Labor theory of value (4TH CENTURY BC- )

With roots in the work of the Greek philosopher Aristotle (384-322 BC), labor theory of value became a central feature in analyses by such classical economists as the Scottish economist Adam Smith (1723-1790) and the English economist David Ricardo (1772-1823). They stated that the value of a commodity was determined by the quantity of labor needed to produce it, the

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Laffer curve (1980S)

Named after American economist Arthur B. Laffer, who maintained that economic expansion could be achieved without government budget deficits. Laffer curve shows the tax-rate at which government tax revenue is maximized, after which it declines. It illustrates the relationship between average tax-rates and total tax revenue, and shows that above a certain average rate of

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Laissez-faire (18TH CENTURY)

A doctrine proposed by the Physiocrats in France, whose principle of ‘Laissez-faire, laissez-passer’ (literally, allow to act, allow to pass) was later adopted by such classical economists as the Scottish Adam Smith (1723-1790). Laissez-faire advocates nonintervention or minimum intervention by government in the economic affairs of a country. Also see: physiocracy, mercantilism, economic liberalism, new classical macroeconomics Source: J Viner,

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Law of diminishing returns

Sometimes referred to as variable factor proportions, law of diminishing returns states that as equal quantities of one variable factor are increased, while other factor inputs remain constant, ceteris paribus, a point is reached beyond which the addition of one more unit of the variable factor will result in a diminishing rate of return and

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Law of large numbers (1713)

Law of large numbers was proven by Swiss mathematician Jakob Bernoulli (1654-1705). This is the fundamental principle of statistics that the sequence xn/n tends to p where the random variables xn have common mean p. This implies that the relative frequency of an event of probability p tends to p as the number of trials tends

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Learning by doing (1962)

Learning-by-doing refers to the hypothesis that labor learns through experience in the production process, thereby allowing economies of scale in future output. The increase in productivity diminishes over time. The first theoretical model of this kind was constructed by American economist Kenneth Arrow (1921- ), but many empirical studies had been carried out in the early

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Least cost location theory (1826)

Part of general location theory, pioneered by Prussian landlord Johann von Thunen (1783-1850) and later by German economist and sociologist ALFRED WEBER (1868-1958); least cost location theory posits that agriculture and industry locate their activities as close to their markets as possible, thereby achieving the least cost of transport for the goods they produce. Von Thunen’s

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Le Chatelier principle (1947)

Named after French chemist Henry Le Chatelier (1850-1936) by American economist Paul Samuelson (1915- ), Le Chatelier principle deals with constraints on maximizing behavior, explaining that short-run demands have lower elasticity than those in the long run since a longer time frame allows new factors and prices to change. (Le Chatelier had earlier formulated a reaction

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Leonhard Euler

One of the greatest mathematicians of the 18th century, Leonhard Euler was responsible for important advancements in a number of different areas, especially number theory. There are Euler theorems, Euler numbers and Euler formulas in a different fields, each distinct because Euler contributed to so many specialties. In the field of philosophy, Leonhard Euler

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Leontief paradox (1953)

Russian-born economist Wassily Leontief (1906-1999) devised this contradiction of the Heckscher-Ohlin trade theory. Trade is determined by the relative abundance of factors of production in each economy. Leontief discovered that despite the USA being endowed with an abundance of capital, its exports were labor intensive and imports capital intensive. Also see: factor-price equalization theorem, rybczynski theorem Source: W W Leontief, ‘Domestic

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Marie-Esprit Leon Walras

The French economist Leon Walras (pronounced ‘Valrasse’) has been hailed by Joseph Schumpeter as ‘the greatest of all economists’ (Schumpeter, 1954: p.827). Walras was one of the three leaders of the Marginalist Revolution, even though his greatest work, Elements of Pure Economics, was published in 1874, three years after those of William Stanley Jevons and Carl

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Life-cycle hypothesis (1957)

Comprising the analysis of individual consumption patterns, life cycle hypothesis was developed by American economist Irving Fisher (1867-1947) and English economist Roy Harrod (1900-1978), before later being extended by Japanese economist ALBERT ANDO (1929-2001) and Italian-born economist Franco Modigliani (1918-2003). Life-cycle hypothesis assumes that individuals consume a constant percentage of the present value of their life income. This is dictated

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Lindahl equilibrium (1919)

Named after Swedish economist Erik Lindahl (1891-1960), Lindahl equilibrium theorizes that the provision of public goods reaches an equilibrium when everyone agrees on the level of goods to be provided, and their prices. Thus, a set of Lindahl prices comprises individual shares of the collective tax burden of an economy. The sum of Lindahl prices is equal to the cost

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Linear programming (1947)

First used by American mathematician GEORGE BERNARD DANTZIG (1914- ), and widely adopted in logistical planning and the optimization of economic development planning; linear programming is a mathematical technique for determining a range of maximum values at minimum cost while dealing with known constraints. A car-maker would try to program the optimum production of

Loanable funds theory of the rate of interest (19TH CENTURY- )

Developed by Swedish economist Knut Wicksell (1851-1926), loanable funds theory of the rate of interest posits that interest rates are determined by the supply and demand of loanable funds in the capital markets. Loanable funds theory of the rate of interest suggests that investments and savings determine the long-term level of interest rates, whereas short-term rates

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Louis Bachelier

The tragic hero of financial economics was the unfortunate Louis Bachelier. In his 1900 dissertation written in Paris, Theorie de la Spéculation (and in his subsequent work, esp. 1906, 1913), he anticipated much of what was to become standard fare in financial theory: random walk of financial market prices, Brownian motion and martingales. His

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Some Considerations on the consequences of the Lowering of Interest and the Raising of the Value of Money

by John Locke (in a letter Sent to a Member of Parliament 1691) Letter 1: These Notions, concerning Coinage Sir, These Notions, concerning Coinage, having for the main, as you know, been put into Writing above Twelve Months since; as those other concerning Interest, a great deal above to many Years: I put them

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Luitzen Egbertus Jan Brouwer

Dutch mathematician and philosopher. He is traditionally referred to as ‘L.E.J. Brouwer’, with full initials, but was called ‘Bertus’ by his friends. In classical mathematics, he founded modern topology by establishing, for example, the topological invariance of dimension and the fixpoint theorem. He also gave the first correct definition of dimension. In philosophy, his

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Lump of labor theory of wages

In the short term, the demand for labor is fixed and employment can be created only by job-sharing and reducing existing working hours of workers. Lump of labor theory of wages ignores the role of macroeconomic policy in stimulating the economy. Source: M Allais and O Hagen, eds, Expected Utility Hypotheses and the Allais

Lyapunov’s theorem (1940)

Named after Russian mathematician A A LYAPUNOV, Lyapunov’s theorem asserts that the range of a non-atomic totally finite vector-valued measure is both convex and compact. Source: A A Lyapunov, ‘On Completely Additive Vector-Functions’, Izvestia Akademii Nauk SSSR, vol. IV (1940), 465-78 Lyapunov theorem may refer to: A theorem related to Lyapunov stability – the stability of solutions

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