Global Political Economy: Glossary (Part 5) T-Z

Tax Haven: A tax haven generally refers to a country, often an offshore island country, where taxes are very low or near zero. Those wishing to avoid taxes can invest their money in these countries and avoid paying taxes to their home governments.

Taylorism: Techniques of production using discipline and organization in the workplace. Production is based upon the scientific study of human efficiency and how much speed the human body can tolerate in the work place. It also uses incentives to increase the speed of work and exploitation. Used widely in US and Europe. Also used by Lenin and the Bolsheviks to modernizes production in the Soviet Union. See Harry Braverman. Labor and Monopoly Capital.

Technocratic Rule: Technocratic rule or management of the economy is frequently seen under neoliberal regimes when the economy has suffered a recession or is under austerity. For example a technocrat prime minister was appointed as Prime Minister of Greece after the economic crises in 2010. In this way, the country may avoid populist pressures to maintain benefits for the poor, elderly and working classes.

Technological Leapfrogging: Technological leapfrogging can be achieved by developing countries when they adopt technologically advanced methods of production as they industrialize. This means that they avoid going through the stages of older less efficient and polluting technologies and advance to more sophisticated technologies at once. This might provide them an advantage in the global market over countries which are still using less efficient production techniques.

Technological Spillover: Technology spillover happens when new technologies developed by a particular firm or group of firms becomes available for use by other firms or countries. The monopolization of a new technology by a particular firm may be relatively short term as other firms gain access to the technology.

Technology Transfer: Technology transfer happens when knowledge, technologies, skills, manufacturing techniques, and other technologies are learned and adopted by other countries, particularly developing countries. For example the technologies for the production of radio, television and video machines by the United States was quickly transferred to Japan in the l950s and l960s. 

Terms of Trade: The terms of trade indicate the relative price of exports of a country in terms of imports. It is the ratio of export prices to import prices. When the price of exports rise, a country can import more products. If the price of exports fall, the country can import less. The terms of trade generally militate against countries which depend upon the export of primary products such as bananas or coffee, because the price of agricultural products is likely to fluctuate greatly in the global market. For example, if the price of coffee falls, a country will have to export a large amount of coffee to buy a bulldozer.

The Theory of Capitalist Development (1942): A seminal book by the Marxist economist Paul Sweezy which extended the theories of Karl Marx to the twentieth century economy of the United States. Sweezy analyzed the operation of monopoly capitalism as it existed in the United States in the twentieth century.

Time Preference Theory of Interest (Irving Fisher): A concept from Irving Fisher that interest is a reward for not consuming things today, but putting off consumption until a later time.

Tobin Tax:  A tax proposed by the late economist James Tobin on international Financial flows but never established. The tax would provide a fund to help bail out countries in financial crises.

Tokyo Round: Trade talks under GATT which began in September 1973 and lasted for 74 months, involving 102 countries. The talks addressed the issues of tariffs and non-tariff measures. The talks resulted in tariff reductions worth 300 billion dollars in world trade.

Toxic Imperialism: Toxic imperialism happens when nations or firms act in such a way as to pollute other countries and profit from doing so. One form of toxic imperialism is dumping toxic waste in low income countries which lack environmental regulations. This can happen through the trade in toxic waste, often mislabeled. Another form is using countries with lax environmental regulations to produce products.

Trade Barriers: Trade barriers are restrictions on international trade, particularly tariff barriers, for the purpose of protecting the survival and profits and of domestic industries. Other types of trade barriers may include quotas, technical regulations, tax policies, and government subsidies to industries.

Trade Protectionism: Barriers to foreign trade, particularly tariff barriers. The major argument for trade protectionism has traditionally been to protect small industries.

Trade Rounds: Generally refers to the trade rounds carried out under the General Agreement on Tariffs and Trade (GATT) in the late twentieth century. The major trade rounds were the Kennedy Round, the Tokyo Round, and the Uruguay Round. The Doha Round has been carried out under the World Trade Organization. 

Traditional Growth Theory: May refer to the theories developed by Robert Solow and others in the l950s. Traditional growth theory posited that economic growth was a function of labor and capital. Technology and human knowledge were considered as exogenous variables. There were seen to be constant returns to scale.

Transatlantic Trade and Investment Partnership (TTIP) A trade investment agreement between the European Union and the United States which was being secretly negotiated through 2014. Talks began in Washington, DC in July 2013 and continued. Objectives of the trade agreement is to remove barriers which will result in millions of dollars of savings to US and European companies. It is argued by liberal proponents that everyone will benefit. Objectives also include cutting tariffs, standardizing technical regulations on products, opening up markets to services and investment, restricting subsidies to state owned enterprises, ensuring a market for genetically modified foods now restricted in Europe, and coordinating regulations in the financial sector between the EU and the United States.   

Transfer Pricing: Transfer pricing is the setting of prices between different branches or companies of a single corporation which are generally located in different countries. The misuse of transfer pricing involves pricing to lower the profits of a company in high-tax countries and raising the profits of a branch in a low-tax country. Transfer pricing is the major tool for corporate tax avoidance.   

Trans-Pacific Strategic Economic Partnership Agreement (TPSEP): A trade agreement of 2005 among Brunei, Chile, New Zealand and Singapore. The purpose was to liberalize trade in the Asia-Pacific region.

Trans-Pacific Partnership (TPP): A proposed expansion of the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP) which has been negotiated beginning in 2010. The potential members include Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US. The agreement might also include Taiwan and South Korea. A round of secret negotiations began in August 2013. Information about the large scale deal was leaked to the public and on November 13, 2013, the complete draft of the Intellectual Property Rights chapter of the agreement was published by WikiLeaks. There are many concerns about the potential agreement. Joseph Stiglitz has said that the TPP presents grave risks.

Turkish Financial Crises (2001): The 2001 Turkish Financial Crises broke out in February. Turkey was under an IMF structural adjustment program with the Turkish Lira pegged to the dollar as a crawling peg. In November, 2000, the banks had liquidity problems with a loss of confidence in the system. The central bank injected a large amount of liquidity into the system, violating its own rules. But this had little effect as a large amount of money flowed out of the country. The current account deficit rose sharply due to high imports. Interest rates rose. On February 19, the President of Turkey, Ahmet Necdet Sezer, warned the Prime Minister, Bulent Ecevit, about corruption in his ministry. Following this, the currency peg collapsed on February 21. The currency was floated, leading to a thirty percent devaluation. The currency crashed further in subsequent days with extremely high interest rates. The Turkish Banking system was badly in need of reform and a large amount of hot money had flowed into the country to take advantage of high interest rates on Turkish liras. Turkey received a loan of 11.5 billion US dollars from the IMF. However there were many strings attached. The government had to embark on a privatization of state economic enterprises and change many laws. Kemal Dervis, a World Bank former vice president was brought into the government to carry out an extensive reorganization of the banks and the country’s economy.

Uneven Development and Combined Development: A complex theory developed by Leon Trotsky to understand global development and the potential for development in Russia under the Czar. Trotsky’s analysis led to the theory of the permanent revolution. He noted that in human history, different countries do not modernize in the same way through linear stages of growth. Also countries are affected by each other with a spill-over effect. This means that countries could skip stages, telescope development, or compress development stages in the transition to modernization. He also noted how imperialism affected the way countries under the rule of another country were changed and modernized or impeded from development.   

Uruguay Round: A round of trade talks which resulted in the establishment of the World Trade Organization. The talks began in September 1986 and continued for 87 months, involving 123 countries. Issues addressed include tariffs, non-tariff measures, rules, services, intellectual property rights, dispute settlement, textiles and agriculture. Besides establishing the WTO, the talks resulted in major reductions in tariffs and agricultural subsidies, an agreement to allow full access for textiles and garments from developing countries, and the extension of intellectual property rights.  

Use Value: Use value is a concept which was developed by classical political economists in the eighteenth and nineteenth centuries. Use value is a measure of the utility which a commodity contains as opposed to its exchange value. For example, paper money contains little use value but only exchange value. 

Utilitarianism (Jeremy Bentham): Utilitarianism says that policies are best which produce the greatest good to the greatest number of people. The theory is sometimes seen to be unethical, as it could allow the weak members of society to perish without any help if the resources used could produce greater happiness elsewhere.    

Variable Capital (Karl Marx): A concept used by Karl Marx to describe labor as a factor of production in which the cost of labor was not fixed, but subject to change according to the conditions of production.  

Virginia School of Economics: A school of economics characterized by the Public Choice approach. Major architects of the school include James M. Buchanan, Gordon Tullock, G. Warren Nutter, and Mancur Olson. A major work was The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962) by James M. Buchanan and Gordon Tullock. First located at the University of Virginia, in 1969 the Center for the Study of Public Choice was established at Virginia Tech University. This center was moved to George Mason University in 1983. Theorists share the “free market” approach with the Austrian and Chicago schools. They apply economic analysis to national constitutions. Mancur Olson studied collective action and special interest groups. They have published a body of literature on rent seeking behavior.

Volatility: Volatility may refer to the rapid and unpredictable changes in the market values of major currencies in the global market. This makes it difficult to predict the prices of imports and exports and impedes international trade.

Wage Fund Doctrine: This principle says that employers must have a fund of capital available to pay the workers during the production process.

Washington Consensus: The assertion made by such organizations as the IMF and the World Bank in the l990s that countries around the world agreed with the approach of the United States that there was no alternative to instituting neoliberal economic management in countries in the age of globalization of production and marketing and that the rollback of interventionist governments along with privatization was necessary. In reality, there is little evidence of such a consensus.  

The Wealth of Nations: The famous book by Adam Smith published in 1776. Adam Smith argued that a more free market and liberal policies had an advantage over statist policies such as those advocated by Friedrich List. The book contained the idea that the free market functioned as if there was an invisible hand operating to produce a favorable result for all parties. The book also promoted the idea of free trade between countries, but noted that sometimes the worst enemies of the free market were the capitalists themselves who tended to form a monopoly in order to control the market.

Welfare Maximizing: Welfare maximizing may refer to devising economic policies which are designed to increase the social welfare of members of a society by the optimal allocation of resources to different segments of the population.

Welfare State: Welfare state may refer to the Western governments which began to provide a range of social services and benefits under Keynesian economic management after the early l930s. Social spending served as a government tool to increase effective demand and stimulate capitalist economies.  

