors of the economy, e.g., cars, steel production and consumer goods. High levels of competition fueled by increasing globalization have forced governments to form oligopolies in many market sectors, e.g., the aerospace industry. Market shares in an oligopoly are set based on product development and advertising. Thus, in heavily regulated markets, e.g., wireless communication, government will only license a few providers because it must subsidize huge industry start-up costs with public taxes. This process forms an industry with public finance and then moves it to the private sector. In some cases, states have licensed only two or three providers of cellular telephone transmission services.

Ontology: the study of the conceptions of reality and the nature of being, in philosophy, as the study of being or existence and forms, which is the basic subject matter of metaphysics. Ontology seeks to describe or posit the basic categories and relationships of being or existence to define entities and types of entities within its framework. It is the science of what is and of the kinds and structures of the objects, properties, and relations in every area of reality.

Philosophers of the Platonic school contend that all nouns refer to entities. Other schools contend that some nouns do not name entities but provide a shorthand way of referring to a collection of either objects or events. In this latter view, the mind, instead of referring to an entity, refers to collection of mental events experienced by the person. As examples, the word society refers to a collection of persons with some shared interactions and geometry refers to a collection of a specific kind of intellectual activity.

Ontology as a philosophical subject deals with the precise use of words as descriptors of entities or realities. Any ontology must give an account of which words refer to entities, which do not, why and what categories result. Apply this process to nouns such as electrons, energy, contract, happiness, time, truth, causality and God; thus, ontology has become basic in many branches of philosophy.

Opportunity cost: the cost related to the next-best choice available to someone who has picked among several mutually exclusive choices. It is a central concept in economics that expresses the basic relationship between scarcity and choice. The concept of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Therefore, opportunity costs are not restricted to monetary or financial costs as the real cost of an output forgone, of lost time, of deferred pleasure or any other benefit that provides utility are factors that are considered as opportunity costs. The concept was conceived and developed by John Stuart Mill.

Outsourcing: a feature of capital flight, the import and export labor as the offshore contracting of labor to an external provider. In this sense, two organizations may form a contract to exchange services, labor and payments. Of concern is the ability of businesses to outsource to suppliers outside the nation: off-shoring, offshore. Related facts have emerged as aspects of the relationships between economic orgs or networks, such as near-shoring, multi-sourcing and strategic off-shoring.

Organizations that outsource, therefore, seek to reduce costs e.g. taxes, restructure their business, improve assets, liberalize contracts, improve operational expertise, access talent, enhance innovation, improve productivity and efficiency (reduce time to market), commodify products, manage risk, gain venture capital and generally streamline production.

Outsourcing represents a loss for the corporation and consumers in terms of 1) quality of service: quality in terms of end-user experience and 2) language skills in call-center support is lower quality when a service is outsourced and 3) consumer, as former and current employee, trust in the corporation. This is made worse when outsourcing is combined with off-shoring to regions where the first language and culture are different. The questionable quality is obvious to consumers when sales and support call centers are outsourced and offshored.

Overproduction: excess production: excess of a supply beyond the demand for a product offered to the market. Therefore, overproduction:

Some economists believe that the existence of overproduction, if confirmed, would contradict Say's law, which states that the more goods for which there is demand that are produced, the more those goods as a supply can constitute a demand for other goods. Overproduction is central to the Marxian theory of crisis and to Keynesian economics. It differs from the idea of under-consumption in which the excess supply results only from low consumer demand. Whether one is distinguishable from the other objectively is arguable. Overproduction may also arise due to 1) a low fixed investment, 2) a low net exports, or 3) a contractionary fiscal or monetary policy.

Pancasila: the philosophical basis for Indonesia. The word consists of two Sanskrit words, panca: five and sila: principle. The five principles of pancasila are held as inseparable and interrelated: 1) belief in one God, 2) a just and civilized humanity—of internationalism, not cosmopolitanism, 3) a unified Indonesia of—nationalism, not a chauvinism; President Sukarno quoted Gandhi, who said, "I am a nationalist, but humanity is my nationalism." 4) democracy led by wise guidance via consultation and representative democracy and 5) social justice for all Indonesians.

