Global Political Economy: Glossary (Part 4) O-S

Offshore Banking: Offshore banking units are concentrated in the Bahamas, the Cayman Islands, Hong Kong, Panama, and Singapore. They can also refer to Swiss Banks and banks in Luxembourg and Andorra. An offshore bank is simply one located outside the country of the depositor. It is usually in a low tax jurisdiction, that is, a tax haven. These banks may provide bank secrecy, low or no taxation, easy access to deposits, and protection from local political or financial instability. It has been estimated that half of the world’s capital may flow through offshore banks. These tax havens have 1.2 percent of the world’s population and 26 percent of the world’s wealth. They have some 31percent of the net profits of US multinational corporations. It has been estimated that some 13 to 20 trillion pounds sterling may be hidden in such tax havens. According to the World Wealth Report of 2010, one third of the wealth of the highest worth individuals, some six trillion dollars, may be held offshore.

Oligopoly: A market situation where a small number of large companies control the market for a commodity. This may allow companies to be price setters and keep profits high.

Oligopsony: Refers to a market in which there are many sellers but few buyers.

Opportunity Costs: The opportunity cost is the benefits that one must give up in order to engage in an alternative activity. For example, the income one would have to give up to take a long holiday.

Pareto Optimality: A pattern of resource distribution in which no one can be made better off without making someone worse off.

Partial Equilibrium Analysis: A type of analysis which examines equilibrium in one of more specific markets, without looking at the entire economy.

Path Dependence: In economics, decisions and patterns are frequently limited or determined by decisions which have been made in the past. For example, a particular technology is established and is put on the market. Once it becomes established, future versions may follow the same technology even though this is not the best possible technology. An example frequently given is the Microsoft operating system which became the dominant technology, even though it is not the best one. 

Pegged Currency: A system in which there is a fixed exchange rate between a  currency and gold or some other currency such as the dollar.

Periphery: Political economies, whether national or global, can be seen to be divided into a core and a periphery. The periphery is the outlying region farthest away from the center.

Physiocrats: A school of political economy in France in the Eighteenth Century. Physiocracy means the government of nature. The Physiocrats believed that the wealth of nations was derived solely from the value of land and agriculture. They saw productive work as the source of national wealth. They said that all life depends upon the productivity of the soil and the ability of the natural environment to renew itself. They praised country living. Their work is seen to be the first well developed theory of economics. The main figure was Francois Quesnay (1694-1774). Another important figure was Anne-Robert-Jacques Turgot (1727-1781).

Pigou Effect (Real Balance Effect from Arthur Cecil Pigou): Says that in a recession, the declining prices will increase the wealth of consumers and therefore increase spending.

Planning Commissions: Government economic institutions which were responsible for planning future economic development in countries such as India that developed plans, such as the Five Year Plans, for development. This approach was modeled after the development plans of the Soviet Union.   

Plaza Conference (1985): A conference in which Japan agreed to appreciate the value of the Yen, under US pressure.  

Pluralism: In the American context, pluralism refers to the concept that power is divided between many groups in the society and that their political activity is primarily a matter of each group trying to maximize their gains from the political system.

Portfolio Investment: Refers to investment in the financial sector in such investment assets as securities, stocks, bonds, Repo and so on, rather than in the manufacturing sector. Foreign portfolio investment is risky for emerging market economies as this type of money is essentially hot money. It can leave the country quickly in the case of economic or political instability.

Post-Fordism: Indicates an economy which has made the transition to a post-industrial economy which is dominated by the service sector. In the case of the United States there is a financialization of the economy.

Precariat: A class of people, such as urban poor, who lack secure jobs and economic security. An increasing proportion of the global population in the early twentieth century.

Predatory Pricing: Happens when businesses sell goods or services below the cost of production in order to ruin their competition. For example, large waste companies in the United States frequently sign up people for waste collection at very low rates until their competition is forced out of business. It is analogous to dumping in the international arena.

Preemption: Happens when a firm succeeds in getting its products into the market ahead of other firms. It is also called First Mover Advantage. This may preempt other firms by preventing them from moving into the market for a considerable time during which the initial firm enjoys high profits. 

Price Setters: A situation in which oligopoly firms control the market for a product and are able to keep the prices from falling. That is, they are able to set the price rather than allow the market to set the price. Having a unique product may also enable a firm to be a price setter.   

Price Takers: Price takers are at the mercy of the market and must sell their products at the price which the market or another firm decides.