World Bank: The World Bank includes The International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank is an international financial institution which was set up at the Bretton Woods Conference in the United States in 1944. It provides loans to developing countries. The official goal of the World Bank is the reduction of poverty. The first World Bank loan was made to France for 250 million US dollars, half of what was asked for. The US State Department refused to approve the loan until the French Government expelled the Communist Party members from the Government.  

World Trade Organization(WTO): The organization established in l995 under the Uruguay Round of Trade negotiations. It replaced the General Agreement on Tariffs and Trade (GATT). As of 2013, there were 159 member states in the WTO.

Zaibatsu: A zaibatsu is a type of business firm which existed in Japan before World War II. The US occupation sought to destroy the Zaibatsus but they were reorganized as keiretsus. These large firms are interlocking and their presidents cooperate in formulating joint policies. They also share in financial matters, R&D, and marketing. They form the backbone of Japanese monopoly capitalism.

 

Sources:

Amin, Samir, The Liberal Virus: Permanent War and the Americanization of the World. New York: Monthly Review, 2004.

Block, Fred L. The Origins of International Economic Disorder. Berkeley: University of California Press, 1977.

Coll, Steve, Private Empire: ExxonMobil and American Power. New York: The Penguin Press, 2012.

Dasgupta, Biplap. “The New Political Economy: A Critical Analysis,” Economic and Political Weekly, 32 (4), 1997.

Foster, John Bellamy and Fred Magdoff. The Great Financial Crises: Causes and Consequences. New York: Monthly Review Press, 2009.

Gilpin, Robert. Global Political Economy. Princeton: Princeton University Press, 2001.

Girdner, Eddie J. and Jack Smith, Killing Me Softly: Toxic Waste, Corporate Profit, and the Struggle for Environmental Justice. New York: Monthly Review Press, 2002.

Girdner, Eddie J., USA and the New Middle East. New Delhi: Gyan Publishing House, 2008.

Girdner, Eddie J. People and Power: An Introduction to Politics (third edition). Istanbul: Literature, 2013.

Heilbroner, Robert L. The Worldly Philosophers (Fourth Edition). New York: Simon and Schuster, 1972,

Hunt, E. K. and Howard J. Sherman. Economics: An Introduction to Traditional and Radical Views (Third Ed.). New York: Harper and Row, l978.

Krugman, Paul, “How the Case for Austerity Has Crumbled,” The New York Review of Books, June 6, 2013.

Krugman, Paul, “Talking Troubled Turkey,” New York Times, Jan. 30, 2014.

London, Jack, The People of the Abyss. London: Pluto Press, 1998. (First published in 1903).

Magdoff, Harry. The Age of Imperialism: The Economics of U.S. Foreign Policy. New York: Monthly Review Press, 1966.

Marx, Karl. Grundrisse: Foundations of the Critique of Political Economy. New York: Penguin Books, 1993.

Marx, Karl. Theories of Surplus Value: Books I, II, and III. New York: Prometheus Books, 2000.

Marx, Karl and Frederick Engels. The German Ideology. New York: International Publishers, 1970.

Medema, Steven G. and Warren J. Samuels, eds., Lionel Robbins, A History of Economic Thought: The LSE Lectures. Princeton: Princeton University Press, 1998.

Payer, Cheryl, The Debt Trap: The International Monetary Fund and the Third World. New York: Monthly Review Press, 1974.

Peritore, Norman Patrick, Adventures in Political Theory. Denver, Colorado: Outskirts Press, 2010.

Pressman, Steven. Fifty Major Economists (Second Ed.). London: Routledge, 2006.

Stiglitz, Joseph, Globalization and its Discontents. London: Allen Lane, 2002.

Tabb, William K. The Amoral Elephant: Globalization and the Struggle for Social Justice in the Twenty-First Century. New York: Monthly Review, 2001.

Terkel, Studs, Working. New York: The New Press, 1972.

Veblen, Thorstein. The Theory of the Leisure Class. New York: Macmillan, 1899.

Veblen, Thorstein. The Theory of Business Enterprise. Mansfield Centre, CT: Martino Publishing, 2013. (First published 1904)

 

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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 3 ) J-N

Jamaica Conference (1976): A conference in which the major industrial powers accepted flexible currency exchange rates. Most economists thought that this would benefit the global economy, while others argued that it would create higher inflation and destabilization.

Japan (Bank of): Nippon Ginko, the Central Bank of Japan located in Tokyo. It was founded after the Meiji restoration in 1882. In l871, a new currency, the Yen was established. The bank issued new bank notes in 1885 which were greatly favored by the rats which ate many of them.

Jevon’s Paradox (William Stanley Jevons): Says that an increase in the efficiency of use of a commodity will not result in decreased consumption of the commodity, but rather increased consumption. For example, if light bulbs become more efficient by using less energy, people will just buy more bulbs and use them longer.

Jugler Cycles (Joseph Schumpeter): A business cycle discovered by Clement Jugler associated with changes in investment in new plant and equipment. These cycles last eight to eleven years.

Justifiable Coalition: A distributional coalition, such as a corporation, which is set up to create value or wealth, rather than to engage in rent seeking on its own behalf. According to New Political Economy, in this case, the coalition is justifiable.

Keiretsu: In Japan, a set of companies with interlocking business relationships. They appeared after World War II, after the partial breakup of the big companies called zaibatsu. The six major postwar groups were Mitsubishi, Mitsui, Sumitomo, Fuyo, Dai-Ichi Kangyo, and Sanwa.  

Kennedy Round: Trade round talks under GATT which began in May 1964 and continued for 37 months. The talks involved 62 countries and addressed the issues of tariff reductions and anti-dumping measures. The talks resulted in 40 billion dollars of trade concessions in world trade.

Keynesian Economics: Also known as demand side economics. The theory presented in The General Theory of Employment, Interest and Money (1936) by the British economist John Maynard Keynes. Keynes noted that economic output depends upon aggregate demand, or total spending in the economy. During a recession or depression, the government can come to the aid of the economy by government spending programs to boost aggregate demand and thus economic output.

Kitchen Cycles (Joseph Schumpeter): Short fluctuations in the economy discovered by Joseph Kitchen, which last from three to four years. They are due to the changes in business inventories.

Kondratiev Waves: Long-run economic cycles lasting between 45 and 60 years and discovered by Nikolai Kondratiev. Prices rise during a 20 to 30 year period, and then decline for 20 to 30 years.

Labor Productivity: The amount of goods and services a worker produces in a unit of time. It can be measured in terms of a firm, a particular process, an industry, or for a country. Productivity depends upon such factors as investment, technology, human capital and intensity of work.

Labor Theory of Value: A theory devised by the classical political economists beginning with Adam Smith and David Ricardo. The theory was used by Karl Marx in his critique of political economy in Capital. The theory basically says that economic value is produced by labor. The amount of value produced depends upon the prevailing means of production in an economy.

Laissez faire capitalism: A system of economy which historically has existed only in theory. In is a concept from classical political economists, such as Adam Smith, of an economy in which the government does not interfere in the workings of the market. Prices are seen to be set by natural factors, such as effort in labor.

Late Industrializer: Countries such as Germany, Japan and the former Soviet Union which industrialized after the rise of earlier industrial countries such as England and the United States. The term is associated with Alexander Gershenkron who argued that the pattern of industrialization was different for countries depending upon the time frame of industrialization. While industrial capital was accumulated gradually through emerging corporations in early industrializers, the state was active in the accumulation of capital in late industrializing states. For example, the banks were a source of capital for capitalist businesses in Japan after 1945.   

Law of Diminishing Returns: A fundamental economic principle which says that in a process of production adding one more factor of production, while holding other factors constant, will, at some point, yield lower per unit returns. This is because at some point, additional units of a factor of production may lower the efficiency of the process.

Law of Income Distribution (Vilfredo Pareto): A pattern of income distribution across nations discovered by Pareto. Income increases geometrically from the poorest to the wealthiest members of society in almost every society, according to the law. Pareto believed that the natural distribution was that twenty percent of the population would own eighty percent of the wealth.

Laws of returns to scale: Includes the law of increasing returns to scale, the law of constant returns to scale and the law of diminishing returns to scale.

Least Developed Countries (LDCs): Least developed countries are countries which lack socioeconomic development and have a low human development index. The three criteria for least developed countries include poverty, lack of human resources and economic vulnerability. LDCs have a gross national income (GNI) per capita of less that US $992 as of 2012. Human resources are weak in terms of nutrition, health, education, and adult literacy. They also demonstrate economic vulnerability based upon the instability of agricultural production, the instability of exports of goods and services, merchandise export concentration, the handicap of smallness, and a significant proportion of the population affected by natural disasters. These criteria are set by the Committee for Development Policy of the UN Economic and Social Council (ECOSOC). There were 50 LDCs in 2014, including 34 in Africa, 10 in Asia, five in Australia and the Pacific, and one in the Caribbean.

Lender of Last Resort: The International Monetary Fund is frequently referred to as a lender of last resort when a country experiences serious financial problems and needs a large loan. The IMF is then seen as the only solution to the problems which the country faces.

Leontief Paradox: A concept from Wassily Leontief. The paradox was that the United States was seen to enjoy a comparative advantage in the export of labor-intensive agricultural products when traditional H-O theory predicted that the US should export capital intensive goods. Most of these agricultural products, however, were not produced under conditions of corporate production, but on individual small and medium sized farms in the United States. The process utilized much family labor which otherwise might have remained idle. Perhaps other relevant factors are the high productivity of much farm land in the US and efficient farming methods used by farmers in the US.

Less Developed Countries: Countries characterized by a low national per capita income, a high rate of population growth, high unemployment, and a dependence upon commodity exports.

Liquidity: Liquidity is cash, cash equivalents, and other assets, such as stocks and bonds that can easily be converted into cash.

Loanable Funds Theory of Interest: This theory says that interest rates are determined by the supply of savings and the demand for loans.  

Lobbying: In the American political system, all major corporations station representatives in Washington, DC, who petition Congressmen for legislation favorable to their business. Congressmen are in turn rewarded for their service with campaign contributions from these corporations. While it appears to be a form of bribery, it is referred to as lobbying, in the American context. More generally, lobbying also occurs in the European Union and other political contexts. 

Macroeconomic Policy: Includes the policies of a government in shaping the national economy. It includes monetary policies and fiscal policies. Monetary policies include such tools as raising or lowering interest rates to expand or restrict the economy. Also a policy of quantitative easing (printing money) is sometimes used to increase the money supply and stimulate the economy. Fiscal policy includes spending policies of the government, including military spending, spending for social welfare, spending for new infrastructure and so on. It also includes policies on taxation.