In 1945, facing the need to unite the diverse archipelago of Indonesia, future President Sukarno offered pancasila as the dasar negara: the basis for the political philosophy of Indonesia. He announced dasar negara in a speech known as the birth of the Pancasila to the Independence Committee in June 1945. Thus, he decreased the conflict between Muslims, nationalists and Christians, as Indonesia's 1945 Constitution set forth the pancasila as the basis for its independence.

Pareto optimality: an economic concept used in a study of efficiency and income distribution and applied to game theory, engineering and the social sciences. Given a set of alternative shares of goods or income for a group of people, a movement from one share to another that can make at least one person better off without making any other person worse off is a pareto improvement. A share is pareto optimal when no further improvements can be made in the distribution of it; this, then, is a strong pareto optimum: SPO. Pareto was the economist who used the concept in a study of efficiency and income distribution.

A weak pareto optimum (WPO) satisfies a less stringent requirement in which a new allocation is only considered a pareto improvement if it is strictly preferred by everyone: all must gain with the new allocation. The set of SPO solutions is a subset of the set of WPO solutions because an SPO satisfies the stronger requirement that there is no allocation that is strictly preferred by anyone, and weakly preferred by the rest. Thus, no one loses out and at least one person gains.

Patriarchy: a social system in which the role of the male as the main authority figure is central to social organization and where fathers hold authority over women, children and property. It implies the institutions of female subordination to male rule and privilege.

Patriarchal societies are often patrilineal: property and title transfer to the male lineage. Patriarchy is manifest in the social, legal, political and economic order of diverse cultures. It exerts power over modern life, though some cultures are moving to an egalitarian social system in the 20th C.

Pattern bargaining: the process of labor relations and negotiations in which a trade union gains a new and better entitlement from one employer and then uses that agreement as a precedent to demand the same or better entitlement from other employers. In the United States, unions such as the UAW and Teamsters have pioneered pattern bargaining.

The first step of the bargaining process is the identification of a target employer most likely to agree to a favorable employment contract. For the selected company, this is an opportunity to influence the contract for the industry; the risk for the company is that of labor disruption if negotiations stall or fail. Once the union workers have negotiated and ratified the contract, the union declares it a pattern agreement and presents it to the other employers as a take-it-or-leave-it offer.

Pigou, Arthur: (1877–1959) economist, teacher, builder of the school of economics at the Cambridge. He trained and influenced many Cambridge economists who went on to fill chairs of economics around the world. His work covered various fields of economics as welfare economics, industrial fluctuations, unemployment, public finance, index numbers and measurement of national output. His reputation was damaged by influential economic writers who used his work to base and define their own opposing views. He served on several public committees, including the Cunliffe Committee and the 1919 Royal Commission on Income tax. His first work was more philosophical than his later work as he expanded the essay, which had won him the Adam Smith prize in 1903, into his book Principles and Methods of Industrial Peace. One of his early acts was to provide private financial support for Keynes to work on probability theory. Pigou's concept of externality remains central to modern welfare economics and environmental economics.

A neglected aspect of Pigou's work is his analysis of a range of labor-market phenomena studied by subsequent economists, including collective bargaining, wage rigidity, internal labor markets, segmented labor market and human capital. In two lectures delivered in 1949 he made a more favorable, though still critical evaluation of Keynes' work, saying: "In setting out and developing his fundamental conception, Keynes made a very important, original and valuable addition to the armory of economic analysis".

Planned economy: an economic system in which the state directs the economy, controls industry and makes all decisions regarding the production and distribution of goods and services.Its most extensive form is a command economy, as a centrally planned economy, that commands and controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output. In such economies, central economic planning by the state government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output. Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives.

A planned economy differs from the an unplanned economy as a market economy in which production, distribution, pricing and investment decisions are made by private owners of the factors of production. These decisions are based on the individual interests, rather than a macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning in which the state employs influence, subsidies, grants and taxes, but does not compel as a planned market economy. A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both. In a command economy, the means of production are publicly owned as an economic system in which the government controls and regulates production, distribution, prices and so forth.