Principles of Economics (1890): The famous textbook written by British economist Alfred Marshall (1842-1924 which went through many editions and was the standard textbook for generations economics students. The textbook deals with theories of supply and demand, marginal utility, costs of production and many other topics. The book is seen as consolidating the ideas of neoclassical economics into a coherent theory. The book was also responsible for changing the name of the discipline from political economy to economics.

Prisoner’s Dilemma: A game which has been analyzed in game theory. The game demonstrates why two individuals might not cooperate, even though it appears that they could benefit by doing so. Two prisoners are arrested and charged with a crime. The prisoners are isolated from each other. Because of lack of evidence, they can be convicted only on a charge that carries a one year sentence. So if neither one gives evidence on the other, they each get a one year sentence. If one remains silent and the other tells, the one who tells goes free and the other gets three years jail. If both of them tell on each other, they both get two years. The rational solution is that both of them defect and tell on the other. But the best solution would be for both of them to remain silent. This is seen to apply to real life situations. In the cold war, the rational solution was to build nuclear weapons. But the best solution for two enemy countries was to cooperate and not build nuclear weapons. The game shows how rational behavior may make one a rational fool. 

Product Cycle Theory (Raymond Vernon): From Raymond Vernon’s book Sovereignty at Bay (1971).  According to this theory, every product follows a cycle from innovation to maturity to the time when it is obsolete. After World War II, American firms had a comparative advantage in innovation because the American market was so large and because the US led in R&D. In the first phase, American products are exported from their US base. Sometime later, the product matures and production techniques become standardized. Foreign firms enter the market as there is technological transfer and a demand for the product. At this point, US firms export the means of production and produce abroad in order to preempt foreign firms. So FDI is a device used to preempt foreign firms from gaining a foothold in the market and allowing American firms to keep their monopoly. This theory helped to explain the behavior of US firms in the l960s.

Profit Seeking Activity: Another term for rent seeking by a coalitional distribution or interest group. If the activity is merely to gain greater benefits without enhancing production, such as in cotton agricultural subsidies in the United States, then the activity is unproductive and unjustified. The term is associated with Mancur Olson and the Virginia School of Public Choice Theory. 

Progressive Taxation:  The policy of taxing high incomes at a higher rate than low incomes.

Public Choice Theory: A theory largely devised by James Buchanan and Gordon Tullock in their book The Calculus of Consent (1962). They used economic theories to understand political behavior. These theorists were strongly opposed to government interference in the market.

Quantitative Easing: Another term for printing money. Central banks may have a policy of increasing the money supply with the aim of stimulating economic activity. This was the case following the financial crises in the United States in 2008. Quantitative easing by the United States and Europe tends to flood foreign currencies into emerging markets such as Turkey, where interest rates are higher.

Radical Critique of Political Economy: Radical critique may refer to the work of Karl Marx and others who challenged the approach and assumptions of the mainstream of political economy, such as Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill in the 18th and 19th centuries. After the marginalist revolution in the nineteenth century and the establishment of neoclassical economics by Alfred Marshall and others, radical critique refers to leftist thinkers in the Marxist tradition, who continued to support working class movements and base their economic analysis upon the labor theory of value, rather than the theory of marginal utility. The modern radical critique can be seen in the writings of Paul Sweezy, Harry Magdoff and others at the Monthly Review journal in New York, as well as other left critics of neoclassical economics.

Rational Choice Theory: Rational Choice Theory emerged from the use of methodological individualism to explain all of human behavior. The approach uses economic theory of utility maximization to analyze political behavior. Examples include the work of Anthony Downs in An Economic Theory of Democracy in the l950s and Gary Becker in The Economic Approach to Human Behavior (1976). The approach is also used in the Public Choice approach of Mancur Olson. It assumes that people make rational calculations to gain the basic desires of life, including food, prestige, awards, health, wealth and happiness. People are seen to approach life with the selfish and egotistical desires assumed by Thomas Hobbes. To act otherwise, presumably, would be a mistake. Probably a justification for capitalist profit-seeking behavior.

Rational Fools: A term from the political economist, Amartya Sen. While economists emphasize rational decision making by individuals, those rational decisions may also mark individuals as rational fools in terms of the likely outcome. One could relate this to rational profit making activity of corporations, which is swiftly destroying the global environment and so turning out to be quite irrational in a larger sense.

Reading School: The Reading School of Political Economy named after the University of Reading in England. The Reading School associated with John Dunning emphasizes technology as an important factor in the development of multinational corporations as well as the organization of production on a global basis. The theory is seen as eclectic as it borrows ideas from different schools of thought.

Real Economy: The Real Economy refers to the production of goods and services rather than investment in the financial sectors of the economy.