Managed Float: An exchange rate system in which the value of a currency is largely determined by the free market and changes from day to day. However, it can be adjusted by actions of the central bank, such as the buying and selling currencies. This is part of the current international financial environment. It is also called a dirty float.

Managerial Capitalism: A form of capitalist production and accumulation in which firms are managed and controlled by highly paid managers who are the central agents of power and direct the enterprises of the firm in order to maximize profits and accumulation. In the case of financial firms, profits and accumulation of capital is the sole underlying objective of the enterprise. 

Marginalist Revolution: The Marginalist Revolution refers to the development of neoclassical economic theory in the Nineteenth Century, beginning in the 1860s with the work of William Stanley Jevons, Carl Menger, and Leon Walras. These theorists developed a marginal theory of value to replace the labor theory of value of the classical political economists. Jevons published The Theory of Political Economy in 1871. Menger published his Principles of Economics in l871 and Walrus published his Elements of Pure Economics in 1874. This work anticipated the work of Alfred Marshall at the end of the century, which began the neoclassical period of economics.

Marginal Return: The marginal return to a factor of production is the change in output brought about by a change in that factor of production. The marginal product of labor is the change in output per unit change in labor.   

Marginal Productivity: The additional output that is produced by hiring one more worker or by using one more unit of input.

Marginal Utility Theory: An economic theory which attempts to measure the increase in satisfaction which consumers gain from consuming an extra unit of a good.

Market: A system, institution, procedure, or infrastructure by which people or parties may participate in the exchange of goods and services. A market generally also establishes the prices of goods and services. A market with a single seller is a monopoly. A market with multiple sellers and a single buyer is a monopsony.

Marshall’s Cross: The graphic depiction of supply and demand in Alfred Marshall’s economic model which depicts price on one axis and quantity on the other. Since the supply and demand curves cross at the point of equilibrium, the graph resembles a cross. It was seen by some to be the worker under capitalist production who was being crucified on this cruel cross.  

Masters of the Universe: The title which the owners and directors of giant global corporations have given themselves depicting their role in the global economy. 

Meiji Restoration (1868-1912): The economic rise of Japan during the imperial rule of Emperor Meiji. Meiji came to power with the end of the Tokugawa Shogunate in 1867. Changes brought about the end of feudal society and the beginning of a market society. Industrialization and the rise of the military promoted Japan as a modern nation with western influence. A Meiji slogan was “Enrich the Country.”   

Methodological Individualism: An approach to understanding economic and political behavior by focusing upon the discreet decisions of individuals which are seen to be rational. Typical of the neoclassical era of economics and particularly of the Austrian school of economics.

Mexican Debt Crisis: In August 1982, Mexico defaulted on its debt to the IMF. The Mexican Peso was devalued by about 50 percent. The private banking system was nationalized and Mexico suspended payments on its debt. The US Government arranged a 3.5 billion dollar loan to Mexico. This was followed by another loan of 3.8 billion dollars three months later during which Mexico was forced to make free market reforms. Wages fell and there was high unemployment. 

Mexican Financial Crises (1994): The Mexican Peso Crises began in December 1994 with the collapse of the Mexican Peso. The new President, Ernesto Zedillo had just been elected. Carlos Salinas de Gortari was the outgoing President. Zedillo took office on December 1, 2004. The Peso was four to a dollar but quickly crashed to seven to a dollar. The United States bought pesos and organized a loan of 50 billion US dollars. The Peso stabilized at around six to a dollar and Mexico emerged from the crises in around three years, which is a typical time. The causes of the crises involved several factors. First, Zedillo reversed the tight monetary controls of Salinas implementing financial liberalization. Secondly, Salinas’s populist policies before the election had strained the country’s finances. His efforts to stimulate the economy were unsustainable. Further the quality of loans made in a period of low interest rates led to high risk. Another factor was the Chiapas rebellion in late 1994. This helped to lead to a drop in foreign investment. Inflation also increased due to high spending in the period 1985-1993. At the same time, oil prices dropped. This made it hard to finance past debts. The current account deficit rose and dollars flowed out of the country.

Microeconomic Policy: Economic policies which are said to be designed to improve economic efficiency such as tax policy, competition policy, deregulation, economic liberalization, reforms of industrial and import licensing, the ending of public monopolies, and bringing an end to central planning.

Ministry of Economics, Trade and Industry (METI): The ministry of the Japanese Government which succeeded MITI in 2001 to coordinate and guide the Japanese economy.

Ministry of International Trade and Industry (MITI): A government ministry in Japan which was created in l949 to coordinate international trade policy with the private and public sectors of the economy and revive the Japanese economy. It provided money for R&D and investment to major companies. It was succeeded by the Ministry of Economics, Trade and Industry (METI) in 2001.

Misery Index: The misery index is a measure of the inflation rate plus the unemployment rate.

Mittelstand: The name given to small and middle sized industries in Germany, Austria, and Switzerland. They are given credit for much of Germany’s economic growth in the 20th century. These firms are seen to be efficient concentrating upon a particular niche in production. They typically enjoy economies of scale, have highly skilled workers, provide high job security, are export oriented, and manufacture innovative and high-value products. In Germany, in 2003, seventy percent of employees in the private sector worked in such industries and contributed fifty percent of GDP. They are often located in small rural communities and produce such items as machinery, auto parts, chemicals and electrical equipment. 

Mixed Economy: An economy typical of Sweden and several developing countries such as India in which some industries are privately owned and some are state-owned. Infrastructure industries, such as dams and electricity producing plants are typically state-owned.

Mob Psychology: Also called crowd psychology. Mob psychology can help to bring about a financial crises as viewed in the financial instability theory of Hyman Minsky. When a new opportunity opens up in the market, firms and individuals rush in to invest resulting in euphoria and creating a bubble in overvalued assets. At some point, some start to believe that the market has reached its peak and start to pull out by selling assets. This trickle picks up and turns into a panic as the mob psychology takes over again and this results in bankruptcies and a financial crisis.

Money Illusion: Happens when people react to the amount of money rather than to the purchasing power of the money. For example, people generally believe that their income has gone up when they get a pay raise, but their real pay may have actually decreased in terms of purchasing power.     

Monetarism: A school of economic thought associated with the American economist Milton Friedman. Adherents of monetarism emphasize the role of government to control the amount of money in circulation. Friedman argued that the excessive expansion of the money supply is inflationary and governments should concentrate upon price stability by regulating the money supply.

Monetary Reserves: Monetary reserves are funds which a government must hold, such as dollars or Euros, to pay its international debts.

Monopoly: A situation in the market when a single enterprise is the only seller of a particular commodity. There is an absence of economic competition and therefore the supplier can raise prices at will.

Monopoly Finance Capital: A description of the US economy after the late twentieth century in which companies engaged in financial enterprises controlled the economy and made the great bulk of their profits from financial enterprises, rather than in manufacturing. The approach is associated with the journal, Monthly Review, in New York, edited by John Bellamy Foster. Financialization is seen as a response to the stagflation in the US economy in the l970s. Financial institutions turned to speculation in the financial markets to generate higher profits. They also invented new financial tools, such as derivatives.   

Monopsony:  Refers to a market situation in which there are many sellers but only one buyer.

Moral Hazard:  Moral hazard is the principle that nations must be held accountable and responsible for their debts. If they are not held responsible when they default on a debt obligation, for example, and are then given a new loan to cover the default, this could be seen as throwing good money after bad, and encouraging the country to be irresponsible. Moral hazard says that actors may be more willing to take risks when most of the risk will be borne by another actor. Therefore, it is important to hold actors responsible.

Multilateral Agreement on Investment (MAI): A draft agreement negotiated between members of the Organization for Economic Cooperation and Development (OECD) between 1995 and l998 on international investment. It was launched in May 1995 and negotiated in secret. In March l997, a draft of the agreement was leaked. NGOs and developing countries launched a campaign of criticism of the draft agreement because it would largely prevent countries from regulating foreign companies. Due to this pressure, the negotiations were suspended in April 1998 and France withdrew from the negotiations in October. The negotiations were then canceled on December 3, 1998. However, similar measures to serve the interests of corporate investors and prevent their regulation are being established under the World Trade Organization.

Mundell Equivalency: Says that trade in capital or labor and trade in goods will have the same effect on the economy and that one can fully substitute for the other. 

Mundell-Fleming Model: A model developed in the l960s by Robert Mundell and John Fleming. It describes an open economy and the relationship between exchange rates, interest rates, and output. The Mundell Flaming Model is used to argue that an economy cannot maintain fixed exchange rates, free capital movement, and an independent monetary policy all at the same time. This is the irreconcilable trinity also known as the Mundell-Fleming Trilemma.  

National Economic Competitiveness: The ability of a country’s firms and industries to supply and sell goods and services in international markets. Paul Krugman, in a 1994 article in Foreign Affairs, “Competitiveness: A Dangerous Obsession,” argued that countries do not compete with each other the way corporations do. US President Bill Clinton once said, on the other hand, that each nation is like a big corporation competing in the global market place. US economist, Lester Thurow, in his 1993 book: Head to Head: The Coming Economic Battle Among Japan, Europe and America argued that nations do compete with each other. He argued that Europe would win out over the US and Japan due to its superior national system of political economy.

National System of Political Economy: The term describes the parameters of a national economy, such as the Japanese or German Political economy. Relevant criteria are the role of the domestic economy and differences with other nations, types of economic activity, the role of the state in the economy, the structure of the corporate structure, and private business practices. 

Negative Externalities: A phenomenon which happens when all of the costs of production of a product are not included in the price. For example, if the cost of an automobile included the cost of the environmental pollution created the price would be considerably higher. These costs, however, are externalized.

Neoclassical Growth Theory: The theory of growth formulated in the l950s by the economist Robert Solow. This model states that economic growth is a function of the factors of production, labor and capital. Technology and human capital are exogenous variables. It assumes that once new technology is invented, it is available to all producers. It also assumes constant returns to scale. It has been superseded by New Growth Theory, which takes account of such factors as economies of scale and control of R&D.