Important planned economies that operated in the past include the economy of the Soviet Union, which was, for a time, the world's second largest economy, China before 1978 and India before 1991. Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating, or as in the Soviet Union, the system collapsed. These economies moved toward market-based economies by allowing the private sector to make the pricing, production and distribution decisions. Although most economies today are market economies or mixed economies, which are partially planned, planned economies still operate in a few countries.

Political economy: originally the study of production, buying and selling and their relations with law, custom and government, as well as with a distribution of national wealth including through the budget process. The study of it began within the study and practice of moral philosophy. It developed in the 18th century as the study of the economies of various states as political economies. In late 19th century, the term was replaced by the term economics to place the study of economy on a mathematical and axiomatic base, rather than the structural relationships of production and consumption. Today, where it is not used as a synonym for economics, refers to an interdisciplinary approach that applies economic methods to analyze how political outcomes and institutions affect economic policy or vice versa. It is presented as an area of study in certain colleges and universities as Global Political Economics.

Positivism: a philosophy that states that the only authentic knowledge is scientific knowledge, which comes only from positive affirmation of theories by strict scientific method. It was developed by Auguste Comte, the first sociologist in the mid-19th-century. By the early 20th-century, logical positivism—a more logical version of Comte's basic thesis—emerged in Vienna and become one of the dominant movements in U.S. and British philosophy. The positivist view is referred to as a scientist ideology and is often shared by 1) technocrats who believe in the necessity of progress through scientific progress and 2) naturalists, who argue that any method for gaining knowledge should be limited to natural, physical and material approaches.

As an approach to the philosophy of science deriving from Enlightenment thinkers, Comte saw the scientific method as replacing metaphysics in the history of thought. He observed the circular dependence of theory and observation in science. Thus, he was one of the leading thinkers of social evolutionism. Comte was quite influential to Brazilian thinkers who turned to his ideas about training a scientific elite to advance the industrialization process. Some were intrigued by a model that was present in the ideas of the Enlightenment and the French Revolution. However, this caused issues with the Church because these positivist ideas were secular, which encouraged the separation of Church and State. Brazil's national motto: Order and Progress was taken from Comte's positivism, which was as influential in Brazil as it was in Poland.

Positivism is the most evolved stage of society in anthropological evolutionism, the point where science and rational explanation for scientific phenomena develops.

Kant used the word positivism with close to the opposite meaning. He distinguished and defined the positive religions from the natural religions, as 1) religions in which authority comes from a human or divine source, rather than 2) those religions that are universally reachable through reason. He sought to rid Christianity of its positivism and instead establish it on pure reason alone. Few scholars of philosophy use the term this way today.

Positivist economist: Milton Friedman's essay "Methodology of Positive Economics" (1953) set the epistemological course for his own subsequent research and, to an extent, that of the Chicago School of Economics. He argued 1) that economics as science should be free of value judgments for it to be objective and 2) a useful economic theory should stand in its simplicity and fruitfulness as an engine of prediction, not by its descriptive realism.

Postmodernism: applies to a set of wide-ranging changes in critical theory, philosophy, architecture and art as culture, in general. Postmodernism emerged from, reacted to, or superseded modernism (another esoteric trend). It began as a reaction to modernism and the result of the doom and gloom caused by WWII. It tends to reflect a cultural, intellectual, or artistic state that lacks hierarchy or organizing principle and embodies complexity, contradiction, ambiguity, diversity and interconnectedness.

Post-modernity is a point in history that was influenced by the new postmodernism art movement, namely the evolutions in society, economy and culture since the 1960s. When the idea of a reaction to, or even a rejection of the movement of modernism, a late 19th, early 20th century art movement, was borrowed by other fields, post-modernism became synonymous, in some contexts, with post-modernity. In terms of a rejection of its bourgeoisie culture, post-modernity is closely associated with post-structuralism (cf. Jacques Derrida) and with modernism.