Realism: Realism may refer to state-centric realism which assumes that the international system is anarchic and sees the state as the most important actor. The approach also recognizes the role of international organizations, multinational firms and NGOs in the international arena.

Recession: A sharp downturn in economic activity in a country. In the United States, the technical definition of a recession is two consecutive quarters of negative economic growth.

Regime Theory in International Political Economy: A regime is defined by Stephen Krasner as a “set of principles, norms, rules, and decision making procedures” which guide actors, such as the directors of the World Trade Organization. In International political economy, the major approach is the liberal approach which assumes that actors act according to their rational interests and cooperate through international organizations. The realist approach sees states as the main actors in the international political economy and often in conflict with each other.

Regional Monetary Integration: May refer to the process by which the currencies of Western Europe were linked together into an exchange rate mechanism and eventually replaced by a single currency, the Euro. It may also refer to attempts toward monetary integration in North America, South America, East Asia, West Africa and other areas of the world through monetary unions and other forms of monetary cooperation.

Regionalism: A process by which the countries of a region, such as Western Europe cooperate to solve regional problems through such methods as customs unions, free trade areas, single markets, and monetary integration. It may refer to countries in North America, Europe, South America, East Asia, South Asia and elsewhere.

Rent Creation: May refer to activities of a government, such as legislation to create new programs, which results in the establishment of benefits which may then be available for distribution to an interest group. For example, a government may create social welfare benefits which are then distributed throughout the society. This can be contrasted to wealth creation in which new values are created through economic production.

Rent Seeking Behavior: Refers to the activities of coalitional distributions or interest groups which lobby or engage in other types of political activity to secure benefits from the government or public sector. This is seen by public choice theorists to be unproductive as it does not create any wealth but merely consumes resources already created.

Research and Development (R & D): Refers to activities which are aimed at innovation, the creation of new products and the improvement of existing products.

Reserve Army of the Unemployed (Karl Marx): A term Marx used to describe those workers who were unemployed and which capitalists could easily hire at cheap wages to expand production in a short period of time.   

Right to Work Laws (Irving Fisher): Also called open shop laws. This means that workers in a factory cannot be forced to join a labor union established by workers or labor officials in the factory.

The Road to Serfdom (1944): This is a famous book by Frederick Hayek which argued that the social welfare programs of the British Labour party were likely to result in totalitarianism.

Roundabout Production: Production methods which require more machinery and capital and therefore take more time to put into place when a decision has been made to expand production.

Savings: Savings may refer to the part of the national income which is not spent or consumed. In this case, it may result from deferred consumption. Savings in an economy may be related to investment and capital formation as the amount of savings may be made available to use as capital, when deposited in a bank or other investment asset.

Seigniorage: Refers to the special privileges the United States enjoyed during the Bretton Woods period as the provider of the world’s reserve currency, the US dollar. 

Service Sector Economy: A service sector economy is an economy in which the dominant enterprises of the economy are in the service sector. The service sector or tertiary sector includes information, transport, distribution of products, sales, pest control, entertainment, repair, food, hotels, hair solons, tourism and more. More than seventy percent of the work force in the United States is in the service sector.

Shareholder Capitalism (Stockholder Capitalism): The national system of political economy in the United States which is based upon the requirement that firms manage their business in such a way as to maximize profits for their stockholders or shareholders, rather than to serve the general needs of society.

 Smithsonian Agreement (December 1971): An agreement which adjusted the fixed currency exchange rates established at the Bretton Woods Conference in l944. The US dollar’s convertibility into gold was abolished. The dollar was over-valued by the l960s. In February 1973, the dollar was devalued by ten percent. The conference was held in Washington, D.C.

Social Dumping: Refers to a situation in which transnational corporations move manufacturing to countries which lack work standards and pay low salaries and few benefits to workers. Relocating in such countries as Bangladesh, for example to produce cheap clothing for higher profits is an example of social dumping.

Social Market Capitalism: Refers to the national systems of political economy in Western European nations such as Germany. These economies have been characterized by higher levels of social welfare and greater benefits to workers as compared to the United States. The members of society are seen as shareholders, as the companies are supposed to serve the interests of the whole society. 

Special Drawing Rights: A reserve currency created by the IMF in 1969 due to the shortfall in US dollars for international liquidity. The SDR is made up of a basket of currencies of the US dollar, British Sterling, the Euro and the Japanese Yen. As of 2013, there were some 275 billion in SDRs which are owned by the member countries of the IMF. They have served as a unit of account for the IMF and before 1981 were mainly seen as a form of credit. Countries are expected to maintain their SDR holdings at a given level. The SDR is sometimes seen as a source of credit for developing countries. They are not seen as very important in providing liquidity, however, as they make up only about four percent of global forex reserve assets.