Neoclassical Political Economy: The term was used originally by Thorstein Veblen in 1900. The neoclassical era of political economy began in the late nineteenth century with the marginalist revolution, and particularly with the work of Alfred Marshall in 1890. The three basic assumptions include (1) people have rational preferences which can be identified (2) individuals try to maximize utility and firms try to maximize profits (3) people and firms act independently, based upon relevant information. Marshall used supply and demand graphs to specify when an economy was in equilibrium. These theorists also developed a theory of value based upon marginal utility. This approach may be viewed as including the Austrian School of political economy.

Neoclassical Synthesis: The neoclassical synthesis is defines as including neoclassical political economy plus Keynesianism.

Neo-institutionalism: An approach to studying society, including economics, sociology, international relations, and political science, that has emerged since the 1980s. It focuses upon the way people behave in institutions. It borrows from the work of Max Weber. In economics, this approach is associated with Douglass North at Washington University in St. Louis. Scholars note that the main goal of institutions is to survive and to do so, they must establish their legitimacy. People may act within institutions rationally to maximize utility; or act out of duty, that is normatively; or they may act cognitively, that is, taking for granted that certain ways are the correct way to do things. Neo-institutionalism emerged as a reaction to behavioralism which focuses upon the individual.

Neoliberalism: The mainstream approach to capitalist accumulation which has emerged since the l980s in Great Britain and the United States and spread widely around the world. Neoliberalism is characterized by the privatization of public sector enterprises, deregulated financial markets, an opening to the global market and foreign direct investment, austerity in government services and social welfare, and state support for capital and failing markets, rather than people. 

New Political Economy: There are several key parameters of the New Political Economy. Following the work of public choice theorists, such as Mancur Olson, it is argued that rent seeking distributional coalitions, such as labor unions, are unproductive and slow economic growth. Economic policy making should be taken out of the hands of populist politicians and put in the hands of technocrats who make decisions based purely upon economic parameters. Justifiable coalitions are positive when they are for the purpose of investing capital for economic growth. Those guiding the economy are seen to be rational and interested in only the needs of the economy.

Niche Products: Products which are produced and intended for a narrow segment of the market.

Nominal Interest Rates: The rate of interest in the current price but ignoring the rate of inflation. For example if the rate of interest is twelve percent, but inflation is ten percent, the real rate of interest is only two percent.

North American Free Trade Agreement (NAFTA): A trade agreement which came into effect in 1993 and links together the economies of Mexico, the United States and Canada. This agreement has shifted many US manufacturing jobs to Mexico. It has also had the effect of lowering average wages of workers in all three countries.  

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.   

Global Political Economy: Glossary (Part 1) A-D

 

Glossary of Terms of Political Economy:

 

Adding-Up Problem (Product Exhaustion): The question of whether the sum of the marginal productivity of all inputs used by a firm equals the product of output in order to cover the cost of the factors of production.

Adjustable Peg: A type of currency exchange rate management in which the currency is pegged to another stronger currency, such as the US dollar, and then the exchange rate is adjusted from time to time when economic conditions change.  

Agglomeration: A process which tends to lead firms to locate near other firms, large markets, and manufacturers. It is most typical of locations within developed countries. This process of concentration of business activities tends to build up the core areas of an economy.

An Economic Theory of Democracy (1957): The seminal work by Anthony Downs who argued that economic theory can be used to understand political behavior. In particular, he studied such phenomenon as the behavior of political parties and individuals in voting.

Arbitrage: An economic activity in which one takes advantage of differences in price between the same assets. For example, the difference in interest rates between two countries allows investors to make profits by moving their money from one country to another.

Asian Financial Crises (1997): The Asian Financial Crises began in July 1997 and affected most of the countries of East and Southeast Asia. In Thailand, the Thai baht was forced to float due to a lack of foreign exchange to maintain its peg to the US dollar. At the same time there was a real estate bubble and financial over-extension. Thailand was also effectively bankrupt with a high foreign debt. The collapse of the Thai economy spread to all of Southeast Asia. The Japanese yen declined. Stock markets fell. The IMF injected 40 billion US dollars to rescue Thailand, South Korea, and Indonesia. Also less affected were Hong Kong, Malaysia, Laos, and the Philippines. Less affected were China, Taiwan, Singapore, and Vietnam. On 21 May, 1998, Indonesian President Suharto was forced to resign after some thirty years in power. There was much crony capitalism in the country. The rupiah was devalued, causing riots. The causes of the crises are disputed. Paul Krugman disputed that there and been an Asian Economic Miracle with the eight to twelve percent economic growth previously. He argued that growth was based on high capital flow into the country due to high interest rates. He claimed that Asian productivity was not high. Secondly, there was a bubble in the Thai economy in housing, stocks and other assets. Further, development money had flowed to those close to power. Most countries also had high current account deficits. The economic recovery took around three years.

Austrian School of Economics: Developed in the late nineteenth and early twentieth centuries in Vienna by the work of Carl Menger, Eugen von Bohm-Bawerk, Friedrich von Wieser, Ludwig von Mises and others. It is based upon methodological individualism. These theorists developed a subjective theory of value and a price theory based upon marginalism. Seen as part of the nineteenth marginalist revolution.

Balance of Power: The term may refer to either nations or groups within a nation where there is a rough equality of power between nations or groups. This is generally seen to lead to political and economic stability.   

Basle Accord (1988): The Basle Accord was an agreement to standardize the regulations on reserve requirements of capital for international banks on an international scale. The agreement was in response to the desires of American bankers. Since reserve requirements were higher for American banks, the American bankers claimed that this gave foreign banks an unfair advantage. The US Federal Reserve put pressure on foreign banks to raise their reserve requirements. European and Japanese banks were forced to raise their reserve requirements.     

Big Bang Approach: A strategy used in Eastern European countries and the former Soviet Union after the collapse of communism. Under this approach, state control of wages and prices is relaxed at once generally leading to vast disruption in the economy for a period of time. It generally militates against those on retirement incomes and those who are suspended from their work. Sometimes associated with the economist Jeffrey Sachs.     

Big Emerging Markets: Refers to the newly industrializing countries after the 1990s era of globalization and neoliberalism. Includes at least twelve countries including the BRICS countries.

Big Push Theory: A theory launched in the 1940s which is seen to have established the field of development economics. Paul Rosenstein-Rodan argued that the governments of the less developed countries should take an active role to promote development. It was argued that with a big push, they could get the development ball rolling.

Biotechnology: Processes which use living systems and organisms to make new technologies and products. Biotechnology includes genomics, recombinant gene technologies, applied immunology and other inventions.

Bretton Woods System: The international monetary system which was put into place at the l944 conference in Bretton Woods, New Hampshire. The system was based upon the American dollar as the hegemonial currency. European currencies and the Japanese Yen would be pegged to the dollar to stabilize the key currencies of the international system. The dollar was the only currency which could not be devalued and was linked to gold, a modified gold standard. The system broke down under its own weight by 1971 as the US abused the system by flooding the world with dollars for war spending. This forced other countries to hold overvalued dollars and help the US pay for the war in Vietnam. The system contained its own seeds of destruction.

BRICS: Refers to a set of five big emerging market countries, specifically, Brazil, Russia, India, China and South Africa.

Bubble Economy: A situation in an expanding economy in which investment and prices tend to overheat and lead to the danger of an economic recession when the bubble bursts.

Capital: Includes capital goods, capital assets, or non-financial assets used in the production of goods and services. Money invested in the productive process is capital in capitalism.

Casino Capitalism: Refers to the era of the financialization of the economy in which capital is used in highly speculative ways. It is seen to increase the danger of a financial meltdown of the economy.

Centrifugal Forces: In economic geography, factors which tend to disperse economic activities away from the center or core toward the periphery.

Centripetal Forces: In economic geography, factors which tend to concentrate economic activities in the center or core, rather than in the periphery.

Chaebol: A Chaebol is a type of business enterprise in South Korea similar to a zaibatsu in Japan. It is a conglomerate which owns many companies and is controlled by a wealthy family. There are several dozen such multinational enterprises in South Korea.

Chicago Boys: Professors and students at the University of Chicago who worked to establish conservative free market policies around the world, particularly in Chile.

Chicago School: The Chicago School of Economics. Approach to economics developed at the University of Chicago by Milton Friedman and others.

Class Struggle: In the Marxist analysis of society, class struggle is the conflict between workers and capitalists.

Classical Political Economy: The Classical era of political economy began in the eighteenth century with the Physiocrats, the writings of Adam Smith and later, David Ricardo and John Stuart Mill.

Collateralized Debt Obligation (CDO): A type of structured asset-backed security (ABS). It is a promise to pay investors in a prescribed sequence based upon the cash flow. The CDO collects money from the pool of bonds or other assets which it owns. CDOs include mortgage backed securities, student loans, credit card debt, aircraft lease equipment as well as other securities.

Collateralized Mortgage Obligation (CMO): A CDO which is based upon mortgages.

Colonialism: The practice of countries ruling over other countries. The era of Western Colonialism emerged in the sixteenth century, up to the twentieth century.

Commercial Paper: Commercial paper refers to money-market securities sold by large corporations to obtain funds to pay short-term debts. They are not backed by collateral and present a particular problem in a financial crises.

Comparative Advantage: Comparative Advantage or comparative cost is usually associated with David Ricardo. The principle of comparative advantage says that in trading with other nations, a country should produce and export that in which it has a cost advantage.

Complementary Goods: These are two or more goods which are generally consumed together, such as peanuts and beer.

Constant Capital: The part of capital consisting of machines, buildings, and so on, which does not change during the production process.

Constant Returns to Scale: A situation in which output increases by the same proportional change as the change in the factors of production, such as labor and capital.

Consumer Satisfaction: A measure of the extent to which an individual’s expectations are fulfilled after purchasing a product. It may include utilitarian dimensions, such as how useful the product proves to be. Also it may include hedonic measures, such as how it makes the consumer feel, happy or disappointed.   

Convergence Theory: In economic development, the theory that developing countries will have a tendency to catch up with the developed countries. This is because the rates of economic growth should be higher in developing countries as the law of diminishing returns has not yet set in.

Convergent Growth: The pattern of high economic growth by which big emerging markets countries tend to catch up in development with developed countries.

Core: In economic geography, the core is an area or a country which is the center of economic activity. The outlying region is a periphery.

Corn Laws: A series of laws in England in the nineteenth century between 1815 and 1846 which levied a heavy tariff on imported grain. The laws were designed to protect landowners who had strong representation in Parliament from foreign competition. The tariffs kept the price of food, primarily bread, high. This also tended to keep wages higher and so was opposed by the industrialists. The 1815 Corn Law, supported by Thomas Malthus, led to wide-scale rioting in London.  