Post-structuralism: the intellectual movement of continental European philosophers and critical theorists whose thought merged with the 20th century French philosophy. The prefix post refers to the fact that many contributors, such as Jacques Derrida, Michel Foucault and Julia Kristeva—rejected structuralism and became critical of it. In direct contrast to structuralist claim of an independent signifier, superior to the signified, post-structuralism views the signifier and signified as inseparable, yet not united. Although post-structuralism is difficult to define or summarize, in the broad sense it is the body of distinct reactions to structuralism. There are two main reasons for this difficulty: 1) it rejects definitions that claim to have discovered absolute truths or facts about the world and 2) very few people have accepted the label of post-structuralist; rather, they have been labeled as such by others; thus, no one has felt obliged to construct a manifesto of post-structuralism.

Primitive accumulation of capital: Original accumulation: explains how the capitalist mode of production comes into being. Capital is money that makes more money, value in search of surplus value: money that is reinvested. It originates in the activity of buying goods for resale at a profit and first emerges in commercial trade that connects economic communities whose production is not yet capitalist. The existence of usury capital, bank capital, rent capital and merchant capital all precede, as primitive accumulation, the capitalist industry, as such.

Profit: the motive for individuals to relinquish some of their spending power as capital for a perceived productive purpose. Rational human beings with self-interest: Homo economicus (HE) can invest some of their capital toward production for others in society only if there is some payback for their sacrifice and risk. If there is no real profit motive, then HE would conserve their capital for personal use and no investment would occur. The profit motive was raised by Adam Smith to explain that HE should invest their personal capital and why HE needs to charge interest for use of the capital. Smith explained the profit motive as an intrinsic aid in the efficient use of resources for the overall benefit of society.

Economies that use economic resources for the maximum sustainable societal benefit need profit, productive labor and resource efficiency to be sustainable. The profit motive must be high enough to incentivize owners of capital to deploy their capital, but not so high as to extract too much rent from the productive capacity of the economy. The neoliberal theory (Friedman, et al) proposed by most modern economists is that goal of an economy is the maximization of growth and thus profit. This is the key difference between classical economists e.g. Smith and modern economists. As a result, in modern economics, profit has been raised from being merely a key to optimize societal benefit, which was the goal of the classical economics, to become the sole purpose of economies.

Superprofit, as surplus-value from Marx, is the above-average enterprise profits that comes by four main scenarios:
(1) technologically advanced firms operating at above average productivity in a competitive, growing market,
(2) under conditions of declining demand, only firms with above-average productivity would obtain the previous average profit rate as a super-profit, while the rest would have lower or no profits,
(3) monopolies of resources or technology, yielding rents from land, mining and technology licenses, and
(4) structural unequality of exchange in the world economy. In this case, superprofit comes through buying products cheaply in one place and selling them at a much higher price elsewhere, yielding an above-average profit. This type of superprofit might not be the result of the conditions of extra productivity or of monopoly because it represents only a transfer of value from one place to another.

Total revenues equal to total costs makes a normal profit, which will match the rate of return: the minimum rate required by equity investors to keep their present level of investment, Thus, a normal profit is a cost as one of the two components of the cost of capital. A firm makes a normal profit when total revenues equal total costs. Normal profits will then match the rate of return that is the minimum rate required by equity investors to keep their present level of investment. Therefore, normal profit is a cost and one of the two components of the cost of capital.

An economic profit means that revenue exceeds the total opportunity cost of its inputs. Inputs include the cost of equity capital, which is met by normal profits. A business makes an accounting profit when its revenues exceed the accounting cost that the firm pays for those inputs. Economics treats the normal profit as a cost, so when deducted from total accounting profit what is left is either economic profit or loss. Economic profit may include an element in recognition of the risks that an investor takes. Due to the incomplete information of speculative risk, it is often uncertain whether an enterprise will succeed. This extra risk is included in the minimum rate of return that providers of financial capital require as an economic cost. The size of that return is compatible to the risk linked to each type of investment, as per the spectrum of risk to return.

 Glossary II • TOCcover pagetopGlossary IV

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