Specie flow mechanism (David Hume): An analysis of the international flow of money which measures the effect upon an economy, including prices and the value of the currency. Hume observed that exports from a country would cause the value of the currency to rise, raising prices and having a negative effect on exports.

Speculative Mania: A phenomena which happens when investors rush to invest in a particular area of the economy, such as stocks or housing. The market may overheat creating a bubble which is likely to burst when investors start to become skeptical that the market will continue to rise. There is then a stampede of investors to get out of the market as quickly as possible.

Stagflation: A term used by a Conservative member of Parliament in the UK in a speech in l965. Lain Macleod warned that the economy was suffering from both high inflation and high unemployment.  This phenomenon was seen in the US economy beginning in the l960s. Unemployment remained high even when there was considerable inflation in the US economy. Some economists believed that the situation could be corrected by applying the proper monetary policies.

Stagnation: Stagnation in an economy happens when the rate of economic growth slows down and economic recovery is difficult to achieve.

Stakeholder Capitalism: Stakeholder capitalism can refer to the national system of social market capitalism in some European states, such as Germany. Members of society are seen to be stakeholders as they have an interest in the economic outcome in terms of their social welfare and quality of life.   

State-Centric Realism: A view of global political economy in which the state is seen as the primary actor in the international economic arena. International organizations are seen as having a secondary importance.

Steady State Economy: A steady-state economy may refer to the economic growth model of Robert Solow. In this model, the economy reaches a steady state when investment is equal to depreciation and is said to be in equilibrium. Knowledge is seen as an exogenous variable.

Stockholder Capitalism: The name applied to the national system of political economy in the United States which is based upon the requirement that firms manage their business in such a way as to maximize profits for their stockholders, rather than to serve the general needs of society.

Stolper-Samuelson Theorem: Says that international trade will tend to benefit those who own the abundant factor (capital or labor) and hurt those who own the scarce factor. Over time there will be a redistribution of value to either labor or capital. In a developing country, labor will benefit most. In a developed country, capital will benefit most.

Strategic Behavior: Strategic behavior in economics is a broad term which could apply to both firms and governments. In order to be successful, a firm must develop a strategy to manage the firm optimally and meet specific goals, most importantly making acceptable profits for its owners and stockholders. The production of cutting edge profits might be part of this strategy. For governments, strategic behavior can involve economic policies which promote domestic firms in the domestic and international environments.

Strategic Management: Strategic management involves the operation of a firm to meet specific objectives. It primarily involves responding to external issues outside the company, such as understanding the customers’ needs and responding to competitive forces. There is a need to continuously adapt to the changing external environment. Strategic management provides overall directions to an enterprise. There are a number of models of strategic management.

Strategic Trade Theory: Strategic Trade Theory argues that countries can increase international trade, particularly exports, by implementing specific policies. For example, Japan was able to capture a large share of the US market in electronics and automobiles in the l960s and 1970s by such policies as government support to oligopolistic industries, producing quality products at low cost, producing niche products, and supporting domestic firms even when they did not make a profit.   

Structural Adjustment Programs (SAP): Structural Adjustment Programs are economic reform policies administered by the IMF as requirements for obtaining a loan from the IMF. These policies usually involve the implementation of austerity packages. They may require large scale privatization of state owned enterprises, cutbacks in government employment, cutbacks in education, cutbacks in health, cutbacks in social welfare, banking reforms, decreases in government subsidies, and other such policies.

Structural Investment Vehicle (SIV): A financial instruments which earns a profit by producing nothing. The SIV was invented by Citigroup in 1988. The market in SIVs collapsed in 2008 with the financial crises. Money is made by borrowing money on short and medium term notes such as securities, commercial paper, and public bonds, at low interest. This money is then used to buy longer term securities that pay higher interest, such as mortgages, bonds, auto loans, student loans, and credit cards. The net credit spread produces profits for the investors. The amount of SIVs reached 400 billion dollars in 2008, but then the market collapsed.

Subprime Mortgage: A subprime Mortgage is one which is held by a borrower with a lower credit rating than a borrower with a conventional mortgage. Since the risk is greater in such lending, the interest rate is generally higher. Over-lending in the subprime market helped to produce the financial crisis in the United States in 2008. 