Corporate Governance: The system by which corporations are directed and controlled. It sets out the rights and duties of the board of directors, the managers, the shareholders, the creditors, the auditors, the regulators, the stakeholders and so on.

Corporate Leveraging: Techniques whereby investors gain the right to the return on a capital base that exceeds the investment which the investor has personally contributed to the entity or instrument achieving a return. This can be achieved through derivatives, such as the gains or losses on 25 million dollars in grain by investing one million dollars in cash as margin.

Corporatism: A type of economy in which labor, capital and the state work together to expand the economy. Typical of fascism.

Cost Benefit Analysis: An evaluation of the benefits of investment or spending for an enterprise, compared to the costs of the enterprise. 

Cost of Production Theory of Price: A concept from Adam Smith in which the natural price is the sum of the costs of paying land, labor, and capital for their contribution to production.

Council of Economic Advisers (CEA): A part of the Executive Office of the President in the United States which provides advice to the President on economic policies.

Crawling Peg: A type of adjustable currency exchange rate system in which a currency is pegged to a stronger currency, generally the dollar, and adjusted as economic conditions change.

Creative Destruction: A concept derived from the work of Karl Marx and used by Joseph Schumpeter to describe the dialectical development of capitalism. For Marx, capital must continuously destroy existing modes of production in order to bring new modes into operation. Schumpeter further developed the concept as typical of modern capitalism.

Credit Default Swap (CDS): A financial instrument which provides insurance against a loan default. It is a financial swap agreement in which the seller of the CDS agrees to compensate the buyer in the event of a loan default or other credit event. This tool was invented by Blyth Masters of JP Morgan in 1994. The value of all credit default swaps reached $62.2 trillion in 2007 and fell to $26.3 trillion in 2010 after the financial meltdown. A CDS has been referred to as a financial weapon of mass destruction.

Crisis of Governability: An explanation for the severe problems encountered by post-communist countries which argues that political elites brought about the collapse of the state as quickly as possible before the societies were ready for such change. They relied too heavily upon neoliberal views of the state. They also feared a return to communism if radical changes were not consolidated quickly.   

Crony Capitalism: A situation often seen in developing countries where state elites are in league with friends and relatives to divide up sectors of the economy to those whom they favor and enrich them. Success in business generally depends upon a close relationship with those in power.

Cultural Legacy Theory: An explanation for the problems of reform in post- communist societies in Eastern Europe and the former Soviet Union. The argument claimed that communism created a society characterized by passive people who had little incentive to work hard, were mainly self-interested, and did not take responsibility for their actions. The problem of nationalism and ethnic conflict returned especially in the Balkans disrupting the economy.

Cumulative Causation: (Gunner Myrdal): This happens when one economic variable affects another economic variable and the process continues. For example, for Myrdal, being black in the United States led to getting a poor education and getting a poor education led to having a poor job. So these effects add up to a worse and worse situation. For a member of the white race, getting a good education could have the opposite effect.

Cumulative Processes: When new growth is added to old growth, then cumulative processes lead to a build-up. In economic geography, cores of an economy build up through a cumulative process as new businesses and production facilities are added to those already there.

Decreasing returns to scale: See Diminishing returns to Scale.

Deductive Reasoning: Reasoning from a general principle to the specific. Also called “top-down” logic. Example: In a democracy, the people rule. This country is democratic, therefore, the people rule.

Loan Default: The failure to repay the loan.

Deflation: The fall of prices during a recession or a depression.

Demand Side Economics: Essentially Keynesian economics in which the economy is believed to be driven by total demand from the government, businesses, households and individuals. Government spending can be increased to avoid recessions and smooth out the business cycles in the economy.

Denaturalization: A process of examining the material causes of phenomenon and events in society, rather than accounting for them as part of a natural process. It is a humanistic approach which implies that individuals are largely responsible for and can change history.

Dependency Theory: Dependency theorists, such as Andre Gunder Frank, argued that third world countries lacked development because they were kept dependent upon developed countries such as the United States and Western Europe. Resources flow from poor countries on the periphery to the rich countries in the core. Therefore, development depends upon the location of the country in the world capitalist system.

Depression: A sharp economic downturn which lasts for a considerable period in the economy.

Deregulation: The process of lowering or removing government regulations on certain activities, particularly on businesses, such as large corporations. Generally corporations claim that it results in greater efficiency, production and lower prices. Opponents point out that it results in lower standards in regard to product safety, environmental standards, and work standards. Deregulation is typically associated with economic change in the age of neoliberalism.

Deregulation of Financial Markets: Signifies the removal of government regulations from the financial sector. This has tended to make the financial sectors more susceptible to crises. An example is the financial crises in the United States in 2008, which was largely brought about by excessive financial speculation in the housing market. Much of this was based upon new types of derivatives, which greatly increased the risk in the financial markets.    

Derivatives: A type of financial instrument and financial contract which derives its value from the performance of another entity, such as an asset, index, or interest rate which is known as the underlying entity. The most common underlying entities are commodities, stocks, bonds, interest rates and currencies. Financial instruments take the form of futures, swaps, credit default swaps, options, and so on.

Developing Countries: Developing countries are defined according to the Gross National Income (GNI) per capita per year. Countries with a GNI of US $11,905 and less are defined as developing countries according to the World Bank (2012). The list included 127 countries as of January 2014.

Development Economics: Development economics emerged in the l940s as a theory of how to help post-colonial countries develop within the capitalist orbit of the global economy. The theories set out the economic aspects of development in Eastern Europe and other low-income countries. Theories focus upon promoting economic development, economic growth, and structural change. The goal is also to improve the health, education, work place conditions, of the people and improve the standards of living and income levels. An early theorist was Paul Rosenstein-Roden in 1943. Others include Walt Rostow in the 1950s and Hollis Chenery in the l960s.

Developmentalist State Capitalism: A type of economic development in which the state takes the lead in economic development. A concept used by Chalmers Johnson to describe economic development in Japan in the twentieth century. Also typical of economic development in such states as Taiwan and South Korea. 

Dialectical view: A methodological approach to understanding society and social change. First a dialectical view of society includes the recognition that two opposite characteristics may be true at the same time but for different sections of society. For example: “It was the best of times; it was the worst of times.” For some people it was the best, for other people, it was the worst. Secondly, the dialectical view observes that social conditions (the thesis) change by destroying existing conditions and creating new conditions (antithesis). These new conditions are in turn destroyed resulting in yet another new condition (synthesis). The synthesis, however, contains elements from both the thesis and antithesis, and is a new stage in social change. This process then continues.

Diminishing Marginal Utility: An economic theory which says that the utility of the first unit of consumption is greater than the second unit of consumption and so on.

Diminishing returns to scale: A situation in production where output increases by less than the proportional change in the factors of production, such as labor and capital.

Directly Unproductive Profit-Seeking Behavior (DUP): Activities in society which are seen to waste resources, such as labor unions which attempt to raise wages above the market rate.

Dismal Science (Thomas Carlyle): A term used to describe the science of economics based upon the pessimism of Thomas Malthus.

Dispute Settlement Body (DSB): A method of settling disputes which arise among the member countries of the World Trade Organization. As of 2014, there were 159 members. According to the World Trade Organization, the DSB is the “central pillar of the multilateral trading system.” It is seen to be the greatest contribution of the WTO to the stability of the global economy. Rulings are made by a dispute panel of experts, who may be corporate lawyers, and presented to the General Council of the WTO, which consists of all member countries. It is effectively impossible for the General Council to reject a ruling, as it requires the consensus of all members. So countries which lose the case cannot block the ruling. Prompt compliance of countries with the ruling is expected. If not the country may have to pay compensation or have trade sanctions imposed upon it. By 2008, 136 out of 369 cases had been resolved. Some were pending and some were resolved out of court.

Distributional Coalition: A concept from Mancur Olson’s book, The Logic of Collective action. A distributional coalition is a group “oriented to struggles over the distribution of income and wealth rather than to the production of additional output.”

Distributional Justice: The idea that justice is not giving every person an equal amount of goods, but rather giving each person his due according to some measure of merit.

Divisible goods: Goods that can be sold in “divisible quantities” such as wheat, oil, corn, or cloth.

Division of Labor: In Adam Smith, division of labor is a process of dividing the production of a commodity into small tasks performed by different workers, in order to increase efficiency and productivity.

Doha Round: A round of trade talks under the World Trade Organization which began in Doha, Qatar in November 2001. The talks, which involved 159 countries, were not yet concluded in 2014. Issues involved tariffs, non-tariff measures, agricultural subsidies, labor standards, environment, competition, investment, transparency, patents, and a number of other issues.

Dollar Hegemony: Refers to the dominance of the US dollar in the global economy beginning with the Bretton Woods period, based upon the fact that the dollar was the central currency. During the Bretton Woods period, the dollar could not be devalued. This gave the US a tremendous privilege and power in the global arena. After l971, the central role of the dollar as a reserve currency continued giving the US a continued central role and power over many countries around the world.

Dollarization: Dollarization is the process by which local prices become linked to the value of the dollar. For example, since petroleum is sold in dollars, the price of petrol in the local currency rises when the exchange rate of the local currency drops against the dollar. Commodities become effectively priced in dollars.  

Dumping: In international trade, dumping happens when producers market goods in a foreign country below the price charged in the home country or below the cost of production. This selling at less than the “normal value” is seen to be a form of protectionism.

Global Political Economy: Chapter Twenty

 

Chapter Twenty: Conclusion: Global Political Economy

The great dialectical struggle over which ideological system of thought would control the world economy and the world’s wealth has been seen in the history of economic thought since the classical period of political economy. It is a matter of the division of the spoils between capital and labor. This historical dynamic has produced the world as it exists today. A critical dimension includes increasing inequality both globally and domestically. Another critical dimension is the ecological one with increasing environmental destruction. The struggle goes on and no one has a crystal ball to tell what the future holds. It is the task of political economy to attempt to understand the complex nature of the global political economy. Attempting to predict the future is a more risky enterprise. Political economists have made many such attempts but have generally not been successful.

We have seen since the seventeenth century the evolution of economic thought has resulted in two great camps. One says that the world as it exists is natural and approved by God. The market and capital are neutral. Inequality is also said to be natural and reflect an equilibrium or Pareto Optimality.

