- Industria: Economy; Printing & publishing
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Legend has it that in November 1974 Arthur Laffer, a young economist, drew a curve on a napkin in a Washington bar, linking average tax rates to total tax revenue. Initially, higher tax rates would increase revenue, but at some point further increases in tax rates would cause revenue to fall, for instance by discouraging people from working. The curve became an icon of supply-side economics. Some economists said that it proved that most governments could raise more revenue by cutting tax rates, an argument that was often cited in the 1980s by the tax-cutting governments of Ronald Reagan and Margaret Thatcher. Other economists reckoned that most countries were still at a point on the curve at which raising tax rates would increase revenue. The lack of empirical evidence meant that nobody could really be sure where the United States and other countries were on the Laffer curve. However, after the Reagan administration cut tax rates revenue fell at first. American tax rates were already low compared with some countries, especially in continental Europe, and it remains possible that these countries are at a point on the Laffer curve where cutting tax rates would pay.
Industry:Economy
Much followed, and much misunderstood, German economist (1818–83). His two best-known works were the Communist Manifesto, written in 1848 with Friedrich Engels, and Das Kapital, in four volumes published between 1867 and 1910. Most of his economic assumptions were drawn from orthodox classical economics, but he used them to reach highly unorthodox conclusions. Although claimed and blamed as the inspiration of some of the most virulently anti-market governments the world has ever seen, he was not wholly against capitalism. Indeed, he praised it for rescuing millions of people from “the idiocy of rural life”. Even so, he thought it was doomed. A shortage of demand would concentrate economic power and wealth in ever fewer hands, producing an ever-larger and more miserable proletariat. This would eventually rise up, creating a “dictatorship of the proletariat” and leading eventually to a “withering away” of the state. Marx thought that this version of history was inevitable. So far, history has proved him wrong, largely because capitalism has delivered a much better deal to the masses than he believed it would.
Industry:Economy
After growing up in the Austro-Hungarian empire, in which he worked as an itinerant lawyer, Joseph Schumpeter (1883–1950) became an academic in 1909. He was appointed Austrian minister of finance in 1919, presiding over a period of hyper-inflation. He then became president of a small Viennese bank, which collapsed. He returned to academia in Bonn in 1925 and in the 1930s joined the faculty of Harvard. In 1911, while teaching at Czernowitz (now in Ukraine), he wrote the Theory of Economic Development. In this he set out his theory of entrepreneurship, in which growth occurred, usually in spurts, because competition and declining profit inspired entrepreneurs to innovate. This developed into a theory of the trade cycle (see business cycle), and into a notion of dynamic competition characterized by his phrase “creative destruction”. In capitalism, he argued, there is a tendency for firms to acquire a degree of monopoly power. At this point, competition no longer takes place through the price mechanism but instead through innovation. Perhaps because monopolies often become lazy, successful innovation may come from new entrants to a market, who take it away from the incumbent, thus blowing “gales of creative destruction” through the economy. Eventually, the new entrants grow fat on their monopoly profits, until the next gale of creative destruction blows them away. Ever controversial, and often wrong, in his 1942 book, CAPITALISM, SOCIALISM AND DEMOCRACY, he predicted the downfall of capitalism at the hands of an intellectual elite. He is associated with both Austrian economics and, arguably as founding father, evolutionary economics.
Industry:Economy
Putting money to work, in the hope of making even more money. Investment takes two main forms: direct spending on buildings, machinery and so forth, and indirect spending on financial securities, such as bonds and shares. Traditionally, economic theory says that a country’s total investment must equal its total savings. But this has never been true in the short run and, as a result of globalization, may never be even in the long run, as countries with low savings can attract investment from overseas and foreign savers lacking opportunities at home can invest abroad (see foreign direct investment). The more of its GDP a country invests, the faster its economy should grow. This is why governments try so hard to increase total investment, for instance, using tax breaks and subsidies, or direct public spending on infrastructure. However, recent evidence suggests that the best way to encourage private-sector investment is to pursue stable macroeconomic policies, with low inflation, low interest rates and low rates of taxation. Curiously, economic studies have not found evidence that higher levels of investment lead to higher rates of GDP growth. One explanation for this is that the circumstances and manner in which money is invested count at least as much as the total sums invested. It ain’t how much you do, it’s the way that you do it.