Subsistence Economies: A subsistence economy is one in which food, clothing, shelter and other basic needs are supplied through nature, such as through hunting and gathering and agriculture in which that which is produced is consumed by individual families or small groups and does not enter the market. Trade in such an economy would be carried out through barter as money is absent.

Subsistence Theory of Wages:  A principle held by classical political economists which says that wages will fall to the point in which the wage only allows the worker to survive.

Supply Side Economics: A right-wing conservative approach to economic policy. Supply side advocates argue that economic growth can best be increased by such policies as a lower income tax, a lower capital gains tax, and by reducing government regulations on firms. They argue that consumers will benefit from the greater supply of goods which result. It is the opposite of demand side economics. 

Surplus Value (Karl Marx): The source of profits for Karl Marx. When the worker works longer than is necessary to produce his cost of living, the additional part of the day is surplus labor for which the capitalist does not pay. This surplus labor produces surplus value for the capitalist.   


Global Political Economy: Glossary (Part 2) E-I


Early Industrializer: Countries such as the UK and the United States which were among the first countries to industrialize in the industrial revolution.

Economic Geography: The study of how a national economy or the global economy is organized spatially in terms of cores, peripheries, and semi-peripheries. Attempts to explain why industries locate where they do leading to agglomeration or decentralization of economic activity. It also includes the factor which affect transportation and patterns of national and international trade.

Economic Miracle: A term which refers to the high rate of economic growth in specific countries for a period of time. For example, Japan after World War II.

Economic Stagnation: Economic stagnation occurs when the rate of economic growth slows down or decreases to a very low level for a considerable period of time.

Economies of Scale: The advantage that firms gain due to their size. The cost per unit is expected to decrease with larger quantities of production up to a point. 

Elasticity of Demand: The percentage change in consumer purchases divided by the percentage change the price of the good. This measures how much sales will be affected by a change in the price.

Embedded Liberalism: A term used by the political scientist John Ruggie (1982). Karl Polanyi had earlier written about disembedded markets and said it would be necessary to re-embed them in society after World War II. The term refers to the global political economy outside the communist sphere following WWII up to the l970s, which promoted free trade, national Keynesianism, and the management of unemployment. The international monetary system was the Bretton Woods System based upon the US dollar. The World Bank was to manage credit to developing countries and the IMF would settle payment accounts between countries.  

Emerging Markets: Refers to countries which have liberalized their economies since the l980s and experience generally rapid economic growth and a high rate of industrialization mostly in the private sector. Particularly, the big emerging markets include China, India, Brazil, Russia, and South Africa.

The End of History and the Last Man: The seminal book by Francis Fukuyama, published in 1992. While Karl Marx believed that history would end with Communism, Fukuyama claimed that Western Liberal Democracy would be the final form of human government.

Endogenous Growth Theory: A theory of economic growth in which knowledge and technological advance through R and D are treated as endogenous variables in the model. The theory is based upon economies of scale and says that there need not be diminishing rates of return.

Endogenous Variable: A variable which is included in the economic model.

Environmental Dumping: This happens when corporations move into developing countries to produce commodities, taking advantage of lax environmental pollution standards to cut the cost of production and increase profits.

Equation of Exchange (Irving Fisher): An equation derived by Irving Fisher which is used to discover the causes of price inflation. According to the equation, the Money supply (M) times its velocity (V), the number of times a unit of money is used during a year to buy goods and services, must equal the value of goods and services (P times Q). MV=PQ.

Equilibrium: In economics, market equilibrium is a situation in which supply and demand are balanced. There may be equilibrium in the market, even though people are starving.

Equity Company: A company which makes investments in the private equity of operating companies using investment strategies. Some examples are The Carlyle Group, Kohlberg Kravis Roberts, Blackstone Group, and Bain Capital.

Eurodollar Market: The Eurodollar market refers to foreign currencies, including dollars, which are deposited in European and other international banks.   

European Central Bank (ECB): An institution of the European Union which administers the monetary policy of the Eurozone, the countries in the European Union which use Euros as their currency. The bank was established by the Treaty of Amsterdam in 1998 and its headquarters is in Frankfurt. The bank is charged with maintaining price stability in the Eurozone and implementing monetary policies.

Excessive Exuberance: A term used famously by Alan Greenspan referring to the US economy in which investors were believed to have overestimated the potential for greater profits in the financial sectors of the economy.

Exchange Rate Mechanism: A complex system implemented in Europe in the l970s to link together the European currencies.

Exchange Value: The value of a commodity in terms of what it can be exchanged for.

Exogenous Variable: A variable which cannot be included in the economic model.