The other perspective is a denaturalization of the world. The world is not natural but rather man-made, a product of history. The first, mainstream economics, has served as an example of an ideology to underwrite the capitalist system even going so far as to say that there is only one possible system of economics. There is no alternative (TINA). The idea comes from Herbert Spencer, but was popularized famously by British Prime Minister Margaret Thatcher.

Today, after the failure of socialist societies to provide their promised benefits, the capitalist ideology has strengthened and essentially rules the global political economy. Since the l970s, the myths of classical political economy, such as laissez faire, have been reinforced. The Austrian School trend in the market and public choice theories in the area of public policy have largely taken over. This has produced a new condition in the world since the middle of the twentieth century. The open global economy generally serves the interests of international capital and the financial sector at the expense of the working classes around the world.

More than half of the world’s people live in conditions in which Jack London called “The People of the Abyss.” Dispossessed. At the same time, they produce the wealth for those who do not have to work. The world precariat, those who barely survive on the edge of existence, and do not know from where their next meal is coming, is increasing. The global ruling ideology is neoliberalism. It is based upon running the world by a technocratic elite and the bankers that serve the interests of global capital. This ideology has become the ruling ideology as even those at the bottom tend to buy into it with effective right-wing propaganda. The world’s leaders talk about democracy but generally do not give the masses a voice. Democracy has been rejected outright by the rational choice theorists. The majority of the people must survive in the underground informal economy just to live and breathe. The underground informal economy, it seems, is the real free market and the underbelly of the global class struggle. The official economy is a monopoly capitalist economy controlled by oligopolistic global corporations.

The Physiocrats saw the rural life as natural and productive of wealth. They promoted agricultural interests and an anti-urban agrarian ideology similar to the Jeffersonian ideal in America. Their ideas were largely pre-capitalist. The eighteenth century saw the beginning of industrial capitalism and the extension of colonialism by European powers. The industrial revolution based upon enclosure, disfranchisement, and colonialism produced wealth for the rising capitalist class in England. Adam Smith and David Ricardo constructed an ideology of free market capitalism. However this approach showed that the wealth and profits of capitalism came from the exploitation of labor.

Two streams of critique emerged in the nineteenth century: the utopian socialists and the scientific socialists. The utopian socialists wanted to use the emerging technology, the means of production, to construct an ideal society. The emergence of science and technology would serve the interests of the whole society and the public good.

With the emergence of industrial capitalism, the proletariat struggled just to live. And many did not live very long, as the brutal exploitation of early factory work meant death at a fairly young age. Marx and Engels explored their condition in England. This provided a critique and platform for the working class in the middle of the nineteenth century. These thinkers set out to shed light upon “the laws of motion of modern capitalist society.” They built upon the insights into capitalism by Adam Smith and David Ricardo, showing that profits came from the exploitation of labor. Their work became a powerful tool for the working classes in the historical struggle for a living wage.

The classical capitalist ideology was forced to shift gears as the theory of surplus value was apparently too revealing. Adam Smith and David Ricardo had clearly exposed the exploitation of labor in capitalist production as the source of profit. The marginalist school emerged. This provided the ideological basis for neoclassical economics. The veil was thrown over the capitalist productive process. Historical reality was obscured, partly by obscure mathematical formulas. The neoclassical approach tended to hide the nature of capitalist exploitation beneath vague concepts and mathematical equations. Presented as economic science, it also hid the fact that it was an ideology of capital. Perhaps it was smoke and mirrors, a way to pull the wool over the eyes of society and defeat the efforts of the working classes for decent wages. The various schools of thought which emerged in the nineteenth century to repair the damage done by the deep insight of Karl Marx into capitalism in the Grundrisse and Capital were consolidated in the work of Alfred Marshall at the end of the nineteenth century. It was to be a water tight proof that capitalism was moral and ethical and that society was in equilibrium. God is in his heaven and all is right with the world. It was all explained by supply and demand, Marshall’s cross. This has become the mainstream approach to economics ever since.

In the late 1920s, a critical problem arose in the system. The internal contradictions were bringing the system down. The system was modified by Keynesianism when neoclassical economic theory could not account for how the real economy worked in the great depression. John Maynard Keynes criticized economists for teaching wrong doctrines to students rather than facing the truth. Economics was political. It was being used as an ideology. With insights from the classical political economists, Keynes devised an approach which would save the capitalist system from itself while providing for the public good. The system must divide a portion of the spoils with the working class. This would be more of a stakeholder approach, rather than harsh class struggle from above for maximum profits. The working class would be cut into the system for a greater share of the spoils. At least for a period of time.

The problem was that the owners of wealth were not willing to share the spoils. The world had been divided up under an imperialist system. For profits, capital needed an open world economy for markets and resources. Those with capital were interested in profits. They fell back on classical ideology for an open world economy which would serve the interests of capital over the interests of the working class. A controlled economy was more compatible with the interests of labor.

After World War II, the Bretton Woods Monetary system put some controls upon capital but the interests of capital won out over the interests of labor. The US pushed for an open global political economy. This was to come about fully only in the l970s, with the strengthening of conservative economics and the attack upon Keynes. It was as Joseph Schumpeter had seen, namely that the capitalist class would not tolerate the gains of the working classes. So it was a struggle from above to remove controls on capital on a global basis. However, the system did not become socialist, as Schumpeter feared. The capitalists were winning with the help of the Nobel Laureates at the University of Chicago.

By the l970s, the US was faced with competition from Western Europe and Japan. The Bretton Woods Monetary System had collapsed, but the dollar was still the global currency. American capitalism, along with European and Japanese capitalism, were oligopolistic systems of political economy. They began to spread and operate on a global basis with strategic management. It became rational for the capitalist class to deconstruct the industrial state in the United States. The deindustrialization of America was carried out. Most industrial jobs shifted overseas. Under the ideology of conservative economists this was said to be good for everybody. Another shift in the ideology was in order.

The ideology of the new political economy based upon public choice theory began to emerge. For the justification for the new phase of global rule, it had to be explained why the stockholders would rule and why there was no need for the stakeholders to be included. It had to be explained why democracy could be simply be dismissed. It came to be said that the problem with democracy and grass-roots interest groups were that they were in conflict with capitalism. The interests of the global population everywhere were in conflict with the interests of capital. The Public Choice school set about to construct an ideology which explained why democracy and political participation on the part of the people must be rejected and society run by technocrats. Getting a share of the spoils was “rent seeking” and this went against the interests of capital. It simply wasted capital. The traditional pluralist theory of American democracy, based on interest group theory, had to be modified.

Marginal utility theory of the nineteenth century was extended beyond economics to every phase of society. It was said that economic methodological individualism could be used to explain all of human behavior by the rational choice theorists. The ideology began to take over all of social science. This pushed both economics and politics to the right.

The liberal doctrines and marginal utility theory had provided an ideology of capitalism. Globally, it was an imperialist political and economic order. The United States, Europe and Japan ruled the world after the war.

After World War II, the US set up a new world order. Theories of trade and development followed traditional liberal doctrines. But these theories did not describe the real world. Multinational corporations arose protected by states to control the economy. America was a global empire, Europe a sub-empire, along with Japan. Samir Amin called this collective imperialism.

By the l970s, American capitalism had stagnated. Greater profits could be made abroad. So the deindustrialization of the US began. This was a dialectic that led to development in some areas, such as China and the big emerging markets, while the American empire declined. America fought wars for the control of markets and resources and for the control of oil in Afghanistan and Iraq, but the empire was declining.

Financialization of the US economy proceeded as manufacturing jobs were exported. Multinational corporations gained great political power. Public choice ideology took hold to roll back Keynesianism. The defense industry preferred military Keynesianism which generated greater profits. The new political economy became the ideology of neoliberalism. The result has been greater struggle and increasing inequality both in the US and in the wider world.

Today, the picture is complex, but clearly, the financial elites have taken over the global economy. They have imposed their ideology on global development to slow economic growth through the structural adjustment programs of the IMF. The official institutions, particularly, the World Trade Organization, serve their interests.

The idea of global development with social dimensions providing for social welfare, the public good and democracy, has largely been lost. Since public choice theory says that democracy does not work and is impossible, it is logical to let technocrats control the economy. This is the new political economy. Since democracy holds back capitalist profits and wastes capital it is not desirable.

Lost sight of as well is the critical dimension of ecological destruction.

In the underground economy, System D, we see the precariat struggling to make a living. If lucky, they work in sweat shops, garbage dumps, ship recycling, and polluting industries. They are street sellers and drug smugglers. The rise of religious politics, in part, may be a result of this struggle that alienates a large section of the society. Socialism failed, but liberal democracies have also failed to meet most people’s needs. The system results in a colossal waste of human resources, human brains and human talent. Western youth sometimes turn against the system and become militants.

The world is becoming increasingly turbulent. The existing system is not serving at least three-quarters of humanity. Today the global political economy is exceedingly complex. It will continue to be a challenge to political economists to understand what is happening. It is an even bigger challenge to change the world for the better for the people. First one must understand as much as possible. Global political economy is a matter of lifting the veil on the real world.

 

Global Political Economy: Chapter Nineteen

 

Chapter Nineteen: The Global Economy Today

The GDP of the global economy in 2013 was 74.9 trillion US dollars (also called Gross World Product). This is 101.93 trillion US dollars in purchasing power parity (PPP). The global population had grown to 7.095 billion.   There were only nine countries with a GDP of over 2 trillion US dollars. These were the USA, China, Japan, Germany, France, the UK, Brazil, Russia, and Italy. However, in terms of purchasing power parity (PPP), India would be included.

By historical standards, the world economy was seen to be limping along at the slow annual economic growth rate of 2.1 percent. The days of six percent growth had ended when neoliberalism began in the l980s. After the recent era of globalization under corporate neoliberalism, world growth rates slowed to some three percent. But recent growth had slumped even further. This was of some concern to the leaders of the G-20 group of nations, although their expectations were not very high. In February 2014 they declared that they would work to increase global GDP by some two trillion dollars in the coming year. However, this was a quite modest goal. The IMF predicted that the world economy would grow by about 3.7 percent in 2014, or by 2.7 trillion dollars. However, no one could be sure if this could be accomplished.

The world economy had been in a slump since the financial crises in the United States in 2008 and the spread of the crises to Europe. In Western Europe, there was no economic growth at all in 2013, except in Germany where growth was just one half of one percent. Eastern Europe also had only a tiny growth rate of one percent. Even Asian economic growth had slowed to 3.9 percent for the year.