Industry:Economy
Referee and, when the need arises, rescuer of the world’s financial system. The IMF was set up in 1944 at Bretton Woods, along with the World Bank, to supervise the newly established fixed exchange rate system. After this fell apart in 1971–73, the IMF became more involved with its member countries’ economic policies, doling out advice on fiscal policy and monetary policy as well as microeconomic changes such as privatization, of which it became a forceful advocate. In the 1980s, it played a leading part in sorting out the problems of developing countries’ mounting debt. More recently, it has several times co-ordinated and helped to finance assistance to countries with a currency crisis. The Fund has been criticized for the conditionality of its support, which is usually given only if the recipient country promises to implement IMF-approved economic reforms. Unfortunately, the IMF has often approved “one size fits all” policies that, not much later, turned out to be inappropriate. It has also been accused of creating moral hazard, in effect encouraging governments (and firms, banks and other investors) to behave recklessly by giving them reason to expect that if things go badly the IMF will organize a bail-out. Indeed, some financiers have described an investment in a financially shaky country as a “moral-hazard play” because they were so confident that the IMF would ensure the safety of their money, one way or another. Following the economic crisis in Asia during the late 1990s, and again after the crisis in Argentina early in this decade, some policymakers argued (to no avail) for the IMF to be abolished, as the absence of its safety net would encourage more prudent behavior all round. More sympathetic folk argued that the IMF should evolve into a global lender of last resort.
Industry:Economy
Founded in 1919 as part of the Treaty of Versailles, which created the League of Nations. In 1946, it became the first specialized agency of the UN. Based in Geneva, it formulates international labor standards, setting out desired minimum rights for workers: freedom of association; the right to organize and engage in collective bargaining; equality of opportunity and treatment; and the abolition of forced labor. It also compiles international labor statistics. One reason for its formation was the hope that international labor standards would stop countries using lower standards to gain a competitive advantage. From the 1980s onwards, the ILO approach came under attack as attention turned to the costs of high labor standards, notably slower economic growth. Universal minimum labor standards might also work against free trade. Imposing rich-country labor standards on poorer countries might help keep the rich rich and the poor poor.
Industry:Economy
A helping hand for poor countries from rich countries. This, at least, is the intention. In practice, in many cases aid has done little good for its intended recipients (improved health care is a notable exception) and has sometimes made matters worse. Poor countries that receive lots of aid grow no faster, on average, than those that receive very little. By contrast, perhaps the most successful aid program ever – the Marshall plan for rebuilding Europe after the second world war – involved rich countries giving to other hitherto rich countries. During the second half of the 20th century rich countries gave over $1 trillion in aid to poor ones. During the 1990s, however, flows of official aid stagnated. In 2001, official aid was a little over $50 billion, roughly one quarter of the GDP of donor countries. On top of this were private-sector donations from NGOs (non-government organizations) worth an estimated $6 billion. Increasingly, such sums were exceeded by private foreign direct investment. In an attempt to reinvigorate international aid, in 2000 the UN committed itself to eight ambitious Millennium Development Goals for reducing global poverty by 2015. Why has aid achieved so little? Donations have often ended up in the offshore bank accounts of corrupt politicians and officials in poor countries. Money has often been given with strings attached, so that much of this “tied” aid is spent on com¬panies and corrupt politicians and officials in the donor country. War has ravaged many potentially beneficial aid projects. Moreover, some aid has been motivated by political goals – for example, shoring up anti-communist governments – rather than economic ones. The lesson of history is that aid will often be wasted unless it is carefully aimed at countries with a genuine commitment to sound economic management. Analysis by the World Bank sorted 56 aid-receiving countries by the quality of their economic management. Those with good policies (low inflation, a budget surplus and openness to trade) and good institutions (little corruption, strong rule of law, effective bureaucracy) benefited from the aid they received. Those with poor policies and institutions did not. This accounts for the growing popularity of conditionality in aid.
Industry:Economy
Interest is usually expressed at an annual rate: the amount of interest that would be paid during a year divided by the amount of money loaned. Developed economies offer many different interest rates, reflecting the length of the loan and the riskiness and wealth of the borrower. People often use the term “interest rate” when they mean the short-term interest rate charged to banks. For instance, when a central bank raises or cuts interest rates, it changes only the price it charges to banks borrowing money overnight, expressed as an annual rate. Bond yields are a better measure of the interest rate on loans that do not have to be repaid for many years. Unlike short-term interest rates, bond yields are determined not by central bankers but by the supply and demand for money, which is heavily influenced by the expected rate of inflation.
Industry:Economy
The cost of borrowing, which compensates lenders for the risk they take in making their money available to borrowers. Without interest there would be little lending and thus a lot less economic activity. The charging of interest is contrary to Sharia (Islamic) law, being considered usury. Some American states also have usury laws, imposing tough conditions on the terms set by lenders, although not actually prohibiting interest. Yet, as the recent rise of a substantial banking industry in Islamic Middle Eastern countries shows, when economic growth is a priority, ways can usually be found to pay lenders to lend.
Industry:Economy
Valuable things, even though you cannot drop them on your foot – an idea, say, especially one protected by a patent; an effective corporate culture; human capital; a popular brand. Contrast with tangible assets.
Industry:Economy