Export Led Growth: A strategy of economic growth which relies upon production of commodities for export. The major shift to export led growth in developing countries happened in the l970s, from the earlier import substitution industrialization approach.

Export Orientation: An economic strategy designed to increase the exports of a country. A typical strategy of many emerging market countries after the l970s.

Externalities: Externalities happen when the cost of producing a good is not paid for by the consumer or when the benefit of the good is not received by the consumer. An example of the first is pollution. An example of the second is the benefit of education to society.

Extreme Poverty: A condition in which individuals lack such basic human needs as adequate housing, clothing, food, electricity, safe drinking water, sanitation facilities, health care, education, and access to information. In such a condition, individuals cannot enjoy the most basic human rights.

Factor Price Equalization Theory: A part of the Heckscher-Ohlin Model of conventional trade theory. It says that under certain circumstances, trade in goods will over time equalize the return for each factor of production, wages to labor and profits to capital.

Factors of Production: The resources necessary to the production of commodities. Classically, the factors of production were land, labor and capital. It is also sometimes claimed that entrepreneurship is also a factor of production.

Falling Rate of Profit: A hypothesis of classical political economy found in the work of Karl Marx, Adam Smith, John Stuart Mill and Stanley Jevons. It says that the rate of profit will tend to fall over time. Marx explained the falling rate of profit according to his theory of exploitation. As the industry develops, the fixed capital or constant capital will increase in relation to variable capital or labor. This means that the surplus value will fall in relation to fixed capital. Since the rate of profit is equal to the surplus value divided by the total capital, the rate of profit will tend to fall.

Fast Track Legislation: A process used when a US Administration wishes to speed up the passing of a law and avoid extensive debate which might be widely reported in the press. For example, the passing of legislation for the North American Free Trade Agreement (NAFTA) was through a fast track legislation process.

Federal Reserve (The Fed): The Central Bank or national bank of the United States. It was privatized in the early part of the twentieth century. 

Financialization: The shifting of the major economic activity in the United States from industrial capital or manufacturing to generating profits through the financial sector. The primary sectors of the financial economy include the finance, insurance and real estate sectors, sometimes referred to as “F|IRE.” This happened after the early 1970s marking the US as a post-industrial service-sector economy. Manufacturing operations were mostly exported to developing countries such as China and Mexico. The analysis of financialization in the American economy is associated with the Monthly Review school in New York, and particularly John Bellamy Foster.

Fixed Exchange Rates: A fixed exchange rate system is an arrangement in which a country attempts to maintain a fixed rate of exchange between its currency and a given weight of gold, another currency or a basket of currencies.

Flying Geese Paradigm: A Japanese view of Kaname Akamatsu describing the pattern of technological development in East Asia. This view argues that Asian nations will catch up with the West as the production of goods for the global market moves from more advanced to less advanced countries in a sequence. With Japan in the lead of the formation, the second tier of countries following will be South Korea, Taiwan, Singapore, and Hong Kong. A third tier includes Indonesia, Thailand and Malaysia. Following these are China, Vietnam and the Philippines. As each country develops, production becomes more capital intensive and production shifts to cheaper labor countries.

Fordism: The term comes from the industrial system developed by Henry Ford to mass produce automobiles in the United States. The same system has been used to manufacture a wide range of products. The three fundamental aspects of Fordism include the production of standardized products, assembly lines based upon the low skill of workers, and living wages with benefits. See the Charlie Chaplin film, Modern Times.

Foreclosure: The process by which a bank reclaims title to a house or other asset when the mortgage holder fails to make the required payments on the loan.

Foreign Direct Investment (FDI): This is a process whereby a company invests in the manufacture of products in a foreign country either by buying companies or expanding production in the foreign country. It is distinguished from portfolio investment, where companies invest in securities.

Fragmentation: Fragmentation happens when production of a good is organized so that different components of the product, such as an automobile, are produced in different countries. The components are then shipped, or traded, and assembled elsewhere. Much of trade is in the form of components.

Free Market Economy: The concept of an economy in which the forces of supply and demand are not controlled by the government or some other authority. This ideal could be described as that of laissez faire. It is also associated with capitalism, but theoretically could be used in other economic systems. It is largely an ideal, as it is difficult to find actually existing economies that conform to these parameters. It is contradictory to the logic of capitalism itself, which tends toward monopoly.

Free Rider Problem: The free rider problem happens when individuals enjoy the benefits of a good for which they do not pay. For example, they may enjoy the benefits of good roads even though they do not pay taxes to construct them. Good roads may not be constructed unless individuals are forced to share the cost. 