Some economists, like Paul Krugman, believed that part of this was due to wrong economic policies in Western countries. For example, austerity policies to cut government spending and debt in the United States and Western Europe had resulted in record unemployment in Europe. This meant that disposable income was less and less consumption affected other regions of the world. There was little investment in Eastern Europe so there was little growth.

At the same time, economic growth slowed in the engine of growth in Asia, China. The Japanese economy had been stagnant for some twenty years. The Indian economy also slowed down just as the current account deficit was rising. At the same time, the Federal Reserve in the United States began a tapering program to cut back on its program of quantitative easing. This led to the fall in the value of currencies in developing countries such as India, Turkey, and Argentina.

The global standard of living was hurt with the rise of food prices, even while the global economy slumped. The real price rises are generally not reflected in official inflation figures. Much of the world’s population of 7.1 billion would be paying more for food, while their real incomes were shrinking.

The IMF projected that in 2014 China would lead economic growth and contribute about a quarter of the increase in global GDP. Today, China was the world’s great workhouse.

Global exports were $12.4 trillion US dollars. And derivatives valued at $601 trillion US dollars.

On the other hand, the absolute number of people living in poverty was increasing. About one billion people lived in slums and this number was growing.

 

 

 

 

 

 

 

The Global Leaders:

1. USA 16.8 Trillion
2. China 9.24 Trillion
3. Japan 4.90 Trillion
4. Germany 3.63 Trillion
5. France 2.73 Trillion
6. United Kingdom 2.52 Trillion
7. Brazil 2.24 Trillion
8. Russia 2.09 Trillion
9. Italy 2.07 Trillion
10. India 1.87 Trillion
11. Canada 1.82 Trillion
12. Australia 1.56 Trillion
13. Spain 1.35 Trillion
14. South Korea 1.30 Trillion
15. Mexico 1.26 Trillion
16. Indonesia 868  Billion
17. Turkey 820  Billion
18. Netherlands 800  Billion
19. Saudi Arabia 745  Billion
20. Switzerland 650  Billion

 

Figure 4: Nominal GDP for the top twenty nations in 2013 (US Dollars)

Source: World Bank

In 2012, the GDP of the state of California in the United States was about equal to the GDP in India. The GDP of Turkey was about equal to the GDP of the city of Los Angeles.

 

  European Union 18.4   Trillion 23.7 %
1. United States 17.41 Trillion 22.4 %
2. China 10.35 Trillion 13.3 %
3. Japan 4.76  Trillion 6.1 %
4. Germany 3.82  Trillion 4.9 %
5. France 2.90  Trillion 3.7 %
6. United Kingdom 2.85  Trillion 3.7 %
7. Brazil 2.24  Trillion 2.9 %
8. Italy 2.13 Trillion 2.7 %
9. Russia 2.06 Trillion 2.7 %
10. India 2.05 Trillion 2.6 %
  World (2013) 74.7 Trillion 100 %

 

Figure 5: 2014 Estimates of GDP (Nominal)

Source: IMF World Economic Outlook Databases (WEO)

 

  World 101.93 Trillion
  European Union 17.57    Trillion
1. United States 16.76    Trillion
2. China 16.15    Trillion
3. India 6.77      Trillion
4. Japan 4.67      Trillion
5. Germany 3.51      Trillion
6. Russia 3.49      Trillion
7. Brazil 3.01      Trillion
8. France 2.53      Trillion
9. Indonesia 2.39      Trillion
10. United Kingdom 2.32      Trillion
11. Mexico 2.06      Trillion
12. Italy 2.03      Trillion
13. South Korea 1.69      Trillion
14. Saudi Arabia 1.55      Trillion
15. Canada 1.52      Trillion
16. Spain 1.49      Trillion
17. Turkey 1.44      Trillion
18. Iran 1.24      Trillion
19. Australia 1.05      Trillion
20. Nigeria 972       Billion

 

Figure 6: GDP in Purchasing Price Parity (PPP) 2013

Source: IMF

 

1. China 17.6 Trillion
2. United States 17.4 Trillion
3. India 7.27 Trillion
4. Japan 4.79 Trillion
5. Germany 3.62 Trillion
6. Russia 3.65 Trillion
7. Brazil 3.07 Trillion
8. France 2.58 Trillion
9. Indonesia 2.55 Trillion
10. United Kingdom 2.43 Trillion
11. Mexico 2.14 Trillion
12 Italy 2.06 Trillion

 

 

Figure 7: GDP Purchasing Power Parity (PPP) Estimates for 2014

Source: IMF

For the first time, China was number one in the world in GDP measured in PPP according to estimates released by the IMF in October 2014.

The G-8:

The G-8 was previously known as the leading group of “industrialized countries.” In 2014, they had about half the worlds’ nominal GDP and 36 percent of World GDP (according to purchasing power parity). Russia was added to the G-7 in 1998 to make the group the G-8. However, in 2014, the G-8 was being replaced by the G-20 as the main economic council of wealthy nations. The reason is that China and India should now be included in the industrialized countries according to either their nominal GDP or GDP (according to PPP).

The G-8 included Canada, France, Germany, Italy, Japan, Russia, the UK, and the United States.

The G-20:

The G-20 countries have about 85 percent of global GDP.

Countries in G-20: Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, South Korea, Russia, Saudi Arabia, South Africa, Turkey, the United States and the European Union. In other words there are 43 countries in the G-20 when the European Union is includud. The G-20 had 85 percent of world industrial output in 2014.

The BRICS: Brazil, Russia, India, China and South Africa

The BRICS have large fast-growing economies and an influence on regional and global affairs. All five are members of the G-20. Together they had a population of three billion people with a GDP of 16.04 trillion US dollars in 2013. They had 4 trillion US dollars in foreign reserves. Exports were 256 billion US dollars in 2012. The main trading partners were China, the USA and Argentina.

The Brazilian Economy:

Brazil was the seventh largest economy in the world in 2013 with a GDP of 2.25 trillion US dollars. Some 21.4 percent of the population of 190 million was below the poverty level. The country had 378 billion US dollars in foreign currency reserves.

The Russian Economy:

In 2013, Russia had the eighth largest economy in the world and was classified as a “developing country.” Its GDP was 2.03 trillion US dollars in 2012. There were 11.2 percent of the people below the poverty line. Exports reached 543 billion US dollars in 2012. Foreign currency reserves were 561 billion US dollars.

The Indian Economy:

India had the tenth largest economy in the world in terms of nominal GDP of 1.87 trillion US dollars in 2012. However in terms of GDP (PPP), India was the third largest economy in the world. Economic growth was about five percent, but the number below the poverty line was 22 percent. The country had an average gross salary of 1580 US dollars per year. India had a huge work force of 498 million people, which included child laborers. The country had 47 billion US dollars in Foreign Direct Investment (FDI) and foreign exchange reserves of 292 billion US dollars.

The Chinese Economy:

China ranked second in world in GDP at 9.24 Trillion US dollars in 2013.

Average salary: $457 per month.

Exports: $2.2 trillion. The main export market is the US (17 percent). Hong Kong was second with 16 percent. China had $116 Billion FDI stock. Gross external debt us $694 billion. China had $3.44 trillion in Forex (March 2013).

The South African Economy:

According to the IMF, South Africa was the thirty-third largest economy in the world in 2013 with a nominal GDP of 351 billion US dollars. It was included in the BRICS group of countries as it was the top country on the African continent with 24 percent of Africa’s GDP. About 31 percent of the people were below the poverty line with a quarter of all people living on less than $1.25 a day. South Africa had a labor force of 18 million. Exports reached 101 billion US dollars. The main trade partners were China, the USA, Germany and Japan. The country had 55 billion US dollars in foreign exchange.

In 2011, the BRICS Forum was formed, an international organization of the members. By 2014 arrangements for a new development bank was planned. This would set up a $100 billion fund to stabilize currency markets. However it might take up to five years to create the bank. There remained some disputes between members, including territorial issues between India and China. There is also a disagreement among members over UN Security Council reform.

In 2014, some seventy-five percent of the world’s currency reserves were in the East. The BRICS countries held $4.4 trillion in export earnings. The BRICS were subsidizing the US economy by holding US dollars. Some countries, particularly Russia wanted an alternative reserve currency, other than the US dollar.

Developing Countries:

The International Statistical Institute defines a developing country as one with gross per capital national income of less than $11,905. This included 139 countries in 2013.

Least Developed Countries (LDCs):

Least developed countries are countries which lack socioeconomic development and have a low human development index. The three criteria for least developed countries include poverty, lack of human resources and economic vulnerability. LDCs have a gross national income (GNI) per capita of less that US $992 as of 2012. Human resources are weak in terms of nutrition, health, education, and adult literacy. They also demonstrate economic vulnerability based upon the instability of agricultural production, the instability of exports of goods and services, merchandise export concentration, the handicap of smallness, and a significant proportion of the population affected by natural disasters. These criteria are set by the Committee for Development Policy of the UN Economic and Social Council (ECOSOC). There were 50 LDCs in 2014, including 34 in Africa, 10 in Asia, five in Australia and the Pacific, and one in the Caribbean. LDCs included some 880 million people or about 12 percent of the global population.

The Shanghai Cooperation Organization (SCO):

By 2013, emerging markets accounted for more than half of world GDP on purchasing power parity (PPP). Clearly, the world wealth was shifting to the East, including China, India, and Southeast Asia.

The Shanghai Cooperation Organization was founded in 2001 in Shanghai by the leaders of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. These countries had one-quarter of the world’s population. They intended to launch large scale projects in transport, energy, telecommunications, and military cooperation. They were involved in setting up a new banking system. These arrangements tend to undermine the role of the USA and the US dollar in the global economy.

A Picture from Life’s Other Side:

At the center of the global economy, the US economy seemed to be way out in front of everyone else in 2014. This could be deceptive, however, when one looks at what was happening to the people. Officially, economic growth was 2.8 percent annually in 2013, but this seemed to exaggerate the true figure. Five years after the US financial crisis, the economy had yet to recover. Consumer confidence was low. The labor market was weak and hundreds of thousands of people had simply given up finding employment.

The trend toward hiring people on a part time and contingent basis with no benefits continued. Two-thirds of jobs opening up were part time or temporary positions. Wages were stagnant and in some cases falling. Much of consumer spending was on credit cards. At the same time, the top ten percent were doing well. The stock market and bond markets had surged to record levels while the economy remained stagnant.

