Economic Glossary

Adam Smith's "Invisible Hand"

This expression refers to the theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. Every business seeks to increase their customer base by introducing improved products and cost-saving innovations. This bolsters profits in the short term, but as rivals respond in kind, the resulting competition gradually drives down prices and profits. In the end, Smith argued, consumers reap all the gains. Read Robert Frank's article on how this economic paradigm is slowly changing, mainly as a consequence of the 2007 depression. Back to top.

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Derivatives

Any commercial transaction that is one or more steps removed from the direct exchange of goods or services. For example, in January I can buy a pound of potatoes to be delivered to me in July by buying a "futures contract" in potatoes. The price and the quantity is determined in January, but the transaction is not consumed until July. Another far more dangerous practice is margin trading. Here the buyer of a future option needs only a 10% payment to secure the option. If in July the potato prices have increase, he can turn around and buy and sell his potatoes at a profit, from which he pays back the 10% cost of the option. If the potatoes, however, have decreased in price, our speculator needs to come up with the remaining 90% and then needs to sell the potatoes at a loss. Back to top.

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The Fed (short for "Federal Reserve Bank")

The U.S. Federal Reserve (the Fed) consists of a Board of seven governors, each of them appointed by the president and confirmed by the Senate, and 12 regional banks. Each regional bank is incorporated as a private corporation owned by individual private banks. As of December 1999, a total of 3,400 banks had an ownership in the Fed's regional banks. The regional banks have a 9-member board, six of which are appointed by member banks and the remaining three by the Board of Governors.

As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President. This means in effect, that the nation's monetary policy is largely controlled by private banks.

As we can see: although the Federal Reserve presents itself as a public institution responsible for exercising oversight, it is accountable only to itself, operates primarily for the benefit of the largest Wall Street banks, and consistently favors the interests of those who live by returns to money over those who live by returns to their labor. In fact, the regional banks' shareholder banks receive an annual dividend of six percent on their shares.

Read one of the rare articles on the banking industry's involvement in the Fed.

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G.D.P. (Gross Domestic Product)

A nation's G.D.P is a basic measure of a country's economic performance. It consists of the market value of all final goods and services made within the borders of a nation in a year. While this measure had been sanctioned by politics and economics as the official indicator of a nation's wellbeing, there has been increasing doubt about the underlying reasoning and the logic of this principle. For the G.D.P, for example, the cost of prisons, police, commuting, and finance are positive and thus beneficial for a nation, while the cost of housework is being ignored in this accounting method. Read more in the New York Times article from 15 September 2009. In all the talk about economic growth we seem to have lost sight of the original purpose of the economy: markets and its institutions were invented to serve society and not to be served by society. Thus growth is not an inherent good but needs to be evaluated on a case by case basis. A much more desirable goal of our markets could be to provide for the most happiness of society. Read how Butan replaced the Gross national Product (GNP) with the Gross National Happiness (GNH). Back to top.

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Moral Hazard

Moral hazard describes a situation where people are protected from the consequences of risky behavior. It has been shown that a person with a seatbelt drives more recklessly than one without seatbelt. Similarly, a homeowner with fire insurance tends to be less carefull with matches and the gas stove than someone without insurance. In the recent crisis, bankers could make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses. In this form of moral hazard the profits are privatized and losses are socialized. For the whole story read David Leonhard's editorial in the New York Times. Back to top.

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Poverty Level

The U.S. poverty line is defined as an income of $22,025 for a family of four. Back to top.

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Public Good

Under "Public Good" we understand a shared resource deemed essential to humans and the earth. Examples include air, water, shelter, education, health care. Read more about the The Public Goods Dilemma. Back to top.

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Supply Side Economics

Supply-side economics is based on the idea that higher tax rates discourage work and investment, two crucial ingredients for economic growth. It has been the leading Republican economic doctrine since the Reagan years. However, the most recent history suggests, that this strategy has not worked out as planned, and that the richer a country becomes, the higher its taxes will progress without affecting economic growth. Read Dave Leonard's article in the New York Times for an inside view. Back to top.

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Trade Balance

The net result of a nations exports minus imports. If exports surpass the imports, a country is said to have a trade surplus. If it imports more goods and services than it exports, we speak of a trade deficit. During 2009, the U.S. has accumulated a trade deficit of roughly $324 billion. Overall, the U.S. trade imballance has resulted in foreign debt of over $4 trillion as of 2006. To put this $4 trillion in perspective, the comparable base of what the whole country is worth is only $48.5 trillion. This total value of the nation is the sum of all real estate, all equities and such personal possessions as cars and furniture. So we are approaching having given away 10% of our net worth as collateral for importing the oil, cars and computers we use for our life style. Back to top.

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Trade Deficit

The U.S. trade deficit is reported on a monthly basis. For April 2009 the number was $29.2 billion (New York Times, 11 June 2009). This means the U.S. imported $29.2 billion more in goods and services than it exported. The opposite of a trade deficit is a trade surplus, meaning that exports exceed imports. Adding all the monthly trade deificits up results in a total number of a country's external debt . For the U.S. this number was a little over $13 trillion in June 2009. This is $42,343 per person in addition to any personal household debt. To put this in perspective, the U.S. total output of goods and service (G.D.P.) in 2008 was slightly over $13 trillion. This means, the U.S. has to work roughly one whole year to pay off its debt to foreign countries. Back to top.

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Unemployment

The official, government issued unemployment rate tells only part of the story. This number, 9.7% in June 2009, counts all Americans actively looking for work, i.e. they are registered with their state's unemployment agencies. If we add all Americans working part-time but would like to work full-time, and those who have become so discouraged that they've stopped actively searching for work, this number climbes to 16.5%, almost twice the official rate. Back to top.

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