Game Theory: The study of strategic decision-making. It involves mathematical models of conflict and cooperation between decision-makers who are considered to behave in a rational manner to maximize their gains in the game. Can be applied to economics and political science as well as other disciplines.

GATT: The General Agreement on Tariffs and Trade. The global multilateral trade agreement which existed from 1947 until 1994. It was replaced by the World Trade Organization in 1995. GATT was an arrangement which resulted from the failure to establish an international trade organization. Its purpose was to reduce tariffs and preferences and increase free trade.

General Equilibrium (Leon Walras): General equilibrium happens when all markets in an economy are in equilibrium at the same time.

Globalization: Globalization may be defined in many ways. Broadly, it can be seen to describe processes of linking peoples of the world together for thousands of years through commerce, travel, conquest, war and so on. The term has come to be largely a buzz term since the l980s, describing global changes associated with the spread of neoliberal capitalism to most countries and areas of the world. The International Monetary Fund (IMF) sees globalization as involving four aspects: global trade and transactions; capital and investment movements; migration and the movement of people and the spread of knowledge. Beyond this doctrinaire definition, the term could just as well describe the growing global resistance to neoliberalism capitalism.

Gold Standard: A strict gold standard is a monetary system in which currencies are made of gold. The Bretton Woods System was a modified gold system as the US dollar was linked to gold at the official price of 35 US dollars per ounce. Other currencies were then linked to the dollar. Gold was thus used to stabilize and maintain the value of the dollar. This could only work if there were not too many dollars. So the seeds of destruction were built into the Bretton Woods System.

Golden Fetters: From the book by Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. (1992) Eichengreen argues that economic policies, particularly the gold standard, constrained economic policies and was largely responsible for the unstable economic environment of the l930s.

Governance: Governance refers to the management, making policies and decisions, instituting processes, and carrying out all the tasks to keep an organization running. It may apply to a government, a business corporation, or other organization, such as a non-governmental organization.   The World Bank defines governance as “the manner in which power is exercised in the management of a country’s economic and social resources for development.”

Gresham’s Law: A principle which says that “bad money drives out good money.” The principle says that people will hold more valuable money and spend less valuable money.

Gross Domestic Product (GDP): A measure of the market value of all the final goods and services produced within a country in a designated period of time.

Harmony of Interests: In economics, the assertion that there is a harmony of interests in society between all members of the population.  The Austrian school of economics claims that this is because the division of labor removes conflict between individuals. This view is the opposite of seeing society in a dialectical way where there is a clash between the interests of different classes in society.  

Hecksher-Ohlin Model (H-O Model): The Hecksher-Ohlin Model is the neoclassical model of international trade theory. The theory is based upon a number of assertions. The model is based upon comparative costs and says that a country will specialize in products where it has a cost advantage over other countries. The model also assumes constant returns to scale and universal availability of production technologies. The model says that (1) a country will export those things which it has in abundance, (2) trade will benefit those who own abundant factors (capital or labor) and hurt those who own scarce factors, (3) all sectors will benefit, but there will be a redistribution to either labor or capital (Stolper-Samuelson Theorem), (4) trade in capital or labor and trade in goods will have the same effect and one can fully substitute one for the other (Mundell equivalency), and (5) trade in goods will over time tend to equalize the return for each factor of production, wages to labor and profits to capital. (Factor-Price Equalization Theorem).  

Hedge Funds: A hedge fund is a pooled investment vehicle run by a management firm. Hedge funds are not sold to the general public and are frequently held by financial institutions. Hedge fund managers invest in a broad range of markets.

Hegemonic Stability Theory: A theory that claims that free trade in the international arena is dependent upon a strong hegemonic state to keep the international system open to international commerce. Seen to be typical of the international order under British colonialism. More generally, it says that the stability of the international order depends upon the dominance of a single powerful state.

Helms-Burton Act: A US law which punishes foreign firms which deal with Cuba. It is seen to be an example of how the US tries to impose its policies on other countries.

Hyper Speculation: Excessive or overextended speculation in markets, whether in financial markets or other assets.

Holding Company: A holding company is a company which owns other companies, for example the outstanding stock. The holding company does not itself produce goods and services.

Hot Money: Money generally from developed countries invested into a foreign country as foreign investment or portfolio investment. The purpose is generally to take advantage of the higher interest rates in emerging market countries such as Brazil, China, Turkey, and Malaysia. These are generally short-term investments and are called hot money because the funds can move out of the markets very quickly, especially with financial or political instability.  

Human Capital: A term which treats the labor, ability, talent, skill, and education of human individuals as capital or a factor of production in the production of commodities.