Veterans returning from the wars in Afghanistan and Iraq faced high levels of unemployment as well as post-traumatic stress and homelessness. Since the year 2000, there had been at least 6000 traumatic amputations from IEDs and other accidents. One million had mental health disorders and there were 22 veteran suicides happening every day according to the Department of Veterans Affairs. There were more suicides than soldiers killed in war in 2013.

At the same time, while corporate profits soared, food stamps were being cut. The Fed was printing 75 billion dollars a month in quantitative easing to stimulate the economy in 2013 while the rich put money in overseas banks. Under the previous five years under President Obama, ninety-five percent of new income had gone to the rich. Corporations were using a practice called “pass throughs” or pseudo-legal partnership structures to avoid corporate taxes. Since profits were being passed through to shareholders, they did not have to pay corporate taxes. They could make huge profits and avoid taxes. One example was Richard Kinder who made 376 million dollars in dividends in one year. Some 63 percent of corporate profits in 2008 were pass throughs. Private equity firms were also making big profits with the Fed policy of providing cheap money.

Many big corporations paid no taxes at all or got rebates by using accounting techniques, such as Wells Fargo Bank, Boeing, Verizon, and General Electric. At least 280 billion in tax revenues was saved by using overseas tax havens. Apple made 74 billion dollars in profits and declared their profits in Ireland to save on taxes. Such corporate practices were starving public services of funds as politicians protected the corporations.

Stress due to poverty and unemployment, financial stress, among ordinary Americans was leading to health problems for many. Some 68 percent of people now had to depend upon private pension plans, which made corporations money and did not provide for a good retirement. Twenty-four million Americans were receiving food stamps, but the $78 billion budget was being cut back so that the Government provided only $1.40 for each meal, instead of $1.50. The food stamp budget was equal to the investment earnings of the 20 richest Americans.

In one year corporate profits doubled while millions of jobs were lost. Taxes were cut for corporations. Americans were becoming less healthy partly due to financial stress. Some 45,000 Americans were dying in a year for lack of health insurance and one out of five adults had mental illness. Under the Obama health plan, people had to buy health insurance from a private company. However, even this was an improvement over the past. The suicide rate in America had increased since 2008. More people were dying of suicides than in auto accidents.

The neoliberal economic policies that the US worked to implement around the world were creating greater poverty in America. Officially, 15 percent, or 46.5 million Americans were living in poverty. In 2012, the poverty line was considered to be an income of $23, 050 yearly for a family of four. Many had fallen into deep poverty, which is half of this amount. At the same time, the United States had the highest GDP on the globe.

The World Bank is continuously launching and running programs to end world poverty. Still, the absolute number of people in poverty is at an all-time high. This is in spite of the figures given about how many people are being “lifted out of poverty” every year under neoliberal development.

In the United States in 2010, there were ten million millionaires. In 2014, the United States had 492 billionaires. But world median income was only $1040.

Some of the facts in 2014 are as follows. Some twenty percent of the global population, or 1.2 billion people, lived below the poverty line of one dollar and twenty-five cents per day. ($1.25 per day) Some 3.25 billion people lived on less than two dollars ($2) per day. This was about half of the world’s population. Some 1.3 billion people had no electricity. Another 2.5 billion had no safe sanitation. There were 783 million with no safe drinking water. And three billion used wood, coal, or dung for cooking and heating.

The World Bank officials said that they wanted to reduce this poverty to three percent by 2030. They said that this could be done through rapid growth for some forty percent of the population in developing and transitional countries. China was seen as one of the few successes in poverty alleviation. But perhaps it was being achieved through a sort of slave-labor capitalism. The World Bank said that China had rescued 680 million people from poverty since l981. They said that extreme poverty had fallen from 84 percent to ten percent. They did not see the Mao era of a mixed economy and import substitution industrialization as contributing significantly to the development of China.

The World Bank said that through the private sector China would be green, with more environmental protection. But, on the other hand, the World Bank was almost seventy years old and pushing private sector growth all this time had not yet eliminated poverty.

The disparity between the richest and poorest nations had greatly increased, which seems to be a feature of modernization and progress. In 1820, the richest nation was about three times wealthier than the poorest. In l998, the richest nation was 74 times as rich as the poorest.

More people were living in cities. About half the world’s population lived in cities in 2014 and with urbanization there were more than 500 cities with over a million people. A billion people or one-seventh of the global population lived in slums. In the next twenty years, two billion more would be added to urban populations. Ninety percent of this urban growth was happening in developing countries and cities had 70 percent of global GDP.

Urban population living in slums included 174 million in China; 110 million in India; 46 million in Brazil; 45 million in Nigeria; 30 million in Bangladesh; and 12 million in Mexico. The absolute number of people living in slums was also rising, while at the same time developing countries like China and India claimed to be raising millions out of poverty. Half of the people in South Asian cities lacked sanitation facilities. It is no wonder that many side streets smell of urine a short distance from the city center in Delhi.

On the other hand, the richest 8.3 million people in the world had 31 trillion US dollars in wealth. This was $3,735,000 per person. Clearly a large amount of global wealth was hidden in offshore tax havens.

The Global Underground Economy:

It is necessary to dive beneath the surface to get a better idea of the real global economy. A huge amount of wealth is not in the official statistics. This is the underground economy.

There are at least five specific underground economies.

One: Criminal Drugs

Two: The illegal Economy

Three: The Unreported Economy

Four: The Unrecorded Economy

Five: The World’s Fastest Growing Economy: The Informal Sector

Each of these sectors was very large and required a separate study. The most important here is the informal economy. The informal economy generated some ten trillion US dollars in GDP globally, but did not appear in the official statistics. This means that if it was a country, it would be the second largest economy in the world. This is the part of the economy that is off the books, not monitored and not reported in GDP and employment statistics. There are both good and bad sides to this. In some ways, one can say that this is the real free economy, the real “free market,” if there is such a thing. It is perhaps the closest thing to Adam Smith’s classical idea of laissez faire that one finds in the global economy and the world’s governments do not even know what is going on there, for the most part. It was outside of the view and control of governments.

Robert Neuwirth, a journalist, has researched and written on this part of the global economy. It is known as “System D” from the French word “debrouillard” which means resourceful or making do with what one has. He reports that half the world’s workers, some 1.8 billion, were working in System D, off the books, in 2011. They were paid in cash and reported no income and paid no taxes. System D produces many types of machinery, mobile telephones, computers, foods, and many other items and these are transported around the world. Many are produced in China and slipped into other countries past the eyes of customs officials using various devious techniques to slip them into countries undetected.

This economy is huge and increasing so much that the OECD estimates that by 2020, two-thirds of the world’s workers will be off the books. In that sense, the world economy is truly moving toward a laissez faire economy. This economy is completely outside of trade agreements, labor laws, copyright agreements, product safety regulations, environmental regulations, and pollution laws. Anything goes. It spreads even high technology around the world at prices that even the poor can afford. They cannot afford to buy the same items legally through MNCs observing intellectual property rights. Most in the world cannot afford software prices charged by Microsoft and other companies, but they can get cheap bootlegged copies. They can get music and films and books, all bootlegged in the informal economy. Simply, the informal economy gives opportunities to the poor, which are not provided by the formal economy, both in terms of jobs and in terms of trade and business, entrepreneurship.

The informal economy does much of the recycling in developing countries. These people do not set out to be environmentalists, but they do more for the environment than most environmentalists. Also trash pickup and many public services, including inexpensive lunches to millions of office workers in cities like Delhi, Bombay and Calcutta are provided. This part of the global economy is so large that by 2014, eighty-five percent of new employment opportunities were in the informal economy. Also sixty to eighty percent of informal workers were women.

The informal economy is also an efficient system of distribution of products, many of which are produced by big corporations in the formal economy. The big companies like Procter and Gamble have developed a way to get their products into the thousands of small unlicensed stores. Food companies can use the same techniques.

The informal economy even works in the Unites States, as it is ten to twenty percent of the US economy. In India, it is estimated at twenty to thirty percent of the economy and in Turkey thirty to forty percent. In Russia forty to fifty percent of the economy is in the informal sector and in some African countries, it reaches sixty percent. The informal economy also provides a safety net when the formal sector is hit by a financial crisis. In Greece it was thirty percent of the economy which saved many in the economic crisis.

The unreported economy is also very large. Edgar Feige has estimated that twenty-five percent of income in the United States is unreported, resulting in an income tax loss to the government of 500 billion US dollars.

Offshore Tax Havens:

It has been estimated that half the world’s capital flows through offshore tax havens. The main venues are Switzerland and the Cayman Islands. Others include Jersey, Guernsey and the Isle of Man. According to the IMF, between 600 billion and 1.5 trillion US dollars illicit money was being laundered annually. This was two to five percent of global output. Up to 500 billion dollars drug money may be laundered off shore in a year, more than the income of the world’s poorest twenty percent. There are also links between offshore banks and standard banks.

Another estimate is that one-third of the wealth of high net worth individuals is hidden offshore. This is some six trillion dollars out of 17.5 trillion. Some 6.3 trillion pounds sterling is owned by the richest 92,000 individuals, or 0.001 percent of the population. Over thirty percent of the net profits of MNCs may be hidden offshore. The estimate of the amount hidden offshore is between 13 and 20 million pounds sterling. Another estimate says 32 trillion US dollars. Some three trillion dollars is in deposits in tax haven banks and the rest in securities held by international business companies and trusts. Swiss banks have an estimated thirty-five percent of the world’s private institutional funds worth three trillion Swiss Francs. The Cayman Islands have 1.9 trillion US dollars in deposits.  Some 1.2 percent or the population has a quarter of the world’s wealth.

Where is the money? Edgar Feige has tried to figure out where the money is. It seems that the location of 85 percent of the US currency supply is unknown. Currency in circulation in 2010 was some 920 billion US dollars. This is 2950 dollars for everyone in the US. A lot of it is abroad. The illicit drug industry was estimated to be 300 to 400 billion dollars a year and the US was the biggest market in the world for illegal drugs. There was also a global illegal market in oil. Other prominent global illicit industries included human trafficking, and prostitution.

It was estimated that a huge amount of black money from India was hidden in Swiss bank accounts, but it was not possible to know the amount.

That’s the way the global cookie crumbles. Some get the goodies and some get the crumbs, like the sparrows in the road.