Imperfect Competition: Imperfect competition refers to a market which shows only some of the characteristic of competitive markets. This can be due to the presence of an oligopoly, where a few companies control the market; due to monopolistic competition, where there are many sellers producing highly differentiated products; a condition of monopsony, where there are many sellers, but only one buyer; and a condition of oligopsony, where there are many sellers but few buyers.     

Imperialism: Generally refers to the domination of one country over another country. Classical imperialism saw the rule of one country over other areas of the world, such as under the British, French, or Dutch.  Modern imperialism may involve the economic and political domination of countries through the dynamics of global capitalism.

Import Substitution Industrialization: The pattern of development typical of countries after World War II, such as India, which tried to produce most products inside the country for domestic markets, rather than to produce products for export and import other goods.

Increasing Returns to Scale: Happens when the output increases by more than the proportional change in the factors of production.

Indivisible goods: Goods that are sold in discrete quantities, such as automobiles, airplanes or computers.

Inductive Reasoning: A type of logical reasoning in which general propositions are derived from a number of specific observations. For example, it may be observed that a number of developing countries suffer negative terms of trade when trading with rich developed countries. Therefore, as a general rule, a developing country can be expected to experience negative terms of trade in international trade. 

Infant Industries: Newly established industries, generally in developing countries, which have not yet developed to the point of being competitive in the international arena.

Infant Industry Argument: The mercantilist argument that protection should be used to protect small industries until they become strong enough to compete in the international environment.

Inflation: A persistent rise in general prices of goods and services over a period of time. Inflation is considered by some economists to be due to a growth in the money supply.

Information Technology (IT): The use of computers and telecommunications equipment to store, retrieve, transmit, and apply data. IT includes computers, software, electronics, semiconductors, internet, telecommunications equipment, and so on.

Institutionalist School of Economics (Thorstein Veblen): Says that economic behavior is not driven by rational decisions by individuals, but rather by the requirements of the institutions in society, such as conspicuous consumption and prestige.

Intellectual Property Rights: The rights given to a person over the creation of their minds. It is said to give the creator an exclusive right over the use of his or her creation for a period of time. Intellectual property rights may apply to literary works, scholarly works, artistic works, symbols, names, images and so on. They may be protected through patents, copyrights and trademarks. In real life, however, creations of the mind are not generally owned by the creator but by a publishing company or other company which pays a small fee for the exploitation of the intellectual creation.

Interest Group Theory: The theory that in a pluralist democracy, individuals and groups are free to form groups which petition the government for certain demands. The theory is closest to American political theory and is associated with such figures as Arthur Bentley and David Truman. Traditionally, interest groups have been seen to make society more democratic and better for all. Public choice theory challenges this view of interest groups.

International Monetary System: Refers to the system that was put into place at the end of World War II to regulate the world’s major currencies. In particular, the Bretton Woods System made the US dollar the principle global reserve currency. The US dollar was linked to gold at the rate of 35 US dollars per ounce. The major European currencies were pegged to the dollar with fixed exchange rates. The system operated well until the early 1970s when the dollar was devalued.

Intrafirm Trade: Trade which takes place between different branches of the same company in different countries. For example, some parts of a ford automobile may be produced in Turkey and shipped to a Ford auto plant in Vietnam. This transfer counts as international trade, even though it is only between two branches of the same company.

Intraindustry Trade: Trade which takes place between firms in the same industry.

Interindustry Trade: Trade which takes place between firms in different industries.

Investments: Capital spent for the purpose of increasing profits or income in future.

Investor-state dispute settlement: A process of the World Trade Organization in which a panel of corporate lawyers make a ruling in disputes between companies investing in foreign countries and the host government. For example, if parliament in the host country makes a law regulating environmental pollution which the company will produce, the company may make a claim to compensation from the host government. In this case, the WTO panel is to decide whether the company is entitled to compensation.

Irrational Exuberance: A term used by the head of the US Federal Reserve System, Alan Greenspan in a speech in 1996, to describe excessive investment by firms and individuals in stocks and other assets during the era of the dot-com bubble. It suggested the assets might be overvalued. The speech was followed by a world-wide fall in stock prices. It is the title of a book, Irrational Exuberance by Robert Schiller in 2000. 

Irreconcilable Trinity: The theory which says that only two out of the three goals of monetary management can be met at any one time. These are stable exchange rates, national independence of monetary policy and capital mobility. An international monetary system can accommodate only two of these goals at any one time. The Bretton Woods system, based upon fixed exchange rates promoted economic stability, but not the free movement of capital.